Sunday’s Wichita Eagle carried an op-ed piece written by Doug Stanley, vice chairman of the Greater Wichita Economic Development Coalition. As we might expect, he calls for more government involvement and management of economic development.
Stanley makes the point that economic development organizations like GWEDC have customers, going so far as to cite the saying “the customer is king.”
The idea of a customer, however, implies willing and voluntary participants on both sides of the transaction. While the companies that receive benefits from the taxpayer are willing participants, the taxpayers are not.
Reading Stanley’s op-ed, you might conclude that Wichita has no industrial sites available. Conversations will several local developers indicate that the opposite is true: there are many industrial sites — some complete with existing buildings — available for immediate occupancy. It may be true that we don’t have the 800 acre site that Sedgwick County wants in an industrial park, but we have many sites that even very large companies could use.
And it’s a rare company that could use even a small fraction of 800 acres.
Critics might say that these sites, owned by private interests, won’t be as responsive to the needs of companies making site selections. But who do you trust to be more proactive and responsive: entrepreneurs looking for survival and profit, or government bureaucrats like those working for GWEDC?
The problem, of course, is that private entrepreneurs don’t have government largess funded by taxpayers to offer.
That leads to something that Stanlely doesn’t mention: Chasing jobs through economic development is expensive. A 1996 PBS report stated “The strategy of offering cheap land, cheap labor, and sizeable tax breaks has worked well for the southern and southeastern states, but it is getting expensive. In 1980, landing a new Nissan plant cost Tennessee $11,000 per job created. In 1985, recruiting the Saturn Corporation cost the state $26,000 per job. In 1992, it cost South Carolina more than $68,000 per job to bring in a BMW plant, and the estimates range from $150,000 to $200,000 per job for the Mercedes Benz plant in Alabama.”
This arms race among states needs to stop. Last year Cessna used the fact of an offer from other states to extract subsidy from Kansas, Sedgwick County, and the City of Wichita. But how else could political leaders in Kansas react? It would have been political suicide to let one of Kansas’ most famous companies escape.
Not that Cessna was planning to leave Wichita altogether. Instead, the decision was where to build a plant to produce a new airplane model. Since last year, Cessna has scrapped plans for the new plane. To its credit, Cessna is returning or not using the subsidies. But this is an indication of the risk that government assumes when engaging in economic development.
Government has a dismal record of picking winners and losers. Instead of making decisions based on economic factors, decisions are made for political reasons. Those reasons often have little to do with sound economic prospects and more to do with the next campaign for re-election.
Action at the federal level is needed to stop this wasteful competition between states. Then, all states can disband their economic development organizations and let business be business.
At today’s meeting of the Wichita City Council, a privately-owned condominium association is seeking special assessment financing to make repairs to its building.
Special assessment financing means that the cost of the repairs, $112,620 in this case, will be added to the building’s property taxes. Actually, in this case, to each of the condominium owners’ taxes. They’ll pay it off over the course of 15 years.
So the city is not giving this money to the building’s owners. They’ll have to pay it back. The city is, however, setting new precedent in this action.
First, special assessment financing has traditionally been used to fund infrastructure such as streets and sewers, and new infrastructure at that. The city, under its facade improvement program, now allows this type of financing to be used to make repairs and renovations to existing buildings. That’s if your building is located in one of the politically-favored areas of town. Not all buildings will qualify.
By using special assessment financing in this way, the city seeks to direct investment towards parts of town that it feels doesn’t have enough investment. This form of centralized government planning is bad public policy. The city should stop doing this, and let people freely choose where to invest.
This case, however, is an even more egregious example of the city’s desire to control where and how people invest.
The agenda report for this item details two exceptions to the city’s facade improvement program that must be waived for this project to obtain special assessment financing.
The first is the private investment match. Here, the city is proposing that since the building’s owners have made a past private investment in this property, there’s no need to require a concurrent investment.
Second, facade improvement projects are required to undergo a gap analysis to “prove” the need for public financing. According to the report: “This project does not lend itself to this type of gap analysis; however, staff believes that conventional financing would be difficult to obtain for exterior repairs to a residential condominium property like this.”
So the city proposes to waive this requirement as well.
What would happen if the city council doesn’t approve the special assessment financing? The agenda report states “Each individual condo owner would be required to fund a share of the cost.”
Isn’t that what private property owners do: fund the cost of repairs to their property?
Today’s action, if approved, would set a public hearing on July 7.
If the city council approves this project — and I suspect it will with no dissenting votes — we must now realize that Wichita has a mayor, city council, and city staff that are willing to throw any principle aside for political expediency.
By the way, the developer of this building is Real Development. Its principles, particularly Michael Elzufon, are familiar to the mayor and some council members as campaign donors. Its public relations executive has been the campaign manager for the mayor and a city council member.
In the past I’ve referred to Real Development as “crony capitalists,” defined in Investopedia this way: “A description of capitalist society as being based on the close relationships between businessmen and the state. Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favoritism that is shown to it by the ruling government in the form of tax breaks, government grants and other incentives.”
Elzufon took exception to that characterization. After asking for this special assessment financing project and its waivers, it fits even better.
(This is a Scribd document. Click on the rectangle at the right of the document’s title bar to get a full-screen view.)
As this city council decides whether to give a grant of $20,000 to a private business, we need to consider the effect of programs like this on all the people of Wichita. And people are telling me that they don’t like it. They wonder why, at a time when the city is struggling with its budget, and when many are struggling with their personal budgets, there’s money available for programs like this.
They also wonder why can’t everyone be eligible for grants like this. Many people throughout the city — not only in politically favored areas — would like help in repairing their buildings.
Programs like the facade improvement program represent centralized government planning. It’s the polar opposite of free people trading voluntarily in markets. These programs represent politicians and bureaucrats deciding where money should be spent, rather than people deciding themselves.
Strip away all the lofty talk and wishful thinking about downtown and revitalization areas, and what we have is this city council deciding that people don’t know how to spend and invest their own money.
That’s a slap in the face to citizens. People don’t like that.
Besides the personal insult, programs like this harm the wealth of our community. Free and competitive markets are the best way to decide where to make investments. Government simply doesn’t have all the knowledge necessary to make these decisions. Government doesn’t have the right incentives, either.
These programs have a way of expanding and growing. Now we have the city manager and his staff deciding whether or not to pay certain bills as developers work on facade improvement. This seems to be an additional layer of city bureaucracy that we can’t afford.
Mr. Mayor and members of the council, please respect the citizens of Wichita by voting against this grant of taxpayer funds to a private business.
On Tuesday June 16, the Wichita City Council will consider whether to give a business $20,000.
The business, Delano Barbeque Partners, LLC, is renovating a building at 579 W. Douglas in Wichita, at the corner of Sycamore Street. They’re applying for special assessment financing in the amount of $60,000. While bad public policy, this financing under the city’s facade improvement program is in the form of a loan that is to be repaid by future property taxes.
What is truly outrageous is that the owners of this business are also asking for a grant of $20,000. This would be, if I understand the plain meaning of the word, a gift to the owners of this property.
How is this possible? Is everyone eligible for grants like this?
I’ve asked the city for the name of the program or law under which grants like this can be made. I’ve also asked the applicant, Delano Barbeque Partners, LLC, for comment. According to the Kansas Secretary of State’s office, the resident agent for the limited liability company is W.G. Farha II, with address of 8100 East 22nd. Street North Building 1700-2, Wichita, KS 67226.
This illustrates a problem with Wichita city government, and other branches too, for that matter: Here it is, late Friday afternoon, and the city council agenda has been available for less than 24 hours. I just received the email from the city announcing its availability. I’ve made a few phone calls and sent a few email messages, but it’s not easy to contact people late on a Friday summer afternoon. So citizens just don’t have much time to do research and prepare for these meetings.
The applicants, of course, have known about this agenda item for some time. They have a lot to gain by making sure this passes. $20,000 of taxpayer money, in fact.
For convenience, I’ve excerpted the appropriate pages of Tuesday’s agenda below.
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The Wichita Business Journal reports that without historic tax credits, some redevelopment projects might stop.
In other words — the Business Journal isn’t quite so blunt — if taxpayers don’t give developers money, some of their projects might not be economically feasible. Or so the developers say.
Spotlighted in Wichita Business Journal reporting is Dave Burk, a well-known developer in Wichita who specializes in getting the taxpayer to fund portions of his developments.
Often the funding comes in the form of TIF district financing or special assessment financing used in ways it’s not normally used.
These complicated financial arrangements serve to hide what’s really happening. Developers like Burk say that these financing schemes don’t cost government or the taxpayer anything. But they go to great lengths to secure them. In the case of Burk, he makes sure to make plenty of campaign contributions.
But tax credits are pretty easy to understand. They excuse someone from paying taxes. If they’re refundable tax credits, the government will even send you a check.
This is a lot different from a tax deduction, in which case you get to reduce your income. That usually leads to a reduced tax liability, but by a much smaller amount. Maybe even nothing, if your business has a loss for the year.
Instead, tax credits reduce your tax liability on a dollar-for-dollar basis. And unless government reduces its spending by an equal amount, the rest of the taxpayers have to make up the difference.
The Kansas Legislature recognizes this, and in an effort to save from losing some revenue in a tough budget year, placed a cap on the amount of tax credits that could be issued over the next two budget years.
That’s what has Burk concerned. Without his gift from the taxpayers, he doesn’t know if he can complete his project.
Tomorrow, though, something might happen to change his prospects. That’s when the legislature meets for its ceremonial closing. Sometimes actual business is done, and there’s some talk, according to Hawver’s Capitol Report, that legislative action could be taken to help subsidized developers like Burk.
Let’s hope that the legislature decides in favor of free markets. If people want to live in historic buildings, let them pay the full cost of what it costs to produce these properties. Anything else means that the taxpayers at large pay for a privileged few like Burk and his tenants.
Sources tell me that Burk continually has his hand out a city hall, looking for whatever subsidy he can get — even to the point of annoying former city manger Chris Cherches.
It’s time to let free markets work. If Dave Burk has an idea he can sell to the public and make a heap of money, more power to him. But let’s stop the taxpayer-subsidized gravy train.
Sedgwick County is considering becoming a developer of an industrial park. The county is limiting itself to deals described as a “home run,” meaning a company that plans to hire more than 1,000 workers.
The problem is that there are few of these deals each year. Maybe just five to eight. But Sedgwick County’s policy makes those odds even worse.
That’s because the county wants to limit tenants of the park to those in “clean” industry, specifically the composites and alternative-energy industries. This likely means the number of deals will be less than five to eight each year.
It could even be none. That’s because of the nature of the two industries.
Consider composites. One of the most promising avenues for their use is in medical devices, and Wichita is actively pursuing that market. Parts used in hip replacements are often given as an example.
The problem with the medical parts market is that it may not exist in its present form after a few years. As the United States considers nationalized health care, we must recognize this means that expensive surgical procedures such as hip replacements will be rationed. Here’s the Wall Street Journal reporting on Canada’s experience:
On the other side of the country in Alberta, Bill Murray waited in pain for more than a year to see a specialist for his arthritic hip. The specialist recommended a “Birmingham” hip resurfacing surgery (a state-of-the-art procedure that gives better results than basic hip replacement) as the best medical option. But government bureaucrats determined that Mr. Murray, who was 57, was “too old” to enjoy the benefits of this procedure and said no. In the end, he was also denied the opportunity to pay for the procedure himself in Alberta.
If the U.S. adopts Canadian-style health care, it doesn’t seem that medical devices will be a growth market.
The other industry Sedgwick County wants to limit itself to — alternative energy — has its own set of problems. Primarily, the industry exists only because of large government subsidy. As the Production Tax Credit for wind energy was about to expire last year, industry advocates warned Congress that without the tax credits, the wind energy industry would be in trouble.
This is a typical quote: “If we move into 2009 and it [the production tax credit] hasn’t been extended, new orders will shrink and it will be a major blow to these new US [wind] manufacturing, investment, and jobs across many states.”
The two industries that Sedgwick County wants to bet on, as you can see, have uncertain futures.
Sedgwick County seems to be in a rush to make a huge decision that will have far-reaching and long-lasting effects on our county. We don’t have, however, anywhere near all the information we need to make this decision. We need to slow down and decide what role we want to have county government play in economic development.
The stated goal of Sedgwick County’s purchase of the Bel Aire industrial park is to have a site ready for companies of 1,000 or more employees. The Wichita Eagle article Sedgwick County seeks to attract industry with land plan tells us, though, that there are just five or six deals like this each year. Research by the Eagle reporter found more than 100 sites already exist, from all across the country, that meet the necessary criteria. So we’re entering a contest with pretty long odds.
On top of that, according to Sedgwick County, the goal of the industrial park is “to welcome only companies in the composites and alternative-energy fields.” This limits the companies the county would pursue to a number smaller than the five or six deals each year mentioned above.
(It’s worth noting that alternative-energy companies, such as wind turbine companies, exist only because of government subsidy aimed at curing a problem that can’t be fixed. Last year, as the production credit for wind power was about to expire, Congress was told that no further wind power would be developed unless the subsidy was restored.)
If the county asks “do you need rail access?” and it is provided for free, why wouldn’t any company say they need it? I’ve been told, however, that it’s not uncommon for companies to list rail access as part of their requirements, but then never need any rail cars once the facility opens. Some of the industries that composites may be used in are industries like medical devices. These products aren’t shipped by rail.
The issue of needing water and sewer utilities in place before the park can be marketed doesn’t make sense. These utilities could, if government wanted to, be installed very quickly, much faster than a building can be built.
That brings up another point — what about electricity and natural gas service? Depending on the type of industry, these utilities are vitally important. We don’t hear about the lack of these utilities being a problem. The likely reason for this is that electricity and gas are provided by private sector companies (even though most are highly regulated).
If a private utility can provide complicated and expensive electrical service infrastructure quickly to a building, why can’t a government quickly provide water and sewer?
It’s also claimed that the reason Wichita didn’t get the Target Distribution Center a few years ago was the lack of land ready to go. “Shovel ready,” so to speak. But according to reporting in the Topeka Capital-Journal, that city had to use eminent domain to forcibly acquire some of the land needed to assemble the tract.
Topeka used purchase options to secure the availability of land, too. I am told that when this strategy was presented to county staff, they had no idea of what this meant. This is evidence that Sedgwick County is not experienced and equipped to be in the land development business.
If Sedgwick County is determined to proceed and acquire the industrial park, we need to find some way to mitigate the damage to existing real estate developers in the Wichita area. That’s because when government can give away land, when it can dish out tax exemptions and other perks, the private sector is at a severe disadvantage.
Some ideas that have surfaced are these:
Limit the industrial park to large — very large — buildings only. Don’t allow smaller buildings that compete with what the private sector already has made available.
Restrict tenants to companies from outside the Wichita metropolitan area.
When existing Wichita-area companies see the perks — free land, etc. — lavished upon companies that move to the industrial park, they will want the same incentives. These incentives could be made available to companies in all industrial parks in the county. After all, we need to retain existing jobs.
There seems to be a great deal of haste towards making a decision on purchasing this land and the county being in the industrial park development business. This decision process is moving much too quickly. Finding a stable set of facts from which to conduct debate is a problem too, as some of the details in the Sunday Wichita Eagle story are different from what was presented at the commission meeting less than one week before.
A project of this scope would take from four to six months for experienced land developers to consider and perform due diligence. Sedgwick County has been considering this deal for about two weeks. As we’ve seen, the county is in no way experienced in this type of business.
Remarks to be delivered at the May 5, 2009 meeting of the Wichita City Council.
Mr. Mayor, members of the council:
Last year, at the January 15, 2008 meeting of this council, there was the notion that city staff would conduct risk analysis of some facade improvement loans that were being considered at that time. I haven’t been able to determine the result of this analysis. Was the risk analysis to be only for the projects in consideration at that time, or is it a procedure that’s in place for all projects, such as the one before you today?
Last December this council indicated the desire to create a system to thoroughly investigate the backgrounds of developers the city is considering partnering with. Is such a system in place? Has this developer, his company, and his partners been investigated under this process?
Why is the developer being paid a fee of $39,227 for overhead and project management? This seems to me as though we’re paying someone to manage themselves.
I realize that we’re not giving the developer this money. Instead, we — the taxpayers of the City of Wichita — will borrow money and then give it to them. They’ll pay back that money as part of their future property taxes.
That leads to the risk that loaning money to this property against its future tax payments increases the financial leverage of this project to the point where it stands on shaky financial footing. Recently President Obama has warned us how highly leveraged real estate deals are a danger to the economy.
So shouldn’t the citizens of Wichita be able to see the financial plans for this project, as well as the financial statements of the developers? After all, now the citizens are a partner in this project.
That brings us to this question: What is the value of this loan program to the developers? Is it the ability to borrow about $700,000 at 6.5% interest, rather than 8.5% or more that private lenders might require?
My calculations show that the difference between these loans, over 15 years, is about $800 per month.
And, if according to the gap analysis mentioned in the agenda material, the project is not feasible without this relatively minor assistance, I would submit that the financial feasibility of this project hangs by a mere thread. It’s not something the taxpayers of the city of Wichita should get involved in.
I’d like to see the city ask for this loan to be personally guaranteed by the developers.
Schemes like this lead to the broader question: Will any project in downtown Wichita ever be accomplished without the taxpayer being involved?
That’s what people — at least me — are criticizing. I’m not against downtown development, Mr. Mayor. I’m against the taxpayer being dragged into deals like this that may or may not work.
It’s entrepreneurs who have the ability to assume and manage risk. They have the potential to earn profits if they do a good job. But the city and its taxpayers don’t have this ability and profit potential. That’s why we need to keep out of these arrangements.
In a talk to the Wichita Pachyderm Club on Friday April 24, 2009, Bryan S. Derreberry, President and CEO of the Wichita Metro Chamber of Commerce, laid out the case for government management of our area’s economic and community development. The title of the talk was “The Basis for Economic Partner Selection and Collaborative Efforts.” The slide presentation is available at the end of this article.
While the Chamber is, strictly speaking, not an arm of government, it receives a large amount of government funding. Additionally, many of the incentives that it offers to companies require governmental action and funding to implement.
One of the things I learned — I had suspected this, but now it is confirmed — is that “economic and community development are now the same.” The Chamber views their mission as more than just economic development.
Moreover, there’s a lot of competition in the economic development field. There are 361 MSA (metropolitan statistical areas) in the United States. There are 18,000 economic development organizations in the United States. All are looking to attract and retain business, just like the Wichita Chamber is.
The prize being sought — the really large expansion or relocation — is relatively rare, as Derreberry said there are just 200 expansions or relocations that feature 500 or more employees each year.
Some of the important tangible things companies are looking at, in order of decreasing importance, are highway access, low labor costs, low occupancy and construction costs, tax exemptions, availability of energy and its cost, availability of skilled labor, state and local incentives, fair corporate tax rates, low union profile, and available land and buildings.
One of the slides Derreberrry presented dealt with the intangible factors that, if aren’t nailed down, “the competition will beat you every time.” These include:
Risk minimization for expanding or relocating employer
Cooperative, enthusiastic, positive, and sincere public and private leadership — sophisticated and wanting of the project
Consultative economic development experts
Solutions-oriented negotiations (“we’ll find a way”)
Tireless momentum that overcomes obstacles
Other intangible qualities of a location include attributes such as vitality, earning, learning, social capital, cost of lifestyle, “after hours,” and “around town.” Many of these fall in to what our mayor and others refer to as amenities. It’s now the duty, it seems, of a city to plan for and provide entertainment for its citizens. Among the economic development planners, this is known as the “third place” beyond home and work: Are there other places I can go and feel good about the community I’m in?
“In February 2007, Stephen Moore wrote a column that appeared in the Wall Street Journal. In it he said ‘Thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government. … In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper.’ Mr. Derreberry, the Wichita Chamber has supported tax increases, subsidies, centralized government planning, and what I call crony capitalism. Do you think this is valid criticism of this chamber?”
He replied that the Chamber opposed a tax increase for education in 2002. The Chamber will support “responsible” taxes, he said. He recognized that a high tax and regulatory environment will inhibit the ability to grow communities. He didn’t address subsidy or centralized government planning, and he didn’t agree that this criticism applies to the Wichita Chamber. Something tells me he doesn’t get asked questions like this very often.
Granting the incentives that the Wichita Chamber wants to offer is expensive. It requires government to pay subsidy directly to companies, or, as is often the case, grant companies relief from paying taxes. Sometimes a company is allowed to use its taxes for its own exclusive benefit, instead of funding the general operations of government.
All these courses are costly.
There’s also some question as to how important these subsidies are to companies. Last year, it was reported that North Carolina offered Cessna $200 million to build a new plant there. Between Kansas, Sedgwick County, and the City of Wichita, Cessna received an offer of $35 million, and decided to build the new plant here. To me, it looks like Cessna left $165 million on the table. Is building a new plant in Wichita worth that much? If they left $165 million on the table, would they have left, say, $185 million there too? The cynic in me says that Cessna never seriously considered building the plant outside Wichita, but they nonetheless wanted a reward for being a good corporate citizen.
The planning that Mr. Derreberry talks about requires government expansion and interventionism on a grand scale. In a newspaper op-ed a few years ago, he mentioned the entrepreneurial spirit of Wichita. Government planning like the downtown revitalization effort underway in Wichita strangles entrepreneurship. So does the public-private partnership.
Since there’s so much competition in economic development, and since Wichita doesn’t have picturesque mountains or seashore, why don’t we try something really different? We could make Wichita and Kansas a laboratory for economic freedom. That would be something quite unusual these days. There’s no telling to what level of prosperity we might advance.
The problem is that this would require unilateral disarmament by Wichita in the escalating arms race between states and cities to see who can dish out the greatest incentives. It doesn’t seem likely to happen, especially given the short time frame of most politicians — the next election campaign.
I spoke to one activist after the talk, and he was distressed at the call for government intervention that Mr. Derreberry called for. This reaction was in the minority, as many seemed appreciate of the Chamber’s efforts.
Another person I talked to said the Chamber’s action reminded him of a quote from Adam Smith: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”
Myself, I thought of a passage by Milton Friedman, which reads: “[The political system] tends to give undue political power to small groups that have highly concentrated interests; to give greater weight to obvious, direct and immediate effects of government action than to possibly more important but concealed, indirect and delayed effects; to set in motion a process that sacrifices the general interest to serve special interests rather than the other way around. There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith’s invisible hand.”