The Wichita city council will consider expanding an existing TIF, or tax increment financing district.
Tomorrow the Wichita City Council will consider expanding the boundaries of an existing tax increment financing district in downtown Wichita. 1
According to city documents for this agenda item,
Expanding the District would allow the Developer to capture the additional increment generated by the increased value of the Ice House building for pay-as-you-go reimbursement of eligible TIF expenses within the TIF district. The Developer would also be reimbursed for the TIF eligible costs related to redevelopment of the Ice House building.
Further:
The project includes up to $317,170 in infrastructure improvements that would be TIF eligible. The Developer proposes that tax increment financing be used to pay for eligible redevelopment project costs on a “pay-as-you-go” basis, for site preparation and infrastructure improvements.
This may be confusing, so here it is in a nutshell: The city will be diverting up to $317,170 in future property tax paid by the developer. Instead of these taxes going to pay for operations of the city, county, and school district, these taxes will be given back to the developer.
Usually, economic development incentives such as tax increment financing, or TIF, are justified because they create jobs. For this building, according to Wichita Eagle reporting from August, the two tenants that will occupy most of the space are existing companies that are moving from other parts of Wichita.
In addition, Gary Oborney, Manager of Union Station, LLC and Ice House, LLC, the company that is receiving the benefit of tax increment financing, has made these recent campaign contributions, according to campaign finance reports filed in July:
Of note, all three are seeking reelection this year.
There is nothing illegal regarding these campaign contributions based on Wichita and Kansas law. Some jurisdictions, however, have laws known as pay-to-play. These laws may prohibit political campaign contributions by those who seek government contracts, prohibit officeholders from voting on laws that will benefit their campaign donors, or the laws may impose special disclosure requirements.
In general, these laws prohibit government officials from enriching their campaign contributors. That seems like a simple concept that makes sense.
While there is no such law in Wichita, wouldn’t citizens appreciate officials acknowledging the campaign support they have received from people with business before the council?
City of Wichita City Council Agenda for October 8, 2019. Agenda Item No. V-1, Public Hearings Considering an Expansion of the Union Station Tax Increment Financing District and Considering a Development Agreement for the Union Station Project Area 3 Plan (District I) ↩
New research explains what you may have wondered: What is tax “decrement” financing?
Wichita has a financing mechanism known as the Gilbert-Mosley tax decrement fund. I knew about tax increment financing, but I never really understood how tax decrement financing worked. I had thought that in this context, “decrement” had a sophisticated meaning that I wasn’t able to understand because I wasn’t smart enough, or I hadn’t tried hard enough, or I didn’t have the correct documents to read.
Now, Chase M. Billingham and Sean Sandefur have published detailed research that explains how the Gilbert-Mosley financing works. Billingham is Assistant Professor of Sociology at Wichita State University. Their research, which forms a chapter of the book Tax Increment Financing and Economic Development, Second Edition: Uses, Structures, and Impact, is titled “The Conceptual Pliability of TIF and the Political Rhetoric of Environmental Remediation: Groundwater Pollution and Tax “Decrement” Financing in Wichita.” You may download a pdf of the chapter by clicking here. The published chapter had to be cut for length, but this pre-print version provides much greater detail than the published version.
Following, an introduction to the research by Billingham:
If you ask people around Wichita why growth in the city’s downtown core has been so slow over the past several decades, you’re likely to hear that one of the main culprits was a terrible problem with groundwater pollution in the 1980s and 1990s. You’re also likely to hear about the miraculous and innovative home-grown response that Wichita came up with to solve this problem. This solution involved using tax-increment financing to fund the groundwater cleanup operation, keep Downtown Wichita from becoming a massive Superfund site, and save the city’s core from turning into a “ghost town.”
Despite the local mythology that has been built up around this operation, neither the history of Wichita’s groundwater problem nor the financial mechanisms that were implemented to address it are well understood by the public.
That’s the focus of a new piece of research published this month as a chapter in a new edited volume – Tax Increment Financing and Economic Development: Uses, Structures, and Impact (SUNY Press). In this chapter, my coauthor Sean Sandefur and I explain the history of Wichita’s downtown groundwater crisis, the politics behind the creation of the local taxing district established to fund the cleanup, and the financial mechanisms that are still in place today to direct money toward the cleanup fund.
Although this has consistently been referred to as a novel use of tax-increment financing, we reveal that the actual structure that was implemented is not an example of TIF at all, but rather a simple diversion of a constant flow of property tax dollars into a special fund, with no relation whatsoever to fluctuations in underlying property values and assessments.
The idea of “TIF” is so poorly understood, so vague, and so frequently subject to mystical ideas about projects “paying for themselves” that it can be used as a convenient label to mask how local governments actually engage in public finance. The results of this research are applicable for thinking about a wide range of downtown development projects currently underway in Wichita, as well as other cities.
A Wichita firm plans to move its offices to what was billed as the city’s premier entertainment district.
King of Freight, a Wichita freight brokerage firm, is planning to move its operations to the vacant Gander Mountain building in WaterWalk. This requires a modification to the lease of the land.
It’s important to recognize that King of Freight is not the tenant in the lease. The landlord is the City of Wichita. The tenant is WaterWalk LLC, a Kansas limited liability company, whose president is Jack P. DeBoer. The lease covers only the land, not the building. The city does not own the building. While the city rents the land to DeBoer, there is undoubtedly a deal between him and King of Freight. Details of that are unknown.
When WaterWalk was conceived, the goal was a destination of retail, entertainment, and residences, and some $41 million of tax money was spent. The original lease for the Gander Mountain ground reflected that. Now, that a non-retail firm will be using the ground, a change was needed.
The reason is that the original lease included a provision for “additional annual rent.” If the business — Gander Mountain — exceeded certain financial parameters, the city could collect additional rent. The additional rent clause was never triggered. Other WaterWalk deals with similar provisions have never paid additional rent, either. 1)
The new lease abolishes the additional rent provision, although it could be reinstated if employment goals are not met. Since the additional rent clause is toothless, so there is no real penalty.
The tenant will continue to pay the city $1 per year in rent. King of Freight will pay $15 per month to use city parking spaces. This is perhaps half the market rate for long-term parking arrangements.
Is the move of King of Freight a good deal for the city and its citizens? King of Freight anticipates adding jobs in the future, and the new lease with the city requires certain job goals to be met. But immediately, the effect is simply moving employees from one downtown office to another. When King of Freight occupies new space, empty space will be left behind.
While putting the Gander Mountain building to use is good, its use as office space moves away from the original concept for WaterWalk, once touted as “Wichita’s Next Great Gathering Place.” 2
Will retail and entertainment establishments wish to locate near an office building? They didn’t want to locate in WaterWalk anyway, so maybe there is no change.
Of interest is DeBoer’s confession of being “confounded” by WaterWalk, recently telling the Wichita Eagle, “It’s a business I don’t know anything about.” 3
Before that, he told the Eagle that whatever becomes of the Gander Mountain building, it will be “something fun and good for the city.” 4
I don’t think that goal has been realized.
Of note: DeBoer told the Eagle he’s had opportunities to “do a restaurant or something,” but he declined. Former Wichita Mayor Carl Brewer, in State of the City addresses, promised specific named restaurants would be opening in WaterWalk. 5
In more detail
Excerpts from the city’s agenda packet for this item:
“The lease’s current rent requirement, which was drafted for a retail use, would be suspended if the job requirement is met, and would terminate in 10 years if KOF and its entities maintains the presence of 400 net new jobs in Wichita through the 10-year period.”
“KOF has also agreed to pay for parking spaces at an initial rate of $15/month per space. Revenue from KOF’s employee parking is estimated at approximately $70,000/year.”
From the lease agreement: “Section 5.01. Minimum Rent. As of the date first written above, Tenant has paid Landlord a minimum fixed annual rent (“Minimum Rent”) of One Dollar ($1) in one (1) installment covering the Term of this Lease as defined in Article I above.”
“Section 5.02. Additional Rent. The Tenant will also pay, without notice, and without abatement, deduction, or setoff, except as otherwise specifically allowed herein, as additional rent, all sums, taxes, assessments, costs, expenses, and other payments which the Tenant in any of the provisions of this Lease assumes or agrees to pay, and, in the event of any nonpayment thereof, the Landlord shall have (in addition to all other rights and remedies) all the rights and remedies provided herein or by law in the case of nonpayment of rent.”
This section then describes the mechanism of calculating “Additional Annual Rent.” This mechanism was crafted for a retail store so that if “Adjusted Net Cash Flow” was ever positive, the city would be paid 25 percent of that. But the activity of the retail store, Gander Mountain, never triggered the payment of additional rent. 6
The section goes on to modify the additional rent provision for uses other than retail, like an office: “No Additional Retail Rent and no Additional Rent involving any payment of any portion of the Adjusted Net Cash Flow shall be owed for any use of the Premises that is not a Retail Use under codes 4400 through 454390 of the 2017 NAICS.”
The property will be paying property taxes: “Section 6.01. Taxes. Tenant shall pay as additional rent during the Term and any extensions thereof, all ad valorem taxes, and all other governmental taxes or charges that may be levied against the Premises.”
Since the property is within a tax increment financing (TIF) district, the taxes flow to that, not to fund the general operations of government.
“Section 9.03. Parking. The parties agree that Tenant’s employees will have nonexclusive access to the 430-space Parking Garage and the 60 spaces of surface parking under U.S. 400 (“Kellogg”) for an initial rate of $15/month per employee for parking between the hours of 8:00 a.m. – 6:00 p.m., Mondays-Fridays. Tenant shall be responsible for providing a monthly report of the number of employees who are parking in Parking Garage and on surface parking lot under Kellogg, and shall remit $15.00 per employee on a monthly basis. At each one-year anniversary of this agreement, the parking rate shall increase 3%.”
“Section 16.06. Assignment; Sublease. Tenant may freely assign or sublease all or any portion of the Premises without Landlord’s consent.”
In his 2008 address, Brewer promised specific development at the struggling Waterfront development, which is heavily subsidized. Beaming with pride, Brewer said to the audience: “And, great strides are being made at Wichita Waterwalk. The topping out ceremony for Waterwalk Place is scheduled for this Thursday and I invite everyone to this event. I am pleased to announce two more national tenants that will be a part of the WaterWalk restaurant and entertainment development. … I am pleased to announce two more national tenants that will be a part of the WaterWalk restaurant and entertainment development. Joining Saddle Ranch Chop House will be Funny Bone Comedy Club and Wet Willies restaurant and daiquiri bar. These are just a couple of the fun and exciting tenants that will help make WaterWalk — Wichita’s Next Great Gathering Place.” This address was delivered a year before DoBoer took full control over WaterWalk, although he was involved before that. ↩
Email with Wichita City Manager Layton, May 10, 2019. ↩
The City of Wichita plans subsidized development of a sports facility as an economic driver. Originally published in July 2017.
West Bank Redevelopment District. Click for larger.This week the Wichita City Council will consider a project plan for a redevelopment district near Downtown Wichita. It is largely financed by Tax Increment Financing and STAR bonds. Both divert future incremental tax revenue to pay for various things within the district.12
City documents promise this: “The City plans to substantially rehabilitate or replace Lawrence-Dumont Stadium into a multi-sport athletic complex. The TIF project would allow the City to make investments in Lawrence-Dumont Stadium, construct additional parking in the redevelopment district, initiate improvements to the Delano multi-use path and make additional transportation improvements related to the stadium project area. In addition to the stadium work, the City plans to construct, utilizing STAR bond funds, a sports museum, improvements to the west bank of the Arkansas River and construct a pedestrian bridge connecting the stadium area with the Century II block. The TIF project is part of the overall plan to revitalize the stadium area and Delano Neighborhood within the district.”3
We’ve heard things like this before. Each “opportunity” for the public to invest in downtown Wichita is accompanied by grand promises. But actual progress is difficult to achieve, as evidenced by the examples of Waterwalk, Kenmar,and Block One.4
Trends of business activity in downtown Wichita. Click for larger.In fact, change in Downtown Wichita — if we’re measuring the count of business firms, jobs, and payroll — is in the wrong direction, despite large public and private investment. 5
Perhaps more pertinent to a sports facility as an economic growth driver is the Intrust Bank Arena. Two years ago the Wichita Eagle noted the lack of growth in the area. 6 Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes. 7
I’m sure the city will remind us that the arena was a Sedgwick County project, not a City of Wichita project, as if that makes a difference. Also, the poor economic performance cited above is for Downtown Wichita as delineated by zip code 67202, while the proposed baseball stadium project lies just outside that area, as if that makes a difference.
By the way, this STAR bonds district is an expansion of an existing district which contains the WaterWalk development. That development has languished, with acres of land having been available for development for many years. We’ve also found that the city was not holding the WaterWalk developer accountable to the terms of the deal that was agreed upon, to the detriment of Wichita taxpayers. 8
Following, selected articles on the economics of public financing of sports stadiums.
The Economics of Subsidizing Sports Stadiums
Scott A. Wolla, “The Economics of Subsidizing Sports Stadiums,” Page One Economics, May 2017. This is a project of the Federal Reserve Bank of St. Louis. Link.
“Building sports stadiums has an impact on local economies. For that reason, many people support the use of government subsidies to help pay for stadiums. However, economists generally oppose such subsidies. They often stress that estimations of the economic impact of sports stadiums are exaggerated because they fail to recognize opportunity costs. Consumers who spend money on sporting events would likely spend the money on other forms of entertainment, which has a similar economic impact. Rather than subsidizing sports stadiums, governments could finance other projects such as infrastructure or education that have the potential to increase productivity and promote economic growth.”
What economists think about public financing for sports stadiums
Jeff Cockrell, Chicago Booth Review, February 01, 2017. Link.
“But do the economic benefits generated by these facilities — via increased tourism, for example — justify the costs to the public? Chicago Booth’s Initiative on Global Markets put that question to its US Economic Experts Panel. Fifty-seven percent of the panel agreed that the costs to taxpayers are likely to outweigh benefits, while only 2 percent disagreed — though several panelists noted that some contributions of local sports teams are difficult to quantify.”
Publicly Financed Sports Stadiums Are a Game That Taxpayers Lose
Jeffrey Dorfman. Forbes, January 31, 2015. Link.
“Once you look at things this way, you see that stadiums can only justify public financing if they will draw most attendees from a long distance on a regular basis. The Super Bowl does that, but the average city’s football, baseball, hockey, or basketball team does not. Since most events held at a stadium will rely heavily on the local fan base, they will never generate enough tax revenue to pay back taxpayers for the cost of the stadium.”
Sports Facilities and Economic Development
Andrew Zimbalist, Government Finance Review, August 2013. Link.
“This article is meant to emphasize the complexity of the factors that must be evaluated in assessing the economic impact of sports facility construction. While prudent planning and negotiating can improve the chances of minimizing any negative impacts or even of promoting a modest positive impact, the basic experience suggests that a city should not expect that a new arena or stadium by itself will provide a boost to the local economy.
Instead, the city should think of the non-pecuniary benefits involved with a new facility, whether they entail bringing a professional team to town, keeping one from leaving, improving the conveniences and amenities at the facility, or providing an existing team with greater resources for competition. Sports are central to cultural life in the United States (and in much of the world). They represent one of the most cogent ways for residents to feel part of and enjoy belonging to a community. The rest of our lives are increasingly isolated by modern technological gadgetry. Sport teams help provide identity to a community, and it is this psychosocial benefit that should be weighed against the sizeable public investments that sports team owners demand.”
Professional Sports as Catalysts for Metropolitan Economic Development
Robert A. Baade, Journal of Urban Affairs, 1996. Link.
“To attract or retain a team, cities are offering staggering financial support and rationalize their largesse on economic grounds. Do professional sports increase income and create jobs in amounts that justify the behavior of cities? The evidence detailed in this paper fails to support such a rationale. The primary beneficiaries of subsidies are the owners and players, not the taxpaying public.”
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” Lefler, Dion. 5 years after Intrust Bank Arena opens, little surrounding development has followed.Wichita Eagle. December 20, 2014. Available at http://www.kansas.com/news/local/article4743402.html. ↩
A look at some of the large economic development programs in Wichita and Kansas.
Here’s video of a presentation I gave at the Wichita Pachyderm Club this week on economic development incentives. The video was produced by Paul Soutar of Graphic Lens. View below, or click here to view at YouTube.
Following, articles that address some of the topics I presented:
Industrial revenue bonds in Kansas: Industrial Revenue Bonds are a mechanism that Kansas cities and counties use to allow companies to avoid paying property and sales taxes.
Wichita TIF projects: some background: Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.
Community improvement districts in Kansas: In Kansas Community Improvement Districts, merchants charge additional sales tax for the benefit of the property owners, instead of the general public.
STAR bonds in Kansas: The Kansas STAR bonds program provides a mechanism for spending by autopilot, without specific appropriation by the legislature.
The Wichita City Council will consider approval of a redevelopment plan in a tax increment financing (TIF) district.
This week the Wichita City Council will hold a public hearing considering approval of more tax increment financing (TIF) spending in downtown Wichita. The spending is for the second phase of redevelopment of the Union Station property on East Douglas. According to city documents, the total cost of this phase is $31,000,000, with TIF paying for $2,954,734. 1
This is a pay-as-you-go form of TIF, which means the city does not borrow funds as it would in a traditional TIF district. Instead, the eligible portion of the developer’s property taxes will be rerouted back to the development as they are paid.
The TIF district was established in 2014. The council this week considers a redevelopment plan, which authorizes spending TIF funds on a specific project. Redevelopment plans must be approved by a two-thirds majority of the council. While overlapping jurisdictions like counties and school districts can block the formation of a TIF district, they have no such role in the approval of a redevelopment plan.
Of note, this public hearing is being held after the fact, sort of. City documents state: “A development agreement was approved by the City Council on August 7, to allow for the developer to begin non-TIF eligible improvements in order to meet deadlines for a new tenant.” The city documents for the August 7 meeting hold this: 2
The Developer has requested that the development agreement be approved now, prior to adoption of the project plan, to allow work to begin on the Meade Corridor improvements in order to complete the project in time for the tenant to move in. The Development agreement is drafted to allow for the Meade Corridor improvements to occur following adoption of the agreement, however, any work or reimbursement for TIF is contingent on City Council adoption of the project plan following the September 11 public hearing.
Citizens have to wonder will the September 11 public hearing have any meaning or relevance, given that on August 7 the city gave its de facto approval of the redevelopment plan.
Following, more information about tax increment financing.
Tax increment financing disrupts the usual flow of tax dollars, routing funds away from cash-strapped cities, counties, and schools back to the TIF-financed development. TIF creates distortions in the way cities develop, and researchers find that the use of TIF means lower economic growth.
How TIF works
A TIF district is a geographically-defined area.
In Kansas, TIF takes two or more steps. The first step is that cities or counties establish the boundaries of the TIF district. After the TIF district is defined, cities then must approve one or more project plans that authorize the spending of TIF funds in specific ways. (The project plan is also called a redevelopment plan.) In Kansas, overlapping counties and school districts have an opportunity to veto the formation of the TIF district, but this rarely happens. Once the district is formed, cities and counties have no ability to object to TIF project plans.
Figure 1.Before the formation of the TIF district, the property pays taxes to the city, county, school district, and state as can be seen in figure 1. Because property considered for TIF is purportedly blighted, the amount of tax paid is usually small. Whatever it is, that level is called the “base.”
Figure 2.After approval of one or more TIF project plans the city borrows money and gives it to the project or development. The city now has additional debt in the form of TIF bonds that require annual payments. Figure 2 illustrates. (There is now another form of TIF known as “pay-as-you-go” that works differently, but produces much the same economic effect.)
Figure 3.Figure 3 shows the flow of tax revenue after the formation of the TIF district and after the completion of a project. Because buildings were built or renovated, the property is worth more, and the property tax is now higher. The development now has two streams of property tax payments that are handled in different ways. The original tax — the “base” — is handled just like before, distributed to city, state, school district, and the state, according to their mill levy rates. The difference between the new tax and the base tax — the “increment” — is handled differently. It goes to only two destinations (mostly): The State of Kansas, and repayment of the TIF bonds.
Figure 4.Figure 4 highlights the difference in the flow of tax revenues. The top portion of the illustration shows development outside of TIF. We see the flows of tax payments to city, county, school district, and the state. In the bottom portion, which shows development under TIF, the tax flows to city, county, and school district are missing. No longer does a property contribute to the support of these three units of government, although the property undoubtedly requires the services of them. This is especially true for a property in Old Town, which consumes large amounts of policing.
(Cities, counties, and school districts still receive the base tax payments, but these are usually small, much smaller than the incremental taxes. In non-TIF development, these agencies still receive the base taxes too, plus whatever taxes result from improvement of the property — the “increment,” so to speak. Or simply, all taxes.)
The Kansas law governing TIF, or redevelopment districts as they are also called, starts at K.S.A. 12-1770.
TIF and public policy
Originally most states included a “but for” test that TIF districts must meet. That is, the proposed development could not happen but for the benefits of TIF. Many states have dropped this requirement. At any rate, developers can always present proposals that show financial necessity for subsidy, and gullible government officials will believe.
Similarly, TIF was originally promoted as a way to cure blight. But cities are so creative and expansive in their interpretation of blight that this requirement, if it still exists, has little meaning.
The rerouting of property taxes under TIF goes against the grain of the way taxes are usually rationalized. We use taxation as a way to pay for services that everyone benefits from, and from which we can’t exclude people. An example would be police protection. Everyone benefits from being safe, and we can’t exclude people from benefiting from police protection.
So when we pay property tax — or any tax, for that matter — people may be comforted knowing that it goes towards police and fire protection, street lights, schools, and the like. (Of course, some is wasted, and government is not the only way these services, especially education, could be provided.)
But TIF is contrary to this justification of taxes. TIF allows property taxes to be used for one person’s (or group of persons) exclusive benefit. This violates the principle of broad-based taxation to pay for an array of services for everyone. Remember: What was the purpose of the TIF bonds? To pay for things that benefited the development. Now, the development’s property taxes are being used to repay those bonds instead of funding government.
One more thing: Defenders of TIF will say that the developers will pay all their property taxes. This is true, but only on a superficial level. We now see that the lion’s share of the property taxes paid by TIF developers are routed back to them for their own benefit.
It’s only infrastructure
In their justification of TIF in general, or specific projects, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on infrastructure. This allows TIF proponents to say the money isn’t really being spent for the benefit of a specific project. It’s spent on infrastructure, they say, which they contend is something that benefits everyone, not one project specifically. Therefore, everyone ought to pay.
This attitude is represented by a comment left at Voice for Liberty, which contended: “The thing is that real estate developers do not invest in public streets, sidewalks and lamp posts, because there would be no incentive to do so. Why spend millions of dollars redoing or constructing public streets when you can not get a return on investment for that”
This perception is common: that when we see developers building something, the City of Wichita builds the supporting infrastructure at no cost to the developers. But it isn’t quite so. About a decade ago a project was being developed on the east side of Wichita, the Waterfront. This project was built on vacant land. Here’s what I found when I searched for City of Wichita resolutions concerning this project:
Figure 5. Waterfront resolutions.Note specifically one item: $1,672,000 for the construction of Waterfront Parkway. To anyone driving or walking in this area, they would think this is just another city street — although a very nicely designed and landscaped street. But the city did not pay for this street. Private developers paid for this infrastructure. Other resolutions resulted in the same developers paying for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. All this is infrastructure that we’re told real estate developers will not pay for. But in order to build the Waterfront development, private developers did, with a total cost of these projects being $3,334,500. (It’s likely I did not find all the resolutions and costs pertaining to this project, and more development has happened since this research.)
In a TIF district, these things are called “infrastructure” and will be paid for by the development’s own property taxes — taxes that must be paid in any case. Outside of TIF districts, developers pay for these things themselves.
If not for TIF, nothing will happen here
Generally, TIF is justified using the “but-for” argument. That is, nothing will happen within a district unless the subsidy of TIF is used. Paul F. Byrne explains:
“The but-for provision refers to the statutory requirement that an incentive cannot be awarded unless the supported economic activity would not occur but for the incentive being offered. This provision has economic importance because if a firm would locate in a particular jurisdiction with or without receiving the economic incentive, then the economic impact of offering the incentive is non-existent. … The but-for provision represents the legislature’s attempt at preventing a local jurisdiction from awarding more than the minimum incentive necessary to induce a firm to locate within the jurisdiction. However, while a firm receiving the incentive is well aware of the minimum incentive necessary, the municipality is not.”
“This paper conducts a comprehensive assessment of the effectiveness of Chicago’s TIF program in creating economic opportunities and catalyzing real estate investments at the neighborhood scale. This paper uses a unique panel dataset at the block group level to analyze the impact of TIF designation and investments on employment change, business creation, and building permit activity. After controlling for potential selection bias in TIF assignment, this paper shows that TIF ultimately fails the ‘but-for’ test and shows no evidence of increasing tangible economic development benefits for local residents.” (emphasis added)
In the paper, the author clarifies:
“To clarify these findings, this analysis does not indicate that no building activity or job crea-tion occurred in TIFed block groups, or resulted from TIF projects. Rather, the level of these activities was no faster than similar areas of the city which did not receive TIF assistance. It is in this aspect of the research design that we are able to conclude that the development seen in and around Chicago’s TIF districts would have likely occurred without the TIF subsidy. In other words, on the whole, Chicago’s TIF program fails the ‘but-for’ test.
Later on, for emphasis:
“While the findings of this paper are clear and decisive, it is important to comment here on their exact extent and external validity, and to discuss the limitations of this analysis. First, the findings do not indicate that overall employment growth in the City of Chicago was negative or flat during this period. Nor does this research design enable us to claim that any given TIF-funded project did not end up creating jobs. Rather, we conclude that on-average, across the whole city, TIF was unsuccessful in jumpstarting economic development activity — relative to what would have likely occurred otherwise.” (emphasis in original)
The author notes that these conclusions are specific to Chicago’s use of TIF, but should “should serve as a cautionary tale.”
The paper reinforces the problem of using tax revenue for private purposes, rather than for public benefit: “Essentially, Chicago’s extensive use of TIF can be interpreted as the siphoning off of public revenue for largely private-sector purposes. Although, TIF proponents argue that the public receives enhanced economic opportunity in the bargain, the findings of this paper show that the bargain is in fact no bargain at all.”
TIF is social engineering
TIF represents social engineering. By using it, city government has decided that it knows best where development should be directed. In particular, the Wichita city council has decided that Old Town and downtown development is on a superior moral plane to other development. Therefore, we all have to pay higher taxes to support this development. What is the basis for saying Old Town developers don’t have to pay for their infrastructure, but developers in other parts of the city must pay?
TIF doesn’t work
Does TIF work? It depends on what the meaning of “work” is.
If by working, do we mean does TIF induce development? If so, then TIF usually works. When the city authorizes a TIF project plan, something usually gets built or renovated. But this definition of “works” must be tempered by a few considerations.
Does TIF pay for itself?
First, is the project self-sustaining? That is, is the incremental property tax revenue sufficient to repay the TIF bonds? This has not been the case with all TIF projects in Wichita. The city has had to bail out two TIFs, one with a no-interest and low-interest loan that cost city taxpayers an estimated $1.2 million.
The verge of corruption
Second, does the use of TIF promote a civil society, or does it lead to cronyism? Randal O’Toole has written:
“TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.”
We see this in Wichita, where the regular recipients of TIF benefits are also regular contributors to the political campaigns of those who are in a position to give them benefits. The corruption is not illegal, but it is real and harmful, and calls out for reform. See In Wichita, the need for campaign finance reform.
The effect of TIF on everyone
Third, what about the effect of TIF on everyone, that is, the entire city or region? Economists have studied this matter, and have concluded that in most cases, the effect is negative.
“TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.”
So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:
“If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.
We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.” (emphasis added)
In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.” (emphasis added)
“This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.” (emphasis added)
These studies and others show that as a strategy for increasing the overall wellbeing of a city, TIF fails to deliver prosperity, and in fact, causes harm.
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Notes
Wichita city council agenda packet for September 11, 2018. ↩
Wichita city council agenda packet for August 7, 2018. ↩
The city has finalized a proposal for a development near Naftzger Park. It includes a few new and creative provisions.
This week the City of Wichita will consider a development agreement for land and buildings near Naftzger Park in downtown Wichita. 1
Community Improvement District
The plan includes the formation of a Community Improvement District. In CIDs, merchants charge additional sales tax for the benefit of the property owners, instead of the general public.2 In this CID, the proposed additional sales tax is two cents per dollar, the maximum available under state law, and could generate up to $3.1 million over a period as long as 22 years.3
This proposed CID contains a “sweetener,” likely designed to reduce public opposition. Ten percent of the CID revenue would be used to maintain Naftzger Park. We’ve seen this before, as in the Cabela’s CID where some of the funds paid for road improvements near the store.4
The action the city council will consider this week is whether to accept the petitions to form the CID and set January 9, 2018 as the date for the public hearing.
Industrial Revenue Bonds and tax forgiveness
This project is also requesting Industrial Revenue Bonds. under this program, the city will not be lending money, nor will it be responsible for repaying any loans. Instead, the program allows the developers to avoid paying sales tax on construction.5 City documents don’t give an amount of tax savings, but it could be over one million dollars. 6
City documents state that a property tax abatement is not being requested. That isn’t available for this project, as its property taxes are already allocated by TIF.
Tax Increment Financing (TIF)
The project has already been approved for of Tax Increment Financing. In this case, future property tax revenues from this project will be rerouted from their normal flow to reconstruct Naftzger Park, something that is seen as a large benefit to the developers.
Construction administration fee
The city will pay the developers up to $250,000 for construction administration of the park.
Parking
This agreement also contains something I’m sure is considered as creative. We also saw this as an incentive offered to Cargill earlier this year. In this case, the city will pay the developers a fee for using their parking spaces. In this case, the city proposes paying a one-time easement fee of $10,000 per spot for from 80 to 90 parking spots. The total payment would be from $800,000 to $900,000. These parking spots would be available to the public outside of business hours, which are defined as 6:00 a.m. to 6:00 p.m. Monday through Friday.
Private events
Buried with the development agreement is a provision that the developers may use the park for private events: “The City and the Board will cooperate with Developers, upon Developers’ request, to create an Annual Master Calendar of private and public events for the Park, with the expectation that the Developers will have the use of the Park for certain private events.”
Little else is mentioned regarding these private events, such as the maximum number of private events. This seems subject to abuse.
Naftzger Park public hearing to be considered. The Wichita City Council may set August 15, 2017 as the date for a public hearing on the future of Naftzger Park in downtown Wichita.
Naftzger Park concerts and parties? In Wichita, a space for outdoor concerts may be created across the street from where amplified concerts are banned.
Downtown Wichita business trends. There has been much investment in Downtown Wichita, both public and private. What has been the trend in business activity during this time?
Council Agenda: “The Developer and Park Board control the land within the proposed CID. The requested CID would provide pay-as-you-go financing for qualified project costs through the imposition of a 2% special retail sales tax on all taxable retail sales within the district for a maximum of 22 years. The eligible project costs identified in the CID petition include costs of renovating the building at 691 E. William and construction of the Class A commercial building. The City will receive 10% of the CID revenue to fund Naftzger Park maintenance and or ROW repairs and improvements, in addition to the 5% administrative fee. The revenue is estimated to be $310,000. The maximum amount of project costs that can be reimbursed is $3,118,504 based on the projected revenue of the project, exclusive of the City’s administrative fee and Naftzger Park maintenance.” ↩
“The Developer is also requesting the issuance of a letter of intent to issue Industrial Revenue Bonds (IRBs), valid through December 31, 2022, in an amount not-to-exceed $26,000,000 to achieve a sales tax exemption on items purchased for the redevelopment project. No property tax abatement is being requested.” ↩
A development near downtown Wichita may receive subsidy through four different avenues.
This week the Wichita City Council will consider approval of a development agreement with EPC Real Estate, LLC, for the Delano catalyst site. This is vacant land north of Douglas, between the Advanced Learning Library and the River Vista project.
Update: The measure passed four votes to three, with Bluebaugh, Frye, and Longwell in the minority.
One form of additional subsidy is forgiveness of sales tax on the construction of buildings. The Letter of Intent for Industrial Revenue Bonds the council will consider states: “The City’s governing body has authorized an application for sales tax exemption with an estimated value of $1,611,822.”
But a really big gift to the developers is the price of the land. City document state the selling price for the 7.2 acre plot is $750,000. That’s about ($750000 / 7.2 acres) = $104,167 per acre. It’s a pretty good deal for the buyers. A look at some current commercial land listings in Wichita finds these:
1.20 acres at 47th South and Seneca for $425,000, or $354,167 per acre.
0.50 acres at 140 N. West St. for $225,000, or $450,000 per acre.
20.00 acres at 1462 S. Maize Road “Great for entertainment, retail, etc.” for $4,251,456, or $212,573 per acre.
0.52 acres at 640 N. Webb Road for $368,570, or $708,788 per acre.
It’s clear that the developers are buying the land from the city for a small fraction of its value.
By the way: Wichita Mayor Jeff Longwell says the city will no longer offer cash incentives for economic development. But selling land a deeply discounted price: Is that different from a cash incentive?
We might also note that this project will receive millions in benefits from Tax Increment Financing. This was a program born out of a perceived need to help redevelop blighted property. This development site, however, is vacant land.
Finally: If downtown Wichita is really progressing as well as its boosters say, why is it necessary to offer so much subsidy to develop a project like this?
The City of Wichita plans subsidized development of a sports facility as an economic driver.
West Bank Redevelopment District. Click for larger.This week the Wichita City Council will consider a project plan for a redevelopment district near Downtown Wichita. It is largely financed by Tax Increment Financing and STAR bonds. Both divert future incremental tax revenue to pay for various things within the district.12
City documents promise this: “The City plans to substantially rehabilitate or replace Lawrence-Dumont Stadium into a multi-sport athletic complex. The TIF project would allow the City to make investments in Lawrence-Dumont Stadium, construct additional parking in the redevelopment district, initiate improvements to the Delano multi-use path and make additional transportation improvements related to the stadium project area. In addition to the stadium work, the City plans to construct, utilizing STAR bond funds, a sports museum, improvements to the west bank of the Arkansas River and construct a pedestrian bridge connecting the stadium area with the Century II block. The TIF project is part of the overall plan to revitalize the stadium area and Delano Neighborhood within the district.”3
We’ve heard things like this before. Each “opportunity” for the public to invest in downtown Wichita is accompanied by grand promises. But actual progress is difficult to achieve, as evidenced by the examples of Waterwalk, Kenmar,and Block One.4
Trends of business activity in downtown Wichita. Click for larger.In fact, change in Downtown Wichita — if we’re measuring the count of business firms, jobs, and payroll — is in the wrong direction, despite large public and private investment. 5
Perhaps more pertinent to a sports facility as an economic growth driver is the Intrust Bank Arena. Two years ago the Wichita Eagle noted the lack of growth in the area. 6 Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes. 7
I’m sure the city will remind us that the arena was a Sedgwick County project, not a City of Wichita project, as if that makes a difference. Also, the poor economic performance cited above is for Downtown Wichita as delineated by zip code 67202, while the proposed baseball stadium project lies just outside that area, as if that makes a difference.
By the way, this STAR bonds district is an expansion of an existing district which contains the WaterWalk development. That development has languished, with acres of land having been available for development for many years. We’ve also found that the city was not holding the WaterWalk developer accountable to the terms of the deal that was agreed upon, to the detriment of Wichita taxpayers. 8
Following, selected articles on the economics of public financing of sports stadiums.
The Economics of Subsidizing Sports Stadiums
Scott A. Wolla, “The Economics of Subsidizing Sports Stadiums,” Page One Economics, May 2017. This is a project of the Federal Reserve Bank of St. Louis. Link.
“Building sports stadiums has an impact on local economies. For that reason, many people support the use of government subsidies to help pay for stadiums. However, economists generally oppose such subsidies. They often stress that estimations of the economic impact of sports stadiums are exaggerated because they fail to recognize opportunity costs. Consumers who spend money on sporting events would likely spend the money on other forms of entertainment, which has a similar economic impact. Rather than subsidizing sports stadiums, governments could finance other projects such as infrastructure or education that have the potential to increase productivity and promote economic growth.”
What economists think about public financing for sports stadiums
Jeff Cockrell, Chicago Booth Review, February 01, 2017. Link.
“But do the economic benefits generated by these facilities — via increased tourism, for example — justify the costs to the public? Chicago Booth’s Initiative on Global Markets put that question to its US Economic Experts Panel. Fifty-seven percent of the panel agreed that the costs to taxpayers are likely to outweigh benefits, while only 2 percent disagreed — though several panelists noted that some contributions of local sports teams are difficult to quantify.”
Publicly Financed Sports Stadiums Are a Game That Taxpayers Lose
Jeffrey Dorfman. Forbes, January 31, 2015. Link.
“Once you look at things this way, you see that stadiums can only justify public financing if they will draw most attendees from a long distance on a regular basis. The Super Bowl does that, but the average city’s football, baseball, hockey, or basketball team does not. Since most events held at a stadium will rely heavily on the local fan base, they will never generate enough tax revenue to pay back taxpayers for the cost of the stadium.”
Sports Facilities and Economic Development
Andrew Zimbalist, Government Finance Review, August 2013. Link.
“This article is meant to emphasize the complexity of the factors that must be evaluated in assessing the economic impact of sports facility construction. While prudent planning and negotiating can improve the chances of minimizing any negative impacts or even of promoting a modest positive impact, the basic experience suggests that a city should not expect that a new arena or stadium by itself will provide a boost to the local economy.
Instead, the city should think of the non-pecuniary benefits involved with a new facility, whether they entail bringing a professional team to town, keeping one from leaving, improving the conveniences and amenities at the facility, or providing an existing team with greater resources for competition. Sports are central to cultural life in the United States (and in much of the world). They represent one of the most cogent ways for residents to feel part of and enjoy belonging to a community. The rest of our lives are increasingly isolated by modern technological gadgetry. Sport teams help provide identity to a community, and it is this psychosocial benefit that should be weighed against the sizeable public investments that sports team owners demand.”
Professional Sports as Catalysts for Metropolitan Economic Development
Robert A. Baade, Journal of Urban Affairs, 1996. Link.
“To attract or retain a team, cities are offering staggering financial support and rationalize their largesse on economic grounds. Do professional sports increase income and create jobs in amounts that justify the behavior of cities? The evidence detailed in this paper fails to support such a rationale. The primary beneficiaries of subsidies are the owners and players, not the taxpaying public.”
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” Lefler, Dion. 5 years after Intrust Bank Arena opens, little surrounding development has followed.Wichita Eagle. December 20, 2014. Available at http://www.kansas.com/news/local/article4743402.html. ↩
