The video is presented in three sections. The material in the first section is different from the way TIF districts work in Kansas, but the other two sections are very similar to the way the law works in Kansas.
At the start of part 3 (“Problems with TIFs”) the narrator states the problem succinctly: “Tax increment financing negatively affects everybody’s property tax bill by taking the tax revenue from increased taxable valuations on the properties in the TIF areas and putting that into TIF accounts.”
She then presents an illustration showing how the property taxes for non-TIF properties have to rise to make up for the fact that taxes from TIF properties do not go towards paying for city, county, or school district services. While Wichita doesn’t use the term “TIF accounts” as used in this video, the economic effect is the same.
The video also mentions politically-favored developers being the beneficiaries of TIF districts, specifically mentioning “a friend of the city who might own property that is struggling.” I wonder: is the North Dakota Policy Council aware of the situation in Wichita, where many feel that the city is bailing out Real Development (also known as the “Minnesota Guys”) by not only granting TIF financing to them, but increasing the amount of TIF financing against the recommendation of its independent consultant?
Longwell and Miller — the rest of the council too, for that matter — are aided by newspaper reporters like the Wichita Eagle’s Bill Wilson, who is dismissive and hostile towards free markets and those who advocate for them, calling reliance on markets “intellectually shallow” and a “thin ideological argument.”
The mayor disagreed with those who have appeared at city council meetings to testify against the use of TIF. He told of how the city called mayors’ associations and the National League of Cities, and they said that most large cities use incentives. He learned that cities use some incentives that that Wichita has not yet heard of, which undoubtedly will give city staff some additional tools in the toolbox in the future.
He said “Incentives are available, and we’re on the right track.”
He said that in a recent meeting of mayors he attended, he learned that the mayors of other cities are trying to figure out how to use incentives and recruit business. They’re not turning their backs on incentives, he said, adding that “What we’re doing is nothing new.”
He told the audience that “We as a city are going to have to endure change, and we as a city are going to have to understand any time there’s change, there is going to be some pain.”
He added that he appreciated input from those who oppose the various subsidies and incentives the city gives to developers, and the city did check to see if the information they provided to the city was correct.
Commentary
The National League of Cities, one of the organizations the mayor consulted with regarding the use of incentives for the purpose of economic development, promotes an expansion of the powers of cities to engage in taxpayer-funded economic development subsidies. Its mission statement sounds noble: “Its mission is to strengthen and promote cities as centers of opportunity, leadership, and governance.” But citizens should not be deceived. It promotes interventionist practices rather than economic freedom. An example is its celebration of the U.S. Supreme Court decision in Kelo v. City of New London, which the Wall Street Journal described as “one of the worst in recent years, handing local governments carte blanche to seize private property in the name of economic development.”
The mayor’s refusal to embrace economic freedom — which he has described as a “philosophy” that is not viable in the real world — means that Wichita is likely to continue to engage in the same competitive practices as do almost all other cities. It means that deals like the subsidy granted to Real Development is a template for other taxpayers-funded giveaways. As Council Member Paul Gray has warned, the plans for the redevelopment of downtown Wichita are likely to require many millions — perhaps hundreds of millions of dollars — of public assistance or investment. Since there isn’t enough tax increment financing available to pay for this, we can expect to see proposals for tax increases, such as a new city sales tax of perhaps one cent on the dollar, to pay for downtown redevelopment.
What Wichita is missing out on is a way to truly distinguish itself from all the other cities and counties that are all using the same economic development tools. Presently about all we can do is offer subsidies that are larger than what other cities offer. But if we decided to forgo the use of the usual economic development subsidies and incentives, that would be something very unusual. It could really put Wichita on the map as a place to locate to.
Since these economic development incentives and subsidies require other taxpayers, both individuals and businesses, to pay for their cost, Wichita could reduce the cost of doing business in Wichita for everyone. A company considering locating to Wichita could be confident that it would be operating in a low-tax environment. It wouldn’t have to hope that it fits into the city’s economic development policy guidelines. It wouldn’t have to hope that politicians and bureaucrats view its application favorably.
Further, once a company locates here, it wouldn’t have to worry that other companies will receive incentives and subsidies that it will have to pay for. It would not need to worry about the other costs that subsidies impose, such as subsidized companies having lower overhead and are therefore better able to compete for employees.
Eliminating interventionist policies from city hall could have other benefits. Is there a “good ‘ol boy” network of insiders that use Wichita city hall as their personal piggy bank? By eliminating the practice of granting incentives and subsidies, we could reduce or eliminate the cynical attitude of many citizens towards city government.
We wouldn’t have to worry whether the campaign contributions made by those seeking favor from city hall were made in the interest of good government, or made in the hopes of getting a TIF district or other subsidy passed through the council.
These ideas, however, are not seriously considered by the mayor or any city council members, at least to my knowledge. Instead, we in Wichita are doomed to finance an escalating economic development arms race. The economic freedom of Wichitans will decline.
This is noteworthy in light of the mayor’s curious assertion in his remarks that we will have to “endure pain” caused by change. We’ve changed nothing.
The item, which appeared on the consent agenda, was the second reading for the ordinances that authorize the Exchange Place Project, including the expansion of its tax increment financing district.
(A consent agenda is a group of items that will be voted on in bulk with a single vote. An item on a consent agenda will be discussed only if a council member requests the item to be “pulled.” If that is done, the item will be voted on separately. Generally, consent agenda items are considered by the city to be non-controversial, but that is not always the case.)
Council Member Lavonta Williams wanted to know more about the change to the parking plan. On Saturday reporting by the Wichita Eagle’s Brent Wistrom told of how the number of parking spaces that will be available to the public has declined as the project plan has evolved: “Now the proposed garage near Douglas and Market would have only 64 spaces saved for public parking. That’s down from 103 promised earlier this month, which was down from the 149 projected in March. Meanwhile, the number of spaces reserved for apartment tenants increased from 195 to 209.”
The availability of additional public parking spaces in downtown was one of the major reasons cited by city council members as a reason for approving the Exchange Place project.
Assistant City Manager Cathy Holderman asked Pat Ayers, a former Key Construction executive, to respond to the question. He said that the unique aspects of the proposed garage actually increased the number of parking spaces available during the work day, as residents of the apartments drive their cars to work.
Is this a deviation from what was originally planned, asked Williams? Yes, was the reply from Ayers.
Vice Mayor Jeff Longwell asked Holdeman about a safeguard in place for this project, a ten percent “retainage.” Ayers replied that this provision is in effect for this project. But Council Member Paul Gray said a retainage is common to construction contracts, and that it simply ensures that the contractor completes the job, not the sustainability of the project.
There was mention of the fact that payments will be made directly to vendors, not to Real Development, the developers of the project. This is a reminder of the peculiar arrangement where the city is placing a huge bet of the success of downtown Wichita redevelopment in the hands of the principals behind Real Development, but evidently we don’t trust them enough to write them a check and be confident they will pay their bills.
The measure passed with Gray and Jim Skelton voting against the measure, as they did last week.
Last week’s meeting of the Wichita City Council featured a message from Council Member Janet Miller that illustrated her firm belief in centralized government planning for the purposes of economic development. It also contained a material mistake in the understanding of the facts of the project.
In her remarks from the bench, Miller disagreed with those who testify at council meetings against tax increment financing (TIF). She said there is much information that says this type of economic development incentive is effective.
She said “Sometimes I wonder what city folks are living in when they talk about the negative, or the lack of results from TIFs.” She then named several Wichita TIF districts that she said performed well.
If her remarks were aimed at me and some of the other people who have testified at city council meetings against the formation of TIF districts, council member Miller may not have been listening very carefully. We do not deny that TIF districts produce results — within the district itself. Things get built, buildings get renovated. It is the effect of TIF on the city as a whole that we are concerned with.
It’s also the unobserved effects — the things that don’t happen because Wichita props up developers in politically-favored areas such as downtown. This form of centralized planning from Wichita city hall overrides the decisions that the citizens of Wichita make with their own pocketbooks, and concentrates power in the hands of bureaucrats and politicians.
As Randal O’Toole has written: “TIF today is often part of a social engineering agenda that Americans should reject.”
Miller praised the amount of office space Real Development has brought online in downtown Wichita. To the extent that this has been done without government assistance, this should be praised.
She agreed with Vice Mayor Longwell’s assessment of this project, saying “This is not a tax abatement project.” She is just as wrong as is Longwell and other council members who believe this.
In discussing the risk involved in this project, Miller told of how the disbursements from a HUD-guaranteed loan that will finance much of this project will made directly to contractors, not to Real Development. City of Wichita documents indicate that the City’s payments will be made in the same way. This is a quite peculiar arrangement: we are placing a huge bet of the success of downtown Wichita redevelopment in the hands of the principals behind Real Development, but evidently we don’t trust them enough to write them a check and be confident they will pay their bills.
Miller also spoke of the jobs that will be created by this project. Implicit in her argument is that this project, or something similar, would not occur without the city’s subsidy. Her argument also ignores what economists tell us — that TIF districts simply transfer development from one part of town to another.
What Wichitans should be most concerned about, however, is a misstatement by Miller that other council members may have relied on in making their decision on how to vote. Miller said: “The property tax increases, the increment that’s being calculated in this project, includes only the buildings in this project.”
This statement directly contradicts the facts. In the Longhofer study, other properties owned by Real Development — the Petroleum Building, Sutton Place, 105 S. Broadway, and others — are used to support the TIF loan for the Exchange Place project. In response to my question, Wichita’s urban development director Allen Bell confirmed the same.
In her message from the bench, Miller said that city staff and council members have had enough time to go over this proposal. Her mistaken remarks indicate, however, that the project is still not understood very well by the council, neither its mechanics or its economic effect.
He said tax revenues will increase from $28,000 to half a million dollars, repeating that it is not a tax abatement.
So is it true that TIF is not a tax abatement?
A little background: The Wichita City council grants property tax abatements regularly as part of its Industrial Revenue Bond program. In the IRB program, the city is not the lender of funds, and it does not guarantee that the bonds will be repaid. Instead, the benefit of the IRB program is that the applicant won’t have to pay property tax on property purchased with the bond money. This abatement is generally granted for a period of ten years, although it is reviewed after five years to see if the company is fulfilling the promises it made to justify the tax abatement. In addition, a sales tax exemption may be granted on the property purchased with the bond money.
Confused? Many people are. A few weeks ago the city issued IRBs to a Wichita movie theater operator. Comments left at various online forums often argued that the city should not be lending money to the theater and its controversial ownership group. But as we’ve seen, the city is not making a loan. Instead, the IRB program is simply a vehicle that is used to grant relief from paying property taxes to the city, county, and school district.
So the IRB program, despite its name, is a tax abatement program. What about tax increment financing, then?
Under TIF, a district is formed. The property taxes being paid by a property in the district at the time of formation is noted and called the base. Usually this property is blighted or run-down, so this base is a very low value.
Then a development plan is created, perhaps to build apartments or a shopping center. Based on that plan and the property taxes that the completed project will likely pay, the city will borrow money and give it to the developers.
After the project is completed, the tax appraiser notices that there’s something new and valuable where there wasn’t before, and he levies a higher tax bill on the property. The difference between the original taxes — the base — and the new taxes is called the increment.
Under normal conditions when new property comes on the tax rolls, the tax revenue is used to provide public services such as police and fire protection. The school district is usually a recipient of a large portion of the new tax revenue, which might be used to pay for the schooling of residents of the new apartments, for example.
But in a TIF district, what happens to this new tax revenue — the increment?
Recall that the city borrowed money and gave it to the developers. The new property taxes — the increment — is used to pay off these bonds.
So council member Longwell is correct, in a way. Real Development will pay increased property taxes.
But when these increased taxes are used to pay off bonds that exclusively benefit Real Development, how is this any different from not paying property taxes?
Consider development not in a TIF district. Developers generally borrow money. Then they have to make loan payments and higher tax payments.
But TIF developers pay only higher taxes. There are no loan payments, as their increased property tax payments are used to pay off the loan.
So when considering the total economic reality, council member Longwell is wrong. Several other council members have the same mistaken belief.
Tax increment financing is a tax abatement in disguise. Actually, it’s worse than that. Tax abatements granted in the IRB program don’t require the city to be on the hook for a loan. But in a TIF district, the city is the lender, and city taxpayers are liable if the TIF district doesn’t perform up to projections. This has happened in Wichita, and taxpayers had to pay in one way or another.
Why is Longwell, now Wichita’s vice mayor, unable to grasp these facts? Perhaps he does but chooses to ignore them. He has a reason to do so. Downtown Wichita real estate developers — let’s be clear: developers who seek public subsidy instead of working to meet market demand — are generous with campaign contributions, funding both political liberals like Wichita city council member Janet Miller and self-styled fiscal conservatives such as Longwell.
Longwell’s term expires next spring, and he may choose to run for his same office or even the mayor’s office, as some political observers have speculated.
Longwell has already drawn one challenger for his city council position, tea party activist Lynda Tyler. While lacking experience holding elective office, Tyler has well-established conservative credentials and can be expected to run a vigorous and well-funded campaign.
Longwell, who along with Wichita Mayor Carl Brewer complains that Wichita doesn’t have enough “tools in the toolbox” for dishing out economic development incentives to politically-connected city hall insiders, will have to explain his actions to voters in his largely conservative west-side district.
Someone should ask him if he really understands the economic reality of tax increment financing districts.
Cato Institute Senior Fellow Randal O’Toole has written extensively on the subject of urban planning, development, and tax increment financing (TIF) districts. The following article contains many points that the Wichita City Council may wish to consider as it considers expansion of a downtown Wichita TIF district at tomorrow’s council meeting.
Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners.
TIF is based on the idea that public improvements to a neighborhood or district will lead developers to invest in that district. To finance such public improvements, cities are allowed to keep the “increment” or increased property taxes collected from the area. Typically, planners estimate in advance how much new property tax the city can collect and then sell bonds that will be repaid out of those taxes. The revenues from the bonds are used to pay for the improvements.
The second article provides insight into Real Development’s track record in Wichita. While success in any real estate venture is not guaranteed, certain types of arrangements seem to have a high likelihood of problems, and these are reported on in the article.
Not mentioned is the problems at the Lofts at St. Francis, a Real Development residential condominium project. Last summer I reported on how this building’s facade needed repair, and the city needed to intervene in order to finance the repairs. I wrote, and testified in front of the city council, that the inability of the homeowners association to deal on its own with such a simple matter indicated a defect somewhere: “While the homeowners association and the condominium owners might not have anticipated that repairs would be needed so soon after the building’s opening, they must have contemplated that repairs and maintenance — to either exterior or interior common areas — would be needed at some time.”
The city waived two guidelines in its facade improvement program so that special assessment financing could be granted to the owners of condominiums in this building.
Some private parties have an interest in seeing Real Development — the “Minnesota Guys” — continue to receive subsidy from the City of Wichita. At Tuesday’s city council meeting, several businessmen testified on behalf of Real Development on the basis that this company is good for the future of downtown Wichita. Some of these, such as a current Key Construction executive, have an obvious financial motive for wanting the project to proceed with city subsidy.
Others, such as a former Key Construction company executive, may also have financial motives that are not immediately obvious. In particular, two tenants of Real Development buildings testified. Joe Tigert, the manager of the New York Life office in Wichita, spoke on behalf of Real Development. He didn’t reveal that he’s a tenant of Real Development at 125 N. Market. Joe Lloyd of Liebherr-Aerospace also spoke in favor of Real Development. His office is at 105 S. Broadway, another Real Development property.
Those who speak at Wichita City Council meetings are not required to disclose their motivations for speaking. And unlike the requirement at the federal and state level, those who are being paid to lobby the council are not required to disclose the fact that they are being paid, or who is paying them, or how much they spend lobbying.
An underlying current of thought that is emerging is that because of its extensive holdings in downtown Wichita, Real Development is too big to fail. If the city doesn’t grant their request for expansion of the amount of the TIF district, the future of downtown Wichita is in doubt.
Citizens ought to reject this argument. If we want to have a robust downtown Wichita, we need development that is grounded in solid free-market fundamentals. Development propped up with subsidy will not have the solid foundation that downtown needs if it is to be successful over the long term.
Following is the tesimony of John Todd before the Wichita City Council on April 13, 2010.
Good morning Mayor and members of the Wichita City Council. My name is John Todd. I oppose the expansion of the Exchange Place TIF and incentive package you are considering today that benefits Real Development, a group of downtown developers commonly known by many people as the “Minnesota Guys.”
Shortly after the Minnesota Guys arrived in Wichita a few short years ago, they were invited to address the Wichita Independent Business Association to share their development plans for downtown Wichita. A Real Development partner indicated to me that the first building they purchased in downtown Wichita was in the $0.81 per square foot range and that after renovation the housing units they were creating were selling in the $200 per square foot range. Their plan for downtown Wichita was exciting and I complemented them for their insight in recognizing the opportunity they had discovered and seized upon in our downtown area.
After the formal presentation I personally complemented the Minnesota Guys and thanked them for what they were doing downtown. They assured me that their redevelopment work in our downtown would be completed without government incentives, and I assured them that they would have my support as long as they stayed out of the public treasury.
Well, so much for that dialogue. Now they are asking for a bigger bite from the public apple.
The 2007 TIF financing plan provided for a $6 million dollar tax funded parking garage, and now they need a $9.3 million dollar facility? The 2007 agreement provided for a $3 million dollar “City Improvement Expenditure” as city reimbursement to the developers for land acquisition, demolition, site preparation and such other “redevelopment project costs” as permitted by Kansas law. That number has grown to $3.325 million dollars under today’s proposal. Where does this money come from under this proposal? Please ask Allen Bell to explain.
Please refer to page 37 of today’s proposal, “Projected Debt Service Schedule” for the Tax Increment Financing Bonds needed to finance this project. Using data that was available to the public last Friday, the principal amount for this project is shown as $10.6 million dollars plus $5.2 million dollars in interest for a total principal and interest projected total cost of $15.8 million dollars.
Based on the 2009 Mill levy of 120.360, Wichita Public Schools would forgo an estimated $7.5 million dollars in tax revenues for this project over the course of the project bonds, with Sedgwick County taxpayers participating at an estimated $3.9 million and the City of Wichita taxpayers at $4.2 million. Since this TIF expansion involves taxes from other government entitles, this TIF expansion should require the approvals of the Wichita Public Schools and the Sedgwick County Board of County Commissioners.
Cato Institute Senior Fellow Randal O’Toole has written about tax increment financing. “TIF does not increase the total amount of development that takes place in a city or region, it merely transfers development from one part of the region (or the city) to another. … The new developments in the TIF districts consume fire, police, and other (city) services, but since they don’t pay for those services, people in the rest of the city either have to pay higher taxes or accept a lower level of services. This means people outside the district lose twice: first when developments that might have enhanced their property values are enticed into the TIF district and second when they pay more taxes or receive less services because of the TIF district.”
In Topeka, a residential and retail project funded with $5 million of tax increment financing (TIF) is in trouble, as the following story from the Topeka Capital-Journal describes.
Both of these projects are residential, and recent times have not been kind to residential real estate. Taxpayers are at risk when TIF districts do not meet their projections. Developers have the opportunity to earn profits to offset the losses they may incur from time to time. Taxpayers, like government, have no ability to profit from successful projects to make up for losses.
College Hill project pushes on All 25 townhomes, 24,000 square feet of retail space remain unoccupied
All 25 relatively new townhomes in Topeka’s College Hill Redevelopment District stand unoccupied.
So does its 24,000 square feet of retail space.
But developers behind the $30 million project to revitalize central Topeka’s College Hill business district say they remain committed. This month, they entered into a contract with a large retail brokerage firm that will work to bring in retail businesses.