Tag Archives: TIF

In Wichita, developer welfare under a cloud

A downtown Wichita project receives a small benefit from the city, with no mention of the really big money.

Today the Wichita City Council approved a subsidy for a project in downtown Wichita.

The city will lend the developer of a project at 303 S. Broadway $620,000 to improve the building’s facade. The property must repay this amount through an assessment on its property tax. The benefit to the property is that the city is able to borrow money at a lower interest rate, and this reduces the cost of borrowing for the project.

The agenda packet for this item states: “The Office of Urban Development has reviewed the economic (“gap”) analysis of the project and determined a financial need for incentives based on the current market.” This stems from the city’s policy on facade improvement projects, which is that the project would not be feasible except for this loan.1

Upon inquiry to the city, I was told that the facade improvement program would increase the developer’s return on investment from 7.06 percent to 8.35 percent. This seemed a stretch; that a small savings on interest costs on a small portion of the project cost could have such a large effect on profitability.

I asked the city for supporting documents that hold the figures used to calculate these amounts, but the city believes the Kansas Open Records Act does not allow it to release the records. In the past, however, I have received this information on request.

So, we’ll have to trust the city on this matter. I’m not comfortable with that. This is another example of the city conducting business within a cloud of secrecy.

Here’s the real money

The cost savings on borrowing $620,000 is just a small portion of subsidy this project will receive. Through tax credits, this project likely will receive over two million dollars in a form equivalent to cash.

The property was listed on the Register of Historic Kansas Places in August. This entitles the project to a tax credit of 25 percent of qualified expenses.2 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,250,000.

From the National Park Service, a credit of 20 percent may be awarded.3 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,000,000. It is not known at this time whether this project has qualified for this tax credit.

Together, the tax credits are worth potentially $2,250,000. Not all citizens may be aware of the mechanism of tax credits. In the case of the state of Kansas, the Department of Revenue will — figuratively — print a certificate that says the holder of this certificate may use it to pay $1,250,000 of state tax liability. It costs the state nothing to create this certificate. When the Department of Revenue receives the certificate instead of cash, the state gains nothing of economic value. The net economic effect is that the holder of the tax credit has been enriched by $1,250,000, and the state misses out on the same amount of revenue.4 Unless the state reduces its spending by the amount of the tax credit, the taxpayers have to make up the lost revenue.

This is not all. The project may apply for Industrial Revenue Bonds. This is a mechanism whereby a project may avoid paying property taxes and sales taxes.5 This property is located within a TIF district, so it is ineligible for property tax abatements. But, a sales tax exemption could be possible, if the developer applies.

That application is likely, as this developer did just that on another downtown Wichita building, also located in a TIF district, but eligible for sales tax exemption on purchases related to the redevelopment.6

Of note: This developer actively campaigned for the proposed 2014 Wichita city sales tax, offering free office space to the effort.7 Should he apply for a sales tax exemption on this property, this is another example of low-income families in Wichita paying sales tax on groceries, but well-off developers escaping paying that same tax.

The council meeting

At the council meeting, a citizen remarked how this project is good for the tax base. But, being in a TIF district, the incremental property taxes from this property will go to the TIF district, not the city, until the TIF debt is retired.

Council Member Janet Miller (district 6, north central Wichita) noted that the city is not contributing to the project, that the developer pays all the costs of the facade improvement loan. But of a direct contribution to the project, she said “Although I wouldn’t probably complain if that was a request.” I’d suggest that Miller read up on the economics of tax credits, and of a possible sales tax exemption. She might be surprised to learn how much cash this project is receiving.


Notes

  1. “Owner shall provide financial information that substantiates the need for the City’s facade loan in order to complete the redevelopment project, including the overall sources and uses of funds and pro forma cash flow analysis that shows a reasonable return on owner’s investment.” City of Wichita. Facade Improvement Program Policies and Procedures. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/Facade%20Improvement%20Program%20Policy.pdf.
  2. Kansas Historical Society. State Historic Rehabilitation Tax Credit. Available at www.kshs.org/p/tax-credit-basics/14673.
  3. National Park Service. Tax Incentives for Preserving Historic Properties. Available at www.nps.gov/tps/tax-incentives.htm.
  4. Sometime the tax credits are sold to someone else. In this case the seller usually receives less than the face value of the credit.
  5. Weeks, Bob. Industrial revenue bonds in Kansas. Available at wichitaliberty.org/kansas-government/industrial-revenue-bonds-kansas/.
  6. Weeks, Bob. The Lux in Wichita: Taxpayer funding of lifestyle choices. Available at wichitaliberty.org/wichita-government/the-lux-in-wichita-taxpayer-funding-of-lifestyle-choices/.
  7. Weeks, Bob. In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters. Available at wichitaliberty.org/wichita-government/wichita-pro-sales-tax-campaign-group-uses-sales-tax-exempt-building-headquarters/.

CID and other incentives approved in downtown Wichita

The Wichita City Council approves economic development incentives, but citizens should not be proud of the discussion and deliberation.

Today’s meeting of the Wichita City Council saw the council discuss and approve economic development incentives for a project in downtown Wichita.

The item contemplated economic development incentives for redevelopment of an empty building in downtown Wichita to become a Hilton Garden Inn Hotel. The incentives being considered were a Community Improvement District (CID), Industrial Revenue Bonds (IRB), a parking agreement, and a skywalk easement. The discussion by the council was useful for revealing two members who are opposed to some targeted economic development incentives, but it also showed a troubling lack of knowledge and consideration by others.

Property tax

The hotel is requesting industrial revenue bonds. These bonds do not mean the city is lending any money. Instead, IRBs in Kansas are a mechanism to convey property tax abatements and sales tax exemptions.

The agenda packet for this item states: “[Hotel developer] WDH is not requesting abatement of property taxes in conjunction with the IRBs.”1 This is presented as a magnanimous gesture, as something the hotel developers (WDH) could have requested, but did not, presumably out of some sort of civic duty.

But: Property tax abatements may not be granted within the boundaries of a TIF district, which this hotel is located within.2 3 So the developers did not request something that they are not entitled to request. This is not news. Nonetheless, several council members were grateful.

As to property taxes, Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) asked what would be the increase in value in the building, once finished. Later Wichita City Council Member Jeff Blubaugh (district 4, south and southwest Wichita) praised the property taxes that will be paid. He also mentioned the “nearly-empty parking garage.” When the city built this garage and accompanying retail space it was to be a showpiece, but has been suffering from blight and lack of tenants paying market rates for rent.4

Asking about tax abatements, Wichita City Council Member Pete Meitzner (district 2, east Wichita) asked “They didn’t apply for other …” His voice trailed off before finishing the question, but the “other” tax abatement that could be applied for is the property tax abatement. Except, the law does not allow for a property tax abatement for this project.

All these questions alluded to the increased property taxes the renovated building will pay. Except, being within a TIF district, property taxes may not be abated. So where will the hotel’s property taxes go?

First, the property tax generated by the present value of the property (the “base”) will be distributed as before. But the increment — which will be substantial — will go to the TIF district, not the city, county, and school district. Except: This is an unusual TIF district, in that an agreement between the city and county provides that only 70 percent of the incremental property taxes will go to the TIF district, with the remainder being distributed as usual. This was not mentioned during today’s discussion.

There was talk about a “gap.” Some economic development incentives require documenting of a “financing gap” that makes the project not economically feasible. But that is not required for the incentives considered for this hotel.

Sales tax

Regarding the sales tax exemption: City document do not state how much sales tax will be forgiven, so we’re left to speculate. Previous city documents5 indicate spending $3,000,000 on furniture and fixtures, which is taxable. Sales tax on this is $225,000.

The same city document mentioned spending of $6,250,000 on construction of the hotel, and of $1,000,000 for construction of retail space. Sales tax on this combined total is $543,750. Based on material from the Kansas Department of Revenue, these amounts would be due if not for the action of the city council.6

In total, the development of this hotel will escape paying $768,750 in sales tax. It should be noted that Kansas is one of the few states that charges sales tax on groceries at the same rate as other purchases, making Kansas food sales tax among the highest in the nation.7

Curiously, council members Clendenin and Williams, who represent low-income districts where families may be struggling to buy groceries — and the sales tax on them — did not object to this special sales tax treatment for a commercial developer.

No more cash?

In his remarks, the mayor talked about how we can continue with economic development “without handing cash to corporations.” But when a project is going to buy materials and services on which $768,750 in sales tax is normally due, and the city council takes action to extinguish that liability, well, that’s better than cash to the receiver.

Good news

Kudos to Wichita City Council Member Bryan Frye (district 5, west and northwest Wichita), who actually cited the United States Constitution in his statement from the bench. He said that the issues surrounding this project are a far cry from what our Founding Fathers envisioned as the role of government, saying “I struggle with using city resources to collect and distribute sales tax for the sole benefit of one commercial entity.” He offered a substitute motion which would have approved all the parts of the agreement except for the CID tax. His motion failed, with only he and Wichita Mayor Jeff Longwell voting in favor.

On the original motion, which was to approve all parts of the incentive agreement, Longwell and Frye voted in opposition, with everyone else voting in favor.


Notes

  1. City of Wichita. Agenda packet for September 6, 2016. Available here.
  2. “Certain property, even though funded by industrial revenue bonds, does not qualify for exemption: … property located in a redevelopment project area established under K.S.A. 12-1770 et seq. cannot be exempt from taxation.” Kansas Department of Revenue. Property Tax Abatements. Available at www.ksrevenue.org/taxincent-proptaxabate.html. Also, Kansas Department of Commerce. Industrial Revenue Bond Exemptions. Available at www.kansascommerce.com/DocumentCenter/Home/View/1082.
  3. Gilmore & Bell PC. Economic Development tools. Available here.
  4. Weeks, Bob. As landlord, Wichita has a few issues. Available at https://wichitaliberty.org/wichita-government/landlord-wichita-issues/.
  5. Wichita City Council Agenda packet for August 16, 2016. Available at wichita.gov/Government/Council/Agendas/08-16-2016%20City%20Council%20Agenda%20Packet.pdf.
  6. “General rule: Materials are taxable.” (p. 4) Also: “Taxable labor services in Kansas are the services of installing, applying, servicing, repairing, altering, or maintaining tangible personal property performed on real property projects in the general category of commercial remodel work.” (p. 8) Kansas Department of Revenue. Sales & Use Tax for Contractors, Subcontractors, and Repairmen. Available at www.ksrevenue.org/pdf/pub1525.pdf.
  7. Food sales tax a point of shame for Kansas. Wichita Eagle. January 25, 2016. Available at http://www.kansas.com/opinion/editorials/article56532903.html.

Kansas economic development programs

Explaining common economic development programs in Kansas.

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. Click here.

Tax increment financing (TIF) resources
Resources on tax increment financing (TIF) districts. Click here.

STAR bonds in Kansas
The Kansas STAR bonds program provides a mechanism for spending by autopilot, without specific appropriation by the legislature. Click here.

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. Click here.

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. Click here.

In Kansas, PEAK has a leak
A Kansas economic development incentive program is pitched as being self-funded, but is probably a drain on the state treasure nonetheless. Click here.

Government intervention may produce unwanted incentives
A Kansas economic development incentive program has the potential to alter hiring practices for reasons not related to applicants’ job qualifications. Click here.

City of Wichita
City of Wichita’s economic development page is here. The Sedgwick County/City of Wichita Economic Development Policy is here.

State of Kansas
A page at the Kansas Department of Commerce with incentive programs is here.

Wichita TIF district disbands; taxpayers on the hook

A real estate development in College Hill was not successful. What does this mean for city taxpayers?

ParkstoneSeeking to promote the redevelopment of land northeast of Douglas and Hillside, the City of Wichita entered into agreements with Loveland Properties, LLC, College Hill Urban Village LLC, and CHUV Inc. The original plans were grand: A Northeast Brownstone Complex located at the northeast corner of Victor and Rutan, a Condominium Tower and Brownstone Complex, a West Brownstone Complex, and the South Retail/Residential Complex. A city analysis in 2007 projected that by 2010 the value of these projects would be $61,817,932.

Unfortunately, this project did not proceed as planned. The Northeast Brownstone Complex was built, and nothing else. Those brownstone condominiums proved difficult to sell. The project held great promise, but for whatever reasons things did not work as planned, and the city has lost an opportunity for progress.

The questions now are: What is the impact on taxpayers? Is there anything to learn as the city moves forward with other public-private partnerships?

City documents tell the story of this project, if you know how to read between the lines. 1

City document says: “The City financed $3,685,000 in TIF bonds in 2014.”
What it means to you: Tax increment financing, or TIF, is a method of economic development financing whereby additional property taxes (the “increment”) are redirected back to a real estate development. In this case, the city sold these bonds and gave the proceeds to the developer. Then — according to plan — as property values rose, the correspondingly higher property taxes generated by the development would pay off the bonds. Except, property values did not rise. So who pays? According to the bond documents, 2 “The full faith, credit and resources of the Issuer are hereby pledged for the payment of the principal of and interest on this Bond.” The Issuer is the City of Wichita, and the resources the city has to pledge are taxes it collects from its taxpayers.

ParkstoneCity document says: “An additional amount of tax exempt expenses related to the project, totaling $1,785,000, were paid off by the Finance Department using cash from the Debt Service Fund.”
What it means to you: These costs were to be paid by the developer, but the developer did not pay. So, the city’s Debt Service Fund was used. The Debt Service Fund gets its money from taxpayers, and this money is being used to pay off a debt owed by a private person. This is necessary because the debt payment is guaranteed by the city, which in turns means it is guaranteed by the taxpayers. If not spent to satisfy the debt for this project, this money might have been used to pay off other city debt, reduce taxes, pay for more police and firemen, fix streets, and satisfy other needs.

City document says: “The City will be responsible for maintenance and property taxes for the property until the property can be sold.”
What it means to you: More expense for city taxpayers.

ParkstoneCity document says: “Any tax increment generated from existing and future development will be used to repay TIF bonds. Staff does not expect remaining TIF revenue to be sufficient to repay the outstanding debt.”
What it means to you: As explained above, taxpayers are on the hook for these bonds.

The original agreement with the developer says: “In addition to all the terms, conditions and procedures for fulfilling these obligations, the Development Agreement also provides for a Tax Increment Shortfall Guaranty in which the developer and other private entities with ownership interest in the project are required to pay the City any shortfall in TIF revenue available to pay debt service on TIF bonds.”
What it means to you: Nothing. It should mean something. The city tells us its participation in these ventures is free of risk to citizens. That’s because recipients of incentives like TIF pledge to hold the city harmless if things don’t work out as planned. In this case, if the TIF district revenue is not enough to pay the TIF district bonds, the developer has pledged to pay the difference. But it is unlikely that the city will be able to collect on the promise made by this developer.

But there may be good news: The first phase of the project, the brownstones, is now owned by Legacy Bank. Hopefully, the city will be able to collect the TIF shortfall from this new owner so that taxpayers don’t have to pay.

The project plan formulated by the city says: “Net tax increment revenue is available to pay debt service on outstanding general obligation bonds issued to finance eligible project costs.” This statement is true if everything works as planned. But real estate development is risky. Things may not work out as planned. City documents don’t tell taxpayers this. Instead, city leaders present these projects as though everything will work out as planned.

There is some undeveloped land that was to be used in future phases of the project. But even empty land is harmful to city taxpayers, as city documents state: “The developer has not paid property taxes on the parcels from 2010 to 2015, resulting in $400,080 in current and delinquent taxes owed. The City will now be responsible for the taxes.”


Notes

  1. Wichita City Council Agenda Packet, March 15, 2016. Available here.
  2. From the Additional Provisions of the series 813 bonds: General Obligations. The Bonds constitute general obligations of the Issuer payable as to both principal and interest, in part from special assessments levied upon the property benefited by the construction of the Improvements (as said term is described in the Bond Resolution), in part from incremental property tax revenues derived in certain tax increment financing districts within the Issuer and, if not so paid, from ad valorem taxes which may be levied without limitation as to rate or amount upon all the taxable tangible property, real and personal, within the territorial limits of the Issuer, the balance being payable from ad valorem taxes which may be levied without limitation as to rate or amount upon all the taxable tangible property, real and personal, within the territorial limits of the Issuer. The full faith, credit and resources of the Issuer are hereby pledged for the payment of the principal of and interest on this Bond and the issue of which it is a part as the same respectively become due

Tax increment financing in Kansas

In this excerpt from WichitaLiberty.TV: How does Tax Increment Financing (TIF) work in Kansas? Is is a good thing, or not? View below, or click here to view at YouTube. Originally broadcast June 7, 2015.

Continue reading Tax increment financing in Kansas

How TIF routes taxpayer-funded benefits to Wichita’s political players

From January 2012, how tax increment financing routes benefits to politically-connected firms.

It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

The latest evidence we have is the construction of a downtown parking garage that benefits Douglas Place, especially the Ambassador Hotel, a renovation of a historic building now underway.

The flow of tax dollars Wichita city leaders had planned for Douglas Place called for taxpayer funds to be routed to a politically-connected construction firm. And unlike the real world, where developers have an incentive to build economically, the city created incentives for Douglas Place developers to spend lavishly in a parking garage, at no cost to themselves. In fact, the wasteful spending would result in profit for them.

The original plan for Douglas Place as specified in a letter of intent that the city council voted to support, called for a parking garage and urban park to cost $6,800,000. Details provided at the August 9th meeting of the Wichita City Council gave the cost for the garage alone as $6,000,000. The garage would be paid for by capital improvement program (CIP) funds and tax increment financing (TIF). The CIP is Wichita’s long-term plan for building public infrastructure. TIF is different, as we’ll see in a moment.

At the August 9th meeting it was also revealed that Key Construction of Wichita would be the contractor for the garage. The city’s plan was that Key Construction would not have to bid for the contract, even though the garage is being paid for with taxpayer funds. Council Member Michael O’Donnell (district 4, south and southwest Wichita) expressed concern about the no-bid contract. As a result, the contract was put out for competitive bid.

Now a winning bid has been determined, according to sources in city hall, and the amount is nearly $1.3 million less than the council was willing to spend on the garage. This is money that otherwise would have gone into the pockets of Key Construction. Because of the way the garage is being paid for, that money would not have been a cost to Douglas Place’s developers. Instead, it would have been a giant ripoff of Wichita taxpayers. This scheme was approved by Mayor Carl Brewer and all city council members except O’Donnell.

Even worse, the Douglas Place developers have no incentive to economize on the cost of the garage. In fact, they have incentives to make it cost even more.

Two paths for developer taxes

Recall that the garage is being paid for through two means. One is CIP, which is a cost to Wichita taxpayers. It doesn’t cost the Douglas Place developers anything except for their small quotal share of Wichita’s overall tax burden. In exchange for that, they get part of a parking garage paid for.

Flows of funds in regular and TIF development.
Flows of funds in regular and TIF development.
But the tax increment financing, or TIF, is different. Under TIF, the increased property taxes that Douglas Place will pay as the project is completed won’t go to fund the general operations of government. Instead, these taxes will go to pay back bonds that the city will issue to pay for part of the garage — a garage that benefits Douglas Place, and one that would not be built but for the Douglas Place plans.

Under TIF, the more the parking garage costs, the more Douglas Place property taxes are funneled back to it — taxes, remember, it has to pay anyway. (Since Douglas Place won’t own the garage, it doesn’t have to pay taxes on the value of the garage, so it’s not concerned about the taxable value of the garage increasing its tax bill.)

Most people and businesses have their property taxes go towards paying for public services like police protection, firemen, and schools. But TIF allows these property taxes to be used for a developer’s exclusive benefit. That leads to distortions.

Why would Douglas Place be interested in an expensive parking garage? Here are two reasons:

First, the more the garage costs, the more the hotel benefits from a fancier and nicer garage for its guests to park in. Remember, since the garage is paid for by property taxes on the hotel — taxes Douglas Place must pay in any case — there’s an incentive for the hotel to see these taxes used for its own benefit rather than used to pay for firemen, police officers, and schools.

Second, consider Key Construction, the planned builder of the garage under a no-bid contract. The more expensive the garage, the higher the profit for Key.

Now add in the fact that one of the partners in the Douglas Place project is a business entity known as Summit Holdings LLC, which is composed of David Wells, Kenneth Wells, Richard McCafferty, John Walker Jr., and Larry Gourley. All of these people are either owners of Key Construction or its executives. The more the garage costs, the higher the profit for these people. Remember, they’re not paying for the garage. City taxpayers are.

The sum of all this is a mechanism to funnel taxpayer funds, via tax increment financing, to Key Construction. The more the garage costs, the better for Douglas Place and Key Construction — and the worse for Wichita taxpayers.

Fueled by campaign contributions?

It’s no wonder Key Construction principals contributed $16,500 to Wichita Mayor Carl Brewer and five city council members during their most recent campaigns. Council Member Jeff Longwell (district 5, west and northwest Wichita) alone received $4,000 of that sum, and he also accepted another $2,000 from managing member David Burk and his wife.

This scheme — of which few people must be aware as it has not been reported anywhere but here — is a reason why Wichita and Kansas need pay-to-play laws. These laws impose restrictions on the activities of elected officials and the awarding of contracts.

An example is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”

This project also shows why complicated financing schemes like tax increment financing need to be eliminated. Government intervention schemes like this turn the usual economic incentives upside down, and at taxpayer expense.

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.

Community Improvement Districts are a relatively recent creation of the Kansas Legislature. In a CID, merchants charge additional sales tax, up to an extra two cents per dollar.

Community improvement district using bonds. Click for larger version.
Community improvement district using bonds. Click for larger version.
There are two forms of CID. Both start with the drawing of the boundaries of a geographical district. In the original form, a city borrows money by selling bonds. The bond proceeds are given to the owners of the district. The bonds are repaid by the extra sales tax collected, known as the CID tax.

In the second form of CID, the extra sales tax is simply given to the owners of property in district as it is collected, after deduction of a small amount to reimburse government for its expenses. This is known as a “pay-as-you-go” CID.

The “pay-as-you-go” CID holds less risk for cities, as the extra sales tax — the CID tax — is remitted to the property owner as it is collected. If sales run below projections, or of the project never materializes, the property owners receive less funds, or no funds. With CID bonds, the city must pay back the bonds even if the CID tax does not raise enough funds to make the bond payments.

Community improvement district using pay-as-you-go. Click for larger version.
Community improvement district using pay-as-you-go. Click for larger version.
Of note is that CID proceeds benefit the owners of the property, not the merchants. Kansas law requires that 55 percent of the property owners in the proposed CID agree to its formation. The City of Wichita uses a more restrictive policy, requiring all owners to consent.

Issues regarding CID

Perhaps the most important public policy issue regarding CIDs is this: If merchants feel they need to collect additional revenue from their customers, why don’t they simply raise their prices? But the premise of this question is not accurate, as it is not the merchants who receive CID funds. The more accurate question is why don’t landlords raise their rents? That puts them at a competitive disadvantage with property owners that are not within CIDs. Better for us, they rationalize, that unwitting customers pay higher sales taxes for our benefit.

Consumer protection
Customers of merchants in CIDS ought to know in advance that an extra CID tax is charged. Some have recommended warning signage that protects customers from unknowingly shopping in stores, restaurants, and hotels that will be adding extra sales tax to purchases. Developers who want to benefit from CID money say that merchants object to signage, fearing it will drive away customers.

State law is silent on this. The City of Wichita requires a sign indicating that CID financing made the project possible, with no hint that customers will pay additional tax. The city also maintains a website showing CIDs. This form of notification is so weak as to be meaningless.

Eligible costs
One of the follies in government economic development policy is the categorization of costs into eligible and non-eligible costs. The proceeds from programs like CIDs and tax increment financing may be used only for costs in the “eligible” category. I suggest that we stop arbitrarily distinguishing between “eligible costs” and other costs. When city bureaucrats and politicians use a term like “eligible costs” it makes this process seem benign. It makes it seem as though we’re not really supplying corporate welfare and subsidy.

As long as the developer has to spend money on what we call “eligible costs,” the fact that the city subsidy is restricted to these costs has no economic meaning. Suppose I gave you $10 with the stipulation that you could spend it only on next Monday. Would you deny that I had enriched you by $10? Of course not. As long as you were planning to spend $10 next Monday, or could shift your spending from some other day to Monday, this restriction has no economic meaning.

Notification and withdrawal
If a merchant moves into an existing CID, how might they know beforehand that they will have to charge the extra sales tax? It’s a simple matter to learn the property taxes a piece of property must pay. But if a retail store moves into a vacant storefront in a CID, how would this store know that it will have to charge the extra CID sales tax? This is an important matter, as the extra tax could place the store at a competitive disadvantage, and the prospective retailer needs to know of the district’s existence and its terms.

Then, if a business tires of being in a CID — perhaps because it realizes it has put itself at a competitive disadvantage — how can the district be dissolved?

The nature of taxation
CIDs allow property owners to establish their own private taxing district for their exclusive benefit. This goes against the grain of the way taxes are usually thought of. Generally, 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 participating in — benefiting from — police protection.

But CIDs allow taxes to be collected for the benefit of one specific entity. This goes against the principle of broad-based taxation to pay for an array of services for everyone. But in this case, the people who benefit from the CID are quite easy to identify: the property owners in the district.

Wichita city hall falls short in taxpayer protection

An incentives agreement the Wichita city council passed on first reading is missing several items that city policy requires. How the council and city staff handle the second reading of this ordinance will let us know for whose interests city hall works: citizens, or cronies.

This week I presented the Wichita City Council my concerns about an inadequate developer agreement for a TIF district development project, the Mosley Avenue Project.

My presentation centered on the lack of an agreement by the developer to forgo appeals of the tax valuation of the property. The applicant had done this in the past, and it caused a shortfall of TIF revenue that the city had to makeup. The city manager had said that taxpayers would be protected in future deals, but the city did not include this protection in the Mosely agreement.

The omission of this taxpayer protection was not all that was missing. The Downtown Development Incentives Policy, revised by the council on June 10, 2014, calls for several items to be supplied when seeking incentives, including tax increment financing, which was the incentive requested for the Mosely project. As I show below, many significant items related to taxpayer protection were missing.

The council approved the project on first reading, noting that the development agreement would be finalized in time for second reading.

This is insufficient. The second reading of an ordinance is usually handled as part of the consent agenda. This is a grouping of items that are voted on as a group, in bulk. There is no discussion unless a council member specifically requests. The practice of the city is that the text of the ordinances on second reading is not made available in the agenda packet, even though changes may have been made between first reading and second reading. That will certainly be the case with this ordinance, as many things are missing from the development agreement.

It’s not clear why there is a first reading and a second reading of an ordinance. It may be so that details may be corrected. Or, perhaps council members would like to have a chance to reconsider their first vote. City code seems to give no guidance as to how much change to an ordinance is allowable between first and second reading.

The problem we face in Wichita is that the approval of a development plan in a TIF district has a mandated public hearing. It is not optional. But the motion passed by the council this week closed the public hearing. Yet, the city will need to make substantial changes to the ordinance and development agreement if it intends to follow the downtown incentives policy that it created. But the public will have no chance to comment on the new material. If past city practice is followed, the new material will not be made available to the public, and perhaps not to council members.

This is a conflict that I do not believe can be resolved unless the city reopens the public hearing for consideration of the revised ordinance and developer agreement on first reading. Anything else disrespects procedures that are designed to benefit and protect the public.

Except. As with many city council policies, there are loopholes. As outlined below, the council can simply vote to waive the requirements of the downtown incentives policy. That gives the council an easy out. But that makes another mockery of the city’s policies, if the council waives them whenever they are inconvenient.

When I presented the defect in the development agreement to the council I asked: Is this lack of taxpayer protection an oversight, or is it by design? There was no answer.

I did not ask this question, but didn’t any city council member notice the omission of significant items needed to comply with its own policies? What about the city manager? Economic development director? City attorney?

More importantly, who in city hall looking out for the interests of taxpayers? Could the generous campaign contributions of Burk and his wife be a factor in this missing taxpayer protection? Or the generous contributions of Key Construction and its executives? (Key Construction is frequently used by Burk.) This is one more incident illustrating the need for campaign finance reform in Wichita.

Missing items

Section D of the incentives policy states “parties requesting Downtown Development Incentives must submit the information listed below.” Significant missing items included the following:

CEDBR Fiscal Impact Model
The idea behind the city’s use of economic development incentives is that the city receives more than it spends or forgoes in future tax revenue. An analysis performed by the Center for Economic Development and Business Research (CEDBR) at Wichita State University is used to make this decision. This appears to have not been done for this project.

Guarantee for a proportional share of public revenue shortfall
This was not present in the developer agreement.

Economic analysis confirms that the project is infeasible “but for” public investment
This was not present in the developer agreement.

Minimum private to public capital investment ratio of 2 to 1
Information necessary to make this judgment was not included in the agenda presentation.

Pro Forma
The incentives policy states: “Pro Forma — The project pro forma will be evaluated on the following criteria:
a. Rate of private investment return
b. Rents/prices consistent with performance of comparables
c. Projected rate of absorption consistent with performance of comparables
d. Long-term project solvency”
It appears that this analysis was not performed.

“Gap” Financing Requirement
The downtown incentives policy states: “Approval of Downtown Development Incentives will require a financial analysis demonstrating that the project would not otherwise be possible without the use of the requested development incentive (“gap” analysis). Parties requesting Downtown Development Incentives will be required to provide the City pro forma cash flow analyses and sources and uses of funds in sufficient detail to demonstrate that reasonably available conventional debt and equity financing sources are not available to fund the entire cost of the project and still provide the developer a reasonable market rate of return on investment.”

There is no evidence that this analysis was performed and made available to the council.

Waiver
The incentives policy contains a loophole. If the council believes it is “inappropriate to evaluate a particular request for Downtown Development Incentives” using the policy, it may vote to waive the requirements.

Wichita drops taxpayer protection clause

To protect itself against self-defeating appeals of property valuation in tax increment financing districts, the City of Wichita once included a protective clause in developer agreements. But this consideration is not present in two proposed agreements.

When the Wichita Eagle reported that a downtown developer represented himself as an agent of the city in order to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, city officials were not pleased.

The property in question is located in a tax increment financing district. Incremental tax revenue from the property is earmarked for paying off bonds that were issued for the property’s benefit. If tax revenue is reduced from original projections — perhaps because the tax valuation was appealed — the tax revenue might be insufficient to pay the bonds. City taxpayers are then on the hook.

This is what happened, according to later Eagle reporting: “A special tax district formed by Wichita to assist in the development of the Old Town cinema project can’t cover its debt payments because the developers — including the city itself — petitioned a state court and got their property taxes reduced, records show.”

This week the Wichita city council considers approving a project plan for part of a TIF district in Old Town, the Mosley Avenue Project. It’s contained within the Old Town Cinema Redevelopment District, a tax increment financing (TIF) district. The developer is Mosley Investments, LLC, a development group comprised of David Burk and Steve Barrett, according to city documents.

The involvement of Burk and Barrett is problematic. The downtown developer who the Wichita Eagle said represented himself as an agent of the city without the city’s knowledge or consent was David Burk. Barrett was a partner on the project.

To protect itself when Burk was involved in another TIF-financed project in 2011, the city added language to the developer agreement that prevented appeals of tax valuation, although there was a large loophole included.

But for the Mosley project, there is no such language prohibiting appeals of tax valuation. For another TIF project plan the city will consider the same day, the Union Station project, there is also no such language.

A question posed to city hall but not yet answered is this: Is lack of taxpayer protection an oversight, or is it by design?

More importantly, who in city hall looking out for the interests of taxpayers? Could the generous campaign contributions of Burk and his wife be a factor in this missing taxpayer protection? Or the generous contributions of Key Construction and its executives? (Key Construction is frequently used by Burk.)

Past action by Burk on property in TIF district

In February 2010 the Wichita Eagle reported on the activities of Burk with regard to property he owns in Old Town. Citizens reading these articles might have been alarmed at his actions. Certainly some city hall politicians and bureaucrats were.

The opening sentence of the Wichita Eagle article (Developer appealed taxes on city-owned property) raises the main allegation against Burk: “Downtown Wichita’s leading developer, David Burk, represented himself as an agent of the city — without the city’s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza, according to court records and the city attorney.”

A number of Wichita city hall officials were not pleased with Burk’s action. According to the Eagle reporting, Burk was not authorized to do what he did: “Officials in the city legal department said that while Burk was within his rights to appeal taxes on another city-supported building in the Cinema Plaza, he did not have authorization to file an appeal on the city-owned parking/retail space he leases. … As for Burk signing documents as the city’s representative, ‘I do have a problem with it,’ said City Attorney Gary Rebenstorf, adding that he intends to investigate further.”

Council member Jeff Longwell was quoted by the Eagle: “‘We should take issue with that,’ he said. ‘If anyone is going to represent the city they obviously have to have, one, the city’s endorsement and … two, someone at the city should have been more aware of what was going on. And if they were, shame on them for not bringing this to the public’s attention.'”

Council member Lavonta Williams was not pleased, either: “‘Right now, it doesn’t look good,’ she said. ‘Are we happy about it? Absolutely not.'”

In a separate article by the Eagle on this issue, we can learn of the reaction by two other city hall officials: “Vice Mayor Jim Skelton said that having city development partners who benefit from tax increment financing appeal for lower property taxes ‘seems like an oxymoron.’ City Manager Robert Layton said that anyone has the right to appeal their taxes, but he added that ‘no doubt that defeats the purpose of the TIF.'”

The manager’s quote is most directly damaging. In the most common form of a tax increment financing (TIF) district, the city borrows money to pay for things that directly enrich the developers, in this case Burk and his partners. Then their increased property taxes — taxes they have to pay anyway — are used to repay the borrowed funds. In essence, a TIF district allows developers to benefit exclusively from their property taxes. For everyone else, their property taxes go to fund the city, county, school district, state, fire district, etc. But not so for property in a TIF district.

This is what is most astonishing about Burk’s action: Having been placed in a rarefied position of receiving many millions in benefits, he still thinks his own taxes are too high.

In response to Burk’s action, the city included a special provision in the agreement for a project in which Burk was involved the next year. This project is the Ambassador Hotel, known at the time as the Douglas Place project. This project is also located within a TIF district and receives the benefit of TIF financing. City documents explained that protests of taxes would not be allowed, but there is a loophole: “In addition, the Developer agrees not to protest the taxes on the building unless the valuation reflects a capitalization rate that exceeds the average rate for boutique hotels as determined by a nationally-recognized hotel appraisal firm.” (Wichita City Council agenda packet, September 13, 2011, page 26.) The agreement and the loophole were expressed in more detail in the agreement on page 138 of the same document.

At the time, city manager Layton told the Wichita Eagle that taxpayers would be protected in future deals: “We’ve taken several safeguards based on the city’s development experience over the last few years, as well as the advice from Goody Clancy and their business partners based on their experience.” He added “We think we’re set to encourage downtown development in a way that provides protection to the taxpayer.”

Now this week Dave Burk comes again before the city council asking for TIF money. But there appears to be nothing in the current agreement to protect taxpayers, as there was in the Douglas Place agreement.

Curiously, Burk is not mentioned by name in the documents prepared for the public hearing on January 6.

Tax increment financing (TIF) resources

Resources on tax increment financing (TIF) districts.

Tax Increment Financing: A Tool for Local Economic Development. Richard F. Dye and David F. Merriman. Tax increment financing (TIF) is an alluring tool that allows municipalities to promote economic development by earmarking property tax revenue from increases in assessed values within a designated TIF district. Proponents point to evidence that assessed property value within TIF districts generally grows much faster than in the rest of the municipality and infer that TIF benefits the entire municipality. Our own empirical analysis, using data from Illinois, suggests to the contrary 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.

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.

The effects of tax increment financing on economic development. Richard F. Dye and David F. Merriman. Local governments attempt to influence business location decisions and economic development through use of the property tax. Tax increment financing (TIF) sequesters property tax revenues that result from growth in assessed valuation. The TIF revenues are to be used for economic development projects but may also be diverted for other purposes. We have constructed an extensive data set for the Chicago metropolitan area that includes information on property value growth before and after TIF adoption. In contrast to the conventional wisdom, we find evidence that cities that adopt TIF grow more slowly than those that do not. We test for and reject sample selection bias as an explanation of this finding. We argue that our empirical finding is plausible and present a theoretical argument explaining why TIF might reduce municipal growth.

Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data. T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

“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 dis-tricts 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 Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government. Richard Briffault, University of Chicago Law Review, Winter 2010. “Tax increment financing (TIF) is the most widely used local government program for financing economic development in the United States, but the proliferation of TIF is puzzling. TIF was originally created to support urban renewal programs and was narrowly focused on addressing urban blight, yet now it is used in areas that are plainly unblighted. TIF brings in no outside money and provides no new revenue-raising authority. There is little clear evidence that TIF has done much to help the municipalities that use it, and it is also a source of intergovernmental tension and a site of conflict over the scope of public aid to the private sector.

Yet, the expansion of TIF makes sense in light of the basic structure of American local government law. Studying TIF can illuminate central features of our local government system. TIF succeeds — in the sense of its widespread adoption and use — because it, like local government more generally, is highly decentralized; reflects and reinforces the fiscalization of development policy; plays off the fragmentation of local governments and the resulting interlocal struggle for investment; and fits well with the entrepreneurial spirit characteristic of contemporary local economic development policy. A better understanding of TIF contributes to a better understanding of the political economy of American local government.”

Wichita should reject Bowllagio TIF district. Wichita should reject the formation of a harmful tax increment financing (TIF) district.

Wichita TIF: Taxpayer-funded benefits to political players. It is now confirmed: In Wichita, tax increment financing (TIF) leads to taxpayer-funded waste that benefits those with political connections at city hall.

Tax increment financing (TIF) and economic growth. There is clear and consistent evidence that municipalities that adopt tax increment financing, or TIF, grow more slowly after adoption than those that do not.

Does tax increment financing (TIF) deliver on its promise of jobs? When looking at the entire picture, the effect on employment of tax increment financing, or TIF districts, used for retail development is negative.

Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing. Randal O’Toole, Cato Institute. While cities often claim that TIF is “free money” because it represents the taxes collected from developments that might not have taken place without the subsidy, there is plenty of evidence that this is not true. First, several studies have found that the developments subsidized by TIF would have happened anyway in the same urban area, though not necessarily the same location. Second, new developments impose costs on schools, fire departments, and other urban services, so other taxpayers must either pay more to cover those costs or accept a lower level of services as services are spread to developments that are not paying for them. Moreover, rather than promoting economic development, many if not most TIF subsidies are used for entirely different purposes. First, many states give cities enormous discretion for how they use TIF funds, turning TIF into a way for cities to capture taxes that would otherwise go to rival tax entities such as school or library districts. Second, no matter how well-intentioned, city officials will always be tempted to use TIF as a vehicle for crony capitalism, providing subsidies to developers who in turn provide campaign funds to politicians.

TIF is not Free Money. Randal O’Toole. 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. … Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth. Paul F. Byrne. Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. 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.

Tax Increment Financing and Missouri: An Overview Of How TIF Impacts Local Jurisdictions. Paul F. Byrne. Tax Increment Financing (TIF) has become a common economic development tool throughout the United States. TIF takes the new taxes that a development generates and directs a portion of them to repay the costs of the project itself. … Supporters of TIF argue that it is a necessary tool for redevelopment in older communities. Detractors contend that it is used to simply subsidize development, and that variances in tax systems allow some governments to implement and benefit from TIF even if its use harms other levels of government. This study provides an overview of the history and basic structure of TIF. It then analyzes the basic tax components of a TIF plan and compares how various aspects, such as tax capture and tax competition, play out in the standard system of TIF. The study then reviews the economic literature on TIF, and ends with a direct application of how TIF operates within Missouri.

The Right Tool for the Job? An analysis of Tax Increment Financing. Heartland Institute. Tax Increment Financing (TIF) is an economic development tool that uses the expected growth (or increment) in property tax revenues from a designated geographic area of a municipality to finance bonds used to pay for goods and services calculated to spur growth in the TIF district. The analysis performed for this study found TIF does not tend to produce a net increase in economic activity; favors large businesses over small businesses; often excludes local businesses and residents from the planning process; and operates in a manner that contradicts conventional notions of justice and fairness. We recommend seeking alternatives to TIF and reforms to TIF that make the process more democratic and the distribution of benefits more fair to residents of TIF districts.

Giving Away the Store to Get a Store. Daniel McGraw, Reason. Largely because it promises something for nothing — an economic stimulus in exchange for tax revenue that otherwise would not materialize — this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela’s can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises. … At a time when local governments’ efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don’t want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

Do Tax Increment Finance Districts in Iowa Spur Regional Economic and Demographic Growth? David Swenson and Liesl Eathington. We found virtually no statistically meaningful economic, fiscal, and social correlates with this practice in our assessment; consequently, the evidence that we analyzed suggests that net positions are not being enhanced — that the overall expected benefits do not exceed the public’s costs.

No More Secret Candy Store: A Grassroots Guide to Investigating Development Subsidies. From Good Jobs First, a comprehensive guide to researching state and local subsidies, economic development agencies, and companies.

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.

The consideration this week by the Wichita City Council of two project plans in tax increment financing districts offers an opportunity to examine the issues surrounding TIF.

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. 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.
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.
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.
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.
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.
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.”

It’s often thought that when a but-for justification is required in order to receive an economic development incentive, financial figures can be produced that show such need. Now, recent research shows that the but-for justification is problematic. In Does Chicago’s Tax Increment Financing (TIF) Programme Pass the ‘But-for’ Test? Job Creation and Economic Development Impacts Using Time-series Data, author T. William Lester looked at block-level data regarding employment growth and private real estate development. The abstract of the paper describes:

“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.

An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

“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)

The Wichita city council is concerned about creating jobs, and is easily swayed by the promises of developers that their establishments will create jobs. Paul F. Byrne of Washburn University has examined the effect of TIF on jobs. His recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

“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.

Economic development in Wichita: Looking beyond the immediate

Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.

Critics of the economic development policies in use by the City of Wichita are often portrayed as not being able to see and appreciate the good things these policies are producing, even though they are unfolding right before our very eyes. The difference is that some look beyond the immediate — what is seen — and ask “And then what will happen?” — looking for the unseen.

Thomas Sowell explains the problem in a passage from the first chapter of Applied economics: thinking beyond stage one:

When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.

The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.

The economic decisions made by governing bodies like the Wichita City Council have a large impact on the lives of Wichitans. But as Sowell explains, these decisions are made by politicians for political reasons.

Sowell goes on to explain the danger of stopping the thinking process at stage one:

When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.

“And then what will happen?” he asked.

The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.

“And what will happen after that?” Professor Smithies asked.

As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.

“And then what will happen?” Smithies persisted.

By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.

Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.

We see stage one thinking all the time when looking at government. In Wichita, for example, a favorite question of city council members seeking to justify their support for government intervention such as a tax increment financing (TIF) district or some other form of subsidy is “How much more tax does the building pay now?” Or perhaps “How many jobs will (or did) the project create?”

These questions, and the answers to them, are examples of stage one thinking. The answers are easily obtained and cited as evidence of the success of the government program.

But driving by a store or hotel in a TIF district and noticing a building or people working at jobs does not tell the entire story. Using the existence of a building, or the payment of taxes, or jobs created, is stage one thinking, and nothing more than that.

Fortunately, there are people who have thought beyond stage one, and some concerning local economic development and TIF districts. And what they’ve found should spur politicians and bureaucrats to find ways to move beyond stage one in their thinking.

An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

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.

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.”

Here we have an example of thinking beyond stage one. The results are opposite of what one-stage thinking produces.

Some city council members are concerned about creating jobs, and are swayed by the promises of developers that their establishments will employ a certain number of workers. Again, this thinking stops at stage one. But others have looked farther, as has Paul F. Byrne of Washburn University. The title of his recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. 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.

While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. And, when thinking beyond stage one, the effect on employment — considering the entire city — is negative.

It’s hard to think beyond stage one. It requires considering not only the seen, but also the unseen, as Frederic Bastiat taught us in his famous parable of the broken window. But over and over we see how politicians at all levels of government stop thinking at stage one. This is one of the many reasons why we need to return as much decision-making as possible to the private sector, and drastically limit the powers of politicians and governments.

Wichita economic development items

The Wichita city council has been busy with economic development items, and more are upcoming.

At the November 25 meeting of the Wichita City Council, on the consent agenda, the council passed these items.

Approved a sublease in a warehouse. This action was necessary as the incentivized warehouse pays no property taxes due to a subsidy program. Given tax costs and industrial building rents, this policy gives these incentivized buildings a cost advantage of about 20 to 25 percent over competitors. That’s very high, and makes it difficult for existing buildings to compete. This lease is for 40,500 square feet for annual rent of $196,425.00, which is $4.85 per square foot. Competing warehouse space might be able to charge rent of $4.25 plus property tax of about $1.00, for a total rent of $5.25 per square foot to the tenant. In the case of the subsidized building, the landlord collects $4.85 instead of $4.25, and the tenant pays $4.85 instead of $5.25. Everyone’s happy. Everyone, that is, except for existing industrial landlords in Wichita — especially those with available space to rent — who must be wondering why they attempt to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage. Then, other commercial tenants must be wondering why they don’t get discounted rent. Taxpayers must be wondering why they have to make up the difference in taxes that the subsidized tenants aren’t paying. (On second thought, these parties may not be wondering about this, as we don’t have a general circulation newspaper or a business newspaper that cares to explain these things.) See Wichita speculative industrial buildings.

While asking for tax breaks, the owner of this building wanted you to pay higher taxes.
While asking for tax breaks, the owner of this building wanted you to pay higher taxes.
Set January 6 as the date for a public hearing on a TIF district project plan. This is the plan for Union Station in downtown Wichita. The public hearing for the formation of its tax increment financing district has already been held, and it passed. The project plan will consider and authorize the actual project and spending of taxpayer funds to reimburse the developer for various items. Unlike the formation of the TIF district, the county and school district have no ability to object to the project plan.

Set December 16 as the date for the public hearing on the formation of a community improvement district. This district is for the benefit of the River Vista project, the proposed apartments on the west bank of the Arkansas River between Douglas and First streets. CIDs redirect sales tax revenue from general government to the developers of the project. Say, does anyone remember Charter Ordinance No. 144, which says this land “shall be hereafter restricted to and maintained as open space”? See In Wichita, West Bank apartments seem to violate ordinance.

Also on that day, during its workshop, the council heard items for the city’s legislative agenda. I have a several articles covering these topics as they relate to the legislative agenda: Airfares, passenger rail, cultural arts districts, and economic development.

On its December 2 agenda, the council has these items:

Property tax and sales tax exemptions for Bombardier Learjet. The council may grant property tax discounts worth as much as $268,548 per year for up to ten years, according to city documents. This will be split among taxing jurisdictions as follows: City $72,389, State $3,340, County $65,415, and USD 259 $127,404. The purchased items may also receive an exemption from sales tax, but city documents give no amount. Bombardier boasts of “Investing in the communities where we do business to ensure we have strong contexts for our operations” and “We support our home community through donations, sponsorships and our employee volunteering program.” Evidently this commitment to investment and support does not extend to shouldering the same tax burden that everyone else does.

Property tax exemptions for Cessna Aircraft Company. The council may grant property tax discounts worth as much as $302,311 per year for up to ten years, according to city documents. This will be split among taxing jurisdictions as follows: City $81,491, County $73,639, State $3,760, and USD 259 $143,421. Generally, items purchased with proceeds of the IRB program also receive sales tax exemption, but city documents do not mention this. Cessna speaks of its commitment to the communities where it operates, but evidently this commitment does not extend to shouldering the same tax burden that everyone else does.

High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
High Touch Technologies in downtown Wichita, with sign calling for higher sales tax.
Property tax exemptions for High Touch. This is an extension of tax breaks first granted last year. See In Wichita, the case for business welfare. Did you know the CEO of this company is also chair of the Wichita Metro Chamber of Commerce? And that while campaigning for higher sales taxes in Wichita, including higher taxes on groceries for low-income households, he sought and received a sales tax exemption for his company?

Forgivable loan to Apex Engineering International. The Wichita Eagle reported that this company “has been growing briskly and adding employees.” Still, the company seeks incentives, in this case a forgivable loan from the city of $90,000. It will ask Sedgwick County for the same amount. These loans are grants of cash that do not need to be repaid as long as goals are met. Three years ago Apex received $1,272,000 in tax credits and grants under programs offered by the State of Kansas. It is not known at this time if Apex is receiving additional subsidy from the state. According to a company news release, “AEI was nominated for the Wichita Metro Chamber of Commerce 2012 Small Business Awards. This prestigious award recognizes two companies each year who are selected based on specific criteria including: entrepreneurship, employee relations, diversity, community contribution and involvement, and leadership and performance.” Maybe we can justify this grant as repayment for Apex’s community contribution. This forgivable loan may receive resistance from some council members. Current council member and mayoral candidate Jeff Longwell (district 5, west and northwest Wichita) was recently quoted in the Wichita Eagle as wanting a “moratorium on forgivable loans right now until we can reassess the way that we do economic development.” While campaigning for his current office, Council member Pete Meitzner (district 2, east Wichita) told an audience “I am not for forgivable loans.” He noted the contradiction inherent in the terms “forgivable” and “loan,” calling them “conflicting terms.” Meitzner has said he will run for his current office again.

Set January 6 as the date for the public hearing regarding the project plan for the Mosely Avenue Project TIF district in Old Town. This TIF district is a project of David Burk and Steve Barrett. Burk has received millions of taxpayer dollars in subsidy. But he’s not finished.

Consider whether to raise water bills by about 5 percent.

Consider a new lease agreement with Museum of World Treasures, Inc. which will, among other things, reduce the museum’s rent paid to the city from $60,000 per year to $1.

Consider passing the legislative agenda. See above for more on this topic.

City of Wichita State Legislative Agenda: Economic Development

The City of Wichita wishes to preserve the many economic development incentives it has at its disposal.

The proposed legislative agenda for the City of Wichita holds this regarding economic development incentives:

ISSUE: The State of Kansas provides economic development incentives through a variety of programs.

RECOMMEND: The Wichita City Council supports the continuation of state economic incentive programs that assist local governments in their efforts to improve their local economies.

Wichita Legislative Agenda, November 2014, page 16, Economic DevelopmentThat’s all the agenda holds. In the presentation for the previous year, the request was more complete, naming specific programs. It’s useful to revisit that list, as Wichita leaders often complain that Wichita doesn’t have enough “tools in the toolbox” to compete effectively in economic development.

In a way, I don’t blame the city for omitting the list this year. Part of the campaign for the proposed sales tax was that Wichita doesn’t have enough incentives to compete for jobs. In making that argument, city leaders use a narrow definition of incentive that doesn’t count the programs listed below. Given the poor results of the city’s economic development machinery, you can see why city leaders minimize the number of incentive programs and the amounts of money that are available.

Here are the programs listed in the previous legislative agenda that the city wants the legislature to protect. Some of these are so valuable that Kansas business leaders told the governor that they value these incentives more than they would value elimination of the state corporate income tax.

  • GWEDC/GO WICHITA: Support existing statutory records exemptions
  • Industrial Revenue Bond tax abatements (IRBX)
  • Economic Development Exemptions (EDX)
  • Tax Increment Financing (TIF)
  • Sales Tax Revenue (STAR) Bonds
  • Community Improvement Districts (CID)
  • Neighborhood Revitalization Area (NRA) tax rebates
  • Special Assessment financing for neighborhood infrastructure projects, facade improvements and abatement of asbestos and lead-based paint.
  • State Historic Preservation Tax Credits (HPTC)
  • State administration of federal Low Income Housing Tax Credits (LIHTC)
  • High Performance Incentive Program (HPIP) tax credits
  • Investments in Major Projects and Comprehensive Training (IMPACT) grants
  • Promoting Employment Across Kansas (PEAK) program
  • Economic Revitalization and Reinvestment Act bonding for major aviation and wind energy projects
  • Kansas Industrial Training (KIT) and Kansas Industrial Retraining (KIR) grants
  • Network Kansas tax credit funding
  • State support for Innovation Commercialization Centers in Commerce Department budget

Union Station development drains taxes from important needs

Testimony of John Todd to the Wichita City Council, October 7, 2014.

I want to complement the Union Station LLC group for tackling an important redevelopment project in downtown Wichita.

I am troubled however, by the developer’s request for $17.3 million in Tax Increment Finance (TIF) funding for his project because it diverts increases in future property tax revenues away from the public treasury and back to the developer for 20 years. Under current taxing levies this means that roughly one-third or $5 million plus of future Union Station property tax revenues would be diverted from the City of Wichita needed for public safety items like police and fire protection, and the building of public infrastructure. Plus, roughly one-third or $5 million plus would be diverted from the Sedgwick County treasury needed to provide for our Court System, the maintenance of property ownership records, the Sheriff’s office and detention center. The last one-third or $5 million plus would be diverted from Wichita Public Schools needed for the education of our children.

Drain, waterThe diversion of future property tax revenues away from local governmental treasuries should concern every taxpaying citizen when one considers the many needs for these funds. On the city level, $5 million over 20 years could go a long way towards funding needed street maintenance and repairs, or providing the revenue needed for a viable public bus system, and finding a long-term solution to our cities’ future water needs. Sedgwick County could use $5 million to re-open the Judge Riddel Boys Ranch that helps turn boy’s lives around and makes our community a safer place to live and play by reducing recidivism and crime. And, just think of how many teachers could be hired with $5 million to prepare our young people for productive lives and jobs.

I am of the opinion that Mr. Gary Oborny has the track record to prove that he is one of the most creative and exceptional real estate developers in the City of Wichita and that he possesses the professional talents needed to make the Union Station project work without TIF public funding.

I believe at some point downtown redevelopment needs to be market driven, stand on its own, and pay taxes into the city treasury like other city development projects do.

Today, you have the opportunity to exercise your leadership skills in achieving this transformation. I urge you to seize it.

Errors in Wichita Union Station development proposal

Documents the Wichita City Council will use to evaluate a development proposal contain material errors. Despite the city being aware of the errors for more than one month, they have not been corrected.

On August 19, 2014 the Wichita City Council considered an agenda item titled “Resolution Considering the Establishment of the Union Station Redevelopment District, Tax Increment Financing.” The purpose of the item was to set October 7, 2014 as the date for the public hearing on the formation of a TIF district. The council passed this resolution.

On August 27 Bob Weeks inquired this of Wichita city officials based on information contained in city documents that were prepared for the August 19 meeting:

“On the Union station TIF proposal, there is mentioned ‘$3,766,156 in monetized historic tax credits.’ Do you know whether these are federal or state tax credits, and the face value of the credits? I presume that ‘monetized’ means the value the developers expect to receive when selling the credits at a discount.”

That same day he received this response from Allen Bell, the city’s Director of Urban Development.

“The Developer has not yet provided the City with details on the tax credits. However, staff analyzed the project to ascertain a ballpark estimate of how much it could generate in both state and federal tax credits and came up with a similar amount. We assume that $3,766,156 is the amount of net proceeds to be injected into the project from the sale of tax credits and that it is discounted from the face value of the credits.”

On follow up, Weeks asked this:

“I was also wondering which incentive program allows for the sales tax exemptions included in the CEDBR analysis.”

The response from Bell was:

“The only incentive program available to Union Station that would provide a sales tax exemption is IRBs. The Developer did not request IRBs or a sales tax exemption. I would guess that CEDBR factored it into the cost-benefit analysis to be extra conservative.”

CEDBR is the Center for Economic Development and Business Research at Wichita State University.

In addition to Bell, other city officials participating in these emails were Van Williams, Public Information Officer; Mark Elder, Development Analyst; and Scott Knebel, Downtown Revitalization Manager.

On October 2, when the city released the agenda packet for the October 7 meeting, the tax credits and sales tax information was not changed.

By the city’s admission, the value of tax credits for this project is a guess, and we don’t know if the project is actually eligible for these tax credits. The sales tax exemption included in the CEDBR is an incentive this project is not eligible for and will not receive. Despite several city officials being aware of these errors, the material the city council will consider on October 7 has not been corrected.

Union Station TIF provides lessons for Wichita voters

A proposed downtown Wichita development deserves more scrutiny than it has received, as it provides a window into the city’s economic development practice that voters should peek through as they consider voting for the Wichita sales tax.

Next week a Wichita real estate developer will ask the Wichita City Council to approve a package of incentives for the redevelopment of Union Station in downtown Wichita. The proposal contains many facets that citizens need to understand. Additionally, the city’s handling of this matter is something that voters will want to keep in mind as they make their decision on the proposed Wichita sales tax in November.

The city’s documents on this matter are available at Resolution Considering the Establishment of the Union Station Redevelopment District (Tax Increment Financing).

Tax increment financing

Union Station LLC is asking for TIF, or tax increment financing. Most commonly, TIF works like this: A city borrows money (by issuing bonds) and gives the cash to a development. After the project is built and has a higher assessed value, the city uses the increased property tax payments (the “increment” in TIF) from the development to pay off the bonds. This obviously is risky for cities, because if the development doesn’t generate sufficient increment in tax payments to cover the bond payments, the city will have to make up the difference. This has happened in Wichita.

In recent years a new type of TIF has been created by statute, the “pay-as-you-go” TIF. Here, instead of issuing bonds and paying off the bonds with the incremental taxes, the city simply refunds the incremental taxes to the development. City documents describe: “The TIF statute also allows for projects to be financed on a pay-as-you-go basis, to reimburse the developer for eligible costs as TIF funds are received.”

This has less risk for cities, because if the hoped-for incrementally higher property taxes don’t materialize, the development doesn’t receive TIF proceeds. There are no bonds that must be paid. The developer just doesn’t receive what was projected. This is why the city claims that pay-as-you-go TIF has no risk to the city.

(Under pay-as-you-go TIF, since the city is essentially refunding nearly all property tax payments back to the development, we have to wonder why the city requires the taxes be paid at all. Also, there is the charade of spending TIF money only on “eligible” project costs. But the criteria for eligibility is broad, and we can be sure that developers will do all they can to make sure costs are characterized as eligible. But the eligibility criteria allows cities to appear to be fiscally prudent. Cities say they don’t allow TIF proceeds to be spent on just anything, but only on eligible costs.)

Here’s what the agenda packet says about this TIF: “Union Station LLC proposes to combine pay-as-you-go TIF with private financing to finance the proposed redevelopment project. The developer will finance through private sources all costs of the redevelopment project, including TIF-eligible project costs. Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis with proof of expenditure of TIF-eligible redevelopment project costs.”

Buried in this paragraph is some financial slight-of-hand. Wichitans need to understand this so that they can be fully informed on this proposed transaction.

The problem lies is the meanings of the terms “to finance” and “to pay for.” Financing is the process of securing money to pay the costs of acquiring something. If financing is in the form of a loan, the economics of the transaction is that the borrower receives cash (assets go up) but also incurs an obligation to pay back the cash (liabilities go up by the same amount).

Then, when the borrower uses this cash to buy something — like a historic train station — one form of asset is exchanged for another. Cash is exchanged for title to the property.

It’s in the future, as the loan is repaid, that needs examination. The goal of real estate development is that the developer creates a project that generates more money coming in than loan payments going out. If this happens, it is a signal that the developer has met customer needs and has used capital in a way that makes everyone better off.

But there’s a confounding factor involved in the “pay for” part of the transaction that the city council will consider next week. The burden of some of the loan repayments will be born by the taxpayer. We don’t know for sure, but undoubtedly Union Station LLC will borrow money to make the project work. Proceeds from the TIF will be used to make at least some of the loan payments.

This is where the slight-of-hand comes in. The city says “The developer will finance through private sources …” That much is true. The city is not loaning any money. But some of the money used to pay back the private loans will come from TIF proceeds. So it is property tax payments being re-routed back to the developer that actually pays for part of the development: “Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis …”

This is the heart of the transaction. It’s what citizens need to understand. Instead of Union Station LLC’s property taxes being used to pay the cost of government, nearly all of these taxes will pay off the owner’s loans.

The purchase of the property

Here’s what city documents state regarding the purchase of the property: “The $6,226,156 in equity is proposed to be in the form of $1,500,000 from the purchase of the property that will be contributed as collateral, $3,766,156 in monetized historic tax credits, and $960,000 in cash.”

It’s the “purchase of the property” that needs scrutiny. More from the city documents: “The developer would be compensated for the fair market value of the land where public access improvements would be located, not to exceed the $1,500,000 actual site acquisition cost. The Public Access Easement attachment illustrates that the portions of the site where a public access easement would be acquired is 274,059 square feet and that the average land acquisition cost of 10 comparable downtown properties is $6.71 per square foot, placing the fair market value of the land where the public access improvements would be located at $1,839,147.”

What’s happening is that part of the land area of the project is being called “public access improvements.” These are things like, according to city documents, “parking structure, pedestrian boardwalk, paving, utilities, and landscaping.” The city is proposing to pay the developer $1,500,000 for these areas.

If the council agrees to this, new avenues will have been opened for spending taxpayer funds. It places other commercial developers and landlords at a disadvantage. Consider, say, the recent Whole Foods Market that opened in Wichita. What Union Station LLC wants is like that developer asking to be reimbursed for the shrubs and grass that was planted, or the parking spaces that are provided. The public will, after all, view the sunlight reflected from the grass and breathe the oxygen generated by the shrubs. And, the public will park in the spaces. These “public access improvements” are part of what is necessary to provide an attractive and desirable development. It’s part of what businesses do to attract customers and earn profits. But the Union Station developer is asking that the city pay him for providing these things. If the council agrees to this, we can expect to see this template applied repeatedly in the future.

The missing tax credits

City documents state this regarding the sources of funds for the project: “Private to Public Investment Ratio — The proposed private capital investment is $36,578,000, and the proposed public capital investment is $17,321,000, resulting in a private to public capital investment ratio of 2.1 to 1.” But missing from this calculation is the contribution of taxpayers in the form of historic preservation tax credits. As reported above, the city reports the project will receive $3,766,156 in monetized historic tax credits.

(Tax credits are economically equivalent to a grant of cash from government. Commonly their value is used to boost the “private” equity contribution to the project. But since the tax credits come from government, we ought to call it the “peoples’ equity.”)

I inquired of city officials whether the historic preservation tax credits are federal, state, or both. The answer I received: “The Developer has not yet provided the City with details on the tax credits. However, staff analyzed the project to ascertain a ballpark estimate of how much it could generate in both state and federal tax credits and came up with a similar amount. We assume that $3,766,156 is the amount of net proceeds to be injected into the project from the sale of tax credits and that it is discounted from the face value of the credits.”

So it seems like the city is surmising things that may or may not be part of the developer’s plan.

False sales tax exemption applied

There’s another level of uncertainty in the city documents. In the analysis performed by Center for Economic Development and Business Research at Wichita State University, about $1.8 million in sales tax exemptions are included in the analysis. In my reading of the project documents, I didn’t see the project qualifying for sales tax exemptions. Upon inquiry to the city, I received this response: “The only incentive program available to Union Station that would provide a sales tax exemption is IRBs. The Developer did not request IRBs or a sales tax exemption. I would guess that CEDBR factored it into the cost-benefit analysis to be extra conservative.”

It appears there is a lack of communication between the city and CEDBR. More surmising. Exactly which incentives are available to be tapped by this project, and in what amount? Can we trust the analysis from CEDBR if it includes incentives that the project has not requested and is not eligible to receive?

Benefit-cost ratios

Benefit-cost ratios of Union Station LLC project for City of Wichita. Click for larger version.
Benefit-cost ratios of Union Station LLC project for City of Wichita. Click for larger version.
The city has a policy that economic development projects should have a benefit-cost ratio of 1.3 to 1 or greater. For this project, CEDBR reports these ratios:

City General Fund, 1.04
City Debt Service Fund, 1.15
Total City, 1.08
Sedgwick County, 1.06
State of Kansas, 1.66
School district, 7.19

For the city and county, the ratios are far below 1.3 to 1. There are many exceptions and loopholes in the incentive policy that allows the city to participate in projects with less than the 1.3 ratio.

The (un)certainty of city policies

For this project we see that city policy is being modified on the fly to meet the circumstances of a particular project. This is not necessarily bad. Entrepreneurship demands flexibility. But the city promises certainty in its standards, and city officials say Wichita has a transparent, open government. The Public-Private Partnership Evaluation Criteria for the redevelopment of downtown Wichita states “The business plan recommends public-private partnership criteria that are clear, predictable, and transparent.”

But as in the past, we find the city’s policies are anything but predictable and transparent. City documents state: “In the opinion of the evaluation team, the established criteria do not adequately address projects such as Union Station where the requested incentives do not involve City debt.” So we see the “clear, predictable, and transparent” policies discarded and reformulated. How are future developers supposed to know which policies can be waived or rewritten? How are citizens supposed to trust that city hall is looking out for their interests when policies are so fluid?

What incentives can Wichita offer?

Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available.

In making the case for an economic development fund paid for by a sales tax, the argument goes like this: “Wichita and Sedgwick County compete conservatively with incentives. The City of Wichita and Sedgwick County have a total of $1.65 million in new uncommitted funds for cash incentives this year with any unused money going back to the general fund.” (Will Wichita Accelerate Competition for Primary Jobs?, presentation made to Wichita city council.)

This statement is true only if we use a very narrow definition of the word “incentive.” By any reasonable definition, Wichita has many incentives worth much more than what is claimed by Wichita economic development officials and politicians.

In fact, the report cited above contains contradictory information about the amounts that are available for economic development incentives in Wichita. Here is an example: “The $4.5 million PEAK program incentive from the Kansas Department of Commerce was an important factor in keeping NetApp in Wichita. Locally we were able to provide $836,000 in incentives.”

So with an incentives budget of $1.65 million, a Wichita company received $5.3 million in incentives. Some of that, like the PEAK incentive, is paid over a period of years. But that amount doesn’t begin to describe the benefits NetApp received.

Available incentive programs

Kansas Department of Commerce logoA letter to NetApp from the Kansas Department of Commerce laid out the potential benefits from the state. As detailed in the letter, the programs with potential dollar amounts are:

  • Promoting Employment Across Kansas (PEAK), up to $7,705,535
  • Kansas Industrial Training with PEAK, up to $160,800
  • sales tax savings of $6,880,000
  • personal property tax exemption, $11,913,682
  • High Performance Incentive Program (HPIP), $8,500,000

The total of these is $35,160,017. Some of these benefits are paid over a period of years. The PEAK benefits are payable over seven years, according to the letter, so that’s about $1.1 million per year. These are potential benefits; the company may not actually qualify for and receive this entire amount. But it’s what the state offered.

It’s true that some of these programs are not cash incentives of the type Wichita complains of lacking. But if a company is going to make purchases, and the state says you can skip paying sales tax on the purchases — well, that’s as good as cash. $6,880,000 in the case of NetApp, according to the Kansas Department of Commerce.

Local tax exemptions

Besides sales tax exemptions, the city has other types of tax exemptions it regularly offers. These exemptions can have substantial value. In 2008 as Drury contemplated Broadview Hotel 2013-07-09 020purchasing the Broadview Hotel, the city allowed the hotel to escape paying much of the taxes that the rest of us have to pay. According to city information, Drury planned to spend $22,797,750 on the hotel. If we use this as the appraised value for the property when it is complete, the annual property taxes due for this property would be $22,797,750 times .25 times 126.323 divided by 1000, or $719,970. This calculation may be rough, but it gives us an approximation of the annual operating subsidy being given to this hotel for the next ten years.

It's important for citizens to know incentivesWhen Boeing announced in 2012 that it was closing its Wichita operations, city leaders complained that Boeing was leaving Wichita even though it had received many incentives. From 1979 to 2007, Boeing received tax abatements through the industrial revenue bond process worth $658 million, according to a compilation provided by the City of Wichita. (This is not money the city lent or gave to Boeing. IRBs provide a vehicle for granting tax abatements or exemptions.) At the time, city officials said the average amount of bonds was $120 million per year. With Wichita commercial property tax rates at 3.008 percent ($30.08 per $1,000 of appraised value), according to GWEDC, that’s a tax savings of around $3.6 million per year. To Boeing, that’s as good as receiving cash year after year.

Tax increment financing

In 2013 Wichita approved a package benefiting Exchange Place in downtown. Here’s what the city council agenda packet gives as the sources of financing for this project.

HUD Loan Amount         $29,087,700
Private Equity            5,652,254
Tax Credit Equity        19,370,395
TIF Proceeds             12,500,000
Total Sources of Funds  $66,610,349

TIF, or tax increment financing, diverts future increased tax revenues away from their normal uses and diverts them back to the project. In this case, the city will borrow $12,500,000 by selling bonds. It will give this money to the developer. Then, TIF proceeds will be used to repay these bonds.

Some will argue that TIF isn’t really an incentive. The owners of the property will have to pay their property taxes, just like any other property owner. But for this project, the property taxes are used for the project’s own benefit instead of funding the costs of city government. This project gets to spend $12.5 million of its property tax payments on itself, rather than funding the costs of Wichita city government.

Tax credits

Ambassador Hotel sign 2014-03-07Note that the sources of financing for the Exchange Place project includes “Tax Credit Equity.” Here’s an example of another downtown project, the Ambassador Hotel, and the incentive package the city prepared:

  • $3,325,000 in tax increment financing.
  • $4,245,000 in city funding under the capital improvement plan (CIP), to build parking for the hotel.
  • $3,800,000 in tax credits from the State of Kansas.
  • $3,500,000 in tax credits from the U.S. government.
  • $537,075 in sales tax exemptions on purchases during the construction and furnishing of the hotel.
  • $60,000 per year in community improvement district (CID) sales tax. The hotel charges an extra two cents per dollar sales tax, which the state returns to the hotel.
  • $127,499 per year (estimated) in rental revenue to the developers from a sweetheart lease deal.
  • Participation in Wichita’s facade improvement program, which provides special assessment financing that is repaid.

All told, this project was slated to receive $15,407,075 in taxpayer funds to get started, with additional funds provided annually.

The tax credits for this project are historic preservation tax credits. They have the same economic impact as a cash payment. The federal tax credits are available across the country, while the Kansas tax credits, of course, are a state program. In this case the hotel developers received an upfront payment of $3.8 million from the state in a form that’s as good as cash.

STAR bonds

Last year a STAR bonds district in northeast Wichita was approved to receive $31,570,785 from these bonds. The STAR bonds are paid off with sales tax revenue that would otherwise go to the state and overlapping jurisdictions. This is sales tax collected from the business’s customers, and doesn’t cost the business anything.

Adding it up

This list is not complete. There are other programs and other beneficiaries of economic development subsidies. With this in mind, it is disingenuous for city and other officials to use the $1.65 million figure as though it was all Wichita had to offer. It’s important for citizens to know that contrary to the claims of officials, Wichita has many economic development incentive programs available, and some have substantial value to the recipients, with corresponding cost to the city and other jurisdictions.

Kansas budgeting “off the tops” is bad policy

From Kansas Policy Institute.

Budget “Off The Tops” Bad Policy

By Steve Anderson

Direct transfers of taxpayer money sent to a specific business or industry is always a tough sell to politicians, let alone the voting public. But, that is why some corporations pay lots of money to lobbyists. If we can’t get a company more revenue (via a taxpayer-funded payment) why don’t we lower their expenses via a tax loophole that lowers how much they pay in taxes?

These sort of special interest tax breaks come in a variety of different forms but the net effect of each is the same — revenues are diverted from the appropriation process and instead sent to some “special” group. A shrewd lobbyist will often make sure the program is funded in a way that their client(s) will receive their funding even if the statute is changed in the future. However, that should not preclude bringing these special interest deals to an end. This is especially important given that the reduction in tax rates will increase the impact of these programs on the revenue stream even as the state continues along the path to eliminating the individual income tax.

These transfer schemes are funded in a number of different ways that obscure the transaction from both the public and the appropriation process. For example, there are a number of these special deals that are funded by payroll withholding taxes. The payroll withholding exemptions are programs where the state abates collection of state income tax withheld on employee’s wages. The state then provides either a program or directly funds some benefit for the employer. These programs come in many forms and often are nearly impossible to find within the very complex tax and revenue reporting statements. In general these programs require relatively long commitments by the state of taxpayer funds. The discontinuance of these type of programs will not generally eliminate the programs immediately but it will create savings going forward that could be substantial to the maintenance of a stable fiscal environment and a more transparent tax code. It would also be a breach of trust, on some level, to yank away a promise made by the state to an entity or individual. But, that doesn’t mean we have to let these program exist into perpetuity.

Investments in Major Projects and Comprehensive Training (IMPACT)

IMPACT provides for major project investment to provide financial assistance to defray business costs. IMPACT uses withholding revenue for a direct funding source to pay for bonds issued by the state for projects. In fiscal year 2013 that percentage was 2% and the program expended $25,420,654 of funds that otherwise would have gone to the state coffers. The good news is that Kansas stopped issuing bonds in the IMPACT program effective Dec. 31, 2011. The bad news was it was replaced with other programs that are very similar. The IMPACT payments will extend on for a number of years in to the future because of the bond’s that funded those projects. This ability to bind future legislators and taxpayers to these sort of “deals” is, in and of itself, problematic but there is more damage done to the state of Kansas than just the direct cost of these bonds.

Bad policy like the type of special interest payment that IMPACT represents often have negative impacts in the future that are not foreseen at the time of their passage. For example, the IMPACT bonds were at the heart of the recent Moody’s down grade of the Kansas state bond rating. The IMPACT bond’s ratings were reviewed by Moody’s rating agency because the funding source to pay off the bonds — withholding taxes — was being reduced by a cut in the tax on wage earners in the state income tax rates. The media, which generally is not comprised of individuals with a financial background, reported that the change in the IMPACT bond ratings were caused by the broad tax cuts, which is only partially true. What the media in general did not report, at least not with the same enthusiasm as their portrayal of the impact of the income tax cuts, was that Moody’s noted the long running unfunded liabilities of the Kansas Public Employees Retirement System (KPERS) and the lack of spending cuts as key elements of their downgrade.

However, analysis of the IMPACT bond rating issues bring to light another important problem with these type of giveaways. Future legislators have their hands tied because their predecessors have committed future tax revenues in a manner that precludes the ability to bring an immediate cessation, or even partial reduction, in the special interest funding source without repercussions such as the recent bond rating issue.

Promoting Employment Across Kansas (PEAK)

The PEAK program allows companies that create 100 new jobs within a specified two-year period to retain 95% of employee withholding taxes for up to 10 years. Not surprisingly with such a generous incentive companies have grown its use rapidly going from $2.7 million in expenditures in 2010 to an estimated $12.5 million in 2012 years. The “cap” on this program going forward is: In FY 2014, the cap is $12 million. In FY 2015, the cap is $18 million, $24 million in FY 2016, $30 million in FY 2017, $36 million in FY 2018, and $42 million 2019. Immediately freezing the cap at the current level and eliminating the program going forward to prevent new obligations generates significant savings going forward for the state. This is giveaway is even more troubling when considering that a recent analysis from Kansas City’s Kauffman Foundation found that, “PEAK incentives recipients are statistically not more likely to generate new jobs than similar firms not receiving incentives.”

Kansas Bioscience Authority (KBA)

The KBA’s short lifespan is a microcosm of what can go wrong with the concept of dedicated directed funding. The lack of transparency created by bypassing the scrutiny of the appropriation process often leads to expenditures that generate headlines but don’t create economic growth.

The legislation that created the KBA produced a number of programs and funding streams. It also set the total funding limit to the authority over 15 years at almost $582 million. The funding was to be for a period of 15 years from the effective date of the establishment of the KBA and required the State Treasurer to annually pay 95% of withholding above the certified base, as certified by the Secretary of Revenue, on Kansas wages paid by bioscience employees to the bioscience development (code categories from NAISC) and investment fund of the KBA.

The amount of funding transferred to the KBA grew from almost $20 million in 2006 to nearly $36 million by 2008 before the creation of the annual funding cap of $35 million in 2009. Issues with operations and management emerged in 2011 which led to a forensic audit by an outside CPA firm. The audit pointed to a number of issues that led subsequent legislatures to reduce the Authority’s funding to $11.3 million in 2012, $6.3 million in 2013, and $4.0 million in 2014 (KBA funding history here). It is doubtful that the current Administration or legislatures would increase funding above current levels but the $35 million is still the statutory cap leaving open that possibility.
There is a secondary issue with KBA’s statutory cap caused by the treatment of these type of dedicated directed funding in the budgeting process. These statutory caps for entities like KBA are considered to be at their cap amount when forecasting future budgets. The $35 million of KBA statutory cap, for example, creates an illusion in fiscal impact statements issued by the Kansas Legislative Research Department (KLRD) because those statements show the full statutory amount of $35 million being spent every year for the five years they project. Based on the current trend line of KBA funding this will not happen and, instead, creates a significant overstatement of expenditures and helps create fiscal deficits where none may exist. These projections are used by legislators and the media and should strive to present as accurate a picture as possible of current and possible future realities. A more proper and accurate display of these type of funded programs for five year projections like KLRD produces would consider whether spending could be altered or removed completely. This should be reflected in either the actual amount shown, if there was a history of partial funding, or, at the very least, in a separate line item with a notation that the sum could be arbitrarily reduced or eliminated.

Job Creation Fund

Another of those dedicated directed funds is the Job Creation Fund (JCF). The Job Creation Program Fund or the “deal closing” fund, its more press-friendly moniker, lets the state, led by the Office of the Governor, make investments and extend incentives aimed at attracting or retaining businesses within a range of statutory guidelines. The funding for the JCF was from the elimination of three other credits: Kansas Enterprise Zone, Job Expansion and Investment Credit Act and a refundable credit for property taxes paid on machinery and equipment. This sort of reallocation of funding sources carry the coveted title of “revenue neutral” and hence have no fiscal impact statement for legislators to worry about when the funding was created. This allowed elected officials to be able to say on one hand they eliminated special interest funding while creating another special interest fund out of the “elimination” of those entities. The annual cap on JCF funds is $10 million which is how much could be immediately saved by letting JCF join its now-defunct predecessors in state history.

Transfers Out of the State General Fund

There is another area where what would be State General Funds are diverted from the appropriation process. There are a number of transfers out of the State General Fund with the largest and most notorious being the $135 million School District Improvements Fund. Not only does this amount not get counted in the school formula, the recent Gannon ruling on school funding pointed directly to this fund as an example of inequity in funding. This “inducement” to issue bonds for new buildings was a bad idea both from a policy and process aspect. Policy-wise the Kansas Supreme Court’s Gannon ruling was correct in pointing out that only the growing school districts could use this fund with a few big school districts garnering most of the monies. Process-wise the choice to use a transfer as the funding mechanism not only bypassed the school finance formula but also ensured that these funds are not counted by the National Center for Education Statistics; NCES is the “go to” place for comparing education-related data from across the country and is run by the U.S. Dept. of Education.

There is also another series of transfers that have their own particular issues.The adjacent list shows the recipient and the amount for FY-2015 (available at link above).The picking of winners and losers by government is never a good idea and the direct transfer of taxpayer funding to companies is a suspect type of economic development.

Transfers out of the State General Fund
Spirit Aerosystems Incentive ($3,500,000)
Eaton MDH Spec. Qual. Indus. Mfg. Fund ($30,000)
Siemens Manufacturing Incentive ($650,000)
Learjet Incentive ($6,000,000)
TIF Replacement Fund ($900,000)
Learning Quest Match  ($500,000)
Total ($11,580,000)

It is also troubling when local communities enter into Tax Increment Finance (TIF) arrangements, not to mention other subsidy giveaways, which are basically an agreement between a company or individual and the city to suspend property tax payments for that company or individual. State taxpayers as a whole have to make up for lost revenues to the governing body of each such city from the TIF arrangement. This means that a TIF issued in Johnson County is, at least in part, paid for by residents of Bourbon County and Elkhart. This distribution of funds from taxpayers across the state to individual “redevelopment areas” that were created by local governments in a manner that is basically hidden from the citizens is another great example of why these “off the tops” are bad policy. Requiring these TIF subsidies to be debated in the light of the full appropriation process would no doubt lead to questions by legislators whose districts did not include cities who receive this subsidy.

A general thought for legislators, citizens and industry on these economic subsidies. The reduction in income tax rates by the state on withholding rates has already provided a huge incentive for these companies in addition to the direct largess they receive from these dedicated funds. The rate cut on withholding taxes increased the take home pay of their employees without those companies having to give a pay raise to their employees out of company funds. Note that the “incentive” of lower withholding taxes is applied to EVERY wage earner in the state and does not go about picking favored businesses, industries, or individuals. This type of transparent, rules-based, and equally-applied policy is the correct way to encourage economic growth and allow the free market to dictate outcomes not politicians or bureaucrats.

Conclusion

Every program that spends the funds of the taxpayer should be examined regularly and the nature of these “off the tops” suggests that is not happening. The need for transparency and accountability is especially true of programs that benefit any specific individual, company or sector of the economy at the expense of another. Because of the contractual type of arrangement some of these represent we do not advocate for the state breaking existing contracts in regards to incentives. But, the creation of new or expansion of existing economic development handouts that are direct redistributions from taxpayers to other sectors of the economy needs to be halted and those still in existence need to be reviewed.

A complete review of every agreement entered into by the state to ascertain if that agreement is contractual in nature or are not legally binding going forward should proceed this next legislative session. The state should review those that are not legally binding and current renewals that can be foregone and put this “off the top” funding back in the appropriation process going forward. How much could the state expect to realize would be determined by that review. Even a preliminary, informed estimate would be in the neighborhood of $50 million annually without breaking any contractual arrangements. The following chart gives an estimate of just three programs with statutory flexibility.

Total Dollars Returned to the State Coffers
$s in Millions FY16 FY17 FY18 FY18
Freeze PEAK at Current Levels $6 $12 $18 $24
Kansas Bioscience Authority $25 $25 $25 $35
Cease Job Creation Fund $10 $10 $10 $10
Totals $41 $47 $53 $69
The issue of transparency is front and center in all of these programs and it would be appropriate for every “off the top” to be displayed on both Consensus Revenue Estimates and Appropriation profiles so that legislators and citizens can see that a significant amount of funds have already been appropriated by these arrangements.