Voice For Liberty

Tag: Wichita city council

  • Wichita city hall silent on handling of ethics issue

    A correction has been noted in this article.

    On Tuesday the Wichita city council will hold a public hearing regarding a request by Real Development for a $2.5 million increase in tax increment district financing. While this proposal should be opposed on its merits, there is reason to give extra scrutiny to this matter. That’s because Real Development employs the services of Wichita public relations executive Beth King. What matters to public policy is that last year she and Wichita City Manager Robert Layton began a dating relationship which continues to the present.

    Documents released to me in response to a records request indicate that King is no mere publicist. Instead, it is apparent she plays an active role in negotiations between city staff and Real Development.

    The mayor, city manager, and city staff have policies in place to control what is an obvious conflict of interest. The efficacy of these policies might be the subject of discussion and debate — except there is no discussion.

    The Wichita Eagle has researched a story on this matter. Reporters interviewed the mayor, city council members, and government ethics experts. (The following sentence in this article is in error. Eagle newsroom management says research was never developed into a story. See here for more.) But Eagle newsroom management has squashed the story, citing the difficulty of drawing a line between public and private behavior. (The Eagle has mentioned the dating relationship and briefly described the city’s response as a small part of a story marking Layton’s first anniversary as Wichita city manager.)

    The Eagle’s editorial board has not written on this issue, either.

    The line between private and public life is difficult to draw, no doubt. But when a company actively represented by a person who is involved in a dating relationship with the city’s top executive is asking the city for millions in tax increment financing, the line has definitely been crossed.

    There needs to be a public discussion of the city’s response to this matter. The people of Wichita need to know that the city believes the conflict of interest has been handled, and by what measures. We need to hear from experts — and regular citizens — as to whether these policies are an appropriate and effective response.

    In a meeting with Wichita Mayor Carl Brewer Friday afternoon, I told him of my concern about the lack of public disclosure of the measures the city has taken. The mayor stressed several times that the manager’s private life is not a subject for public discussion, and I agree.

    The mayor feels that by providing information to news media and having been interviewed, his obligation is fulfilled. That could be true if the management of the Wichita Eagle, our town’s only daily newspaper, printed the story that would let citizens know of the city’s policies regarding this matter.

    But since that story is apparently not forthcoming from the Eagle, I feel that the city needs to come forward and tell citizens of the policies it instituted and why the city believes they are effective. It is not appropriate for the city manager to do this, since he is the subject of these policies. Instead, this is the job of the mayor, as he is the political head of the city.

    Besides this issue there is another area of concern. King served as campaign manager for Mayor Brewer and Council Member Lavonta Williams. Should theses elected officials abstain from participating in a decision involving a client of their campaign manager? At the minimum, these relationships need to be disclosed.

    In his first state of the city address, the mayor addressed government accountability, stating: “I’m talking about public trust in government.” Citizens become cynical, however, when they feel there is a group of insiders — commonly called the “good ol’ boy network” — who get whatever they want from city hall at the expense of taxpayers. An obvious conflict of interest can’t simply be swept under the rug — as the city has done in this case — without fueling this cynicism. There’s a tension between widespread knowledge of this matter and the city’s refusal to deal with it in public. This is the case whether the city’s policies are an effective and appropriate response, or if they are not.

  • Wichita community improvement district questions unanswered

    This week the Wichita city council approved the use of Community Improvement Districts. These districts are a new creation of the Kansas legislature from last year.

    In a CID, merchants may charge additional sales tax, up to an extra two cents per dollar. Sometimes bonds might be sold by the city with the bond proceeds being given to the occupants of the district. Then the bonds are repaid by the extra sales tax collected. Or, the extra sales tax might simply be given to the occupants of the district, after deduction of a small amount for expenses.

    A presentation created by city staff is available here.

    Whether creation of a CID is wise is a matter of debate. The city requires that all property owners in the boundaries of the CID agree to its formation.

    I asked two questions of the city council and staff. First, if a business 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 find out 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 other terms.

    Second, 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?

    These questions were not answered.

    During discussion from the council bench, it became clear that there was an urgent need to pass the CID policy that day. When it was suggested that passage of the policy might be deferred a week in order to provide time to answer a different issue, the mayor noted that the first applicant for a CID (he was seated in the audience) seemed to be getting nervous at the possibility of delay.

    Citizens ought to be concerned that the Wichita city council is willing to bypass thoughtful deliberation of policies in order to placate one particular applicant.

  • Wichita economic development incentives discussed

    At today’s meeting of the Wichita city council, economic development incentives were a topic of discussion.

    In his remarks, Wichita Mayor Carl Brewer ignores evidence that targeted economic development incentives — the type being considered — don’t produce economic growth for the community. He also expresses his disdain for free market concepts and those who believe in them.

    It was a bad day for economic freedom in Wichita. Not a single council member voted in favor of economic freedom over corporate welfare.

    Related: Wichita targeted economic development should end, Wichita Warren Theater IRB a TIF district in disguise.

  • Wichita targeted economic development should end

    Is the City of Wichita able to choose which companies are worthy of taxpayer assistance for the purposes of economic development?

    This week and next, the Wichita City Council will attempt to do this several times. It starts tomorrow with a theater owner’s request to avoid paying millions in property taxes. A food processing company is asking for similar treatment.

    Several downtown buildings are receiving special assessment financing for improvements. An ordinance allowing a downtown hotel to keep its guest tax collections for its own exclusive benefit will be voted on.

    The city will also decide whether to implement community improvement districts. These districts let a business add up to two cents on the dollar of sales tax, and keep that extra revenue for its own benefit. (One wonders why the business doesn’t simply increase its prices by two percent.)

    That’s all in one day’s work.

    The question Wichitans need to ask is simply this: Do these targeted economic development incentives work? The answer is, almost always, no.

    In 2008 the Kansas Legislative Division of Post Audit looked at the use of economic development incentives in Kansas, examining some $1.3 billion in spending over five years. In examining the literature, the auditors found: “Most studies of traditional economic development incentives suggest these incentives don’t have a significant impact on economic growth.”

    It also found: “The majority of research concludes there is a lack of demonstrated impact from the typical types of economic development assistance, and that incentives aren’t cost-effective.” The audit can be read at Economic Development: Determining the Amounts the State Has Spent on Economic Development Programs and the Economic Impacts on Kansas Counties.

    Recently Alan Cobb wrote of the harm that targeted incentives cause, using Detroit as an example: “While state and local government poured incentives into the Big Three’s trough, the marginal costs of doing business for everyone else crept up.”

    Wichita is taking the same path. Instead of competing in the market, businesses look to city hall for special treatment. When applicants ask government for special treatment at the expense of others, the economic term for that activity is rent seeking.

    The term rent, or more precisely, economic rent is somewhat unfortunate, as the common usage of the term — paying someone money for the use of an asset for a period of time — contains no sinister connotation. But economic rent does carry baggage.

    So what is rent seeking? Wikipedia defines it like this: “In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.”

    This explanation doesn’t do full justice to the term, because it doesn’t mention the role that government and politics usually play. The Concise Encyclopedia of Economics adds this: “The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.”

    It’s thought that Wichita needs to dish out economic development subsidies so that we can attract new companies to our town, or, as is often the case, retain existing companies. So we grant special tax treatment — usually through industrial revenue bonds, but also in other ways such as tax increment financing — to these companies. Or sometimes we may dispense with these cumbersome processes and simply give companies money or make loans that don’t need to be repaid.

    These benefits — representing economic rent and rent seeking behavior — are great for the lucky companies that received them. But what about considering the city or region as a whole? In that case, something different emerges. Here’s an excerpt from “Rent Seeking and Economic Growth: Evidence From the States,” Harold J. Brumm, Cato Journal, Vol. 19, No. 1 (Spring/Summer 1999):

    The present study finds the growth rate of real gross state product (GSP) per capita to be negatively correlated with the initial level of real GSP per capita, the burden of state tax structure, and — most notably — the level of rent-seeking activity in the state. On the basis of the estimates obtained for the standardized coefficients of the explanatory variables in the growth rate equation, the conclusion reached here is that rent-seeking activity has a relatively large negative effect on the rate of state economic growth. An implication of this finding is that a state government which promulgates policies that foster sustained artificial rent seeking does so at considerable expense to its economic growth.

    In simple terms, rent seeking activity harms economic growth.

    This study also states: “The private returns of rent seekers come from the redistribution of wealth, not from wealth creation. The tax that rent seeking imposes on the productive sector reduces the output growth rate by reducing the incentives of entrepreneurs to produce and innovate.”

    This study looked at state governments and their activities, but there’s reason to suspect that the findings apply to cities and counties, too.

    So should we simply give up and not grant preferential tax treatment and other subsidies to companies to induce them to locate in Wichita? No. Instead, as I’ve outlined in Wichita universal tax exemption could propel growth, we should offer preferential tax treatment to all new investment in Wichita.

    A broad policy like this, where everyone benefits, eliminates the harmful effects of rent seeking. All companies can benefit, not only those that fit into certain categories or make special pleadings to politicians or bureaucrats. All companies can plan with certainty on receiving the benefit — there won’t be the risk whether the city council and bureaucrats will approve the benefit.

    This is the type of policy we should follow to increase economic growth in Wichita.

  • Wichita Warren Theater IRB a TIF district in disguise

    On Tuesday the Wichita City Council will consider an economic development incentive for a local business. The process the city is using to grant this incentive bypasses the scrutiny that accompanies the formation of TIF districts while providing essentially the same benefit.

    The proposal provides Industrial Revenue Bond financing to American Luxury Cinemas, Inc., d.b.a. 21st Street Warren Theatre, a company owned in part by Wichita theater operator Bill Warren. Under the city’s IRB program, no city money is lent to Warren, and the city does not provide any guarantee that the bonds will be repaid.

    Instead, the benefit of the IRB to Warren is that he will escape paying property taxes on the new theater. Also, he will likely avoid paying sales taxes on purchases made with the bond money. (The city-supplied material doesn’t mention the sales tax exemption, but this incentive is commonly granted, and mention of it was likely omitted by mistake from the agenda report.)

    This project is a TIF district in effect. It has the same economic benefit to the applicant. But the way this deal is structured means it doesn’t have to go through the normal approval process of a TIF district. Specifically, the Sedgwick County Commission will not have a chance to consider approval of these incentives. That approval would probably not be granted.

    The process being used also allows the city to bypass the 30 day notice of a public hearing required for formation of a TIF district.

    In a TIF district, the city borrows money and spends it immediately for the benefit of the TIF district. What the city spends money on isn’t important, as long as it’s spent on things that the owners of the property in the TIF district would have to pay for themselves, if not for the city. This is important to remember, as defenders of TIF districts say that the city money is spent “only on infrastructure,” as if most developers don’t have to pay for their own infrastructure.

    As improvements to property in the TIF district are made — buildings being built or renovated, etc. — the property taxes on the property go up. This increase in the tax payments — that’s the increment in TIF — goes to pay off the borrowed money that was spent on the TIF district.

    Since the TIF district spending was for the exclusive benefit of of the TIF district applicant, and the increased property taxes are paying off the bonds that provided that spending, TIF districts, in effect, let the applicants keep the increase in their own property taxes for their exclusive benefit.

    Whenever anyone else improves their property and has to pay higher taxes, those taxes go to fund the general operations of government.

    (If this sounds confusing and complicated, it is. It is confusing by design. A while back I told the council: “I’ve come to realize that this confusion serves a useful purpose to this council, because if the people of Wichita knew what was really happening, they’d be outraged.”)

    In the Warren deal that the council will consider on Tuesday, no TIF district is being created. But because the property is in the IRB program, property taxes will be forgiven. Warren is agreeing to make payments equal to the present tax bill on the property (plus a small annual increase).

    The net effect is that the Warren group will not pay property taxes on the value of the new project. It’s the same economic effect as a TIF district, without the scrutiny that accompanies formation of a TIF district.

    Some city politicians and bureaucrats — particularly Mayor Carl Brewer, council member Jeff Longwell, and the city’s economic development chief Allen Bell — have complained that the city doesn’t have enough “tools in the toolbox” when it comes to dishing out economic development incentives.

    This applicant has been the recipient of economic development incentives, including a TIF district formed for its benefit. When that business was failing, the city created a special tool for Warren’s benefit: a no-interest and low-interest loan.

    Here we see another new tool being created — the formation of what is, in effect, a TIF district without accompanying scrutiny.

    Warren IMAX Theater Project

  • Detroit, corporate welfare and Wichita’s future

    The following op-ed from Americans for Prosperity Foundation’s Alan Cobb appeared in today’s Wichita Eagle (the unedited version is below).

    I agree with Cobb. Wichita definitely has a problem with its economic development strategies. Instead of low taxes that will benefit everyone, the Wichita city council and Wichita city hall bureaucrats insist on dishing out subsidies to companies nearly every week. I’ve shared my ideas with the council in testimony like Wichita universal tax exemption could propel growth and articles like Wichita’s economic development strategy: rent seeking.

    Still, there are some council members who, along with Mayor Carl Brewer and some city staff, feel city the doesn’t have enough “tools in the toolbox” for shoveling incentives on companies for economic development purposes.

    Recently The Eagle printed an article by Molly McMillin, a well-respected aviation and business reporter.

    The question asked throughout the article is one that Wichita leaders and citizens have been asking for some time: What can we do to prevent Wichita from falling into the hole that is Detroit?

    A simple answer is to continue throwing money and other goodies to keep the aviation companies. A better answer is we need to get rid of the notion that our elected officials and others have so much forethought to know what will or won’t be successful in 20 or 50 years. They don’t.

    Detroit became the modern tragedy it is, not just because of global competition, poor products or poor management at the Big Three. Other sectors of the Michigan economy weren’t there to pick up the slack, when the auto industry floundered. Michigan put too much focus on the auto industry, to the detriment of the overall business and economic climate.

    While state and local government poured incentives into the Big Three’s trough, the marginal costs of doing business for everyone else crept up.

    It‘s the classic example of the seen vs. the unseen. We see the new factory Pontiac builds. We don’t see the businesses that reduce their size, close or just move. The irony is we will still see the Pontiac factory after it is closed and boarded up.

    For each tax dollar given to the auto industry, one is taken one away from entrepreneurs trying to create the next GM, Ford, Google or Apple. This may not be too bad the first time or the second time, but over years and decades, the results can be significant. The “next big thing” will be created in a state with a better tax and regulatory climate.

    Cessna, Spirit, Boeing, Learjet and Beechcraft are all great companies that produce great products known throughout the world. Kansans and Wichitans are rightly proud.

    Who can predict with any certainty they’ll be in Wichita or even in business in 10 or 30 years? I hope so, and I think they will, but I am not willing to bet Wichita’s future on it.

    We shouldn’t give other individual companies state or local funded goodies, either.

    Lower the tax rates for everyone. After all, the tax breaks and other prizes handed out are recognition that the cost of doing business in a particular are is too high.

    The Kansas Division of Legislative Post Audit last year reported we spent billions of dollars in “economic development” with literally nothing to show for it. Our lawmakers aren’t very good at picking winners and losers.

    When Wichita’s aircraft leaders were asked about Detroit, there was a golden opportunity to ask other business leaders in Kansas and Wichita that same question.

    It is just as likely and maybe more so, that they will determine if Wichita goes the way of Detroit — or does not.

  • David Burk, Wichita developer, overreaches

    Today’s Wichita Eagle contains a story about a well-known Wichita real estate developer that, while shocking, shouldn’t really be all that unexpected.

    The opening sentence of the article (Developer won tax appeal on city site) tells us most of what we need to know: “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.”

    Some might say it’s not surprising that Burk represented himself in the way the Eagle article reports. When a person’s been on the receiving end of so much city hall largess, it’s an occupational hazard.

    And when you’ve been the beneficiary of so much Wichita taxpayer money, you might even begin to think that you shouldn’t have to pay so much tax anymore.

    At the state level, you might seek over a million dollars of taxpayer money to help you renovate an apartment building.

    Burk has certainly laid the groundwork, at least locally. A registered Republican voter, Burk regularly stocks the campaign coffers of Wichita city council members with contributions. These contributions — at least for city council candidates — are apparently made without regard to the political leanings of the candidates. How else can we explain recent contributions made to two city council members who are decidedly left of center: Lavonta Williams and Janet Miller? Burk and his wife made contributions to their campaigns in the maximum amount allowed by law.

    This is especially puzzling in light of Burk’s contributions to campaigns at the federal level. There, a search at the Federal Election Commission shows a single contribution of $250 to Todd Tiahrt in 2005.

    It’s quite incongruous that someone would contribute to Tiahrt, Williams, and Miller. Except Williams and Miller can — and have — cast votes that directly enrich Burk. Politicians at the federal level don’t have the same ability to do that as do Wichita city council members. Well, at least not considering Wichita city business.

    So which is it: is Burk a believer in Republican principles, a believer in good government, or someone who knows where his next taxpayer handout will come from?

    Burk’s enablers — these include Wichita’s lobbyist Dale Goter, Wichita Downtown Development Corporation president Jeff Fluhr and chairman Larry Weber, Wichita City Manager Robert Layton, Wichita economic development chief Allen Bell, and most importantly Wichita Mayor Carl Brewer and various city council members — now have to decide if they want to continue in their efforts to enrich Burk. Continuing to do so will harm their reputations. The elected officials, should they run for office again, will have to explain their actions to voters.

    At the state level, the bill that will enrich Burk will likely be voted on in the Kansas Senate this week. Then, similar action may take place in the Kansas House of Representatives. Let’s hope they read the Wichita Eagle in Topeka.

  • Businesses in Old Town Cinema district fought property taxes

    As reported in the Wichita Eagle by Brent Wistrom: “Business owners in a special taxing district surrounding the Old Town Warren Theatre have fought to have their property taxes reduced, forcing the city to cover debts incurred when the city bought land, installed utilities and built a park to spur the development.”

    I guess no one wants to pay taxes, even when those taxes go to pay off bonds that benefited your property. That’s true even though the city has made a no-interest and low-interest loan to the primary business in this TIF district. As the Eagle story reports: “The move was seen as a way to ensure the theater’s success and give the TIF district a boost.”

    We see the desire to skirt paying a full load of taxes playing out in the Power & Light District in Kansas City, Missouri, which is often cited as an example of what we’d like to have in Wichita. There, the Cordish Company refers to the project as an $850 million investment. But according to Kansas City Business Journal reporting, the company wants the appraised value for tax purposes to be just $12.3 million.

    This didn’t go over well with the writer of an editorial in the same publication. The anonymous author wrote: “But for all of The Cordish Co.’s skill in conjuring the entertainment district, the developer doesn’t seem to miss an opportunity to kick its host community in the shins. The latest kick comes in the form of a protest by Cordish of the appraised value of the Power & Light District.”

    Further: “Cordish isn’t bickering with the county about a slight variance in figures — it is claiming a value that is less than one-tenth of the county’s number.”

    We don’t have many more details about the situation in Wichita. I’ve made a records request that should tell us which property owners appealed their tax valuations, their reasons why, and the result of the appeal.

  • Wichita city council signals possible change in economic development incentive policy

    At today’s meeting of the Wichita City Council, discussion by council members and their vote may signal a change in the city’s stance toward economic development incentives.

    At issue was a request for extension of economic development incentives for a Wichita company. Five years ago the city council approved an economic development package for the company that included a tax abatement. As is the city’s policy, the council revisits the issue in five years to see if the company has meet its goal commitments. In the case of this company, one commitment — the building of a new facility — was met. The other commitment — creation of a certain number of jobs — was met early on during the period of the tax abatement, but employment has been declining in recent years, and employment is currently 100 jobs below the goal.

    Recently the city council adopted new guidelines for companies that are not meeting their goals at the time of review. These guidelines make it easier for companies to qualify for the extension of the abatement. If the WSU Current Conditions Index has declined since the awarding of the incentives, the company will qualify for an extension if a majority of the goals are met. A company will also qualify for extension if their peak job creation numbers exceeded the goal, even if the number has fallen, as is the case with the company under consideration today.

    Based on the new guidelines, city staff recommended to approve the extension of the incentives.

    Council member Lavonta Williams asked if it was possible if, as an company receiving an incentive, could “I hire five people today and fire them by Friday and then meet my criteria?” The answer by city economic development director Allen Bell is that the policy contains no such guideline as to minimum period of employment.

    Wichita city manager Bob Layton interjected that staff’s recommendation to approve the extension is a difficult one to make, as this company is in a declining pattern of employment. Additionally, the newly calculated benefit-to-cost ratios are low, and he said he is uncomfortable with that: “We’re actually subsidizing this business, so to speak, or others are subsidizing or bearing their load for debt service.”

    Council member Sue Schlapp asked a question not covered by policy: if we deny the extension today, and next year the company improves its situation, could they come back and ask for the extension of the tax abatement then? There is no definitive answer to this question at this time, according to Bell and Layton.

    Schlapp added that it seems like we’re “lowering the bar all the time” as to the granting of incentives.

    Council member Paul Gray remarked that the council makes itself look bad in these situations, as it always grants extensions even though the city has created policies that should hold companies accountable to their committed goals. The reason for awarding the incentives, he said, was for the increase in employment, and that employment level has not been kept. “We need to start taking a harder stand on this, as we’re going to run out of money if we keep giving it all away.” Vice mayor Jim Skelton agreed.

    No one from the public was there to speak on this matter.

    Wichita mayor Carl BrewerWichita Mayor Carl Brewer was on the losing end of a 6 to 1 vote.

    Gray made a motion to deny the staff recommendation of approval of the extension. Mayor Carl Brewer said that this vote, if it proceeds in the direction it appears to be going, will change the direction of many things that affect businesses in Wichita. He said that the intent of the council is to start holding individuals accountable, and there’s not been a track record of that. It’s been worse since the economy entered the recession, he said. He urged council members to make sure they know which way they’re going with this action. “This will be the direction that we’ll be going as we start working on policy, and it will be effective for everyone, whether it be large or whether it be small. … Just making sure that when we press that button and we head down this path, that we know what we’re doing.”

    The vote was 6 to 1 in favor of Gray’s motion, with the mayor being the lone “No” vote.

    Analysis

    This action by the Wichita city council, being nearly unanimous, is very much different from its action just one week ago, when it employed one new method plus several existing methods to heap millions in subsidy on a downtown hotel developer.

    Today’s discussion is another illustration of just how difficult it is to pick winners and losers, and how difficult it is to choose which companies the city should invest in. This is why I have recommended that Wichita grant tax abatements on all new capital investment.

    Today’s action is especially cruel to the subject company. In the past, city staff has argued that withdrawing tax abatements when a company is struggling is harmful. In December 2008, economic development director Bell said this regarding a company that had not met its performance commitments: “I don’t think it would be productive at this time to further penalize them — as the market has already penalized them — by putting them back on the tax roles at this time.” This is further evidence that taxes are harmful to business and economic growth.

    Council member Williams’ question about hiring and then quickly firing employees indicates that she must not be familiar with the costs of hiring and firing. Furthermore, a company’s unemployment insurance premiums are based on its history, and actions like this would certainly raise premiums by a large amount.

    Extension of EDX Tax Exemption (Sharpline Converting, Inc.)