The developers of property near Naftzger Park in downtown Wichita will possibly receive millions in other subsidy.

The powerful impetus to redevelop Naftzger Park in downtown Wichita is attributed to two sources: The NCAA basketball games in March and the desire of TGC Development Group to develop property it owns near the park.

How much motivation comes from which source depends on who you ask. But it’s clear that the present state of the park is a problem for TGC. A newly redesigned park will effectively serve as the “front yard” for TGC’s projects, and will greatly benefit that company. If the park redesign is paid for with tax increment financing, or TIF, this new park comes at no cost to TGC.

But this is likely not the only benefit TGC will receive from taxpayers. The building TGC owns near Naftzger Park is commonly known as the “Spaghetti Works” building. Before that it was known as the Wichita Wholesale Grocery Company. Under that name, the property was listed on the National Register of Historic Places in 1983. ¹ Then, in 2016 conditional approval was given for federal historic preservation tax credits. ²

These federal tax credits are worth 20 percent of the cost of rehabilitating historic structures. ³ These credits may be used dollar-for-dollar when paying federal income taxes, or they may be sold for cash, usually at a discount, and someone else uses them — instead of cash — to pay taxes they owe.

That’s not all. Although there is no application at this time, it’s likely that TGC will also apply for Kansas tax credits. These are like the federal credits, except they are for 25 percent of the rehabilitation costs. ⁴

Together these tax credits can pay up to 45 percent of the costs of rehabbing this building.

These tax credits have a real cost. As long as state or federal government does not reduce spending by the amount of these credits, and specifically because of these credits, other taxpayers have to pay.

Additionally, these tax credits are inefficient. When Kansas Legislative Post Audit looked at Kansas tax credits, it found that when sold, the state receives 85 cents of project value for each dollar foregone. ⁵

There are many reasons why historic preservation tax credits should be eliminated. ^{6 7} But for now, it’s important to know that a redesigned Naftzger Park is not the only economic subsidy the nearby private property owners are likely to receive.

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Notes

One of the issues surrounding Naftzger Park in downtown Wichita is land ownership.

We can see that the park is built partially on land owned by private owners. City officials have said that a narrow strip of land on the east side of the park is involved. From this map we can see that the situation is more complex.

It would be interesting to learn how this mistake — if that’s what it is — occurred. At one time the city owned the entire block after it acquired land to reform what was skid row.

On Tuesday August 15 the Wichita City Council will hold a public hearing to consider authorizing spending TIF funds on Naftzger Park.

This week the Wichita City Council is scheduled to hold a public hearing on a new redevelopment project plan for a tax increment financing (TIF) district in downtown Wichita. The redevelopment project plan contemplates transforming Naftzger Park. The hearing is part of the regular council meeting at 9:00 am Tuesday August 15 at city hall.

While the city has held four public meetings on the topic of Naftzger Park redesign, these meetings were not legally required. But the Tuesday public hearing is required, as city documents explain: “In order to establish the legal authority to use tax increment financing the City Council must adopt a redevelopment project plan for a project area, within the district, which provides more detailed information on the proposed project, how tax increment financing would be used and demonstrates how the projected increase in property tax revenue will amortize the costs financed with tax increment financing.” ¹

As for providing “more detailed information on the proposed project,” the redevelopment project plan supplied by the city is quite generic. This week the project architect presented four plans at public meetings. But these drawings cannot be found online — not on the city’s website, its Facebook page, or the Wichita Downtown Development Corporation — except for unclear photographs.

The redevelopment project plan describes how to pay for the redesign of Naftzger Park: “Improvements on the adjacent site are anticipated to generate the revenue necessary to fund the improvements to Naftzger.” This is the mechanism of tax increment financing: Future property taxes are redirected from their normal course and funneled back to benefit the development. The city correctly notes that the TIF funds are being used to develop a public park, not a private development. But the private property owner obviously considers the present park a problem. A new park will effectively serve as the “front yard” for new development and will be of great benefit to the owner. And, many people are opposed to changing the park.

From the redevelopment project plan: “The City will provide public funding, including tax increment financing and general obligation bond financing to finance the project costs.” ² That is, there is additional spending contemplated.

“Tax increment funds may also be used to pay for eligible improvements financed through general obligation bonds and to reimburse additional eligible project costs when additional tax increment revenues are available.” ³ Here, the redevelopment project plan hints at more property tax being redirected to the development.

“It is assumed that Project construction will begin in 2018 and be completed before the end of 2023, and therefore achieve full valuation by January 1, 2024. It is estimated that in 2024 the property tax increment will be $163,970.” ⁴ These projections are highly speculative. The city’s record in projecting future development in current TIF districts is spotty. See WaterWalk, Ken-Mar, etc.

“Park improvements are projected to costs approximately $3,000,000, with $1,500,000 of such costs to be financed from proceeds of the City’s full faith and credit tax increment bonds (the “Bonds”).” ⁵ Here the redevelopment project plan reminds readers that if future property taxes are insufficient to pay the bonds, the city itself is liable. The city exacts an agreement from TIF developers that if TIF revenue is insufficient that the developers will pay the difference, but the city’s record in enforcing these agreements is spotty. ⁶

“Incremental tax revenue available after the payment of such Bonds may be used to pay for additional TIF-eligible Project costs related to Park improvements on a pay-as-you-go basis or reimburse the debt service on City general obligation bonds issued to finance a portion of the cost of the Park improvements, if any.” ⁴ Again, the redevelopment project plan hints that future park spending may be paid for with TIF.

The table titled “Projected Tax Increment Report” is subtitled with the name of a different project. This is probably an error without much consequence, as someone in the city probably reused a spreadsheet from a similar project and forgot to revise the title. The same error appears in a second table of figures titled “Projected Bond Cash Flow Report.” Except: The city made this same error in previous versions of this document, as I reported earlier. ⁸ We’re left to wonder whether anyone — at city hall, the Wichita Downtown Development Corporation, or the private developers who will benefit from this spending — care to correct errors like this.

The first table projects the assessed value — and by implication, also the appraised or market value — of property through the year 2036. These projections are highly speculative.

In a section titled “Description of Naftzger Park Project” we see an item titled “TIF Pay-as-you-go Costs” with the amount given as $1,500,000. This spending was mentioned in earlier city documents, but hasn’t received much public discussion. The $1.5 million figure that is in the news is from “regular” TIF financing. In that case, the city borrows money, and the debt is repaid from future property taxes. With the pay-as-you-go TIF, the city simply spends future property taxes in the project. ⁹ The difference is that in regular TIF, the city is liable for the debt if future incremental taxes are insufficient to cover bond payments. In pay-as-you-go TIF, there is no debt, only redirection of property taxes from their normal distribution.

For more about Naftzger Park, see these articles and other information from Voice for Liberty:

• WichitaLiberty.TV: Naftzger Park. Wichita Assistant City Manager and Director of Development Scot Rigby joins hosts Bob Weeks and Karl Peterjohn to discuss the plans for Naftzger Park. Then, Bob and Karl continue the discussion.
• Naftzger Park public hearing to be considered. The Wichita City Council may set August 15, 2017 as the date for a public hearing on the future of Naftzger Park in downtown Wichita.
• Naftzger Park Facebook group.
• Photo album on Flickr.
• Naftzger Park contract: Who is in control? The City of Wichita says it retains final approval on the redesign of Naftzger Park, but a contract says otherwise.
• Downtown Wichita gathering spaces that don’t destroy a park. Wichita doesn’t need to ruin a park for economic development, as there are other areas that would work and need development.
• Naftzger Park concerts and parties? In Wichita, a space for outdoor concerts may be created across the street from where amplified concerts are banned.
• Naftzger Park tax increment financing (TIF). Background on tax increment financing (TIF) as applied to Naftzger Park in downtown Wichita.
• Upcoming Naftzger Park legislative action. The redesign of Naftzger Park in downtown Wichita is not a done deal, at least not legally.

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Notes

The City of Wichita seeks a construction manager for the construction of Naftzger Park.

The request for qualification is titled “CONSTRUCTION MANAGER AT RISK to Construct Naftzger Park.” On the city’s purchasing website the relevant information is contained in five separate documents. I’ve gathered them together in one document, which you may access here.

The city may be getting ahead of itself. The RFQ sets the deadline for submissions as 2:00 pm Tuesday August 15. That morning is when the Wichita City Council will consider approval of the redevelopment project plan. ¹ Until that plan is approved by a two-thirds majority of the council, there exists no authorization to spend funds from a tax increment financing district. ²

Something new appears in this paragraph: “Design and construction are planned to be implemented in phasing to accommodate budget, with the first phase budget of $1,500,000 for design, project administration and construction. The first phase budget will provide for an open and usable park that accommodates as many programming features as budget allows. In addition to the $1,500,000 for phase one, there will also be approximately $500,000 worth of cross site work, demolition, and infrastructure to be completed on the adjacent property.”

The document doesn’t specify the source of the $500,000, and this is the first mention of that sum, as far as I know. But the fact that management of it is included in this RFQ is more evidence that the redesign of Naftzger Park is really a project being done for the benefit of the nearby private landowner.

Later, more evidence of the park’s importance to, and benefit of, one company: “Because of the adjacent location and utilization of the park as it relates to the Spaghetti Works Development, it is necessary that TGC’s team play an integrated role; so that the flow and function developed in the park work seamlessly together with the TGC project.”

Just to emphasize, the proposals are not sent to city hall but to the private company that will benefit from the park redesign: “Sealed Request for Proposal will be received in the office of the TGC Development Group, 125 N Emporia, Suite 202, Wichita, KS 67202, Attn: Blake Heiman.”

The city has provided an illustration of what a potential redesign might look like. There has been much criticism — including by city council members — especially for the covering of the park with artificial turf. But, the RFQ states: “A summary of programmatic elements will include a flexible use lawn area (with potential of artificial turf).”

For more about Naftzger Park, see these articles and other information from Voice for Liberty:

• WichitaLiberty.TV: Naftzger Park. Wichita Assistant City Manager and Director of Development Scot Rigby joins hosts Bob Weeks and Karl Peterjohn to discuss the plans for Naftzger Park. Then, Bob and Karl continue the discussion.
• Naftzger Park public hearing to be considered. The Wichita City Council may set August 15, 2017 as the date for a public hearing on the future of Naftzger Park in downtown Wichita.
• Naftzger Park Facebook group.
• Photo album on Flickr.
• Naftzger Park contract: Who is in control? The City of Wichita says it retains final approval on the redesign of Naftzger Park, but a contract says otherwise.
• Downtown Wichita gathering spaces that don’t destroy a park. Wichita doesn’t need to ruin a park for economic development, as there are other areas that would work and need development.
• Naftzger Park concerts and parties? In Wichita, a space for outdoor concerts may be created across the street from where amplified concerts are banned.
• Naftzger Park tax increment financing (TIF). Background on tax increment financing (TIF) as applied to Naftzger Park in downtown Wichita.
• Upcoming Naftzger Park legislative action. The redesign of Naftzger Park in downtown Wichita is not a done deal, at least not legally.

—
Notes

Background on tax increment financing (TIF) as applied to Naftzger Park in downtown Wichita.

The City of Wichita has proposed using tax increment financing (TIF) revenue to redevelop Naftzger Park in downtown Wichita. Various city officials have said something along these lines: There is a pot of money — 1.5 million dollars — available for use on Naftzger Park, and this money can’t be used for any other purpose. Also, it’s implied that if this money is not used on Naftzger Park, this money will not be available for any purpose, almost as though the money will be wasted.

The source of the money is tax increment financing (TIF). This is a method of public finance whereby future property tax revenues are redirected from their normal flow to something else. The amount of taxes that are paid at the time of the formation of the TIF district is called the base, which is a function of the district’s original assessed value. The plan is that as new property is built or existing property renovated in the TIF district, there is more assessed value, and more taxes are levied and collected. The amount of taxes paid each year above the base is called the increment. It is these incremental taxes that are captured and rerouted. Because TIF is usually applied to blighted areas and the property is not highly valued, the base is usually low. In successful TIF projects, the increment can be very large. ¹

To where are the incremental taxes redirected? Generally, to the benefit of property owners in the TIF district. ² While there are restrictions on how TIF dollars may be spent, I don’t think any developers within TIF districts have not been able to take full advantage of the TIF dollars that are available, although Naftgzer Park is a special case (see below).

Advocates of TIF make it sound as though it is free money. They often say that if the proposed project does not receive TIF financing, it can’t be built. This is the “but for” justification: But for the benefit of TIF, nothing will happen. Without TIF there will be no development, and no future incremental taxes will be collected.

There are several issues with this line of thinking. First, the but for rationale is subject to abuse. Developers who want to use TIF have a large monetary incentive to make it appear as though their projects are not financially viable without TIF. That’s the meaning of but for. To make their case for TIF, developers supply financial projections to cities, and the city usually accepts them at face value. These financial projections rely on many assumptions about the future, often 20 or more years in the future. For example, what will be the occupancy rate and average room rate for a proposed hotel in 15 years? Forecasting these values for next year is difficult enough. Yet, it is projections like these that form the basis of the necessity of TIF.

City officials do not have the expertise to evaluate these financial projections. If citizens want to see these projections, the City of Wichita will not supply them, in most cases.

Second: The pleas for TIF made by developers are sometimes plainly false. In Wichita, a developer wanted to build a grocery store using TIF and other incentives. He told the city he has “researched every possible way” to make the project work, and it would not work without TIF. ³ A representative of the developer told the city council, “There will not be a building on that corner if this [TIF] is not passed today. … That new building would not be built. I absolutely can tell you that because we have spent months … trying to figure out a way to finance a project in that area.”

The city’s chief economic development official told the council, “We know, for example, from the developer’s perspective in terms of how much they will make in lease payments from the Save-A-Lot operator, how much that is, and how much debt that will support, and how much funds the developer can raise personally for this project. That has, in fact, left a gap, and these numbers that you’ve seen today reflect what that gap is.” ⁴

While the city approved TIF, the county did not. So TIF was not available, and the developer abandoned the project. But: A different developer built the same grocery store and additional retail space at the same location without TIF. It is still in operation six years later.

Third: If it is true that we can’t have new development without TIF, there may be obstacles in place that should be removed so that development can take place without TIF.

Not free money

TIF has a cost. A real cost. If we don’t recognize that, then we must reconsider the foundation of local tax policy.

In Wichita, as in most cities, the largest consumers of property tax dollars are the city, county, and school district. All justify their tax collections by citing the services they provide: Law enforcement, fire protection, education, etc. It is for providing these services that we pay local taxes.

Within a TIF district, however, the new property tax dollars — the increment — do not go to the city, county, and school district to pay for services. Instead, these dollars are used in ways that benefit the development: Property acquisition, site preparation, utilities, drainage, street improvements, streetscape amenities, public outdoor spaces, landscaping, and parking facilities, according to the city’s explanation.

Yet, the new development will undoubtedly demand and consume the services local government provides — law enforcement, fire protection, and education. But its incremental property taxes do not pay for these, as they have been diverted elsewhere. (The base property taxes still go to pay for these services, but the base is usually low.) Instead, others must pay the cost of providing services to the TIF development, or accept reduced levels of service as existing service providers are saddled with new demand.

Supporters of TIF argue that developers aren’t getting a free ride. The city isn’t giving them cash, they say. The owners of the TIF development will be paying their full share of higher property taxes in the future. That’s true. But, these new tax dollars are spent for their benefit, not to pay for the cost of government.

We’re left with an uncomfortable situation. City officials tell us that we must pay property taxes so the city can provide services. (In fact, right now the Wichita city manager is recommending increasing property taxes to pay for more police officers.)

At the same time, however, the city creates special classes of people who use services but don’t pay for them.

Yes, the city and developers cite the but for argument, arguing that without the benefit of TIF, there won’t be new development and new demand for services. But we’ve seen that the but for rationale is dubious and subject to abuse.

Of note: At a recent public meeting regarding Naftzger Park, someone asked if some of the $1.5 million could be used for more police officers. The answer from city officials was “no.” That answer is correct. But in the normal case, part of this $1.5 million would be available to pay for more police.

Also: The redevelopment district in which incremental taxes will be redirected to Naftzger Park includes a number of properties that are already developed.

Allowed uses: It’s just infrastructure

In their justification of TIF, proponents may say that TIF dollars are spent only on allowable purposes. Usually a prominent portion of TIF dollars are spent on things that are related to infrastructure, as listed above. 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.

But this isn’t the case. Often non-TIF developers pay for significant infrastructure at their own expense. An example is the Waterfront development in northeast Wichita. There is a street that winds through the development, 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 $1,672,000 for this infrastructure, and then deeded it to the city. The same developers paid for street lights, traffic signals, sewers, water pipes, and turning lanes on major city streets. In order to build the Waterfront development, private developers paid for infrastructure, with a total cost of these projects at one time being $3,334,500. It has likely risen since then. ⁵

In the case of Naftzger Park, it’s argued that the park benefits everyone. Therefore, it’s akin to infrastructure. In reality, the park is more like the front yard of a proposed hotel and a nearby building, being developed for their owner’s benefit. The developers of these are managing, along with the city, the plans for Naftzger Park. Incredibly, applications to be the park’s architect were sent not to the city, but to the private developers. ⁶

Further: Park improvements were not an allowed use of TIF funds when the Center City South TIF was formed in 2007. So the city amended the TIF district plan to allow for TIF funds to be used to redevelop Naftzger Park. ⁷

Redirect your taxes, not mine

The Wichita Downtown Development Corporation (WDDC) is funded, primarily, by property taxes. A district known as the Self-Supported Municipal Improvement District (SSMID) levies a property tax in a district roughly defined as from Kellogg north to Central, and the Arkansas River east to Washington Street. In 2011 the mill levy was 5.950 and raised nearly $600,000 in revenue. ⁸ For 2016 the mill levy was 7.140. With an assessed value of $92,901,423, the SSMID tax ought to raise about $663,000. ⁹

All the property tax money raised by the SSMID is used to fund WDDC.

Now, WDDC — one of the leading advocates for the use of TIF in downtown Wichita — is quite happy to see incremental tax dollars redirected away from the city, county, and school district to benefit TIF developers. You might think that WDDC would also participate in this — purportedly — beneficial arrangement, consenting for its share of property tax to also be redirected for the benefit of developers.

Guess again. The SSMID — nearly the only source of funding for WDDC — is exempted from having its tax revenue capture by TIF and redirected to another purpose.

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Notes

The redesign of Naftzger Park in downtown Wichita is not a done deal, at least not legally.

While the City of Wichita is engaging citizens and planning for the future of Naftzger Park, there is still another legislative step the city must take in order to fully proceed. In Kansas, use of tax increment financing requires at least two steps. The first step is that cities or counties establish the boundaries of the TIF district. After the TIF district is defined, cities then must approve one or more project plans that authorize the spending of TIF funds in specific ways. (The project plan is also called a redevelopment plan.) In Kansas, overlapping counties and school districts have an opportunity to veto the formation of the TIF district, but this rarely happens. Once the district is formed, cities and counties have no ability to object to TIF project plans. ¹

In order to pass a redevelopment plan into statute, Kansas law requires a public hearing and passage of the redevelopment plan by a two-thirds majority of the governing body. For the Wichita city council, that means five votes are needed to adopt the project plan and start spending money. ²

Documents from the city explain: “The next step in establishing the legal authority to use TIF is the adoption by the City Council of a redevelopment project plan, within the district, which provides more detailed information on the proposed project and how TIF would be used, and demonstrates how the projected increase in property tax revenue will amortize the costs financed with TIF.” ³

Just for emphasis, from the same document: “Once adopted, the City will be authorized to use TIF to finance eligible project costs.”

(The terminology may be confusing. Some documents use the term “project plan” and sometimes “redevelopment plan.” TIF districts are also sometimes referred to as “redevelopment districts.”)

On July 11, 2017 the Wichita city council set August 15 as the date for the public hearing. Presumably a vote on adoption of the redevelopment plan will be at the same meeting, although votes like this have been delayed. And, there’s no guarantee there will be five votes in favor of adopting the plan.

Since the redevelopment plan has not been adopted, you may be wondering how the city is going to use TIF funds to pay the architects. That’s a good question. It is the city’s declared intent to use TIF funding for work that is currently being done: “The park design is anticipated to be provided by Tax Increment Financing and is identified in the proposed 2018 CIP.” ⁴

Another consideration: The city is proceeding at full speed — “an aggressive timetable” is the quote from the city manager — on the plan to redevelop Naftzger Park. ⁵ Public sentiment seems to be that it is a “done deal.” It’s going to happen, people are resigned to say.

To his credit, the city manager is also quoted in the same Eagle article showing his understanding that the process is not complete: “If the process doesn’t allow us to do it, it doesn’t allow us to do it,”

But other city officials act as though the design of Naftzger Park is inevitable, that the TIF money is there waiting to be spent, and those funds will be lost if not spent on the park.

With attitudes like this, I wonder why we should bother holding a public hearing.

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Following is an excerpt from the July 11, 2017 city council agenda packet:

The next step in establishing the legal authority to use TIF is the adoption by the City Council of a redevelopment project plan, within the district, which provides more detailed information on the proposed project and how TIF would be used, and demonstrates how the projected increase in property tax revenue will amortize the costs financed with TIF. …

In accordance with state law, a TIF Project Plan has been prepared in consultation with the Wichita-Sedgwick County Metropolitan Area Planning Commission, which has made a finding that the project is consistent with the Comprehensive Plan for development of the area. In order to adopt a TIF Project Plan, the City Council must first set a public hearing no less than 30 and no more than 70 days from adoption of the resolution setting the hearing. The date of August 15, 2017, at the regular City Council meeting is proposed for the public hearing on the Naftzger Park Project Plan.

If adopted by the City Council, the attached resolution setting the August 15, 2017 public hearing will be sent to the owners and occupants of all property located within the proposed Naftzger Park Project Area, by certified mail. The resolution will also be published in the Wichita Eagle and copies will be provided to the Board of County Commissioners and Board of Education and their appropriate staff.

After closing the public hearing on August 15, 2017, the City Council may adopt the TIF Project Plan by ordinance, by two-thirds majority vote. Once adopted, the City will be authorized to use TIF to finance eligible project costs.

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Notes