Voice For Liberty

Tag: Wichita Eagle opinion watch

  • Intrust Bank Arena loss for 2019 nears $5 million

    Intrust Bank Arena loss for 2019 nears $5 million

    A truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss.

    The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.

    There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and ASM Global, a company that operates the arena. SMG, the former operator of the arena, merged with another company to form ASM Global.

    This agreement specifies a revenue sharing mechanism between the county and ASM. For 2109, the accounting method used in this agreement produced a profit, or “net building income,” of $1,021,721 to be split (not equally) between SMG and the county. The county’s share was $310,861. (1)The Operations of INTRUST Bank Arena, as Managed by ASM Global. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2019. Available here.

    While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” (2)Ibid, page 2.

    That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.

    A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2019 Comprehensive Annual Financial Report for Sedgwick County. (3)Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2019. Available at https://www.sedgwickcounty.org/finance/comprehensive-annual-financial-reports/. This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”

    Regarding the arena in 2019, the CAFR states:

    The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $5.0 million. The loss can be attributed to $5.0 million in depreciation expense.

    Financial statements in the same document show that $4,993,361 was charged for depreciation in 2019. If we subtract the ASM payment to the county of $310,861 from depreciation expense, we learn that the Intrust Bank Arena lost $4,682,500 in 2019.

    Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,682,500 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.

    But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2019 decreased by $5.0 million to $146.6 million. Of that $146.6 million, $138.9 million is invested in capital assets. The decrease can be attributed to depreciation, which was $5.0 million.” (4)CAFR, page A-10. (emphasis added)

    At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”

    The contention — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.

    Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.

    The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.

    Reporting on Intrust Bank Arena financial data

    In February 2015 the Wichita Eagle reported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.

    In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”

    The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)

    That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.

    In 2018, the Wichita Eagle reported, based on partial-year results: “Intrust Bank Arena remains profitable but is reporting a 20 percent drop in income this year, despite a bump from the NCAA March Madness basketball tournament. Net income for the first three quarters of this year was about $556,000. That’s down from just shy of $700,000 last year, according to a report to the Sedgwick County Commission.” (5)Lefler, Dion. Despite March Madness, Intrust Bank Arena profit down 20 percent. December 7, 2018. Available at https://www.kansas.com/news/politics-government/article222300675.html. This use of “profitable” is based only on the special revenue-sharing agreement, not generally accepted accounting principles.

    Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.

    All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.

    References

    References
    ↑1The Operations of INTRUST Bank Arena, as Managed by ASM Global. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2019. Available here.
    ↑2Ibid, page 2.
    ↑3Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2019. Available at https://www.sedgwickcounty.org/finance/comprehensive-annual-financial-reports/.
    ↑4CAFR, page A-10.
    ↑5Lefler, Dion. Despite March Madness, Intrust Bank Arena profit down 20 percent. December 7, 2018. Available at https://www.kansas.com/news/politics-government/article222300675.html.

  • The finances of Intrust Bank Arena in Wichita

    The finances of Intrust Bank Arena in Wichita

    A truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss. Despite hosting the NCAA basketball tournament, the arena’s “net income” fell.

    The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.

    Intrust Bank Arena Payments to Sedgwick County. Click for larger
    There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena.

    This agreement specifies a revenue sharing mechanism between the county and SMG. For 2108, the accounting method used in this agreement produced a profit, or “net building income,” of $647,634 to be split (not equally) between SMG and the county. The county’s share was $123,817. 1

    While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” 2

    Intrust Bank Arena Payments to Sedgwick County. Click for larger.
    That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.

    A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2018 Comprehensive Annual Financial Report for Sedgwick County. 3 This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”

    Regarding the arena in 2018, the CAFR states:

    The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $4.5 million. The loss can be attributed to $4.8 million in depreciation expense.

    Financial statements in the same document show that $4,783,229 was charged for depreciation in 2017. If we subtract the SMG payment to the county of $123,817 from depreciation expense, we learn that the Intrust Bank Arena lost $4,659,412 in 2018.

    (Of note, 2018 was the year the arena hosted a round of NCAA men’s basketball tournament games. For that year, the payment from SMG to the county was down by 58.8 percent from $300,414 in 2017. Attendance rose by 4.2 percent.)

    Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,659,412 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.

    But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2018 decreased by $4.7 million to $151.6 million. Of that $151.6 million, $142.9 million is invested in capital assets. The decrease can be attributed to depreciation, which was $4.8 million.” 4 (emphasis added)

    At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”

    The contention — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.

    Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.

    The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.

    Reporting on Intrust Bank Arena financial data

    In February 2015 the Wichita Eagle reported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.

    In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”

    The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)

    That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.

    In 2018, the Wichita Eagle reported, based on partial-year results: “Intrust Bank Arena remains profitable but is reporting a 20 percent drop in income this year, despite a bump from the NCAA March Madness basketball tournament. Net income for the first three quarters of this year was about $556,000. That’s down from just shy of $700,000 last year, according to a report to the Sedgwick County Commission.” 5 This use of “profitable” is based only on the special revenue-sharing agreement, not generally accepted accounting principles.

    Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.

    All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.

    —
    Notes

    1. The Operations of INTRUST Bank Arena, as Managed by SMG. Independent Auditor’s Report and Special-Purpose Financial Statements. December 31, 2018. Available here. ↩
    2. Ibid, pages 4 and 7. ↩
    3. Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2018. Available at https://www.sedgwickcounty.org/finance/comprehensive-annual-financial-reports/. ↩
    4. CAFR, page A-10. ↩
    5. Lefler, Dion. Despite March Madness, Intrust Bank Arena profit down 20 percent. December 7, 2018. Available at https://www.kansas.com/news/politics-government/article222300675.html. ↩
  • Wichita Eagle calls for a responsible plan for higher taxes

    Wichita Eagle calls for a responsible plan for higher taxes

    A Wichita Eagle editorial argues for higher property taxes to help the city grow.

    In a recent op-ed, the Wichita Eagle editorial board writes: “It’s hard to make the argument that Wichitans are overtaxed by their city government. It’s time for the community to look at how it helps the city grow. A responsible plan that asks Wichita families to chip in the cost of a family meal should be part of the conversation.” 1

    First, note that some factual elements of the editorial board’s argument are incorrect, as I show in Wichita Eagle argues for higher taxes.

    The argument that a tax increase is only “the cost of a family meal” is weak. (From the editorial: “A 1-mill increase would cost a property owner $11.50 annually for every $100,000 of appraised value of a home.”) In other words, it’s just a little bit. Just one dollar each month. You won’t even notice it.

    This is a standard argument made by those who want higher taxes and those who oppose tax cuts. The problem is just that: Everyone makes this argument, and when added together, the nickels and dimes add up to real money.

    Besides, there are families in Wichita who have trouble paying for family meals.

    Then, there’s the effect on business. An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. Specifically, taxes on commercial property in Wichita are among the highest in the nation. Commercial property is taxed at 2.180 times the rate as residential property. (The U.S. average is 1.683.) Because Wichita’s ratio is high, it leads to high property taxes on commercial property. 2

    Raising taxes on commercial enterprise shifts economic activity from the private sector to government. Citizens may want to ask where money is spent most beneficially.

    The Eagle editorial board says higher property taxes could help the city grow. There’s no doubt the city needs help growing. But given the record of our local government leaders — both elected and bureaucratic — it’s difficult to see how giving them more money to spend will help.

    WaterWalk, downtown Wichita, September 30, 2014. There has been little change since then, except for the loss of Gander Mountain.
    As an example of government helping the city grow, consider the Waterwalk development in downtown Wichita. Despite some $41 million in taxpayer subsidy, the development languishes. On top of that, the city doesn’t enforce agreements that might benefit taxpayers. 3

    The Wichita Eagle editorialized “Seven years into a project that was supposed to give Wichita a grand gathering place full of shops, restaurants and night spots as well as offices and condos, some City Council members and citizens remain skeptical at best about WaterWalk’s ability to deliver on its big promises. … True, the skepticism to date is richly deserved.” 4

    Oh. That editorial was written in 2009, nine years ago. Since then, there has been some improvement, like the Marriott Fairfield Inn and Suites Hotel and the fountain. But, Gander Mountain — the development’s retail anchor — closed.

    The present Eagle editorial board calls for a “responsible plan.” But when we see the city spending on things like Waterwalk and then failing to uphold agreements designed to protect taxpayers — well, the city hasn’t been acting responsibly.

    Contrast downtown’s Waterwalk with Waterfront, a development at 13th and Webb Road in east Wichita that started around the same time as Waterwalk. There, developers spent millions of their own money to build a beautiful parkway, sewers, traffic lights, and the like. 5

    Merchants at Wichita’s Waterfront. Click for larger.
    It is at Waterfront where we see large first-class office buildings and small executive offices. It is there we find desirable nationally-known restaurants like Abuelo’s Mexican Food Embassy, Bonefish Grill, PF Chang’s China Bistro, and Red Robin. We also see fine local restaurants like Chester’s Chophouse & Wine Bar. It is at Waterfront we find lodging like Homewood Suites by Hilton, retail stores like Ethan Allen, and the city’s only Whole Foods Market.

    All this at Waterfront was done without help from the taxpayers, unlike downtown’s Waterwalk consuming our $41 million. Other popular developments like Bradley Fair and New Market Square were developed with little or no government help.

    Trends of business activity in downtown Wichita. Click for larger.
    Even the subsidized “development” that most people agree is a success is not all it’s cracked up to be. That is downtown Wichita, where there has been hundreds of millions in private and public investment over the past decade. The result is that over the same time, business activity in downtown Wichita has been on a downhill trend. The data for 2016 (the most recent year for data) is a bit of good news, with the decline stopping and business activity remaining mostly unchanged. It isn’t the vibrant growth we’ve been told is happening in downtown Wichita, but at least things are not getting worse. 6

    So: Do we trust Wichita’s political and bureaucratic leaders to develop a “responsible plan?” Give this record, do we want to shift more resources from the private sector to the government sector?

    Competing tax hikes

    It’s surprising that the Eagle editorial board would recommend higher property taxes right now. That’s because it’s likely we’ll be asked to approve more taxation, probably soon. There is support among the city’s elite for a renovated or new performing arts and convention center, something that probably can’t be done without more tax revenue. Project Wichita is seen by many as an effort to persuade the region for higher taxes.

    Also: In 2014 the steering committee for the Wichita/Sedgwick County Community Investments Plan delivered a report to the Wichita City Council. This report told the council that the “cost to bring existing deficient infrastructure up to standards” is an additional $45 to $55 million per year over current levels of spending. 7

    I’m not aware of the city directing additional spending to cure this maintenance gap. As time passes, the gap becomes larger. Although: The city decided to spend an additional $10 million on street repair. But that was a one-time infusion made available when the city sold a capital asset.

    This backlog of maintenance is a manifestation of the city not being responsible with assets Wichita taxpayers paid for. And if it is true that we need to spend an additional $45 to $55 million per year, where will the city get those funds? The Eagle urges a one mill property tax increase, which it says means the “city budget would gain $3.5 million to $4 million.” To fix our maintenance backlog would require a property tax increase of over ten mills, if that is how the city decides to raise the funds.

    —
    Notes

    1. Wichita Eagle editorial board. Wichita, it’s time to consider a tax increase. It’s past time, actually. August 17, 2018. Available at https://www.kansas.com/opinion/editorials/article216790960.html. ↩
    2. Weeks, Bob. Wichita business property taxes still high. Available at https://wichitaliberty.org/wichita-government/wichita-business-property-taxes-still-high/. ↩
    3. Weeks, Bob. Wichita WaterWalk contract not followed, again. Available at https://wichitaliberty.org/wichita-government/wichita-waterwalk-contract-not-followed/. ↩
    4. Weeks, Bob. Wichita’s Waterwalk failure breeds skepticism. Available at https://wichitaliberty.org/wichita-government/wichitas-waterwalk-failure-breeds-skepticism/. ↩
    5. Weeks, Bob. Many Wichita developers pay for infrastructure. Available at https://wichitaliberty.org/wichita-government/many-wichita-developers-pay-for-infrastructure/. ↩
    6. Weeks, Bob. Downtown Wichita business trends. Available at https://wichitaliberty.org/wichita-government/downtown-wichita-business-trends-2016/. ↩
    7. Weeks, Bob. Wichita sales tax does little to close maintenance gap. Available at https://wichitaliberty.org/wichita-government/wichita-sales-tax-little-close-maintenance-gap/. ↩
  • Wichita Eagle argues for higher taxes

    Wichita Eagle argues for higher taxes

    The Wichita Eagle editorial board wants higher taxes. Relying on its data and arguments will lead citizens to misinformed and uninformed opinions.

    In a recent op-ed, the Wichita Eagle editorial board writes: “From the moment the budget was first proposed in July, city leaders made a point of emphasizing the city’s mill levy — the rate by which property is taxed — hasn’t been increased in 25 years. The 25-year figure wasn’t followed by exclamation points of pride or emojis of sadness. It’s just a fact: For one reason or another, the city’s mill levy hasn’t been increased.” 1

    I guess we shouldn’t be too harsh on the Eagle editorial board. They believed city leaders. And, I suppose the language is correct in one sense: “the city’s mill levy hasn’t been increased.”

    But a quick look at readily available data shows that the City of Wichita mill levy has increased, and by quite a bit.

    I don’t have data going back 25 years, but I have gathered and prepared data from 1993 to 2017. And during that time, the City of Wichita mill levy rose from 31.290 to 32.667. That is an increase of 4.40 percent.

    It is true that the Wichita City Council did not pass an ordinance to cause this mill levy rate to rise. This is where “hasn’t been increased” holds a grain of truth.

    Instead, the mill levy rate is set by the county based on the city’s budgeted spending and the assessed value of taxable property subject to City of Wichita taxation. Someone estimates the assessed value of property the city can tax, and that is subject to error.

    The city acknowledges this when pressed. It’s on video. 2

    But city leaders and elected officials act as though the mill levy is subject to the whims of forces beyond their control.

    While the city doesn’t have control over the assessed value of property, it does have control over the amount it decides to spend. As can be seen in the chart of changes in the mill levy, the council’s decisions result in a generally rising mill levy. From 1993 to 2017, there were seventeen years in which the mill levy rose from the previous year, and six years in which it declined.

    We have an estimating process that ought to be random — too high in half the years, too low in the other half — overwhelmingly producing higher tax rates. This nearly three-to-one ratio is beyond mere chance or coincidence.

    Also, while some may argue that an increase of 4.40 percent over two decades is not very much, this is an increase in a rate of taxation, not tax revenue collected. As property values rise, and as the mill levy rises, property tax bills can rise rapidly.

    But it doesn’t seem that the Eagle editorial board understands this, as it wrote: “A 2019 budget can’t be expected to function properly under 1994 tax rates. Nearly everything a city does costs more a quarter-century later.”

    True, I suppose. But the data tells us that property tax revenue rises, and rises faster than the rate of inflation, if inflation is what the editorial board means when it writes that things cost more.

    In the nearby table, I use a hypothetical $100,000 home and track the taxes paid to the City of Wichita. I use a home price index to track increases in residential home values. I use the Consumer Price Index to adjust dollars for inflation.

    In the table, a $100,000 house paid $360 in taxes to the City of Wichita in 1994. In 2017, the same house paid $665. The increase is due to rising property values and the rising mill levy.

    Adjusting for inflation to 2017 dollars, the tax paid in 1994 was worth $595. In 2017, the tax was $665, in 2017 dollars, of course.

    So from 1994 to 2017, the property tax paid to the City of Wichita by this hypothetical house rose by 11.7 percent, in inflation-adjusted dollars.

    When the Eagle editorial board writes “Nearly everything a city does costs more a quarter-century later,” the response ought to be “Yes, but property taxes paid by citizens on their homes are rising faster than inflation.”

    This needs to be considered in the light of cuts the city has made and threatens in the future.

    Click for larger.

    —
    Notes

    1. Wichita Eagle editorial board. Wichita, it’s time to consider a tax increase. It’s past time, actually. August 17, 2018. Available at https://www.kansas.com/opinion/editorials/article216790960.html. ↩
    2. Weeks, Bob. Wichita property taxes rise again. Available at https://wichitaliberty.org/wichita-government/wichita-property-taxes-rise/. ↩
  • Wichita school spending, according to the Wichita Eagle

    Wichita school spending, according to the Wichita Eagle

    A recent editorial by the largest newspaper in Kansas misinforms its readers.

    “For too many years, the [Wichita public school] district was constrained by reduced state spending on public-school children. School systems across Kansas tightened belts to the point of being unable to breathe.” 1

    So says a recent editorial in the Wichita Eagle, the largest newspaper in Kansas. What does the data tell us?

    Click for larger.
    Data from the Kansas State Department of Education for the school year ending in 2017 (the most recent data available) show that state and local total spending, per pupil, adjusted for inflation, has been remarkably level since 2011. 2

    Wichita school revenue. Click for larger.
    The situation in each school district may vary, so the nearby chart shows data from the Wichita public school district comprehensive annual financial report along with my calculations. I took two data series (total revenue and the sum of state and local revenue) divided by FTE enrollment, and adjusted for inflation. I plot the sum of state and local revenue because in 2015 there was a change in the way some taxes were allocated, and using the sum of the two removes the effect of the change. 3

    As can be seen in the chart, the trend for both series is generally rising, with a few dips along the way.

    Is the Wichita Eagle editorial board aware of this data? We have to hope so. But that leaves the question as to why it claims the district is “constrained by reduced state spending.” Another excerpt from the editorial provides a clue: “State funding, amazingly, still isn’t to the levels of 10 years ago and reinforces the damage that the late 2000s recession and Brownback-era tax cuts of 2013 and 2014 had on public education. In 2008, base state funding for Wichita was $4,492 per student, or $327 more than this year. Multiplied by 50,000 students, that’s still a $16.4 million shortfall.”

    The numbers that the Eagle cites are base state aid per pupil. This number does not accurately characterize school spending in Kansas. Base state aid is an inaccurate indicator of total spending on schools by the state. It’s deceptive, in that after adjusting for inflation, base state aid has declined. But at the same time, total state aid to school districts has increased.

    For a newspaper to uncritically present base state aid as the only indicator of school spending is a big problem.

    Kansas school spending, showing base state aid and total state aid. See article for notes about 2015. Click for larger.
    Base state aid per pupil is an important number. 4 It’s the starting point for the Kansas school finance formula used before the 2015-2016 (fiscal 2016) school year. 5

    Base state aid, however, is not the only important number. To calculate the funding a school district receives, weightings are added. If students fall into certain categories, weightings for that category are added to determine a weighted enrollment. That is multiplied by base state aid to determine total state aid to the district. 6

    While this may seem like a technical discussion that doesn’t make a difference, it’s very important, because some of the weightings are large. The at-risk weighting, intended to cover the additional costs of teaching students from low-income families, started at five percent in 1993. In other words, for every student in this category, a school district received an extra five percent of base state aid. The value of this weighting has risen by a factor of nine, reaching 45.6 percent starting with the 2008-2009 school year.

    There’s also the high-density at-risk weighting. Starting with the 2006-2007 school year districts with a high concentration of at-risk students could receive an extra weighting of four percent or eight percent. Two years later the weightings were raised to six percent and ten percent. (This formula was revised again in 2012 in a way that may have slightly increased the weightings.)

    Kansas school spending, showing ratio of total state aid to base state aid. See article for notes about 2015. Click for larger.
    Kansas school spending. See article for notes about 2015. Click for larger.
    The weightings have a large effect on school funding. For example: During the 2004-2005 school year, base state aid was $3,863 and the at-risk weighting was ten percent. An at-risk student, therefore, generated $4,249 in state funding. (Other weightings might also apply.)

    Ten years later base state aid was $3,852 — almost exactly the same — and the at-risk weighting was up to 45.6 percent. This generates funding of $5,609. For a district that qualified for the maximum high-density at-risk weighting, an additional $404 in funding was generated. (These numbers are not adjusted for inflation.)

    So even though base state aid remained (almost) unchanged, funding targeted at certain students rose, and by a large amount.

    Over time, values for the various weightings grew until by 2014 they added 85 percent to base state aid. A nearby chart shows the growth of total state aid as compared to base state aid. (Starting in fiscal 2015 the state changed the way local tax dollars are counted. That accounts for the large rise for the last year of data in the chart. For school years 2016 and 2017, block grants replaced the funding formula, so base aid and weightings do not apply in the same way.)

    So yes, the Eagle editorial board is correct that base state aid per pupil is down. But total spending by the state is up.

    Opinions may vary on spending more or less on schools. But our state’s largest newspaper isn’t giving its readers the information they need to form an informed opinion.

    —
    Notes

    1. Wichita Eagle Editorial Board. *A well-funded Wichita school district. A sight this city’s children deserve.” August 10, 2018. Available at https://www.kansas.com/opinion/editorials/article216418710.html. ↩
    2. Weeks, Bob. Kansas school spending. Available at https://wichitaliberty.org/wichita-kansas-schools/kansas-school-spending-2017/. ↩
    3. Weeks, Bob. Wichita school revenue. Available at https://wichitaliberty.org/wichita-kansas-schools/wichita-school-revenue-2017/. ↩
    4. Weeks, Bob. Kansas school weightings and effects on state aid. In making the case for more Kansas school spending, the focus on base state aid per pupil leaves out important considerations. https://wichitaliberty.org/wichita-kansas-schools/kansas-school-weightings-and-effects-on-state-aid/. ↩
    5. For the fiscal 2016 and 2017 school years, the formula was replaced by block grants. ↩
    6. Amendments to the 1992 School District Finance and Quality Performance Act and the 1992 School District Capital Improvements State Aid Program (Finance Formula Components), Kansas Legislative Research Department, May 20, 2014
      http://ksde.org/Portals/0/School%20Finance/amends_to_sdfandqpa_2015.pdf ↩
  • What is the real problem at Wichita Southeast?

    What is the real problem at Wichita Southeast?

    There is likely a different explanation for problems at a Wichita high schools from what we’ve been told by the school district and our newspaper.

    Recently the Wichita Eagle editorial board opined about problems with Wichita Southeast High School. That editorial was based on Eagle reporting in the article The new Southeast High is bigger and better. So why is its graduation rate dropping?

    Sociologist Chase Billingham offers commentary and insight in his piece Southeast’s grad rate more about discipline:

    The Wichita school district officials and The Eagle Editorial Board said the slipping graduation rate was partially attributable to the relocation of Southeast from its previous location to a new building at the far eastern edge of Wichita. According to these claims, students needing bus service when they could once walk to school have resulted in declining attendance, which in turn has led to the low graduation rate.

    The falling graduation rate is real, and it is troubling. However, it was not caused by the school’s relocation.

    Billingham proceeds to cite statistics from the Kansas State Department of Education and concludes, “Rather, it is more likely that the school has become more strict in applying formal disciplinary sanctions to student behavioral problems that may previously have resulted in informal reprimands.”

    I wonder if school district officials knew of these statistics. They should have, as those officials compile and report them to KSDE. I also winder if Eagle reporters and editorial writers looked into this.

    (By the way, the Eagle doesn’t disclose the membership of its editorial board.)

    This episode is another troubling revelation about Wichita schools since the departure of the oft-praised and rewarded superintendent John Allison. Today the Eagle editorial board wrote, “Hiring Thompson as superintendent proved to be a good move at a time when Wichita schools were languishing — poor teacher morale, stagnant student achievement results and a district in need of a spark.”

  • Intrust Bank Arena loss for 2017 is $4,222,182

    Intrust Bank Arena loss for 2017 is $4,222,182

    As in years past, a truthful accounting of the finances of Intrust Bank Arena in downtown Wichita shows a large loss.

    The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and it hides the true economics of the arena. What’s missing is depreciation expense.

    There are at least two ways of looking at the finance of the arena. Nearly all attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena. 1

    This agreement specifies a revenue sharing mechanism between the county and SMG. For 2107, the accounting method used in this agreement produced a profit, or “net building income,” of $1,000,829 to be split (not equally) between SMG and the county. The county’s share was $300,414. 2

    While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations in conformity with accounting principles generally accepted in the United States of America.” 3

    Intrust Bank Arena Payments to Sedgwick County. Click for larger.
    That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.

    A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2017 Comprehensive Annual Financial Report for Sedgwick County. 4 This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”

    Regarding the arena, the CAFR states:

    The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the County incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $4.3 million. The loss can be attributed to $4.5 million in depreciation expense.

    Financial statements in the same document show that $4,522,596 was charged for depreciation in 2017.

    Trends of events and attendance at Intrust Bank Arena. Click for larger.
    If we subtract SMG payment of $300,414 from depreciation expense, we learn that the Intrust Bank Arena lost $4,222,182 in 2016.

    Depreciation expense is not something that is paid out in cash. That is, Sedgwick County did not write a check for $4,522,596 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.

    But not many of our civic leaders recognize this, at least publicly. We — frequently — observe our governmental and civic leaders telling us that we must “run government like a business.” The county’s financial report makes mention of this: “Sedgwick County has one business-type activity, the Arena fund. Net position for fiscal year 2017 decreased by $4.3 million to $156.3 million. Of that $156.3 million, $146.0 million is invested in capital assets. The decrease can be attributed to depreciation, which was $4.5 million.” 5 (emphasis added)

    At the same time, these leaders avoid frank and realistic discussion of economic facts. As an example, in years past Commissioner Dave Unruh made remarks that illustrate the severe misunderstanding under which he and almost everyone labor regarding the nature of spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”

    The contention — witting or not — is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.

    Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic reality that can’t be ignored — except by politicians, apparently. The Wichita Eagle and Wichita Business Journal aid in promoting this deception.

    The upshot: We’re evaluating government and making decisions based on incomplete and false information, just to gratify the egos of self-serving politicians and bureaucrats.

    Reporting on Intrust Bank Arena financial data

    In February 2015 the Wichita Eagle reported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time. Neither did the Eagle article.

    In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”

    The Wichita Eagle opinion page hasn’t been helpful, with Rhonda Holman opining with thoughts like this: “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (For some years, the county paid to create a large “check” for publicity purposes.)

    That followed her op-ed from a year before, when she wrote: “And, of course, Intrust Bank Arena has the uncommon advantage among public facilities of having already been paid for, via a 30-month, 1 percent sales tax approved by voters in 2004 that actually went away as scheduled.” That thinking, of course, ignores the economic reality of depreciation.

    Even our city’s business press — which ought to know better — writes headlines like Intrust Bank Arena tops $1.1M in net income for 2015 without mentioning depreciation expense or explaining the non-conforming accounting methods used to derive this number.

    All of these examples are deficient in an important way: They contribute confusion to the search for truthful accounting of the arena’s finances. Recognizing depreciation expense is vital to understanding profit or loss, we’re not doing that.

    —
    Notes

    1. Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here. ↩
    2. Minutes of the Sedgwick County Commission, February 14, 2018. ↩
    3. Management Agreement between Sedgwick County and SMG. ↩
    4. Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2017. Available at https://www.sedgwickcounty.org/media/39501/2017-cafr.pdf. ↩
    5. Ibid. ↩
  • Project Wichita right to look ahead at city’s future

    Project Wichita right to look ahead at city’s future

    We can understand self-serving politicians and bureaucrats. It’s what they do. But a city’s newspaper editorial board ought to be concerned with the truth.

    In February the Wichita Eagle editorialized about Project Wichita, a ramping-up effort to do something about the future of Wichita. 1 It’s worthwhile to take a look at the op-ed, if only to learn something about the quality of Wichita Eagle editorial writing.

    I understand civic boosterism; the desire to paint a positive image of the future. But this rosy outlook has to be based, at least loosely, on facts. Following, a look at a few claims made in the editorial.

    “Our downtown is becoming more of a destination and place to live.”
    The problem is this: Wichita economic development officials use a circuitous method of estimating the population of downtown Wichita, producing a number much higher than Census Bureau estimates. Downtown Wichita, the city’s economic development agency responsible for downtown, says the population of downtown is 2,138, which is far — really far — outside the range the Census Bureau gives. For more about this, see Living in downtown Wichita.

    As far as a destination for business, the U.S. Census Bureau tracks business trends by zip code. For zip code 67202, which is downtown Wichita, results since 2007 show fewer business establishments, fewer people working downtown, and lower earnings generated in downtown Wichita. In all cases, the trend is lower. For more about this, see Downtown Wichita business trends.

    Further, Wichita leaders have exaggerated the number of people working in downtown. For years our leaders told us there were 26,000 daytime workers in downtown Wichita. But this claim is based on misuse of data so blatant it can be described only as malpractice. In fact, this figure is now omitted from the state of downtown reports. No one will accept responsibility for this mistake. See Downtown Wichita jobs, sort of and Downtown Wichita report omits formerly prominent data.

    “But Wichita feels pretty good about itself, which suggests the community is at the perfect time to think about its future.”
    I have to say, we’ve been hoodwinked, and by our top leaders. Recently both the mayor of Wichita and chair of the county commission penned upbeat editorials praising our economy. See Mayor Longwell’s pep talk and Sedgwick County’s David Dennis on economic development.

    But the reality is quite different. See:

    Given this, why do the mayor, county commission chair, and our newspaper’s editorial board say what they do? The first two are politicians, but we ought to ask that our newspaper seek the truth, not personal political gain.

    “It will get more serious in March, when students and volunteers from Wichita State University’s Public Policy and Management Center …”
    This is the same organization on which the city relies for many services, including the gathering of public input in past campaigns like the 2014 sales tax election. The city seemed sure that tax would pass, but voters rejected it by a wide margin. 2

    “Public Policy director Misty Bruckner and her group will deliver feedback and conclusions to Project Wichita’s four co-chairs.”
    A few years ago Bruckner co-authored a paper titled “Citizen Attachment: Building Sustainable Communities.” 3 My reporting on it was titled Wichita needs more, and willing, taxpayers. An excerpt: “Increasingly, citizens are retreating from their responsibilities to community and demanding more from government than they are willing to pay for. But changes in local government behavior can be instrumental in reversing this trend, by strengthening citizens’ commitment to the well-being of their communities. Citizens who are committed to community are more willing to accept responsibility for the well-being of their fellow citizens and are also more likely to join with government and other parties to improve their communities. Citizens who are committed to community are also more willing taxpayers — that is, when government demonstrates that it can be trusted to invest public resources in ways that strengthen the community. The central thrust of this model is getting citizens and governments to work together, but realistically, many communities will require new revenue — including additional tax dollars — if they are to assemble the critical mass of resources necessary for meaningful change. Accordingly, citizens who are willing to pay increased taxes are an important component of building sustainable communities.” (emphasis added)

    Please don’t fault me for being cynical when I suspect that this entire operation is designed to prepare Wichitans (or the region) for a tax increase.

    “Community input will be as wide as the city limits.”
    Wait a moment. I thought we were supposed to think regionally.

    “Project Wichita seems similar to Visioneering Wichita …”
    I wonder if anyone remembers anything positive that resulted from Visioneering Wichita. After a few years, the organization’s website went stale, and staff discontinued making presentation to the city council and county commission See Visioneering asks for money. Let’s ask these questions.

    “Unlike Visioneering, Project Wichita isn’t headed by city or county government.”
    Visioneering Wichita was led by the Chamber of Commerce, not government. Local governments made financial contributions to Visioneering, just as they are also contributing to Project Wichita. 4

    —
    Notes

    1. Wichita Eagle Editorial Board. Project Wichita right to look ahead at city’s future. Available at http://www.kansas.com/opinion/editorials/article198178899.html. ↩
    2. Ryan, Kelsey. Voters soundly defeat Wichita sales tax proposal. Available at http://www.kansas.com/news/politics-government/election/article3567045.html. ↩
    3. See http://www.gfoa.org/sites/default/files/GFR_OCT_10_24.pdf. ↩
    4. Wichita Business Journal. Sedgwick County Commission approves Visioneering Wichita funding. Available at https://www.bizjournals.com/wichita/blog/2012/12/sedgwick-county-commission-approves.html. ↩
  • Mayor Longwell’s pep talk

    Mayor Longwell’s pep talk

    A column written by Wichita Mayor Jeff Longwell ignores the reality of Wichita’s economy.

    This week Wichita Mayor Jeff Longwell contributed a column to the Wichita Eagle that seems to defy economic reality. 1

    For example, he wrote how Wichita is a “thriving city in a brand new age of possibility.” Construction and change is everywhere, he said.

    The problem is this: Even though there seems to be a lot of construction and change, Wichita isn’t thriving.

    There are several ways to gauge the economic health of a city. Jobs are probably most important, especially to politicians, and jobs data is available on a frequent and timely basis. And when we look at Wichita’s growth in nonfarm jobs, we see Wichita lagging far behind the nation.

    Wichita and national nonfarm employment. Click for larger.
    Wichita and national nonfarm employment, ratio. Click for larger.
    It wasn’t always that way. Nearby charts show the ratio of Wichita job growth to the nation. When the line is above the value one, it means Wichita was outpacing the nation.

    Wichita has done that many times — growing faster than the nation. But that hasn’t been the case recently. In fact, as the charts show, the ratio of Wichita to the nation is sinking. Wichita is falling farther behind.

    But despite this evidence, the mayor wrote, “In the coming years, we’re going to continue our growth pattern, and we need passionate individuals supporting and expanding upon our efforts.”

    I sincerely hope the mayor is not aware of the poor performance of the Wichita-area economy. Because if he is aware, and he promises to “continue our growth pattern,” we’re in for continued trouble. Did you know that the Wichita-area economy shrank from 2015 to 2016? That is, we produced fewer goods and services in 2016 than in 2015, after accounting for inflation. 2 Is this the growth pattern the mayor promises to continue?

    Finally, the mayor issued this plea: “We can’t be complacent in our comfort. We must reconcile our vibrant history with a limitless future. Let’s shed the stigma of what we have been and embrace the vibrant mantle of what we’re becoming.”

    First, anyone who’s complacently comfortable is uninformed or unbelieving of the statistics regarding the Wichita economy.

    Second, “what we’re becoming” is a low-growth area, falling behind the rest of the country, with the gap growing. The opposite of “vibrant.”

    Then, the “stigma of what we have been” describes Mayor Longwell and other long-time officeholders and bureaucrats. It is they who have taken responsibility for the development of the Wichita-area economy. It is their decisions and policies that have led to our slow growth. They are eager to take credit for the successes we do have. But as the mayor’s ill-informed article shows, they are not willing to accept responsibility for failure, much less to even acknowledge the truth.

    For other measures of the Wichita economy, see:

    —
    Notes

    1. Longwell, Jeff. All Wichitans have a part in pushing forward. Wichita Eagle, March 4, 2018. Available at http://www.kansas.com/opinion/opn-columns-blogs/article203559924.html. ↩
    2. Weeks, Bob. Wichita economy shrinks. Available at https://wichitaliberty.org/economics/wichita-economy-shrinks/. ↩