Tomorrow’s Wichita City Council meeting will consider a clawback provision for a forgivable loan made by the city. It’s on the consent agenda, so it is unlikely there will be any discussion.
Clawbacks are mechanisms whereby government can be paid back for the cost of economic development subsidies when companies don’t achieve the promised goals, usually employment levels or capital investment. Officials like to look tough on this issue, so they can say they’re fighting for the interests of the taxpayer. An example is Wichita City Council Member Jeff Longwell, who during his recent campaign was quoted by the Wichita Eagle on this topic: “We need to be consistent with policies that provide a positive return on investment and hold companies accountable with personal guarantees that include claw-back features to protect the taxpayers’ investment.”
It turns out, however, that clawbacks are often difficult to enforce. The most likely reason a company may not meet employment or investment targets is that the company is not performing well financially. This is the case with a Wichita company that received a forgivable loan of $62,000 from the city five years ago. The company has not met the agreed job levels, so it must repay the loan.
But, according to city documents: “the severe downturn in the aviation industry prevented the firm from growing its business as projected.” So the city is allowing the company to repay the loan in five annual installments.
By the way, in 2010 the city granted this company, Burnham Composite Structures, Inc., a property tax exemption worth an estimated $105,746 per year.
Sometimes the city council simply doesn’t want to enforce clawback agreements. Last year the council granted a bailout to Reverend Kevass Harding and his underperforming tax increment financing (TIF) district. New considerations showed that the project would not generate enough incremental property tax revenue to pay the TIF bonds. This should not have been a problem for the city, as the agreement with Harding contained this provision: “The developer will be required by the development agreement to provide satisfactory guarantees for the payment of any shortfall in TIF revenues available for debt service on all ‘full faith and credit’ TIF bonds issued by the City for this TIF district.”
So the city could have held Harding to his promise and taxpayers wouldn’t be hurt, at least not any more than the formation of the TIF district itself hurt.
Despite this provision, the city refinanced the TIF debt using the city’s debt service fund, charging Harding and his partners the same interest rate the city itself pays. See Ken-Mar TIF district, the bailouts.