Wichita Mayor Carl Brewer
Today on the Joseph Ashby Show, the host had a few comments on Wichita Mayor Carl Brewer. An excerpt follows.
The video Joseph played audio from is here, and a longer video of the issue is here.
If you ask Wichita Mayor Carl Brewer to live up to the policies he himself promotes, you might be threatened with a lawsuit. Video here, or below. A related story is Ambassador Hotel Industrial Revenue Bonds.
The City of Wichita should not approve a measure that is not needed, that does not conform to the city’s policy (based on relevant information not disclosed to citizens), and which is steeped in cronyism.
This week the Wichita City Council will consider authorizing industrial revenue bonds (IRB) for the Ambassador Hotel project in downtown Wichita.
In most cases, the major benefit of IRBs is exemption from paying property taxes. Since the Ambassador Hotel is located within a tax increment financing (TIF) district, it’s not eligible for property tax abatement. (Because of the TIF, the developers have already achieved the diversion of the majority of their property tax payments away from the public treasury for their own benefit.)
Instead, in this case the benefit of the IRBs, according to city documents, is an estimated $703,017 in sales tax that the hotel won’t have to pay.
The Ambassador Hotel has benefited from many millions of taxpayer subsidy, both direct and indirect. So it’s a good question as to whether the hotel deserves another $703,017 from taxpayers.
But if we follow the city’s economic development policy, the city should not authorize the IRBs. Here’s why.
The Sedgwick County/City of Wichita Economic Development Policy states: “The ratio of public benefits to public costs, each on a present value basis, should not be less than 1.3 to one for both the general and debt service funds for the City of Wichita; for Sedgwick County should not be less than 1.3 overall.”
The policy also states that if the 1.3 to one threshold is not met, the incentive could nonetheless be granted if two of three mitigating factors are found to apply. But there is a limit, according to the policy: “Regardless of mitigating factors, the ratio cannot be less than 1.0:1.”
In September 2011 the city council passed a multi-layer incentive package for Douglas Place, now better known as the Ambassador Hotel and Block One. Here’s what the material accompanying the letter of intent that the council passed on August 9, 2011 held: “As part of the evaluation team process, the WSU Center for Economic Development and Business Research studied the fiscal impact of the Douglas Place project on the City’s General Fund, taking into account the requested incentives and the direct, indirect and induced generation of new tax revenue. The study shows a ratio of benefits to costs for the City’s General Fund of 2.62 to one.”
The same 2.62 to one ratio is cited as a positive factor in the material prepared by the city for Tuesday’s meeting.
So far, so good. 2.62 is greater than the 1.3 that city policy requires. But the policy applies to both the general fund and the debt service fund. So what is the impact to the debt service fund? Here’s the complete story from the WSU CEDBR report (the report may be viewed at Wichita State University Center for Economic Development and Business Research Study of Ambassador Hotel):
Cost-benefit ratio
City Fiscal Impacts General Fund 2.63
City Fiscal Impacts Debt Service Fund 0.83
City Fiscal Impacts 0.90
We can see that the impact on the debt service fund is negative, and the impact in total is negative. (A cost-benefit ratio of less than one is “negative.”)
Furthermore, the cost of the Ambassador Hotel subsidy program to the general fund is $290,895, while the cost to the debt service fund is $7,077,831 — a cost factor 23 times as large. That’s why even though the general fund impact is positive, the negative impact of the much larger debt service fund cost causes the overall impact to be unfavorable.
The city didn’t make this negative information available to the public in 2011, and it isn’t making it available now. It was made public only after I requested the report from WSU CEDBR. It is not known whether council members were aware of this information when they voted in 2011.
So the matter before the council this week doesn’t meet the city’s economic development policy standards. It’s not even close.
There are, however, other factors that may allow the city to grant an incentive: “In addition to the above provisions, the City Council and/or County Commission may consider the following information when deciding whether to approve an incentive.” A list of 12 factors follows, some so open-ended that the city can find a way to approve almost any incentive it wants.
A note: The policy cited above was passed in August 2012, after the Ambassador Hotel incentives package passed. But the 1.3 to one threshold was de facto policy before then, and whether a proposed incentive package met that standard was often a concern for council members, according to meeting minutes.
Citizens might wonder why industrial revenue bonds are being issued for a hotel that’s complete and has been operating for over three months. The truly cynical might wonder why this matter is being handled just two weeks after the city’s general election on April 2, in which four city council positions were on the ballot. Would citizens disagree with giving a hotel $703,017 in sales tax forgiveness? Would that have an effect on the election?
Campaign contributions received by James Clendinin from parties associated with Key Construction. Clendenin will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)Combine this timing with the practice of part of the hotel’s ownership team of engaging in cronyism at the highest level. Dave Burk and the principals and executives of Key Construction have a history of making campaign contributions to almost all city council candidates. Then the council rewards them with overpriced no-bid contracts, sweetheart lease deals, tax abatements, rebates of taxes their customers pay, and other benefits. The largesse dished out for the Ambassador Hotel is detailed here. This hotel, however, was not the first — or the last time — these parties have benefited from council action.
Campaign contributions received by Lavonta Williams from parties associated with Key Construction. Williams will vote tomorrow whether to grant sales tax forgiveness worth $703,017 to some of these donors. (Click for larger view.)Campaign finance reports filed by two incumbent candidates illustrate the lengths to which Key Construction seeks to influence council members. Wichita City Council Member James Clendenin (district 3, southeast and south Wichita) and Wichita City Council Member Lavonta Williams (district 1, northeast Wichita) received a total of $7,000 from Key Construction affiliates in 2012. Williams received $4,000, and $3,000 went to Clendenin. For Williams, these were the only contributions she received in 2012.
A table of campaign contributions received by city council members and the mayor from those associated with the Ambassador Hotel is available here.
Wichita mayor Carl Brewer with major campaign donor Dave Wells of Key Construction. Brewer will vote tomorrow whether to grant a company Wells is part owner of sales tax forgiveness worth $703,017.This environment calls out for campaign finance reform, in particular laws that would prohibit what appears to be the practice of pay-to-play at Wichita City Hall.
There was a time when newspapers crusaded against this type of governance. Unfortunately for Wichitans, the Wichita Eagle doesn’t report very often on this issue, and the editorial board is almost totally silent. Television and radio news outlets don’t cover this type of issue. It’s left to someone else to speak out.
As Wichitans decide their preference for city council members, voters should take a look at the numbers and decide whether they’re satisfied with our city’s performance in economic development.
As shown in the article Wichita economic statistics, Wichita is not doing well in key economic statistics. Debt has risen rapidly in recent years. Growth of private sector jobs lags far behind the nation and the state of Kansas, and government jobs have grown faster than private sector jobs. While inflation-adjusted spending per person is holding relatively steady, the city is cutting services and generally sending a message of budgetary distress.
Perhaps most astonishing: With all the public money poured into downtown redevelopment, with all the claims of new projects being competed, and with all the talk of building up the tax base, assessed valuation in downtown Wichita is declining.
In his recent State of the City Address, Wichita Mayor Carl Brewer called for increased effort and funding for economic development, specifically job creation. He, and most of Wichita’s political and bureaucratic leaders, believe that more targeted economic development incentives are needed to boost Wichita’s economy.
Whether these incentives are good economic development policy is open for debate. I don’t believe we need them. Kansas and Wichita should chart another course to increase economic freedom in Kansas. That, in turn, will make our area appealing to companies. But our local bureaucrats, most business leaders, and nearly all elected officials believe that targeted incentives are the way to attract and retain business.
Even if we believe that an active role for government in economic development is best, we have to conclude that our efforts aren’t working. In most years, the number of jobs that officials take credit for creating or saving is just a small part of the labor force, often less than one percent.
Rarely mentioned are the costs of creating these jobs. These costs have a negative economic impact on those who pay them. This means that economic activity and jobs are lost somewhere else in order to pay for the incentives.
Also, some of these jobs would have been created without the city’s efforts. All the city should take credit for is the marginal activity that it purportedly created. Government usually claims credit for everything, however.
Several long-serving politicians and bureaucrats that have presided over this failure: Mayor Carl Brewer has been on the city council or served as mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for many years.
Wichita City Manager Robert Layton has had less time to influence the course of economic development in Wichita. But he’s starting to become part of the legacy of Wichita’s efforts in economic development.
The incumbents running for reelection to city council have been in office varying lengths of time. All, however, subscribe to the interventionist model of economic development championed by the mayor. That’s the model that hasn’t been working for Wichita.
If voters in Wichita are truly concerned about economic development for everyone, next week’s election provides an opportunity to make a positive change by bring new voices to the city council.
Wichita city leaders have promoted public investment in downtown Wichita as wise because it will increase the tax base.
In his State of the City Address for 2013, Wichita Mayor Carl Brewer told the audience (based on his prepared remarks):
As you know, revitalizing downtown has been a key part of growing our community in recent years, recognizing that a healthy and thriving downtown improves our ability to attract new business, keep our young people here, and expand our tax base. With $100 million in completed downtown projects in 2012 and another $115 million starting this year, we’ve made extraordinary progress toward having the downtown that Wichitans have dreamed of. … As development continues downtown, we are closer to reaching our goals of increased pride, an increased tax base, and bringing more businesses and jobs to Wichita.
The Wichita Downtown Development Corporation sold the planning process to Wichitans by making the argument that “it will grow existing tax base revenues.”
To evaluate the success of the city’s efforts, we might look at the change in assessed property valuation in downtown Wichita over past years. A way to do that is to look at the valuations for property in the Wichita downtown self-supporting municipal improvement district (SSMID). This is a region of the city that pays an additional property tax to fund the activities of the Wichita Downtown Development Corporation. Its boundaries are roughly the Arkansas River east to Washington, and Kellogg north to Central.
Assessed valuation is the basis for levying property tax. The process starts with an appraised value, which is targeted to be fair market value for the property. Then, that is multiplied by 25 percent for commercial property, or by 11.5 percent for residential property. This produces the assessed value. Multiply that by the sum of the several mill levy rates that apply to the property, and you have the total property tax for that property.
With all the new projects coming online in downtown Wichita, we should expect that the assessed valuation is rising. As someone converts an old, dilapidated property into something more valuable, appraised and assessed values should rise. As new buildings are built, new appraised and assessed value is created where before there was none (or very little). This process is the success story that Mayor Brewer and boosters of public investment in downtown trumpet, as the mayor did twice in one paragraph in his State of the City Address.
So what has happened to the assessed valuation of property in downtown Wichita, using the SSMID as a surrogate?
The answer is that after a period of increasing values, the assessed value of property in downtown has has been declining. The peak was in 2008. The nearby table holds the figures.
This is the opposite of what we’ve been promised. We’ve been told that public investment in downtown Wichita builds up the tax base.
Some might excuse this performance by noting there’s been a recession. That’s true. But according to presentations, there has been much activity in downtown Wichita. Hundreds of millions of dollars in worth, we are told.
So why isn’t the assessed valuation rising? Why is it falling during the time of huge successes?
More research is needed.
Data can be viewed here.
When the Wichita City Council recently received the 2012 Project Downtown Annual Report, a city council member took the opportunity to question and clarify some of the facts and figures presented in the report.
In his questions, Wichita City Council Member Paul Gray (district 4, south and southwest Wichita) asked whether the amount of public investment presented did, in fact, include all public investment.
In his answer, Scott Knebel, who is Downtown Revitalization Manager, said no, not all forms of public investment were included in the figures presented in the report. He told the council that an analysis is being prepared, perhaps to be available in May.
Gray urged Knebel to be more forthcoming when reporting on the level of public investment in order to gain a better level of community buy-in: “If you truly want a greater level of community buy-in, being as forthcoming as we can with the financial analysis of these projects and truly demonstrating what we as a community are putting in through all the different public financing mechanisms available. You may not persuade the people who don’t like public participation in projects — you’re not going to change their viewpoints by that and I don’t expect you to — but the difference is you may get more trust and buy-in from the community that thinks you’re not being forthcoming and honest with them.”
Regarding Wichita news media, Gray said the media may say “‘See, it’s a 90 percent private funded ratio versus 10 percent’ which is not really the case. We’re skewing actual numbers to demonstrate our successes downtown, but I think our successes downtown speak for themselves.”
Knebel and Wichita Downtown Development Corporation President Jeff Fluhr promised to be more forthcoming with investment figures in the future.
Gray also asked about the city’s practice of building retail space and practically giving it away to developers, who can then lease the space and earn outsized returns at taxpayer expense. I reported this at the time this lease was under consideration by the city council:
According to a letter of intent approved by the city council — and sure to become law after a public hearing at a meeting of the Wichita City Council on September 13th — the city is planning to build about 8,500 square feet of retail space in a downtown parking garage. The garage is being built, partly, to serve a hotel Burk and partners are developing.
Here are the details of the deal Burk and his partners are getting from the taxpayers of Wichita: The city plans to lease this space to Burk and $1.00 per year. Not $1.00 per square foot, but $1.00 for the entire space — all 8,500 square feet.
That’s the plan for the first five years. For the next 10, the city would charge $21,000 rent per year, which is a rate of about $2.50 per square foot.
For years 15 through 20, the rent increases to $63,000, or $7.41 per square foot. At the end of this period, Burk will have the option of purchasing the space for $1,120,000, which is a cost of about $132 per square foot.
That cost of $132 per square foot is within the range of what sources in the real estate industry tell me top-quality retail space costs to build in Wichita, which is from $130 to $140 per square foot. Rents asked for that space would be from $15 to $18 per square foot per year.
Using the low figure, Burk could expect to collect about $127,500 in annual rent on space he rents for $1.00, leaving a gross profit of $127,499 for him. As the $15 rent is a net figure, Burk’s tenants will pay taxes, insurance, and maintenance.
Wichita city manager Robert Layton answered Gray by saying that real estate leasing is not an area of the city’s expertise.
Without Gray’s questions, these important matters of public policy would likely not have been brought to public attention. For mentioning these topics, Gray was — in an attempt at humor by Wichita City Council Member Pete Meitzner (district 2, east Wichita) — branded as “Debby Downer.”
Citizens might expect that as millions in public funds are invested, someone in city hall is keeping track, and that there is a plan for reporting these numbers. Citizens should ask why Mayor Brewer, City Manager Layton, and current council members are not concerned that there appears to be no such plan for accountability.
The notion of reporting that there was only $10.7 million in “public projects” in 2012 is absurd. Just one project, the Ambassador Hotel, received $15,407,075 in taxpayer funds to get started, and then was slated to receive $321,499 per year for the first five years, with smaller amounts for 22 years. Wichita voters rejected a small part of the ongoing subsidy, but the rest remained.
As to city manager Layton’s answer that the city is not experience in real estate leasing, my response is well, why then did you get involved? It’s not the first time the city has made such a sweetheart lease deal with some of the same parties. It’s become almost routine, as I reported at the time this lease was being considered:
While most citizens might be shocked at the many layers of subsidy offered to Burk, he’s accustomed to such treatment. In 2003, the city offered a similar deal to Burk and his partners for retail space that is part of the Old Town Cinema project. That deal was made with Cinema Old Town, LLC, whose resident agent is David Burk. According to the Wichita Eagle, other partners in this corporation include Wichita theater owner Bill Warren, real estate agent Steven Barrett, Key Construction and seven others.
David Wells, one of the owners of Key Construction, is a partner with Burk on the new hotel project, and Key is slated to build the garage under a process that doesn’t require competitive bidding, even though city money is used to pay for it. Note: Later the garage was put out for competitive bid.
The Old Town project let Burk and his partners lease 17,500 square feet of retail space from the City of Wichita for $1.00 per year for the first five years. Like the proposed project, that’s not $1.00 per square foot, but $1.00 per year for all 17,500 square feet.
I wonder: Is the fact that these parties — Burk, Key Construction, Bill Warren — are reliable campaign contributors to Wichita Mayor Carl Brewer and many other Wichita City Council members, does that mean anything?
Wichita Eagle reporting on this meeting is at City Council member Paul Gray questions numbers by Wichita Downtown Development.
At a recent Wichita City Council meeting, Council Member Jeff Longwell (district 5, west and northwest Wichita) was critical of topics broached by two speakers, admonishing them to “take a different approach.”
The speakers had mentioned votes made and actions taken by the council and the appearance of influence or linkage to campaign contributions.
Longwell’s concern is understandable. As perhaps the most accomplished practitioner of cronyism on the council, he’s dished out millions in taxpayer subsidy to his significant campaign contributors. His acceptance of campaign contributions last summer from a Michigan construction company that had business before the council lifted cronyism to new heights.
After that, I thought that we wouldn’t ever see a more blatant instance of the appearance of impropriety. That is, until Mayor Carl Brewer started selling his barbeque sauce at a movie theater he’s voted to grant taxpayer subsidy to, several times.
These incidents are embarrassing for Wichita. So I can understand that Longwell doesn’t want them mentioned in public. I’m sure that’s what he would prefer.
That’s why it’s surprising that he would speak out at a council meeting. Why call additional attention to your bad behavior?
I think I know the answer: It is not possible to shame Longwell, Brewer, and most other council members. They believe their conduct is honest, forthright, and above reproach. They believe it is their critics who are harming the city’s reputation.
But in many cities, the routine practice of most Wichita City Council members would be a violation of the city’s ethics code, or even of city law. An example is from Westminster, Colorado. Its charter reads:
The acceptance or receipt by any Councillor or member of that Councillor’s immediate family, or an organization formed to support the candidacy of that Councillor, of any thing of value in excess of one-hundred dollars ($100) from any person, organization, or agent of such person or organization, shall create a conflict of interest with regard to that Councillor’s vote on any issue or matter coming before the Council involving a benefit to the contributing person, organization, or agent, unless such interests are merely incidental to an issue or question involving the common public good.
In commenting on this ordinance, CityEthics.org noted:
Westminster goes right to the heart of the matter — not the contribution itself, which is central to citizens’ expressions of their political preferences — but the effect of the other sort of contribution, the large contribution intended, possibly, not only to express a political preference (or not even, since often large contributions are given to both or all candidates by the same individual or entity), but also to influence the candidate.
If the contribution was not intended to influence the candidate, then the contributor won’t mind that the candidate cannot participate or vote on any matter dealing with the contributor’s interests. In addition, the candidate will not be placed in the position of appearing to favor someone who gave him or her a sizeable contribution or — and this is certainly possible if the candidate is truly independent — having to vote against a strong supporter. It’s a win-win situation for everyone, so long as there was no intent to influence.
In Wichita, we don’t have any laws or codes of ethics that prohibit or discourage what Westminster, Colorado does. We don’t even have many council members who think these are desirable.
Instead, the solution preferred by Wichita’s political class is to follow Jeff Longwell’s advice: Just don’t talk about it.
In August 2011 the council voted to award Key Construction a no-bid contract to build the parking garage that is part of the Ambassador Hotel project, now known as Block One. The no-bid cost of the garage was to be $6 million, according to a letter of intent. Later the city decided to place the contract for competitive bid. Key Construction won the bidding, but for a price $1.3 million less.
The no-bid contract for the garage was just one of many subsidies and grants given to Key Construction and Dave Burk as part of the Ambassador Hotel project. In Wichita city elections, individuals may contribute up to $500 to candidates, once during the primary election and again during the general election. As you can see in this table complied from Wichita City Council campaign finance reports, spouses often contribute as well. So it’s not uncommon to see the David and DJ Burk family contribute $2,000 to a candidate for their primary and general election campaigns. That’s a significant sum for a city council district election campaign cycle. Click here for a compilation of campaign contributions made by those associated with the Ambassador Hotel project.
Council Member Jeff Longwell (district 5, west and northwest Wichita), in his second term as council member, led the pack in accepting campaign contributions from parties associated with the Ambassador Hotel project. For his most recent election, he received $4,000 from parties associated with Key Construction, and $2,000 from David Burk and his wife. Total from parties associated with the Ambassador Hotel project: $6,000. When Longwell ran for Sedgwick County Commission this summer, these parties donated generously to that campaign, too.
What citizens need to know is that the Wichita City Council was willing to spend an extra $1.3 million of taxpayer money to reward a politically-connected construction firm that makes heavy campaign contributions to council members. Only one council member, Michael O’Donnell, voted against this no-bid contract. No city bureaucrats expressed concern about this waste of taxpayer money.
Then, last summer while Longwell was campaigning for the Sedgwick County Commission, campaign contributions from parties associated with Walbridge, a Michigan-based construction company appeared on Longwell’s campaign finance reports. Why would those in Michigan have an interest in helping a Wichita City Council member fund his campaign for a county office? Why should we in Wichita care if they do?
These contributions are of interest because on July 17, 2012, the Wichita City Council, sitting in a quasi-judicial capacity, made a decision in favor of Key and Walbridge that will cost some group of taxpayers or airport customers an extra $2.1 million. Five council members, including Longwell, voted in favor of this decision. Two members were opposed.
On July 16 — the day before the Wichita City Council heard the appeal that resulted in Key Construction apparently winning the airport contract — John Rakolta, Chairman and Chief Executive Officer of Walbridge and his wife contributed $1,000 to Longwell’s campaign for Sedgwick county commissioner.
Then on July 20, three days after the council’s decision in favor of Key/Walbridge, other Walbridge executives contributed $2,250 to Longwell’s campaign. Besides the Walbridge contributions, Key Construction and its executives contributed $6,500 to Longwell’s county commission campaign. Key and its executives have been heavy contributors to Longwell’s other campaigns, as well as to Wichita Mayor Carl Brewer and many other Wichita City Council members.
When asked about the Michigan contributions, Longwell stated “We often get contributions from a wide variety of sources, including out-of-town people,” according to the Wichita Eagle.
But analysis of Longwell’s July 30, 2012 campaign finance report shows that the only contributions received from addresses outside Kansas are the Walbridge contributions from Michigan, which contradicts Longwell’s claim. Additionally, analysis of ten recent campaign finance reports filed by Longwell going back to 2007 found only three contributions totaling $1,500 from addresses outside Kansas.
In December 2010, the State of Kansas, City of Wichita, and Sedgwick County teamed to offer economic development incentives to Wichita-based Hawker Beechcraft. The incentives were offered not to create new jobs, but to retain existing jobs.
Economic development officials took credit for saving 4,000 jobs. Now that Hawker employment has fallen to 3,372, will we update our economic development scorecard?
Past practice suggests we won’t. I can imagine officials arguing that after all, these jobs were preserved for between one and two years. Also, the amount of subsidy Hawker will receive is trimmed a little as a result of the reduced employment.
In his State of the City address in January 2011, just after the Hawker deal was reached, Wichita Mayor Carl Brewer told the audience that “We responded to the realities of the new economy by protecting and stabilizing jobs in the aviation industry.”
Later he added “The deal with Hawker Beechcraft announced last December keeps at least 4,000 jobs and all existing product lines in Wichita until at least 2020.”
Well, not quite. Now there are 15.7 percent fewer jobs than the mayor promised. The news that Hawker will shed its business jet line means the loss of a product line, and probably more lost jobs.
There’s no joy in reporting this news. People have been hurt. Investors have lost money. Sadly, it’s quite certain that Wichita will not learn from this sad news, as Mayor Brewer and others want to double down on the strategy of targeted economic development investment. Brewer called for a dedicated funding source for this in his State of the City address delivered yesterday.
The danger we in Kansas, and specifically the Wichita area, face is the overwhelming urge of politicians to be seen doing something. We see this now in the call for more spending on economic development. In response to the departure of Boeing last year, Brewer called for the community to “launch an aggressive campaign of job recruitment and retention.”
It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs or retain what we have. But our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians such as Brewer, however, is to take action, usually in the form of targeted incentives to spur economic development.
We’ve seen the disappointing results — not only with Hawker and Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.
There’s other evidence that Wichita is not growing and prospering, compared to other cities: “The inflation-adjusted gross domestic product for the Wichita metro area declined 0.4 percent in 2010, according to initial estimates from the federal Bureau of Economic Analysis. The decline slowed from the year before, when this measure of economic growth plummeted by 7.7 percent. … Wichita’s decline came even as GDP grew by 2.5 percent nationwide in 2010. GDP increased in 304 of 366 metro areas nationwide.” (Wichita Business Journal, Wichita’s real GDP declined in 2010 amid national recovery, database shows.)
For those who prefer pictures, charts here and here illustrate.
The targeted economic development efforts that Wichita uses fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This, however, does not stop governments from creating policies for the awarding of incentives. It also doesn’t stop the awarding of incentives willy-nilly without a policy, as the Wichita City Council has done for a hotel.
This “active investor” approach to economic development is what has led to Boeing and other companies escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita is sure to undertake in response to the loss of Boeing: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.
We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.
Much like President Barack Obama in his recent inaugural address, Wichita Mayor Carl Brewer displayed his collectivist instincts in his “State of the City” address for 2013. His speech, as prepared, may be read here.
Opening, the mayor said “Wichita has overcome great challenges in the past and will overcome these as well, but we’ll need to work together.”
Near the close, the mayor said “THE TIME FOR ACTION IS NOW! We have reached a point where we MUST come together as a community, and create a plan that defines our priorities and the City we are to become.” And then: “For all of our differences, I have never doubted this community’s ability to come together and protect what matters most.” (The capitalization is in the mayor’s prepared text.)
But what’s really important to Wichita is economic development. Regarding that, Brewer said this:
As we struggle to compete for new businesses and new jobs, especially in light of job losses in aviation, we must face the reality that we are competing with other cities that offer economic incentives for business development and expansion. If we want to be IN the game, we need to PLAY the game, but we have no dedicated funding source for economic development. If we’re serious about finding new jobs for our people — and I am — we must change this scenario as soon as possible. Where will those incentive dollars come from? (Capitalization, again, is from the original.)
The idea of a dedicated funding source for economic development is something that many in Wichita would support. Many would oppose it, too. But instead of just lobbing rhetorical questions (Where will those incentive dollars come from?), the mayor should give us some answers. Or, at least make a specific proposal. Does the mayor recommend a sales tax increase? Or allocating specific levels of property tax to economic development? (The city is doing this on a temporary basis.) Or asking the state legislature to fund Wichita’s economic development, as we insist the legislature fund our airline subsidy program?
Whatever it is, Mayor Brewer, give us some specific ideas as to how you want to raise this money, and how you would spend it.
It’s that spending, I think, that people in Wichita have concern over. The cumulative record of Brewer, the city council, and city bureaucratic staff hasn’t inspired trust and confidence. Giving the city additional dollars to spend on economic development is not a wise investment.
For example, the mayor says that subsidizing downtown development is good economic development strategy. But we see the mayor and nearly all council members voting to give an overpriced no-bid contract to their significant campaign contributors. This happened despite the company’s large cost overruns on previous no-bid contracts awarded by the city. Is that good economic development practice?
We see the city council sitting in a quasi-judicial role, adjudicating the award of an airport construction contract when one of the parties is a significant campaign contributor. In fact, Key Construction — the company that prevailed in that decision — through its principals and executives, was the sole source of campaign funds raised by Lavonta Williams (district 1, northeast Wichita) in 2012 as she prepared to run for reelection this spring.
Key’s executives also contributed heavily to James Clendenin (district 3, southeast and south Wichita) last year. He’s running this spring, too.
At the time this airport contract was being handled, Council Member Jeff Longwell (district 5, west and northwest Wichita) was campaigning for the Sedgwick County Commission. Campaign finance reports revealed contributions from parties associated with Walbridge, a Michigan construction company. Why would those in Michigan have an interest in helping a Wichita City Council member fund his campaign for a county office? Would the fact that Walbridge is a partner with Key Construction on the new airport terminal, and that Longwell would be voting on that contract, provide a clue?
Or: A movie theater owner and business partners contribute to the mayor’s (and other) campaigns. Mayor and council vote to give a no-interest and low-interest loan and tax breaks to theater owner and his partners. Mayor goes into barbeque sauce business. Mayor’s barbeque sauce is now sold at movie theater.
Doesn’t Carl Brewer see anything wrong with this? Don’t his advisors tell him that this creates the appearance of impropriety? Does the mayor consider whether these actions make a positive impression on those who might want to invest in Wichita?
We see the city awarding economic development incentives that were not necessary for the project to proceed. It took a special election to teach the mayor and council that lesson. By the way, that unneeded and rejected incentive was awarded to the significant campaign contributors of Mayor Brewer and most council members.
We see the city taking credit for building up the tax base, yet giving away tax revenue in the form of property tax abatements, IRBs, tax increment financing, and STAR bonds.
The bureaucratic missteps: The Southfork TIF district is just the latest example.
The lack of respect for citizens’ right to know how taxpayer funds are spent is another troubling aspect of Brewer’s tenure as mayor. None of the words “accountability,” “transparency,” or “open government” were mentioned in the mayor’s address this year, as they have been in the past. No sense in calling attention to an area where the city has failed, I suppose.
All this is done in the name of economic development and jobs. But Wichita is underperforming Kansas and the nation in these areas. Under Brewer’s leadership, however, we are overachieving in the advancement of cronyism and its ills.
The record indicates that our officeholders, and those who advise them, are not worthy of our trust, and certainly not more taxes for economic development.
After last year’s State of the City speech, I noted “Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles of freedom and liberty ‘simplistic.’ Instead, his government prefers crony capitalism and corporate welfare.”
I also wrote: “Relying on economic freedom, free markets, and limited government for jobs and prosperity means trusting in free people, the energy of decentralized innovation, and spontaneous order. A government plan for economic development is the opposite of these principles.”
This year, the outlook for economic freedom and limited government in Wichita is gloomier than ever before. The door for those who wish to profit through cronyism is wide open. We’ll have to hope that, somehow, Wichita can learn to thrive under this regime.