Voice For Liberty

Tag: Economic development

  • Wichita economic development, the need for reform

    Wichita economic development, the need for reform

    An incentives deal for a Wichita company illustrates a capacity problem and the need for reform.

    Next week the Wichita City Council will consider an economic development incentives package intended to enable a local manufacturing company to expand its operations.

    R and R Aerospace benefits 2015-05-05City documents give some detail regarding the amounts of property tax to be forgiven on an annual basis, for a period of up to ten years. In the past, city documents have often mentioned other incentive programs that will benefit the company, but that information is missing. Other sources mention two state programs — PEAK and HPIP — the company may benefit from, but amounts are not available.

    In order to prepare the incentives package, several events took place. There was a visit to the company. Then another visit and tour. Then economic development officials helped the company apply for benefits from the Kansas Department of Commerce. Then these officials worked closely with Wichita city staff on an incentive package.

    City documents state that the expansion will create 28 jobs over the next five years. Obtaining these jobs took a lot of effort from Wichita and Kansas economic development machinery. Multiple agencies and fleets of bureaucrats at GWEDC, the City of Wichita, Sedgwick County, and the State of Kansas were involved. Wichita State University had to be involved. All this to create 5.6 jobs per year for five years.

    The jobs are welcome. But this incident and many others like it reveal a capacity problem, which is this: We probably need to be creating 5.6 jobs every working hour of every day in order to make any significant progress in economic growth. If it takes this much effort to create 28 jobs over five years, how much effort will it take to create the many thousands of jobs we need to create every year?

    This assumes, of course, that the incentives are necessary to enable the company to expand. City documents state that the tax exemption is necessary to make the project “viable.” It’s likely that the mayor or city council members will say that if we don’t award the incentives, the company won’t be able to expand. Or perhaps the company will expand in some other city. So the incentives really don’t have any cost, they will tell citizens.

    This only hints at a larger problem. If companies can’t afford to make investments in Wichita unless they receive exemptions from paying taxes, we must conclude that taxes are too high. (An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation. See here.) It’s either that, or this company simply doesn’t want to participate in paying for the cost of government like most other companies and people do.

    To top it off, this expansion and the new jobs seem far from certain. City documents state the company is “bidding on a new work package” and the “expansion project would be completed in phases
    based upon the timing and demand of the work package.”

    Civic leaders say that our economic development policies must be reformed. So far that isn’t happening. Our leaders say that cash incentives are on the way out. This deal does not include grants of cash, that is true. But forgiveness of taxes is more valuable to business firms than receiving cash. That’s because cash incentives are usually taxable as income, while forgiveness of taxes does not create taxable income. Each dollar of tax that is forgiven adds one dollar to after-tax profits. 1

    The large amount of bureaucratic effort and cost spent to obtain a small number of speculative jobs lets us know that we need to do something else in order to grow our local economy. We need to create a dynamic economy, focusing our efforts on creating an environment where growth can occur organically without management by government. Dr. Art Hall’s paper
    Embracing Dynamism: The Next Phase in Kansas Economic Development Policy provides much more information on the need for this.

    Another thing we can do to help organically grow our economy and jobs is to reform our local regulatory regime. Recently Kansas Policy Institute released a study of regulation and its impact at the state and local level. This is different from most investigations of regulation, as they usually focus on regulation at the federal level.

    Business Perceptions of the Economic Impact of State and Local Government Regulation coverThe study is titled “Business Perceptions of the Economic Impact of State and Local Government Regulation.” It was conducted by the Hugo Wall School of Public Affairs at Wichita State University. Click here to view the entire document.

    Following is an excerpt from the introduction by James Franko, Vice President and Policy Director at Kansas Policy Institute. It points to a path forward.

    Surprising to some, the businesses interviewed did not have as much of a problem with the regulations themselves, or the need for regulations, but with their application and enforcement. Across industries and focus group sessions the key themes were clear — give businesses transparency in what regulations are being applied, how they are employed, provide flexibility in meeting those goals, and allow an opportunity for compliance.

    Sometimes things can be said so often as to lose their punch and become little more than the platitudes referenced above. The findings from Hugo Wall are clear that businesses will adapt and comply with regulations if they are transparent and accountable. Many in the public can be forgiven for thinking this was already the case. Thankfully, local and state governments can ensure this happens with minimal additional expense.

    A transparent and accountable regulatory regime should be considered the “low hanging fruit” of government. Individuals and communities will always land on different places along the continuum of appropriate regulation. And, a give and take will always exist between regulators and the regulated. Those two truisms, however, should do nothing to undermine the need for regulations to be applied equally, based on clear rules and interpretations, and to give each business an opportunity to comply. (emphasis added)

    Creating a dynamic economy and a reformed regulatory regime should cost very little. The benefits would apply to all companies — large or small, startup or established, local or relocations, in any industry.

    Our civic leaders say that our economic development efforts must be reformed. Will the path forward be a dynamic economy and reformed regulation? Or will it be more bureaucracy, chasing five jobs at a time?

    1. Site Selection magazine, September 2009. 2015. ‘INCENTIVES — Site Selection Magazine, September 2009’. Siteselection.Com. Accessed May 1 2015. http://www.siteselection.com/issues/2009/sep/Incentives/ ↩
  • Wichita economic development policies questioned

    Wichita economic development policies questioned

    One of the themes of the recent Wichita mayoral campaign was the need to restore trust in city hall. Following, from April 2013, an example of how city hall has created the trust deficit. Although this story was covered nowhere but here, it it exemplary of how Wichita city hall operates. Since then the city’s economic development director has retired, but we have the same city manager and nearly all the same council members, with one having moved up to mayor. For an update on this story, see Wichita: No such document.

    At Tuesday’s meeting of the Wichita City Council, I was prepared to ask the council to not approve issuance of Industrial Revenue Bonds. My reason, explained here, was that the cost-benefit analysis did not meet the standard the city has established in its economic development incentives policy.

    At the meeting, though, Urban Development Director Allen Bell and Wichita city manager Robert Layton both explained that for downtown projects, the city’s policy that the debt service fund must show a cost-benefit ratio of 1.3 to one or better doesn’t apply. (Video of Bell explaining this policy is here, and of Layton doing the same, here.)

    I thought I should have known about that policy. I felt bad — embarrassed, even — for not being aware of it.

    There’s a certain logic to their arguments. The parking garage is available to the public — at least some parking stalls. But the garage was not built until the Ambassador Hotel project was finalized. And the number of parking spots actually available to the public is difficult to determine. One analysis shows that the number of spots available to the public is zero, although the city says otherwise.

    So the next day I sought to inform myself of this policy regarding the cost-benefit ratio for the city’s debt service fund for downtown projects.

    I found a document titled “City of Wichita Downtown Development Incentives Policy” as approved by the Wichita City Council on May 17, 2011. It doesn’t address cost-benefit ratios for any funds, at least by my reading.

    (By the way, that document, which was available on the city’s website at wichita.gov, wasn’t available after the city recently transitioned to a new website.)

    There is also the evaluation matrix for downtown projects. It includes as a criterion “Extent City’s ROI exceeds benefit/cost ratio of 1.3:1 on CEDBR Model.”

    I don’t see either of these documents supporting what was stated by two top city officials at Tuesday’s meeting, that the cost-benefit ratio of 1.3 to one requirement does not apply to the debt service fund for downtown projects.

    I’ve asked the city to provide such a policy document. So far, city officials have searched, but no such document has been provided. You’d think that if there is a document containing this policy, it would be readily accessible.

    Whether the “new” policy explained Tuesday by Messrs. Bell and Layton is sound public policy is something that should be discussed. It might be a desirable policy.

    But this entire episode smacks of molding public policy in order to fit the situation at hand.

    The city relies on cost-benefit analysis produced by Wichita State University Center for Economic Development and Business Research. The positive result produced for the general fund — the 2.62 that Bell referred to — was used to justify the public investments the city asked taxpayers to make in September 2011.

    We didn’t know about the unfavorable result for the city’s debt service at that time. City officials, however, knew, as it’s contained in the analysis provided to the city from CEDBR.

    City officials could have — if they had wanted to — explained this special debt service policy for downtown projects at that time. City officials or the mayor could have explained that part of the Ambassador Hotel project doesn’t meet the city’s economic development policies, but here’s why the project is a good idea nonetheless.

    City officials and the mayor could have used that opportunity to inform Wichitans of the special policy for downtown projects regarding the debt service fund, if such a policy actually existed at that time.

    But they didn’t do that. And if the policy actually existed at that time, it was a well-kept secret, and was until Tuesday.

    I’m sure some will say that we should just shrug this off as an innocent oversight. But this project is steeped in cronyism. It is the poster child for why Wichita and Kansas need pay-to-play laws so that city council members are prohibited from voting to send millions to their significant campaign contributors and the mayor’s fishing buddy.

    Soon the city will probably ask Wichitans to trust it with more tax revenue so the city can do more for its citizens. The city commissioned a survey to justify this. Also, the mayor wants a dedicated stream of funding so that the city can spend more on economic development.

    In other words, the city wants its citizens to trust their government. But in order to gain that trust, the city needs to avoid episodes like this.

  • WichitaLiberty.TV: Wichita Eagle reporting, marijuana laws, and the Kansas economy

    WichitaLiberty.TV: Wichita Eagle reporting, marijuana laws, and the Kansas economy

    In this episode of WichitaLiberty.TV: The Wichita Eagle prints several stories that ought to cause readers to question the reliability of its newsroom. Wichita voters pass a marijuana law that conflicts state law. Performance of the Kansas economy. Finally, some unexplained results in the way people vote. View below, or click here to view at YouTube. Episode 81, broadcast April 19, 2015.

  • Did Jeff Longwell dodge a tough city council vote?

    Did Jeff Longwell dodge a tough city council vote?

    On election day, Wichita city council member and mayoral candidate Jeff Longwell appears to have ducked an inconvenient vote and would not say why.

    At his Wichita mayoral campaign announcement last November, then-council member Jeff Longwell called for a moratorium on the use of forgivable loans until a new policy is implemented. 1

    Jeff Longwell, now Wichita mayor
    Jeff Longwell, now Wichita mayor

    At other times he called for the end to traditional cash incentives, telling the Wichita Eagle “I think that we have to get away from the traditional cash incentives that we’ve been using and look for better ways to grow jobs in this community.” 2

    In the Wichita Eagle voter guide, for the question “What is your philosophy or practice regarding public incentives for companies and developers?” Longwell started his response with this: “I believe there is a better way to promote economic growth.” 3

    Wichita voters can be excused for believing Jeff Longwell wants to pursue economic development in a different way. It was a good strategy for the candidate to employ, as the rejection of the sales tax last year by Wichita voters is widely thought to be grounded in voter distrust of the economic development package.

    Summary of benefits for Figeac AeroOn election day this April, an economic development incentive package was under consideration by the Wichita city council. The deal contained a common mix of incentives from city, county and state. Details on the amounts of the incentives were sketchy, so I estimated the benefit to the company at $2,315,000 up front cash and credits equivalent to cash, and $605,000 in ongoing annual benefits for at least five years. 4

    This was an example of the traditional way Wichita and other cities do economic development, that is, targeted incentives for specific companies. It’s something that Longwell said we need to get away from, especially the forgivable loans part, having called for a moratorium on their use.

    This matter provided a perfect opportunity for Longwell to cast a vote aligned with his new perspectives on economic development. So when this matter came before the city council, how did Longwell vote?

    The answer is: We don’t know. Longwell didn’t vote. At about 10:27 am, shortly before the council took up this economic development incentives agenda item, Longwell left the council chambers. He did not return before the meeting ended. When asked why he left the meeting, Longwell would not provide an answer. He provided several contradictory explanations. He said he would explain at his campaign watch party on election night the reason for leaving, but would not say that afternoon why he left the meeting. (See Twitter and Facebook dialogs following.)

    In a profile during the campaign, Longwell told the Wichita Eagle “I certainly can appreciate and understand the need to not vote on items, but sometimes you just simply, as tough as it is, you have to take a position,” he said. “I don’t know any better way to explain it. It’s part of the responsibility of being elected to do a job. 5

    Here was a tough vote for Longwell. It was an opportunity for citizens to see him cast a vote in alignment with his campaign rhetoric. But he didn’t vote. He didn’t take a position, and he wouldn’t say why.

    This isn’t the first time Longwell has dodged questions he doesn’t want to answer. He canceled an appearance on The Joseph Ashby Show and would not reschedule. Ashby, for those who haven’t listened, asks tough questions.

    Twitter and Facebook transcripts, April 7, 2015

    Bob Weeks @bob_weeks Apr 7
    Does anyone know why Jeff Longwell left the city council meeting early? @jefflongwellict #ictcouncil @CityofWichita

    Jeff Longwell @jefflongwellict Apr 7
    @bob_weeks I had a prior appointment. I had to see a man about a horse. I know you miss me when I’m not there. @CityofWichita

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita May I ask why you made an appointment during city council hours?

    Jeff Longwell @jefflongwellict Apr 7
    @bob_weeks Bob, I’m touched. Thank you for being concerned that my voice is being heard on the council and I’m there to help guide our city.

    Jeff Longwell @jefflongwellict Apr 7
    @bob_weeks Also, this was unplanned and was of a personal nature. But thank you for your concern. It means a lot, Bob.

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita Would you please answer why you made an appointment during city council hours?

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita Which was it? A prior appointment or unplanned?

    Jeff Longwell @jefflongwellict Apr 7
    @bob_weeks An appointment I had to schedule this morning. Priorly unplanned to making it. Don’t worry, I’m fine. @CityofWichita

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita Could you please tell us some details? Why did it have to be done during a city council meeting?

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita When a council member and mayoral candidate misses an important vote, the public has a right to know why.

    Jeff Longwell @jefflongwellict Apr 7
    @bob_weeks City council members leave meetings periodically. It’s a personal matter, not a conspiracy, Bob. @CityofWichita

    Jeff Longwell @jefflongwellict Apr 7
    @bob_weeks if you’d like to stop by my watch party tonight we can chat about it all you want. @CityofWichita

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita You will not tell voters why you scheduled this appointment, is that your response?

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita It’s not me who deserves to know. It’s the people of Wichita who need to know why a council member left.

    Jeff Longwell @jefflongwellict Apr 7
    @bob_weeks Nothing would have changed with my vote today, Bob. Council members miss on occasion. @CityofWichita

    Bob Weeks @bob_weeks Apr 7
    @jefflongwellict @CityofWichita If you had a legitimate reason for missing a vote, I would think you’d be willing to tell voters details.

    Later, on Facebook:

    Mayor Jeff Longwell: As I said, while I appreciate your concern and the fact that you feel my presence is crucial to city council meetings, I had to leave for a personal matter. Council members leave meetings on occasion, and nothing would have changed with the addition of my vote. But it really means a lot to me that you feel I’m a vital part of the council and miss me when I’m gone, Bob.
    April 7 at 3:02pm

    Bob Weeks: Dodging the question again. You said that you would tell me tonight why you left the meeting, so why won’t you say now?
    April 7 at 3:05pm

    —
    Notes

    1. Wichita Eagle, 2015. Economic Development Among Mayoral Candidate Jeff Longwell’s Priorities For Wichita. Accessed April 16 2015. Available at www.kansas.com/news/local/article393829. ↩
    2. Wichita Eagle, 2015. Jeff Longwell, Sam Williams Advance In Race For Wichita Mayor. Accessed April 16 2015. Available at www.kansas.com/news/politics-government/election/article12332810.html. ↩
    3. C3.thevoterguide.org, 2015. Wichita Mayor — The Wichita Eagle Voter Guide. Accessed April 16 2015. Available at c3.thevoterguide.org/v/wichita15/race-detail.do?id=14013125. ↩
    4. Weeks, Bob. 2015. Figeac Aero Economic Development Incentives. Voice For Liberty In Wichita. Accessed April 16 2015. Available at wichitaliberty.org/wichita-government/figeac-aero-economic-development-incentives/. ↩
    5. Wichita Eagle, 2015. Council Member Jeff Longwell Touts Experience In Mayoral Race. Accessed April 16 2015. Available at www.kansas.com/news/politics-government/election/article15627836.html. ↩
  • Economic indicators for Kansas

    Economic indicators for Kansas

    This visualization has been updated. Click on Economic indicators for the states.

    During this century the Kansas economy has not kept up with the national economy and most neighboring states.

    The Federal Reserve Bank of Philadelphia calculates two indexes that track and forecast economic activity in the states and the country as a whole.

    Coincident Economic Activity Index, Kansas highlighted against neighboring states.
    Coincident Economic Activity Index, Kansas highlighted against neighboring states.
    The coincident index is a measure of current and past economic activity for each state. This index includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries. July 1992 is given the value 100.

    The leading index predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, “the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.”

    Leading Index, Kansas highlighted against neighboring states.
    Leading Index, Kansas highlighted against neighboring states.
    Positive values mean the coincident index is expected to rise in the future six months, while negative values mean it is expected to fall.

    I’ve created an interactive visualization of these two indexes. Examples appear nearby. Click here to open the visualization in a new window. You may select a range of dates and one or more states to include on the chart. Click on a state’s legend color to spotlight it against other states.

  • Figeac Aero economic development incentives

    Wichita politicians, economic development officials, and civic leaders bemoan the lack of incentives Wichita can offer. A deal under consideration illustrates what is really available.

    Next week the Wichita City Council will consider a forgivable loan to Figeac Aero North America related to its expansion of its Wichita facility. Following is an explanation of the various incentives and benefits planned for this company.

    Figeac will receive forgivable loans of $250,000 each from Sedgwick County and the City of Wichita, with the State of Kansas adding $500,00, although it is not clear if that is a grant or forgivable loan.

    City documents don’t mention this, but a letter from the Kansas Department of Commerce indicates that Figeac will benefit from the Promoting Employment Across Kansas program, commonly known as PEAK. This program rebates 95 percent of the state withholding taxes back to the company. An investigation from earlier this year showed that PEAK incentive payments can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions who earns $40,000 annually, the withholding would be $27 per week (for weekly payroll), or $1,404 annually. For a married person with two children earning the same salary, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

    Briefcase with moneyWe don’t know how much withholding tax Figeac employees will generate. An estimate is that with 200 employees earning $40,000, averaging the two withholding scenarios illustrated above, Figeac would receive $1040 * 200 * 95% = $191,900 per year in PEAK payments.

    The Department of Commerce also offers tax credits through the High Performance Incentive Program (HPIP). This rebates, in the form of tax credits, 10% of the capital investment above $1.0 million. City documents state Figeac will invest about $21,000,000, with capital investment of $7,000,000 in machinery and equipment, which should qualify for HPIP credits. This means the company would receive tax credits equal to ($7000000 – $1000000) * 10% or $600,000. It’s possible that other expenditures would qualify for these credits. Tax credits are economically equivalent to a cash grant for both the state and the recipient.

    The letter from Commerce also says the state will “underwrite a portion of the company’s actual expenses for training new employees.” No dollar value is given for this.

    Finally, the city is issuing Industrial Revenue Bonds in an amount up to $20,680,000. The city does not lend this money to Figeac. Instead, the purpose of the IRBs is to enable property tax and sales tax forgiveness. City documents are sketchy as to the amount of tax that will be saved, but documents state “After the five year exemption period, the new improvements would generate an estimated $82,470 annually for the General Fund and $29,196 for the Debt Service Fund.” This means the city alone is forgiving $111,666 per year in taxes. City documents usually give the amount of tax that overlapping jurisdictions are abating, but this information is missing. Based on relative mill levies for the county, school district, and state, I estimate the total property tax benefit at $414,000 per year.

    The IRBs also carry a sales tax exemption. The $7,000,000 in machinery and equipment would be exempt from sales tax, and possibly some of the property improvements. If Figeac spent $10,000,000 in expenditures subject to sales tax, the one-time benefit to Figeac is $715,000.

    The following table summarizes the benefits.

    Summary of benefits for Figeac Aero

  • Ranzau, Peterjohn endorse Sam Williams for Wichita mayor

    Ranzau, Peterjohn endorse Sam Williams for Wichita mayor

    Despite past differences, two members of the Sedgwick County Commission have endorsed Sam Williams for Wichita Mayor.

    Citing recent revelations that Jeff Longwell voted to use taxpayer funds that helped his private business profit, County Commissioners Richard Ranzau and Karl Peterjohn called on supporters of ethics reform and transparency to oppose Longwell and support Sam Williams.

    “Even though Sam Williams has supported our opponents in the past, we think it is vital that he be elected over Longwell,” Peterjohn and Ranzau said in a joint statement.

    “We have known for some time that Jeff Longwell has had a problem with ethics. In fact, the voters rejected his approach to government when he ran against me,” Karl Peterjohn stated. “It was during his race against me that Longwell presented the appearance that his vote was for sale. Now there is evidence that not only did he utilize his position on the City Council to enrich his campaign coffers, but he also has used it for his personal enrichment.”

    According to campaign finance reports filed by Longwell, his campaign for County Commission accepted multiple out-of-state donations from the CEO of Walbridge and his spouse the day before he voted to award Walbridge a contract that was millions of dollars higher than another bid being considered. Three days after that vote, Longwell accepted thousands of dollars more from other Michigan-based employees of the company.

    It was recently reported that Jeff Longwell made a motion and then supported the use of $10,000 in taxpayer money to sponsor the car show known as The Blacktop Nationals. What Longwell failed to disclose was that his company, Ad Astra Printing, which is registered as an LLC with Jeff Longwell as the only listed owner, received compensations for doing work for the event. Longwell recently admitted his firm did profit from the event. According to Wichita’s Code of Ethics for Council Members (Title 2, Section 2.04.050), council members “shall refrain from making decisions involving business associates, customers, clients, friends and competitors.” Longwell’s motion to use public funds for a project where he would personally profit is clearly a violation of the Code of Ethics for Council Members. The relevant Wichita law can be found here.

    “For Wichita to move forward and to grow the jobs we all want, we have to work together in the interest of south-central Kansas — not in the self-interests of politicians,” stated Commissioner Richard Ranzau. “It is well-documented that Sam Williams has actually supported my opponents, as well as those of Karl Peterjohn, in the past, but I know that Sam’s top priority is enriching Wichita, not enriching himself. That’s why I am supporting Sam Williams for mayor. The public needs to have greater transparency and I believe Sam Williams will be an advocate for that. Jeff Longwell has been in office for 20 years and has done nothing to increase transparency or to make local government more accessible to the people,” Ranzau stated.

    “Longwell’s consistent ethical lapses will damage economic development opportunities in Sedgwick County. Business leaders will shy away doing business in that manner. Sam Williams is a proven job creator, and I urge voters to support him for mayor,” stated Peterjohn.

  • Downtown Wichita deal shows some of the problems with the Wichita economy

    In this script from a recent episode of WichitaLiberty.TV: A look at the Wichita city council’s action regarding a downtown Wichita development project and how it is harmful to Wichita taxpayers and the economy. This is from episode 77, originally broadcast March 8, 2015. View the episode here.

    This week a downtown Wichita project received many economic benefits such as free sales taxes and a bypass of Wichita’s code of conduct for city council members.

    Exchange Place
    Exchange Place
    The issue had to do with tax increment financing, or TIF. This is a method of economic development whereby property taxes are routed back to a real estate development rather than funding the cost of government. It’s thought that TIF is necessary to make certain types of projects economically feasible. I appeared before the Wichita city council and shared my concerns about the harmful effects of this type of economic development.

    I said that regarding the Exchange Place project in downtown Wichita, I’d like to remind the council of the entire subsidy package offered to the project.

    There are historic preservation tax credits, which may amount to 25 percent of the project cost. These credits have the same economic impact as a cash payment, and their cost must be born by taxpayers.

    There is $12.5 million in tax increment financing, which re-routes future property tax revenues back to the project for the benefit of its owners. Most everyone else pays property taxes in order to pay for government, not for things that benefit themselves exclusively, or nearly so.

    There is a federal loan guarantee, which places the federal taxpayer on the hook if this project isn’t successful.

    The owner of this project also seeks to avoid paying sales taxes on the purchase of materials. City documents don’t say how much this sales tax forgiveness might be worth, but it easily could be several million dollars.

    I said: Mayor and council, if it in fact is truly necessary to layer on these incentives in order to do a project in downtown Wichita, I think we need to ask: Why? Why is it so difficult to do a project in downtown Wichita?

    Other speakers will probably tell you that rehabilitating historic buildings is expensive. If so, working on historic buildings is a choice they make. They, and their tenants, ought to pay the cost. It’s a lifestyle choice, and nothing more than that.

    I told the council that I’m really troubled about the sales tax exemption. Just a few months ago our civic leaders, including this council, recommended that Wichitans add more to our sales tax burden in order to pay for a variety of things.

    Only 14 states apply sales tax to food purchased at grocery stores for home consumption, and Kansas has the second-highest statewide rate. We in Kansas, and Wichita by extension, require low-income families to pay sales tax on their groceries. But today this council is considering granting an exemption from paying these taxes that nearly everyone else has to pay.

    I told the council that these tax subsidies are not popular with voters. Last year when Kansas Policy Institute surveyed Wichita voters, it found that only 34 percent agreed with the idea of local governments using taxpayer money to provide subsidies to certain businesses for economic development. Then, of course, there is the result of the November sales tax election where city voters emphatically said no to the council’s plan for a sales tax increase.

    This project is slated to receive many million in taxpayer-funded subsidy. Now this council proposes to wave a magic wand and eliminate the cost of sales tax for its owners. People notice this arbitrary application of the burden of taxation. They see certain people treated differently under the law, rather than all being treated equally under the law. People don’t like this. It breeds distrust in government. This council can help restore some of this trust by not issuing the Industrial Revenue Bonds and the accompanying sales tax exemption.

    In response to my remarks, city council member and mayoral candidate Jeff Longwell had a few comments, as we see here in video from the meeting.

    We see city council member and mayoral candidate Jeff Longwell contesting the idea that TIF funds are being rerouted to the benefit of the owners of the project. We’re getting a public parking garage is the city’s response.

    Let’s look at the numbers and see if we can evaluate this claim. According to city documents, the project will hold 230 apartments, and the garage is planned to hold 273 parking stalls. You can imagine that many of the apartment renters or buyers will want a guaranteed parking space available to them at all times. And in fact, an early version of the development plan states: “A minimum of 195 spaces will be allocated for use by the apartments. The remaining 103 spaces will be for public parking.” So the city is giving up $12.5 million of tax revenue to gain 103 parking spaces. That’s 121 thousand dollars per parking spot. You can buy a very nice house in Wichita for that.

    The actual situation could be even worse for the city’s taxpayers. The development agreement states: “A minimum of 103 parking spaces shall be set aside in the Parking Garage for public parking and the balance for the exclusive use of the residents and guests of Exchange Place Building and Douglas Building.” It also holds this: “This allocation can be revised by Developer as market experience may demonstrate a need to reallocate parking spaces with consent of the City Representative (which consent shall not be unreasonably withheld or delayed).”

    So a large portion of the parking garage is not a public benefit. It’s for the benefit of the apartments developer. If not for the city building the garage, the developer would need to provide these parking spaces in order to rent the apartments. And because of tax increment financing, the developer’s own property taxes are being used to build the garage instead of paying for government, like almost all other property taxes do, like your property taxes do. If this was not true, there would be no benefit to the developer for using tax increment financing. And if TIF did not have a real cost to the rest of the city’s taxpayers, we might ask this question: Why not use TIF more extensively? Why can’t everyone benefit from a tax increment financing district?

    In his remarks, the city manager mentioned the Block One garage as a public asset, as it was funded by tax increment financing, so let’s look at the statistics there. According to the revised budget for the project, the plan is for 270 stalls in the garage. But 125 stalls are allocated for the hotel, and 100 are allocated for the Slawson development, and 45 allocated for the Kansas Leadership Center building. That leaves precisely zero stalls for public use. That’s right. If these three businesses make full use of their allocation of parking stalls, there will be zero stalls available for the public.

    It’s not quite that simple, as Slawson will use its spaces only during the workday, leaving them available to the public evenings and weekends. Perhaps the same arrangement will be made for the Kansas Leadership Center. Being near the Intrust Bank Arena, the garage is used for parking for its events. Except, there aren’t very many event in the arena. In some months there are no events. But you can see that something that is promoted for the public good really turns out to be narrowly focused on private interests.

    The manager also mentioned the garage on Main Street. According to city documents, the cost to rehabilitate this garage is $9,685,000, which creates 550 parking stalls. But the city is renting 180 parking stalls to a politically-connected company at monthly rent of $35. We looked at this a few months ago and saw how bad this deal is for city taxpayers.

    In his remarks, Mayor Carl Brewer thanked city staff and the developers for “working collectively as a team.” He criticized those who say, in his words, “let’s not do anything, let’s just see where the chips may fall.” As an alternative, he said “we can come together, we can work together, we can work collectively together, and we can bring about change and form it the way we want.”

    These remarks illustrate the mayor’s hostility to free markets, that is, to thousands and millions and billions of people trading freely in order to figure out how to allocate scarce resources. But the mayor likens the marketplace of free people to a random event — where the chips may fall, he said. But that’s not how markets work. Markets are people planning for themselves, using their knowledge and preferences and resources in order to build things they want, and what they think others will want. That’s because in markets, the only way you can earn a profit is by doing things that other people want. You have to please customers in order to profit.

    But Wichita Mayor Carl Brewer says we need to work collectively together. He says we can form the future the way “we” want. Well, who is the “we” he’s talking about? As we see, the dynamics of free markets results in people doing what other people want. But the “we” the mayor talks about is politicians, bureaucrats, cronies, and do-gooders deciding how they want things to be done, and using your money to do it. That reduces your economic freedom. Your money is directed towards satisfying the goals of politicians and bureaucrats rather than actual, real people.

    Here’s how bad this deal really is for Wichita. In my remarks to the council I also said this: Might I also remind the people of Wichita that some of their taxpayer-funded subsidies are earmarked to fund a bailout for a politically-connected construction company for work done on a different project, one not related to Exchange Place except through having common ownership in the past? I don’t think it is good public policy for this city to act as collection agent for a private debt that has been difficult to collect.

    I was referring to the fact that the Exchange Place project started as an endeavor of the Minnesota Guys, two developers who bought a lot of property in downtown Wichita and didn’t do very well. They both have been indicted on 61 counts of securities violations in relation to their work in downtown Wichita. One of their projects was the Wichita Executive Center on north Market Street. The Minnesota Guys still owe money to contractors on that project, and some of the taxpayer funding for the Exchange Place project will be used to pay off these contractors.

    Why, you may be asking, is the city acting as collection agent for these contractors? There’s an easy answer to this. Money is owed to Key Construction company. We’ve talked about this politically-connected construction firm in the past. Through generous campaign contributions and friendships, Key Construction company manages to gain things like no-bid contracts and other subsidies from the city.

    Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction.
    Wichita Mayor Carl Brewer with major campaign donor Dave Wells of Key Construction.
    This is a problem. Dave Wells, the president of Key Construction, is a friend of the mayor, as well as frequent and heavy campaign financier for the mayor and other council members. And the mayor voted for benefits for Wells and his company. That is a violation of Wichita city code, or at least it should be. Here’s an excerpt from Wichita city code section 2.04.050, the Code of ethics for council members as passed in 2008: “[Council members] shall refrain from making decisions involving business associates, customers, clients, friends and competitors.”

    Dave Wells and Carl Brewer are friends. The mayor has said so. But the City of Wichita’s official position is that this law, the law that seem to plainly say that city council members cannot vote for benefits for their friends, this law does not need to be followed. Even children can see that elected officials should not vote economic benefits for their friends — but not the City of Wichita.

    There’s much research that shows that tax increment financing is not an overall benefit to a city’s economy. Yes, it is good for the people that receive it, like the developer of Exchange Place and the mayor’s friends and cronies. But for cities as a whole, the benefit has found to be missing. Some studies have found a negative effect of TIF on economic progress and jobs. That’s right — a city is worse off, as a whole, for using tax increment financing. The evolving episode involving Exchange Place — the massive taxpayer subsidies, the cronyism, the inability of the mayor and council members to understand the economic facts and realities of the transactions they approve, the hostility towards free markets and their benefits as opposed to government planning of the economy — all of this contributes to the poor performance of the Wichita-area economy. This is not an academic exercise or discussion. Real people are hurt by this.

    Mayor Brewer has just a month left in office, and there will be a new mayor after that. We, the people of Wichita, have to hope that a new mayor and possibly new council members will chart a different course for economic development in Wichita.

  • No-bid contracts still passed by Wichita city council

    No-bid contracts still passed by Wichita city council

    Despite a policy change, the Wichita city council still votes for no-bid contracts paid for with taxpayer funds.

    In the current campaign for Wichita mayor, one candidates says he never has voted for no-bid contracts: “[Longwell] also takes issue with the claim he has ever voted for any no-bid contract, something he says his voting record will back up. ‘That’s the beauty of having a voting record,’ he says.” Mayoral candidate Williams decries ‘crony capitalism’ of critics, Wichita Business Journal, March 12, 2015

    We don’t have to look very hard to find an example that contradicts Longwell’s claim of never voting for a no-bid contract. Minutes from the August 9, 2011 meeting of the city council show that there was discussion about the no-bid contract for the garage benefiting the Ambassador Hotel. Then-council member Michael O’Donnell questioned if the city was getting the best deal for taxpayers, since the garage was to be built with public funds. O’Donnell was told that the no-bid contract was at “the developer’s request.” These developers include principals and executives of Key Construction and Dave Burk, all who have been generous and consistent funders of Longwell’s campaigns.

    But we don’t have to go back that far to find voting for no-bid contracts paid for with taxpayer funds. Longwell has voted several times in favor of the Exchange Place project, starting when it was a project of the Minnesota Guys. The latest such vote was on March 3, 2015, when Longwell voted in favor of a project that contained this benefit, according to city documents: “The City will also provide TIF funding in an amount not to exceed $12,500,000 for the acquisition of land and construction of the parking structure.”

    This garage, to be paid for through public funds, was not competitively bid. Despite the garage being pitched as a public good, most parking spaces are for the exclusive benefit of Exchange Place.

    Impetus for change

    The votes by Longwell and others for no-bid contracts sparked the city manager to ask for a change in policy. The Wichita Eagle reported in 2012:

    The days of awarding construction projects without taking competitive bids might be numbered at City Hall if City Manager Robert Layton has his way, especially with public projects such as parking garages that are part of private commercial development.

    Layton said last week that he intends to ask the City Council for a policy change against those no-bid contracts.

    Three years later, Longwell and others are still voting to spend taxpayer funds on no-bid contracts.

    —
    Minutes from August 8, 2011 meeting

    Council Member O’Donnell stated and we will not being going out to bid to find the best
    deal on that and are just awarding.

    Allen Bell Urban Development Director stated that is the developer’s request. Council Member O’Donnell asked if that is City precedent and that with a government project in the tune of $6 million dollars, does not have to be sent out for bid?

    Gary Rebenstorf Director of Law stated we have Charter Ordinance No. 203 that has been adopted by the City Council, which provides a procedure to exempt these types of projects from the bidding requirements from the City and has to meet certain requirements in order for it to be used by the Council. Stated the most significant is that there has to be a public hearing and has to be a 2/3 vote by the Council to approve this development agreement that sets up this type of project.

    Council Member O’Donnell stated he is glad the media is here to pick up on that because he thinks that $6 million dollars is a lot of money and to just award that to a contractor that has special ties to campaign finance reports of everyone on the City Council except himself, seems questionable.