Voice For Liberty

Tag: Economic development

  • Clawbacks illustrate difficulty of economic development

    Clawbacks illustrate difficulty of economic development

    Politicians and government officials like clawbacks in economic development incentive agreements. But do these provisions have any negative aspects?

    When business firms receive economic development incentives from government, the incentives may be given conditionally. That is, there may be benchmarks or conditions that the company has agreed to meet. These benchmarks are most commonly in the form of job counts or payroll value, and sometimes capital investment.

    But what happens if the company does not meet the benchmarks? Some agreements have clawback provisions that come into play at this time. Sometime the company may be required to repay all or part of the value of incentives that were received. Or, perhaps the company will not be eligible to receive additional incentives that were planned.

    Government officials like the idea of clawbacks. It lets them appear to be responsible in the awarding of incentives. Politicians and bureaucrats tell voters that government is looking out for them. If a company accepts incentives and doesn’t create every last job that was promised, by golly, the politicians say, we’re going to get back the taxpayers’ money for them.

    Clawbacks can be useful. If a company fraudulently seeks and receives incentives, it’s good there’s a way to retrieve the money. More commonly, however, the clawbacks are to protect taxpayers in case the business plans do not work out as hoped, and the promised jobs are not delivered.

    It’s understandable that taxpayers want to see clawbacks in place to protect their investment. We realize that politicians want to appear to be responsible with taxpayer funds. But there are several problems. When a company has not achieved its benchmarks, it is likely because the company is not performing well financially and economically. The company may not have the capacity to make the clawback payments. This recently happened in Wichita with a company that had received a forgivable loan. The company did not meet the required benchmarks, and was not able to repay the loan. The city is allowing them to make their clawback payments over time.

    City diverted funds to Walmart projectSometimes government may choose not to enforce clawbacks that have been agreed to. In the case of a Wichita company that had received a property tax abatement but suffered a downtown in its business and was not able to meet the benchmarks, the city’s economic development director told the city council “I don’t think it would be productive at this time to further penalize them — as the market has already penalized them — by putting them back on the tax rolls at this time.” In another Wichita example, the city had a personal guarantee from a real estate developer to cover shortfalls in a tax increment financing district, But instead of holding the developer to the terms of the contract, the city issued a bailout. I estimated the cost to city taxpayers at about $30,000 per year, or $516,000 over the course of the loan.

    These examples reveal a problem with clawbacks. Will struggling companies be able to pay the clawback? If a company is struggling financially and hasn’t met the benchmarks, aggressively pursuing clawback payments might be the factor that forces a company to shut down. That means fewer jobs. Would it be better to let the company retain its incentives and continue to operate, even though it hasn’t met the benchmarks? It is presumably providing some good, after all.

    There’s also the consideration that if clawback provisions are too strict, will companies be discouraged from applying for incentives? A recent loan considered by the Sedgwick County Commission contemplated one or more of four different forms of security: a mortgage, a security agreement, a collateral assignment of life insurance, or a corporate guaranty.

    friedman-spending-categories-2013-07The issue of clawbacks is a window into the difficulties of economic development incentives. Officials tell us they are making an investment in the community’s future. But it’s a transaction unlike any investment decision made in the private economy. For one, government officials are not spending and investing their own money (or shareholders’ money) for their own benefit (or shareholders’ benefit). Instead, they’re using someone else’s money, and spending it on still someone else. As Milton Friedman has noted, this is absolutely the worst way to spend money. (Click here for an explanation of the diagram.)

    When negotiating clawback provisions, similar considerations apply. The government’s economic development officials are not negotiating over the security of their own investment. To them, it’s someone else’s money. They did not earn or raise it, and ultimately they are not responsible for it. But for the party across the table — the business firm — the transaction concerns their own money, and the motivations and responsibilities are very different.

  • Year in Review: 2014

    Year in Review: 2014

    Here is a sampling of stories from Voice for Liberty in 2014.

    January

    A transparency agenda for Wichita
    Kansas has a weak open records law, and Wichita doesn’t want to follow the law, as weak as it is. But with a simple change of attitude towards open government and citizens’ right to know, Wichita could live up to the goals its leaders have set.

    New York Times on Kansas schools, again
    The New York Times — again — intervenes in Kansas schools. As it did last October, the newspaper makes serious errors in its facts and recommendations.

    Visit Wichita, and pay a tourism fee
    The Wichita City Council will consider adding a 2.75 percent tax to hotel bills, calling it a “City Tourism Fee.” Welcome to Wichita!

    Wichita’s growth in gross domestic product
    Compared to peer areas, Wichita’s record of growth in gross domestic product is similar to that of job creation: Wichita performs poorly.

    The death penalty in Kansas, a conservative view
    What should the attitude of conservatives be regarding the death penalty? Ben Jones of Conservatives Concerned about the Death Penalty spoke on the topic “Capital Punishment in Kansas from a conservative perspective: Is it a failed policy?”

    Kansas school test scores, the subgroups
    To understand Kansas school test scores, look at subgroups. Sometimes Kansas ranks very well among the states. In other instances, Kansas ranks much lower, even below the national average. It’s important for Kansans — be they citizens, schoolchildren, parents, education professionals, or (especially) politicians of any party — to understand these scores.

    The state of Wichita, 2014
    Wichita Mayor Carl Brewer delivered the annual State of the City address. He said a few things that deserve discussion.

    February

    In Wichita, why do some pay taxes, and others don’t?
    A request by a luxury development in downtown Wichita raises issues, for example, why do we have to pay taxes?

    Wichita considers policy to rein in council’s bad behavior
    he Wichita City Council considers a policy designed to squelch the council’s ability to issue no-bid contracts for city projects. This policy is necessary to counter the past bad behavior of Wichita Mayor Carl Brewer and several council members, as well as their inability to police themselves regarding matters of ethical behavior by government officials.

    Our Kansas grassroots teachers union
    Letters to the editor in your hometown newspaper may have the air of being written by a concerned parent of Kansas schoolchildren, but they might not be what they seem.

    Wichita’s legislative agenda favors government, not citizens
    This week the Wichita City Council will consider its legislative agenda. This document contains many items that are contrary to economic freedom, capitalism, limited government, and individual liberty. Yet, Wichitans pay taxes to have someone in Topeka promote this agenda.

    Wichita planning documents hold sobering numbers
    The documents hold information that ought to make Wichitans think, and think hard. The amounts of money involved are large, and portions represent deferred maintenance. That is, the city has not been taking care of the assets that taxpayers have paid for.

    In Wichita, citizens want more transparency in city government
    In a videographed meeting that is part of a comprehensive planning process, Wichitans openly question the process, repeatedly asking for an end to cronyism and secrecy at city hall.

    March

    Special interests struggle to keep special tax treatment
    When a legislature is willing to grant special tax treatment, it sets up a battle to keep — or obtain — that status. Once a special class acquires preferential treatment, others will seek it too.

    In Wichita, West Bank apartments seem to violate ordinance
    Last year the Wichita City Council selected a development team to build apartments on the West Bank of the Arkansas River, between Douglas Avenue and Second Street. But city leaders may have overlooked a Wichita City Charter Ordinance that sets aside this land to be “open space, committed to use for the purpose of public recreation and enjoyment.”

    In Wichita, pushing back at union protests
    A Wichita automobile dealer is pushing back at a labor union that’s accusing the dealer of unfair labor practices.

    Wichita City Council to consider entrenching power of special interest groups
    The Wichita City Council will consider a resolution in support of the status quo for city elections. Which is to say, the council will likely express its support for special interest groups whose goals are in conflict with the wellbeing of the public.

    State employment visualizations
    There’s been dueling claims and controversy over employment figures in Kansas and our state’s performance relative to others. I present the actual data in interactive visualizations that you can use to make up your own mind.

    State and local government employment levels vary
    The states vary widely in levels of state government and local government employees, calculated on a per-person basis. Only ten states have total government employee payroll costs greater than Kansas, on a per-person basis.

    April

    Wichita not good for small business
    When it comes to having good conditions to support small businesses, well, Wichita isn’t exactly at the top of the list, according to a new ranking from The Business Journals.

    Cronyism is welfare for rich and powerful, writes Charles G. Koch
    “The central belief and fatal conceit of the current administration is that you are incapable of running your own life, but those in power are capable of running it for you. This is the essence of big government and collectivism,” writes Charles G. Koch in the Wall Street Journal.

    Rich States, Poor States for 2014 released
    In the 2014 edition of Rich States, Poor States, Utah continues its streak at the top of Economic Outlook Ranking, meaning that the state is poised for growth and prosperity. Kansas continues with middle-of-the-pack performance rankings, and fell in the forward-looking forecast.

    Wichita develops plans to make up for past planning mistakes
    On several issues, including street maintenance, water supply, and economic development, Wichita government and civic leaders have let our city fall behind. Now they ask for your support for future plans to correct these mistakes in past plans.

    May

    Poll: Wichitans don’t want sales tax increase
    According to a newly released poll from Kansas Policy Institute, Wichitans may want more jobs and a secure water source but they certainly don’t support a sales tax increase as the means to get either. Reporting on this poll is available in these articles: In Wichita, opinion of city spending consistent across party and ideology, Few Wichitans support taxation for economic development subsidies, Wichitans willing to fund basics, and To fund government, Wichitans prefer alternatives to raising taxes.

    Contrary to officials, Wichita has many incentive programs
    Wichita government leaders complain that Wichita can’t compete in economic development with other cities and states because the budget for incentives is too small. But when making this argument, these officials don’t include all incentives that are available.

    In Wichita, the streetside seating is illuminated very well
    Wichita city leaders tell us that the budget and spending have been cut to the bone. Except for the waste, that is.

    Wichita seeks to form entertainment district
    A proposed entertainment district in Old Town Wichita benefits a concentrated area but spreads costs across everyone while creating potential for abuse.

    In Wichita, capitalism doesn’t work, until it works
    Attitudes of Wichita government leaders towards capitalism reveal a lack of understanding. Is only a government-owned hotel able to make capital improvements?

    Wichita, again, fails at government transparency
    At a time when Wichita city hall needs to cultivate the trust of citizens, another incident illustrates the entrenched attitude of the city towards its citizens. Despite the proclamations of the mayor and manager, the city needs a change of attitude towards government transparency and citizens’ right to know.

    Wichita per capita income not moving in a good direction
    Despite its problematic nature, per capita income in Wichita is used as a benchmark for the economy. It’s not moving in the right direction. As Wichita plans its future, leaders need to recognize and understand its recent history.

    Uber, not for Wichita
    A novel transportation service worked well for me on a recent trip to Washington, but Wichita doesn’t seem ready to embrace such innovation.

    For Kansas’ Roberts, an election year conversion?
    A group of like-minded Republican senators has apparently lost a member. Is the conservative voting streak by Pat Roberts an election year conversion, or just a passing fad?

    June

    Wichita property taxes compared
    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.

    Government employee costs in the states
    The states vary widely in levels of state government and local government employees and payroll costs, calculated on a per-person basis. Kansas ranks high in these costs, nationally and among nearby states.

    With new tax exemptions, what is the message Wichita sends to existing landlords?
    As the City of Wichita prepares to grant special tax status to another new industrial building, existing landlords must be wondering why they struggle to stay in business when city hall sets up subsidized competitors with new buildings and a large cost advantage.

    Wichita city council schools citizens on civic involvement
    Proceedings of a recent Wichita City Council meeting are instructive of the factors citizens should consider if they want to interact with the council and city government at a public hearing.

    Forget the vampires. Let’s tackle the real monsters.
    Public service announcements on Facebook and Wichita City Channel 7 urge Wichitans to take steps to stop “vampire” power waste. But before hectoring people to introduce inconvenience to their lives in order to save small amounts of electricity, the city should tackle the real monsters of its own creation.

    July

    Wichita property taxes rise again
    The City of Wichita is fond of saying that it hasn’t raised its mill levy in many years. But the mill levy has risen in recent years.

    For Wichita leaders, novel alternatives on water not welcome
    A forum on water issues featured a presentation by Wichita city officials and was attended by other city officials, but the city missed a learning opportunity.

    For Wichita’s new water supply, debt is suddenly bad
    Wichita city leaders are telling us we need to spend a lot of money for a new water source. For some reason, debt has now become a dirty word.

    Pat Roberts, senator for corporate welfare
    Two years ago United States Senator Pat Roberts voted in committee with liberals like John Kerry, Chuck Schumer, and Debbie Stabenow to pass a bill loaded with wasteful corporate welfare.

    August

    Charles Koch: How to really turn the economy around
    Writing in USA Today, Charles Koch offers insight into why our economy is sluggish, and how to make a positive change.

    Wichita airport statistics updated
    As the Wichita City Council prepares to authorize funding for Southwest Airlines, it’s worth taking a look at updated statistics regarding the airport.

    Wichita sales tax hike would hit low income families hardest
    Analysis of household expenditure data shows that a proposed sales tax in Wichita affects low income families in greatest proportion, confirming the regressive nature of sales taxes.

    Welcome back, Gidget
    Gidget stepped away for a few months, but happily she is back writing about Kansas politics at Kansas GOP Insider (wannabe).

    September

    Wichita planning results in delay, waste
    Wichita plans an ambitious road project that turns out to be too expensive, resulting in continued delays for Wichita drivers and purchases of land that may not be needed.

    ‘Transforming Wichita’ a reminder of the value of government promises
    When Wichita voters weigh the plausibility of the city’s plans for spending proposed new sales tax revenue, they should remember this is not the first time the city has promised results and accountability.

    Fact-checking Yes Wichita: NetApp incentives
    In making the case that economic development incentives are necessary and successful in creating jobs, a Wichita campaign overlooks the really big picture.

    Arrival of Uber a pivotal moment for Wichita
    Now that Uber has started service in Wichita, the city faces a decision. Will Wichita move into the future by embracing Uber, or remain stuck in the past?

    Fact-checking Yes Wichita: Boeing incentives
    The claim that the “city never gave Boeing incentives” will come as news to the Wichita city officials who dished out over $600 million in subsidies and incentives to the company.

    Beechcraft incentives a teachable moment for Wichita
    The case of Beechcraft and economic development incentives holds several lessons as Wichita considers a new tax with a portion devoted to incentives.

    For Kansas budget, balance is attainable
    A policy brief from a Kansas think tank illustrates that balancing the Kansas budget while maintaining services and lower tax rates is not only possible, but realistic.

    To Wichita, a promise to wisely invest if sales tax passes
    Claims of a reformed economic development process if Wichita voters approve a sales tax must be evaluated in light of past practice and the sameness of the people in charge. If these leaders are truly interested in reforming Wichita’s economic development machinery and processes, they could have started years ago using the generous incentives we already have.

    For Wichita Chamber’s expert, no negatives to economic development incentives
    An expert in economic development sponsored by the Wichita Metro Chamber of Commerce tells Wichita there are no studies showing that incentives don’t work.

    Water, economic development discussed in Wichita
    Dr. Art Hall, Executive Director of the Center for Applied Economics at the University of Kansas School of Business, presented his “Thoughts on Water and Economic Development” at the Wichita Pachyderm Club Friday, September 19, 2014

    Stuck in the box in Wichita, part one
    To pay for a new water supply, Wichita gives voters two choices and portrays one as bad. But the purportedly bad choice is the same choice the city made over the last decade to pay for the last big water project. We need out-of-the-box thinking here.

    October

    Kansas economy has been underperforming
    Those who call for a return to the economic policies of past Kansas gubernatorial administrations may not be aware of the performance of the Kansas economy during those times.

    Union Station TIF provides lessons for Wichita voters
    A proposed downtown Wichita development deserves more scrutiny than it has received, as it provides a window into the city’s economic development practice that voters should peek through as they consider voting for the Wichita sales tax.

    A simple step towards government transparency in Wichita
    Kansas law requires publication of certain notices in newspapers, but cities like Wichita could also make them available in other ways that are easier to use.

    While Wichita asks for new taxes, it continues to spend and borrow
    The City of Wichita says it doesn’t have enough revenue for things like street maintenance and transit, but continues to borrow for spending on new projects.

    Wichita debt levels seen to rise
    As part of the campaign for a proposed Wichita sales tax, the city says that debt is bad. But actions the city has taken have caused debt levels to rise, and projections are for further increases.

    For Wichita, another economic development plan
    The Wichita City Council will consider a proposal from a consultant to “facilitate a community conversation for the creation of a new economic development diversification plan for the greater Wichita region.” Haven’t we been down this road before?

    In Wichita, pro-sales tax campaign group uses sales tax-exempt building as headquarters
    While “Yes Wichita” campaigns for higher sales taxes, it operates from a building that received a special exemption from paying sales tax.

    For Wichita Chamber of Commerce chair, it’s sales tax for you, but not for me
    A Wichita company CEO applied for a sales tax exemption. Now as chair of the Wichita Metro Chamber of Commerce, he wants you to pay more sales tax, even on the food you buy in grocery stores.

    Should Wichita expand a water system that is still in commissioning stage?
    Should we be concerned about rushing a decision to expand a water production system that has not yet proven itself?

    Wichita sends educational mailer to non-Wichitans, using Wichita taxes
    Why is the City of Wichita spending taxpayer money mailing to voters who don’t live in the city and can’t vote on the issue?

    Wichita to consider tax exemptions
    A Wichita company asks for property and sales tax exemptions on the same day Wichita voters decide whether to increase the sales tax, including the tax on groceries.

    November

    In election coverage, The Wichita Eagle has fallen short
    Citizens want to trust their hometown newspaper as a reliable source of information. The Wichita Eagle has not only fallen short of this goal, it seems to have abandoned it.

    Kansas school spending visualization updated
    There’s new data available from Kansas State Department of Education on school spending. I’ve gathered the data, adjusted it for the consumer price index, and now present it in this interactive visualization.

    In Kansas, school employment rises again
    For the fourth consecutive year, the number of teachers in Kansas public schools has risen faster than enrollment, leading to declining pupil-teacher ratios.

    Richard Ranzau, slayer of cronyism
    In Sedgwick County, an unlikely hero emerges in the battle for capitalism over cronyism.

    Kansans still uninformed on school spending
    As in the past, a survey finds Kansans are uninformed or misinformed on the level of school spending, and also on the direction of its change.

    In Kansas, voters want government to concentrate on efficiency and core services before asking for taxes
    A survey of Kansas voters finds that Kansas believe government is not operating efficiently. They also believe government should pursue efficiency savings, focus on core functions, and spend unnecessary cash reserves before cutting services or raising taxes.

    Kansas cities should not unilaterally grant tax breaks
    When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.

    City of Wichita State Legislative Agenda: Cultural Arts Districts
    Wichita government spending on economic development leads to imagined problems that require government intervention and more taxpayer contribution to resolve. The cycle of organic rebirth of cities is then replaced with bureaucratic management.

    December

    City of Wichita State Legislative Agenda: Airfares
    The City of Wichita’s legislative agenda regarding the Affordable Airfares subsidy program seems to be based on data not supported by facts.

    Options for funding Wichita’s future water supply
    Now that the proposed Wichita sales tax has failed, how should Wichita pay for a future water supply?

    KU records request seen as political attack
    A request for correspondence belonging to a Kansas University faculty member is a blatant attempt to squelch academic freedom and free speech.

    Why is this man smiling?
    In Wichita, the chair of the Wichita Metro Chamber of Commerce crafts a sweetheart deal for his company to the detriment of Wichita taxpayers.

    Wichita Metro Chamber of Commerce: What is the attitude towards taxes?
    Does the Wichita Metro Chamber of Commerce support free markets, capitalism, and economic freedom, or something else?

    Will the next Wichita mayor advocate enforcing our ethics laws?
    Wichita has laws that seem clear. But the city attorney said they don’t mean what they seem to say. Will our next mayor stand up for ethics?

    Campaign contribution stacking in Wichita
    Those seeking favors from Wichita City Hall use campaign contribution stacking to bypass contribution limits. This has paid off handsomely for them, and has harmed everyone else.

    Economic development in Wichita: Looking beyond the immediate
    Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.

    Economic development in Sedgwick County
    The issue of awarding an economic development incentive reveals much as to why the Wichita-area economy has not grown.

  • Economic development in Sedgwick County

    Economic development in Sedgwick County

    The issue of awarding an economic development incentive reveals much as to why the Wichita-area economy has not grown.

    At the December 17, 2014 meeting of the Sedgwick County Commission an economic development incentive was considered. The proceedings are of interest as a window into how economic development works.

    The proposal was that Sedgwick County will make a loan to Figeac Aero in the amount of $250,000 as an economic development incentive in conjunction with its acquisition of a local company and a contemplated expansion. It’s likely the county will also participate in forgiving property taxes, although that decision will be made by the City of Wichita on the county’s behalf.

    Sedgwick County Chief Financial Officer Chris Chronis presented the item to the commissioners, telling them “the company has been very successful in Europe.”

    Chronis also presented the benefit-cost analysis from calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. He said the proposed county property tax abatement has a value of just over $473,000, although the award of the exemption is controlled by the city. The present value of county’s cost over ten years, considering both the property tax abatement and the $250,000 loan, is $687,793. The present value of the benefit is just over $1,000,000, so the county’s net benefit is $317,834. Therefore, the net public financial benefit ratio to the county of 1.46 to one.

    The final review of the contract is still to be performed. Chronis asked the commission for authorizing him to execute an agreement “in substantially the same form as the one we have given you, subject to final review by the county counselor.”

    Commissioner Richard Ranzau asked if the commission had in its possession the final form of the document. The answer was no. Chronis said that the document is substantially in final form, subject to some tweaking. Later questioning by Ranzau revealed that there are many parts of the contract that are not present. The agreement the commissioners had referenced the missing parts, such as a security agreement.

    Ranzau also brought up the fact that the commission had changed its policy so that forgivable loans are no longer used. Chronis said this is not a forgivable loan. Ranzau asked “what is it?” Chronis replied it is a loan. Ranzau asked if the company had to repay the loan. Chronis said if they don’t fulfill their end of the agreement, then yes, they will have to pay it back. If the company does not repay the loan, this is because the company has met the employment targets, and the county gets its repayment in the form of economic benefit to the community and to Sedgwick County government, he added.

    In the end, Chronis admitted that this agreement has the same elements of past forgivable loans, but is different because now there is better protection in case the company does not satisfy commitments.

    In support of the incentive, Wichita Metro Chamber of Commerce president Gary Plummer said he is here in a “positive environment.” He told the commissioners that staff worked very hard. He mentioned how much tax the company has paid to Sedgwick County. He said this is a great moment in Sedgwick County economic development history.

    Greater Wichita Economic Development Coalition Chair Gary Schmitt appeared to mention the return to the county in the form of tax revenue.

    Greater Wichita Economic Development Coalition president Tim Chase promoted the security that the county is receiving in case the loan needs to be repaid. There is a lien on tangible assets, for example. But the company still must agree to specific provisions for the security of the loan. Chase said this is “not, in any way, shape, or form a done deal.”

    French air parts maker Figeac has plans to grow in WichitaCommissioner Karl Peterjohn mentioned a newspaper article from May that quoted Figeac Aero’s vice president of business development as saying “the heart of Figeac North America will be Wichita.” Chase explained there had been personnel changes since then. Also, Chase said that Figeac hired a consultant that advised the company to inquire about “standard” incentives. When GWEDC did not supply an answer the company considered satisfactory, Chase said he was told “that starts the clock over. We’re going to begin looking at other locations.” The article Peterjohn referred to is French air parts maker Figeac has plans to grow in Wichita May 9, 2014 Wichita Eagle.

    There was a question about state participation in incentives. Chronis did not know what, if anything, the state would be offering.

    In further discussion, Ranzau said that Figeac has already bought a company here and is hiring. They have plans to be here, he said, meaning that the “but for” argument does not apply. By his calculation, if the average salary was reduced by 12 cents per hour, that would amount to the value of the incentive Sedgwick County is offering, $250,000 over five years. He expressed his concern that the contract the commission is being asked to approve is incomplete, and that the City of Wichita has yet to vote on it. Ranzau made a motion that the item be tabled until the agreement is complete. That motion failed, with only Peterjohn voting in support.

    In other discussion, Ranzau repeated his concern over approving an incomplete document, telling commissioners that this would not be done in the private sector, adding that this is what it means that you can’t “run government like a business.”

    In his remarks, Peterjohn quoted a government official famously who said “you have to pass the document to find out what’s in it.” Peterjohn expressed concern that the analysis provided by CEDBR is based on numbers provided by the company. This qualification is standard, he said, and always a concern.

    The measure passed by a vote of three to two, with Peterjohn and Ranzau opposed.

    Excerpt from the meeting

    Discussion

    Capacity
    The labor force in the Wichita metropolitan area is about 298,000 people. The 50 jobs to be created in the first year by Figeac represents 0.017 percent of the labor force, or one job for every 5,960 people in the labor force.

    Another way to place the 50 Figeac jobs in context is to look at them in comparison to jobs created, not the labor force. In Kansas in recent years, job gains in the private sector are about six percent of employment. (Figures are not available for Wichita alone.) Employment in the Wichita metropolitan area is about 284,000. Six percent of that is 17,040. So the 50 Figeac jobs are now 0.29 percent of all jobs created in a year, or one out of 341 jobs.

    It’s good that 50 people will have jobs. Recall, however, that the president of the chamber of commerce told commissioners that staff worked very hard to acquire these jobs. He called this “a great moment.”

    This illustrates a problem with targeted economic development incentives. Making deals takes a lot of time and effort. Three top officials attended the commission meeting, and they will likely attend the Wichita city council meeting where the incentive is presented. Much time of county staff was required.

    Our economic development agencies and local governments do not have the capacity to strike enough deals to account for significant job growth. A better strategy is to create an environment where business firms can form and expand organically, without requiring or depending on government assistance.

    Is the incentive necessary?
    The quotation from a newspaper article seven months old that described Figeac’s commitment to grow in Wichita raises suspicions of what is commonly alleged: That companies make location and expansion plans for business reasons. Then, some may seek incentives, even though the decision has already been made. Local economic development officials are eager to accommodate the request for incentives, as they need to justify their existence and notch a few sure wins. Most politicians, of course, are more than willing to take credit for creating jobs.

    Are there other incentives?
    The Sedgwick County commissioners had to make a judgment on the wisdom of incentives without knowledge of all the incentives the company may receive. The City of Wichita had not acted on a similar loan request and property tax abatements. The State of Kansas would not disclose what incentives it had offered to Figeac.

    We don’t know, but a program that Figeac may qualify for is PEAK, or Promoting Employment Across Kansas. This program allows companies to retain 95 percent of the payroll withholding tax of employees. This can be a substantial sum. Tables available at the Kansas Department of Revenue indicate that for a single person with no exemptions earning $40,000 annually, the withholding would be $27 per week, or $1,404 annually. For a married person with two children, withholding would be $676 annually. Under PEAK, the company retains 95 percent of these values.

    (Since unmarried workers have higher withholding rates than married workers, and those with fewer exemptions have more withheld than those with many, does this provide incentives for companies in the PEAK program to adjust their hiring preferences?)

    Who benefits?
    As is common, incentives are justified by a benefit-cost analysis that purports to show that more comes in to government coffers than goes out due to the incentive. But the “benefits” that go into this calculation are quite different from the profits that business firms attempt to earn.

    Here’s a question: In his presentation, the county’s chief financial officer said the benefit to the county over ten years is $317,834. What will the county do with that money? Will it reduce taxes by that amount? That is what would benefit the taxpayers that paid to provide the incentive. But that doesn’t happen. Instead, the benefit is spent.

    The entire process assumes that these benefit-cost ratios are valid. This is far from certain, as follows:

    1. The benefits in the calculation are not really benefits. Instead, they’re in the form of projected higher tax revenues collected by governments. This is very different from the profits that private sector companies earn from their customers in voluntary market transactions.

    2. Government claims that in order to get these “benefits,” incentives are necessary. But often the new economic activity (relocation, expansion, etc.) would have happened without the incentives.

    3. Even if government collects more tax by offering incentives, it should not be the goal of government to grow just for the sake of growing.

    4. Why is it that many companies are able to grow without incentives, but only a few companies require incentives? What is special about these companies? Why do some companies receive incentives year after year?

    Diversification
    wichita-detroit-job-industry-concentrationWe’ve been told for many years that Wichita needs to diversify its economy. The Wichita economy is highly dependent on one industry — aircraft manufacturing — and Figeac is in the aircraft industry. When citizens have told the Wichita City Council that offering incentives to aircraft companies serves to make it more difficult to diversify, the president and chair of the Wichita Metro Chamber of Commerce complained in an op-ed: “Would the anti-business voices’ diversification strategy be to send aviation jobs to other cities and states, thereby crippling our economy? Where’s the logic in that?” This says a great deal about the problems with economic development in Wichita, namely that our leaders see no difference between business and capitalism, and that the need for diversification is merely a slogan that is not followed to in any meaningful way.

    The nature of the game
    The explanation by Chase spotlights some of the difficulties in economic development. The negotiations are not complete, but government approval is needed. More broadly, economic development officials are not negotiating the use of their own capital or capital that has been entrusted to them. They’re spending someone else’s money, for which there is little incentive to bargain wisely.

    Commissioners were told that Figeac is a successful company. Why, then, does it need incentives?

  • Kansas is not an entrepreneurial state

    Kansas is not an entrepreneurial state

    The performance of Kansas in entrepreneurial activity is not high, compared to other states.

    The Ewing Marion Kauffman Foundation prepares the Kauffman Index of Entrepreneurial Activity. According to the Foundation, “The Kauffman Index of Entrepreneurial Activity is a leading indicator of new business creation in the United States. Capturing new business owners in their first month of significant business activity, this measure provides the earliest documentation of new business development across the country.”

    Kauffman Index of Entrepreneurial Activity, showing Kansas highlighted against neighboring states. Click for larger version.
    Kauffman Index of Entrepreneurial Activity, showing Kansas highlighted against neighboring states. Click for larger version.
    As shown by the data, Kansas ranks low in entrepreneurial activity. This is true when Kansas is compared to the nation, and also when compared to a group of nearby states.

    I’ve prepared two visualizations that present this data. One holds data for all states. Click here to open it in a new window.

    Instructions for using the visualization of Kauffman data. Click for larger version.
    Instructions for using the visualization of Kauffman data. Click for larger version.
    A second visualization presents the data for Kansas and some nearby states. Click here to open it in a new window.

    Visualization created using Tableau Public.

  • In Wichita, running government like a business

    In Wichita, running government like a business

    In Wichita and Sedgwick County, can we run government like a business? Should we even try? Do our leaders think there is a difference?

    Sedgwick County Working for YouAs Wichita considers the future of its economy, a larger role for government is contemplated. The views of the people leading the effort to expand government management of the local economy are important to explore. Consider Gary Schmitt, who is an executive at Intrust Bank. Following is an excerpt from the minutes of the May 22, 2013 meeting of the Board of Sedgwick County Commissioners. The topic was a forgivable loan to Starwood Hotels and Resorts Worldwide Inc. These loans are equivalent to a cash grant, as long as conditions are met. At the time of this meeting Schmitt was vice chair of Greater Wichita Economic Development Coalition.

    This discourse shows the value of elected officials like Karl Peterjohn, and also Richard Ranzau, as he too contributed to the understanding of this matter. When Michael O’Donnell served on the Wichita City Council, he also contributed in this way.

    Here’s what Schmitt told the commissioners, based on the meeting minutes: “I know at the bank where I work, if we had a $1 invested and get a return of over $2.40, we would consider that a very good investment in the future.”

    Shortly after that he said “Very similar what we do at the bank when we negotiate loan amounts or rates. So it is very much a business decision to try to figure out how to bring 900 jobs to our community without overspending or over committing.”

    Wichita leaders need to understand businessThe problem is that when the bank Schmitt works for makes a loan, there are several forces in play that are not present in government. Perhaps the most obvious is that a bank loans money and expects to be repaid. In the case of the forgivable loan the commission was considering, the goal is that the loan is not repaid. These loans, remember, are a grant of cash, subject to a few conditions. If the recipient company is required to repay the loan, it is because it did not meet conditions such as job count or capital investment. In these circumstances, the company is probably not performing well economically, and therefore may not be able to repay the loan.

    Another example of how a bank is different from government is that at a bank, both parties enter the loan transaction voluntarily. The bank’s shareholders and depositors are voluntary participants. Perhaps not explicitly for each loan, but if I do not like the policies or loans my bank has made, I can easily move my shares and deposits to another bank. But for these government loans, I personally have appeared several times before governmental bodies asking that the loan not be made. I did not consent. And changing government is much more difficult than changing banks.

    Another difference between Schmitt’s bank and government is that bank’s goal is to earn a profit. Government doesn’t calculate profit. It is not able to, and when it tries, it efforts fall short. For one thing, government conscripts its capital. It faces no market test as to whether it is making good investments. It doesn’t have to compete with other institutions for capital, as a private bank does. Ludwig von Mises taught us that government can’t calculate profit and loss, the essential measure that lets us know if a business is making efficient use of resources. Thomas DiLorenzo elaborated, writing: “There is no such thing as real accounting in government, of course, since there are no profit-and-loss statements, only budgets. Consequently, there is no way of ever knowing, in an accounting sense, whether government is adding value or destroying it.”

    An example of this lack of accounting for capital comes from the same governmental body making this forgivable loan. In Intrust Bank Arena depreciation expense is important, even today, I explain that proper attention given to the depreciation expense of Intrust Bank Arena in downtown Wichita would recognize and account for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena. But the county doesn’t do that, at least not in its most visible annual reporting of the arena’s financial results.

    Governments locally do have a measure of what they consider to be “profit.” It’s the benefit-cost ratio calculated by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. This is the source of the “$1 invested and get a return of over $2.40” that Schmitt referenced. But the “benefits” that go into this calculation are quite different from the profits that business firms attempt to earn. Most importantly, the benefits that government claims are not really benefits. Instead, they’re in the form of additional tax revenue paid to government. This is very different from the profits companies earn in voluntary market transactions.

    Government usually claims that in order to get these “benefits,” the incentives must be paid. But often the new economic activity (expansion, etc.) would have happened anyway without the incentives. There is much evidence that economic development incentives rank low on the list of factors businesses consider when making investments. A related observation is that if the relatively small investment government makes in incentives is solely or even partially responsible for such wonderful outcomes in terms of jobs, why doesn’t government do this more often? If the Sedgwick County Board of Commissioners has such power to create economic growth, why is anyone unemployed?

    Those, like Gary Schmitt, who are preparing to lead Wichita’s efforts in stimulating its economy believe that government should take on a larger role. We need to make sure that these leaders understand the fundamental differences between government and business, and how government can — and can’t — help business grow.

    Following is an excerpt from the meeting minutes:

    Chairman Skelton said, “Okay, thank you. Anybody else who wishes to speak today? Please state your name and address for the record.”

    Mr. Gary Schmitt, (address redacted to respect privacy) greeted the Commissioners and said, “I work at Intrust Bank and I am the Vice-Chair of GWEDC. Thank you for the opportunity to speak to you today. I want to thank all of you also for just saving the county $700,000 by refinancing the bond issue. I think that was a great move. I think that’s exactly what we need to do to help support our county.

    Mr. Schmitt said, “Also want to say I think Starwood coming to Wichita with 900 jobs in the very near future is a big win for Wichita, for Sedgwick County and our community. And I just want to encourage you to support the $200,000 investment. I know at the bank where I work, if we had a $1 invested and get a return of over $2.40, we would consider that a very good investment in the future. And I think having 900 people employed in basically starter jobs, or jobs to fill the gap in their financial needs for their families is very important also. So thank you very much for the opportunity to speak. I encourage you to support positive vote on this.”

    Chairman Skelton said, “Commissioner Peterjohn.”

    Commissioner Peterjohn said, “Mr. Schmidt, I thank you for coming down and speaking today and your efforts on behalf of GWEDC. One of the things I struggle with these issues when they come before the Commission is what is the, how do we come up with an optimum number? I mean, why is $200,000 the right figure for the county’s contribution. And also, I mean, other than the fact that the city approved a similar amount yesterday, and when this comes to us and the calculations are coming from a, I think, a basic input and output model that fluctuates, depending on what assumptions you feed into it, I struggle with, you know, how do we determine, when you get a proposal at the bank, somebody comes in and says, hey, I would like to borrow x number of dollars for this project, we expect a net present value or rate of return of so much, and based on a loan cost of a certain interest rate, we get those very specific calculations. Can you provide any insight, in terms of why $200,000 is the optimal number for this forgivable loan over 5 years, and help me out on that point?”

    Mr. Schmitt said, “I’ll try. GWEDC basically is a cooperation between businesses, business community leaders and also the city and the county government. We sort of have all the players at the table. And it’s very similar to what we do at the bank, when somebody comes in and asks for a proposal, we have to understand what our capacity is, what our expectations are, and we analyze all that. By using WSU calculate return on investment, that’s similar to what we do at the bank to calculate our return on investment. Now, I’m sure Starwood would be very excited if we said we will give you $2 million instead of $200,000, but we negotiated a number that we thought was acceptable to Starwood and also us.

    “Very similar what we do at the bank when we negotiate loan amounts or rates. So it is very much a business decision to try to figure out how to bring 900 jobs to our community without overspending or over committing. So, Mr. Peterjohn, I think we’ve tried to do everything we can to bring the best deal to the community we possibly can.”

    Commissioner Peterjohn said, “Well then help me out, in terms of the point that was raised over, we’ve got a forgivable loan for five years, but the calculation, in terms of return and so on are over 10 years. So basically our clawback provisions don’t exist from year 6 through 10.”

    Mr. Schmitt said, “Well…”

    Commissioner Peterjohn said, “And then you’ve got that disparity.”

    Mr. Schmitt said, “You know, the other interesting thing is they have a 15 year lease out there on the building. So our expectation is they will be a minimum of 15 years. So do we do it on 5, 10, or 15 years. So, I understand your question. I don’t know the answer to that.”

    Commissioner Peterjohn said, “Okay. Thank you for coming down and providing…” Mr. Schmitt said, “You are welcome. Thank you.”

  • Economic development in Wichita: Looking beyond the immediate

    Economic development in Wichita: Looking beyond the immediate

    Decisions on economic development initiatives in Wichita are made based on “stage one” thinking, failing to look beyond what is immediate and obvious.

    Critics of the economic development policies in use by the City of Wichita are often portrayed as not being able to see and appreciate the good things these policies are producing, even though they are unfolding right before our very eyes. The difference is that some look beyond the immediate — what is seen — and ask “And then what will happen?” — looking for the unseen.

    Thomas Sowell explains the problem in a passage from the first chapter of Applied economics: thinking beyond stage one:

    When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced, because politics has its own principles and imperatives. It is not just that politicians’ top priority is getting elected and re-elected, or that their time horizon seldom extends beyond the next election. The general public as well behaves differently when making political decisions rather than economic decisions. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another — or perhaps even one car rather than another.

    The voter’s political decisions involve having a minute influence on policies which affect many other people, while economic decision-making is about having a major effect on one’s own personal well-being. It should not be surprising that the quantity and quality of thinking going into these very different kinds of decisions differ correspondingly. One of the ways in which these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters do not think beyond stage one, many elected officials have no incentive to weigh what the consequences will be in later stages — and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival politicians can drive a wedge between them and their constituents by catering to public misconceptions.

    The economic decisions made by governing bodies like the Wichita City Council have a large impact on the lives of Wichitans. But as Sowell explains, these decisions are made by politicians for political reasons.

    Sowell goes on to explain the danger of stopping the thinking process at stage one:

    When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.

    “And then what will happen?” he asked.

    The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.

    “And what will happen after that?” Professor Smithies asked.

    As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable than those at the first stage, and I began to waver somewhat.

    “And then what will happen?” Smithies persisted.

    By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous — and, in fact, much worse than the initial situation that it was designed to improve.

    Simple as this little exercise may sound, it goes further than most economic discussions about policies on a wide range of issues. Most thinking stops at stage one.

    We see stage one thinking all the time when looking at government. In Wichita, for example, a favorite question of city council members seeking to justify their support for government intervention such as a tax increment financing (TIF) district or some other form of subsidy is “How much more tax does the building pay now?” Or perhaps “How many jobs will (or did) the project create?”

    These questions, and the answers to them, are examples of stage one thinking. The answers are easily obtained and cited as evidence of the success of the government program.

    But driving by a store or hotel in a TIF district and noticing a building or people working at jobs does not tell the entire story. Using the existence of a building, or the payment of taxes, or jobs created, is stage one thinking, and nothing more than that.

    Fortunately, there are people who have thought beyond stage one, and some concerning local economic development and TIF districts. And what they’ve found should spur politicians and bureaucrats to find ways to move beyond stage one in their thinking.

    An example are economists Richard F. Dye and David F. Merriman, who have studied tax increment financing extensively. Their article Tax Increment Financing: A Tool for Local Economic Development states in its conclusion:

    TIF districts grow much faster than other areas in their host municipalities. TIF boosters or naive analysts might point to this as evidence of the success of tax increment financing, but they would be wrong. Observing high growth in an area targeted for development is unremarkable.

    So TIF districts are good for the favored development that receives the subsidy — not a surprising finding. What about the rest of the city? Continuing from the same study:

    If the use of tax increment financing stimulates economic development, there should be a positive relationship between TIF adoption and overall growth in municipalities. This did not occur. If, on the other hand, TIF merely moves capital around within a municipality, there should be no relationship between TIF adoption and growth. What we find, however, is a negative relationship. Municipalities that use TIF do worse.

    We find evidence that the non-TIF areas of municipalities that use TIF grow no more rapidly, and perhaps more slowly, than similar municipalities that do not use TIF.

    In a different paper (The Effects of Tax Increment Financing on Economic Development), the same economists wrote “We find clear and consistent evidence that municipalities that adopt TIF grow more slowly after adoption than those that do not. … These findings suggest that TIF trades off higher growth in the TIF district for lower growth elsewhere. This hypothesis is bolstered by other empirical findings.”

    Here we have an example of thinking beyond stage one. The results are opposite of what one-stage thinking produces.

    Some city council members are concerned about creating jobs, and are swayed by the promises of developers that their establishments will employ a certain number of workers. Again, this thinking stops at stage one. But others have looked farther, as has Paul F. Byrne of Washburn University. The title of his recent report is Does Tax Increment Financing Deliver on Its Promise of Jobs? The Impact of Tax Increment Financing on Municipal Employment Growth, and in its abstract we find this conclusion regarding the impact of TIF on jobs:

    Increasingly, municipal leaders justify their use of tax increment financing (TIF) by touting its role in improving municipal employment. However, empirical studies on TIF have primarily examined TIF’s impact on property values, ignoring the claim that serves as the primary justification for its use. This article addresses the claim by examining the impact of TIF adoption on municipal employment growth in Illinois, looking for both general impact and impact specific to the type of development supported. Results find no general impact of TIF use on employment. However, findings suggest that TIF districts supporting industrial development may have a positive effect on municipal employment, whereas TIF districts supporting retail development have a negative effect on municipal employment. These results are consistent with industrial TIF districts capturing employment that would have otherwise occurred outside of the adopting municipality and retail TIF districts shifting employment within the municipality to more labor-efficient retailers within the TIF district.

    While this research might be used to support a TIF district for industrial development, TIF in Wichita is primarily used for retail development. And, when thinking beyond stage one, the effect on employment — considering the entire city — is negative.

    It’s hard to think beyond stage one. It requires considering not only the seen, but also the unseen, as Frederic Bastiat taught us in his famous parable of the broken window. But over and over we see how politicians at all levels of government stop thinking at stage one. This is one of the many reasons why we need to return as much decision-making as possible to the private sector, and drastically limit the powers of politicians and governments.

  • Research on economic development incentives

    As Wichita considers how to grow its economy, its reliance on targeted economic development incentives should be guided by research, not the grandstanding of politicians and bureaucrats.

    symbols-going-upwardsHere’s a summary of the peer-reviewed academic research that examines the local impact of targeted tax incentives from an empirical point of view. “Peer-reviewed” means these studies were stripped of identification of authorship and then subjected to critique by other economists, and were able to pass that review.

    Ambrosius (1989). National study of development incentives, 1969 — 1985.
    Finding: No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective.

    Trogan (1999). National study of state economic growth and development programs, 1979 — 1995.
    Finding: General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).

    Gabe and Kraybill (2002). 366 Ohio firms, 1993 — 1995.
    Finding: Small reduction in employment by businesses which received Ohio’s tax incentives.

    Fox and Murray (2004). Panel study of impacts of entry by 109 large firms in the 1980s.
    Finding: No evidence of large firm impacts on local economy.

    Edmiston (2004). Panel study of large firm entrance in Georgia, 1984 — 1998
    Finding: Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.

    Hicks (2004). Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties).
    Finding: No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries.

    LaFaive and Hicks (2005). Panel study of Michigan’s MEGA tax incentives, 1995 — 2004.
    Finding: Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.

    Hicks (2007a). Panel study of California’s EDA grants to Wal-Mart in the 1990s.
    Finding: The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall.

    Hicks (2007b). Panel study of entry by large retailer (Cabela’s).
    Finding: No permanent employment increase across a quasi-experimental panel of all Cabela’s stores from 1998 to 2003.

    (Based on Figure 8.1: Empirical Studies of Large Firm Impacts and Tax Incentive Efficacy, in Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, Russell S. Sobel, editor. Available here.)

    In discussing this research, the authors of Unleashing Capitalism explained:

    Two important empirical questions are at the heart of the debate over targeted tax incentives. The first is whether or not tax incentives actually influence firms’ location choices. The second, and perhaps more important question, is whether, in combination with firms’ location decisions, tax incentives actually lead to improved local economic performance.

    We begin by noting that businesses do, in fact, seem to be responsive to state and local economic development incentives. … All of the aforementioned studies, which find business location decisions to be favorably influenced by targeted tax incentives, also conclude that the benefits to the communities that offered them were less than their costs.

    References:

    Ambrosius, Margery Marzahn. 1989. The Effectiveness of State Economic Development Policies: A Time-Series Analysis. Western Political Quarterly 42:283-300.
    Trogen, Paul. Which Economic Development Policies Work: Determinants of State Per Capita Income. 1999. International Journal of Economic Development 1.3: 256-279.
    Gabe, Todd M., and David S. Kraybill. 2002. The Effect of State Economic Development Incentives on Employment Growth of Establishments. Journal of Regional Science 42(4): 703-730.
    Fox, William F., and Matthew Murray. 2004. Do Economic Effects Justify the Use of Fiscal Incentives? Southern Economic Journal 71(1): 78-92.
    Edmiston, Kelly D. 2004. The Net Effects of Large Plant Locations and Expansions on County Employment. Journal of Regional Science 44(2): 289-319.
    Hicks, Michael J. 2004. A Quasi-Experimental Estimate of the Impact of Casino Gambling on the Regional Economy. Proceedings of the 93rd Annual Meeting of the National Tax Association.
    LeFaivre, Michael and Michael Hicks 2005. MEGA: A Retrospective Assessment. Michigan:Mackinac Center for Public Policy.
    Hicks, Michael J. 2007a. The Local Economic Impact of Wal-Mart. New York: Cambria Press.
    Hicks, Michael J. 2007b. A Quasi-Experimental Test of Large Retail Stores’ Impacts on Regional Labor Markets: The Case of Cabela’s Retail Outlets. Journal of Regional Analysis and Policy, 37 (2):116-122.

  • This week, Wichita has a chance to increase government transparency

    This week, Wichita has a chance to increase government transparency

    The Wichita City Council can decide to disclose how taxpayer money is spent, or let it remain being spent in secret.

    The City of Wichita has three surrogate quasi-governmental agencies that are almost totally taxpayer-funded, specifically Go Wichita Convention and Visitors Bureau, Wichita Downtown Development Corporation, and Greater Wichita Economic Development Coalition. Each agency contends it is not a “public agency” as defined in Kansas law, and therefore does not have to fulfill records requests.

    Go Wichita Convention and Visitors BureauThese agencies spend considerable sums of tax money. This week the city will consider funding Go Wichita with a budget of $2,356,851 for 2015. That is not all the taxpayer money this agency will spend, as earlier this year the council voted to increase the city’s hotel tax by 2.75 cents per dollar, with the proceeds going to Go Wichita. City documents indicate that tax is estimated to generate $2.3 million per year.

    That is a lot of tax money, and also a high proportion of the agency’s total funding. According to the 2012 IRS form 990 for Go Wichita, the organization had total revenue of $2,609,545. Of that, $2,270,288 was tax money from the city. That’s 87 percent taxpayer-funded. When the surge of higher hotel tax money starts flowing in, that percent will undoubtedly rise, perhaps to 93 percent or more.

    Despite being nearly totally funded by taxes, Go Wichita refuses to supply spending records. Many believe that the Kansas Open Records Act requires that it comply with such requests. If the same money was being spent directly by the city, the records undoubtedly would be supplied.

    City of Wichita Spends 2 million Rebuffs Citizen’s Transparency RequestI’ve appeared before the council several times to ask that Go Wichita and similar organizations comply with the Kansas Open Records Act. See Go Wichita gets budget approved amid controversy over public accountability, City of Wichita Spends $2 million, Rebuffs Citizen’s Transparency Request, and articles at Open Records in Kansas.

    The lack of transparency at Go Wichita is more problematic than this. Earlier this year Go Wichita refused to provide to me its contract with a California firm retained to help with the re-branding of Wichita. When the Wichita Eagle later asked for the contract, it too was refused. If the city had entered into such a contract, it would be a public record. Contracts like this are published each week in the agenda packet for city council meetings. But Go Wichita feels it does not have to comply with simple transparency principles.

    The City of Wichita could easily place conditions on the money it gives to these groups, requiring them to show taxpayers how their tax dollars are being spent. But the City does not do this. This is not transparency.

    In the past I’ve argued that Go Wichita is a public agency as defined in the Kansas Open Records Act. But the city disagreed. And astonishingly, the Sedgwick County District Attorney agreed with the city’s interpretation of the law.

    So let’s talk about good public policy. Let’s recognize that even it is the case that the Kansas Open Records Act does not require Go Wichita, WDDC, and GWEDC to disclose records, the law does not prohibit or prevent them from fulfilling requests for the types of records I’ve asked for. Even if the Sedgwick County District Attorney says that Go Wichita is not required to release documents, the law does not prevent the release of these records.

    Once we understand this, we’re left with these questions:

    Why does Go Wichita want to keep secret how it spends taxpayer money, as much as $4.6 million next year?

    Why is this city council satisfied with this lack of disclosure of how taxpayer funds are spent? Many council members have spoken of how transparency is important. One said: “We must continue to be responsive to you. Building on our belief that government at all levels belongs to the people. We must continue our efforts that expand citizen engagement. … And we must provide transparency in all that we do.” That was Mayor Brewer speaking in his 2011 State of the City address.

    It would be a simple matter for the council to declare that the city and its taxpayer-funded partner agencies believe in open government. All the city has to have is the will to do this. It takes nothing more. It costs the city and its agencies nothing, because the open records law lets government charge for filling records requests. I would ask, however, that in the spirit of open transparent government, in respect for citizens’ right to know how tax funds are spent, and as a way to atone for past misdeeds, that Go Wichita fulfill records requests at no charge.

  • In Wichita, the need for campaign finance reform

    In Wichita, the need for campaign finance reform

    Actions of the Wichita City Council have shown that campaign finance reform is needed. Citizen groups are investigating how to accomplish this needed reform, since the council has not shown interest in reforming itself.

    Consider recent actions by the council and its members:

    • The council voted to give a movie theater operator a no-interest and low-interest loan, after having already received the benefit of tax increment financing.
    • A minister dabbling in real estate development made a large contribution to his council representative just before he asked the city council for tax increment financing.
    • The council voted to give a construction company a no-bid contract for a parking garage. When later put out for competitive bid, the same company won the contract, but with a bid 21 percent less costly to taxpayers.
    • Executives of a Michigan construction company made contributions to the campaign of a city council member just before and after the council voted to give the company and its local partner a huge construction contract.
    • When a group of frequent campaign contributors wanted to win a contest for the right to build an apartment project, the city’s reference-checking process was a sham. City and other government officials were listed as references without their knowledge or consent, and none of the people listed as references were actually contacted.
    • A frequent campaign contributor, according to the Wichita Eagle, “represented himself as an agent of the city — without the city ‘s knowledge or consent — to cut his taxes on publicly owned property he leases in the Old Town Cinema Plaza.” City officials expressed varying degrees of displeasure. But it wasn’t long before David Burk was receiving taxpayer subsidy again from the city council.
    • The council voted to grant $703,017 in sales tax forgiveness to frequent campaign contributors and the mayor’s fishing buddy.

    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. Brewer has voted to send millions to Key, including overpriced no-bid contracts.
    What is the common thread running through these incidents? Council members have voted to enrich their significant campaign contributors. Each of these are examples of a “pay-to-play” environment created at Wichita City Hall. It’s harmful to our city in a number of ways.

    First, overpriced no-bid contracts and other giveaways to campaign contributors isn’t economic development. It’s cronyism. It’s wasteful.

    Second: Citizens become cynical when they feel there is a group of insiders who get whatever they want from city hall at the expense of taxpayers. At one time newspaper editorial pages crusaded against cronyism like this. But no longer in Wichita. The Wichita Eagle has reported on some of these issues — sometimes in depth, sometimes in passing, but some have escaped notice. The editorial page of the newspaper sometimes takes notice, but is rarely critical of the council or mayor.

    Third, when it is apparent that a “pay-to-play” environment exists at Wichita City Hall, it creates a toxic and corrosive political and business environment. Companies are reluctant to expand into areas where they don’t have confidence in the integrity of local government. Will I find my company bidding against a company that made bigger campaign contributions than I did? If I don’t make the right campaign contributions, will I get my zoning approved? Will my building permits be slow-walked through the approval process? Will my projects face unwarranted and harsh inspections? Will my bids be subjected to microscopic scrutiny?

    Importantly: Will the Wichita city council prop up a competitor to my company with economic development incentives that place my company at severe disadvantage?

    Wichita's mayor sells his barbeque sauce at movite theaters owned by a campaign contributor who receives city taxpayer subsidies.
    Wichita’s mayor sells his barbeque sauce at movite theaters owned by a campaign contributor who receives city taxpayer subsidies.
    We need laws to prohibit Wichita city council members from voting on or advocating for decisions that enrich their significant campaign contributors. A model law for Wichita is a charter provision of the city of Santa Ana, in Orange County, California, which states: “A councilmember shall not participate in, nor use his or her official position to influence, a decision of the City Council if it is reasonably foreseeable that the decision will have a material financial effect, apart from its effect on the public generally or a significant portion thereof, on a recent major campaign contributor.”

    We’d also need to add — as does New Jersey law — provisions that contributions from a business owner’s spouse and children will be deemed to be from the business itself. This is because for Kansas municipal and school district elections, only personal contributions may be made. Additionally the contributions of principals, partners, officers, and directors, and their spouses and children, are considered to be from the business itself for purposes of the law. These provisions are important, as many city council members in Wichita receive campaign contributions from business owners’ family members and employees as a way to skirt our relatively small contribution limits. For two examples of how companies use family members, employees, and friends to stack up campaign contributions, see Campaign contributions show need for reform in Wichita.

    Such campaign finance reform would not prohibit anyone from donating as much as they want (up to the current limits) to any candidate. Nor would the law prevent candidates from accepting campaign contributions from anyone.

    This reform, however, would remove the linkage between significant contributions and voting to give money to the contributor. This would be a big step forward for Wichita, its government, and its citizens.

    Proponents see three paths towards campaign finance reform. One would be to press for a law in the upcoming session of the Kansas Legislature. Such a law would be statewide in scope, and could apply to city councils, county commissions, school boards, townships, and other elective bodies.

    A second path would be to use the municipal initiative process. Under this process, a group writes a proposed ordinance. Then, it collects valid signatures on petitions. If a successful petition is verified, the city council must either (a) pass the ordinance as written, or (b) set an election to let the people vote whether the ordinance should become law.

    There is also a third path, which is for the Wichita City Council to recognize the desirability of campaign finance reform and pass such an ordinance on its own initiative.

    If we take the affected parties at their word, this third path should face little resistance. That’s because politicians who accept these campaign contributions say it doesn’t affect their voting, and those who give the contributions say they don’t do it to influence votes.

    If politicians and contributors really mean what they say, there should be no opposition to such a law. Citizens should ask the Wichita City Council to pass a campaign finance reform ordinance that prohibits voting to enrich significant campaign contributors.

    Some incidents

    warren-bailout-poses-dilemmaIn 2008 the Wichita City Council approved a no- and low-interest loan to Bill Warren and his partners. Reported the Wichita Eagle: “Wichita taxpayers will give up as much as $1.2 million if the City Council approves a $6 million loan to bail out the troubled Old Town Warren Theatre this week. That’s because that $6 million, which would pay off the theater’s debt and make it the only fully digital movie theater in Kansas, would otherwise be invested and draw about 3 percent interest a year.”

    When questioned about election donations:

    “I would never do anything because of a campaign contribution,” said [former council member Sharon] Fearey, who received $500 from David Burk and $500 from David Wells.

    “I don’t think $500 buys a vote,” said [former council member Sue] Schlapp.

    “One has nothing to do with the other,” [Wichita Mayor Carl] Brewer said.

    Also in 2008, the Reverend Dr. Kevass J. Harding wanted to spruce up the Ken-Mar shopping center at 13th and Oliver, now known as Providence Square. Near the end of June, Kevass Harding and his wife contributed a total of $1,000, the maximum allowed by law, to the campaign of Wichita City Council Member Lavonta Williams (district 1, northeast Wichita). This was right before Harding appeared before the city council in July and August as an applicant for tax increment district financing (TIF).

    These campaign contributions, made in the maximum amount allowable, were out of character for the Hardings. They had made very few contributions to political candidates, and they appear not to have made many since then.

    Campaign contributions to Wichita City Council member Lavonta Williams from an applicant for tax increment financing.
    Campaign contributions to Wichita City Council member Lavonta Williams from an applicant for tax increment financing.

    But just before the Ken-Mar TIF district was to be considered for approval, the Hardings made large contributions to Williams, who is the council member representing Ken-Mar’s district. Harding would not explain why he made the contributions. Williams offered a vague and general explanation that had no substantive meaning.

    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 compiled 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. <a href=”http://wichitaliberty.org/files/wichita-city-council-campaign-contributions-associated-with-ambassador-hotel.pdf”” target=”_blank” title=”Wichita City Council campaign contributions associated with Ambassador Hotel”>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.

    Council Member Lavonta Williams (district 1, northeast Wichita) received $5,000 from parties associated with the Ambassador Hotel: $3,000 from parties associated with Key Construction, and $2,000 from David Burk and his wife.

    Wichita Mayor Carl Brewer received $5,000 from parties associated with the Ambassador Hotel: $4,500 from parties associated with Key Construction, and $500 DJ Burk, David Burk’s wife.

    Council Member and Vice Mayor Janet Miller (district 6, north central Wichita) received $3,500 during her 2009 election campaign from parties associated with the Ambassador Hotel: $1,500 from parties associated with Key Construction, and $2,000 from David Burk and his wife.

    For his 2011 election campaign, Council Member Pete Meitzner (district 2, east Wichita) received $3,500 from parties associated with the Ambassador Hotel: $2,500 from parties associated with Key Construction, and $1,000 from David Burk and his wife.

    For his 2011 election campaign, Council Member James Clendenin (district 3, southeast and south Wichita) received $1,500 from parties associated with the Ambassador Hotel: $1,000 from parties associated with Key Construction, and $500 from David Burk and his wife.

    In 2011 nearly all council members approved a no-bid contract for this garage. It was later re-bid at a much lower price.
    In 2011 nearly all council members approved a no-bid contract for this garage. It was later re-bid at a much lower price.
    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.

    Of interest to current mayoral politics: In 2012 while Jeff 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? Would the fact that Walbridge is a partner with Key Construction on the new Wichita Airport terminal provide a clue?

    Michigan contractors headline 500These 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.

    Jeff Longwell vote to help Michigan CompanyThen 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.