As Wichita voters consider promises of transparency and reporting regarding job creation, the city fails to make even the most basic information available.
In November, Wichita voters will consider whether to authorize a sales tax of one cent per dollar. Part of that would be used for economic development with the aid of creating jobs. The city promises a transparency in decision making and reporting of results regarding this jobs fund.
Material produced by the city on July 22 contains: “Decisions about who receives funding, the number of jobs, and the impact on community would be made in public meetings and tracked through a website. Reports would be made on a regular basis to elected officials.”
On its website, the “Yes Wichita” group promises that “Results will be measured and reported publicly.” Also, “Decisions and results are made in public meetings and transparent with website tracking results, investments and return on investment to community.”
In other words, sales tax boosters are promoting transparency and presentation of results.
The thing is, the city and its affiliated groups could be doing this right now if they wanted to. They could have been doing it for many years, if they had wanted to.
A specific example
Premier Processing is a company located in Wichita that received forgivable loans from both Wichita and Sedgwick County five years ago. The loans included clawback provisions calling for repayment of the loans if jobs targets were not met.
Unfortunately, the job targets were not met. Premier has repaid the loans to both governments. (I’ve requested further details from the city, such as whether the company paid the interest that the contract specified in case of default.)
Are you aware of this news? It’s not likely that you are aware, as neither Sedgwick County or the city made this information public. But this is the type of information the city and “Yes Wichita” promise will be available in the future.
It’s true that the city doesn’t have a fancy website on which to report these results. But that isn’t needed right now. If the city is truly interested in reporting results to citizens, it could have written a simple press release. Two or three sentences is all that’s needed. The city could have dictated these sentences to a newspaper or television reporter. This is not difficult. It would cost next to nothing.
But the city didn’t do that. Instead, someone tipped me, and I asked. If not for that, we would not know. This is the culture at Wichita city hall.
In a poll, about one-third of Wichita voters support local governments using taxpayer money to provide subsidies to certain businesses for economic development.
The second question the survey asked was “In general, do you agree? Or disagree? With the idea of local governments using taxpayer money to provide subsidies to certain businesses for economic development?” Following are the results for everyone, and then divided by political party and political ideology.
Overall, 55 percent disagreed with using taxpayer money to provide subsidies to certain businesses for economic development. 34 percent agreed.
The results are fairly consistent across political party and ideology, although Republicans are somewhat more likely to agree with using taxpayer funds for economic development incentives, as are those who self-identify as political moderates.
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?
This week the Wichita City Council will consider funding “the formulation of a new economic development strategy.” Here’s a summary provided by the city:
Wichita State University approached STARNet about developing a proposal to assist WSU, the Wichita Metro Chamber of Commerce and the community with the formulation of a new economic development strategy. Over a period of almost ten months STARNet will manage a four phase process that will lead to an integrated economic development strategy that will prioritize how and where to deploy resources. The process will include a comprehensive review of the region’s assets and issues, development of a common vision, identification of priorties [sic] and egagement [sic] of stakeholders committed to strategy implementation.
It sounds from this as though the city has not been engaging in economic development and strategizing. This reminds me of the $658 million in tax abatements Boeing received over several decades. Wasn’t that economic development? The answer from pro-sales tax forces was no, that wasn’t paid in cash. Also, even though Boeing has left Wichita, the facilities still generate $6 million in property taxes. So, it really worked after all, they say.
Here’s something else from the proposal summary: “Project Objective: Support formulation of a Wichita Economic Development Strategy that integrates existing initiatives (e.g. GWEDC and WSU); is supported by the majority of regional stakeholders and can be used to guide policy discussions for use of new City/County revenues for job formation.” (emphasis added)
I thought we already had a plan for the sales tax revenue, according to the city and the “Yes Wichita” group. Now we are told we need to start an expensive and lengthy planning process?
What about the cost and funding? “The total estimated cost of the project is $234,929. Funding partners include WSU, Wichita Metro Chamber of Commerce, Greater Wichita Economic Development Coalition, Wichita Downtown Development Corporation, the City of Wichita and Sedgwick County. The City of Wichita is being asked to contribute an amount not to exceed $42,986. The funding partners will have an agreement with WSU who, in turn, will hold the contract with STARNet.”
Here is the first thing that will be done, according to the proposal: “Secure Co-chairs to Lead Initiative: This regional initiative begins with the designation of at least two or more high level, objective, economic leaders agreeing to co–chair the on–going initiative. The co-chairs are often effective when chosen from an existing regional development group.”
This is written as through Wichita has been doing nothing in this regard. I wonder what the leaders of the Wichita Metro Chamber Leadership Council thinks of this? Here’s what the Chamber says about this council:
The Leadership Council is a think tank comprised of 100 top business, non-profit and public-sector CEO’s for the purpose of discussing and pursuing resolutions of major issues or projects to make the Wichita area competitive for job creation, talent attraction, capital investment and therefore long-term economic prosperity. Created by the Wichita Metro Chamber of Commerce, the Council is co-chaired by Charlie Chandler (Intrust Bank Chairman and CEO) and Jeff Turner (retired CEO of Spirit AeroSystems). The Council was formed in 2012 and held its first meeting in September of the same year.
So we’ve had two prominent Wichita business leaders shepherding an initiative for two years. Is this effort now discarded?
Here’s something to watch for. Proposals like this contain buzzwords — something new and exciting, something that leaders can use to show they’re on the cutting edge. So note this language in the proposal:
Moreover, economies don’t stop at municipal or county boundaries; they go where their residents drive to work—the “comutershed”. (Misused punctuation in the original.)
I wonder when city leaders start using this neologism — comutershed — if they will correct the spelling of one of its base words.
There are solutions to the Wichita water shortage (to the extent it exists) that originate outside city hall. Dr. Art Hall of KU explains in this excerpt from WichitaLiberty.TV. View below, or click here to view at YouTube. Originally broadcast September 28, 2014. For more on this topic see:
Wichita city hall promises policies that are clear, predictable and transparent, except when they’re not.
On July 22, 2104, a presentation to the Wichita City Council sought to assure the council and public that a proposed jobs fund created with money collected by the proposed sales tax would have policies that govern the spending of funds: “GWEDC – Finds businesses to expand, recruit, follows established policies for retention/recruitment.”
But there’s a problem. It’s difficult for governments to establish policies that will satisfy everyone. How do we know today what we’ll need five or ten years down the road? When governments change policies to fit particular circumstances, taxpayers are rightfully concerned that the alterations are to suit the needs of special people — the cronies that feed from the city hall trough of taxpayer money. When you couple in what public choice theory tells us, which is that the cronies who want money from government have a much stronger motive to succeed than the bureaucrats are motivated to protect citizens and taxpayers, we can have trouble.
This has happened before in Wichita. Last year when a project didn’t meet the (supposedly) required benefit-cost ratio, the city simply said that it didn’t apply in that case. See Wichita’s policymaking on display.
Now, Wichita seeks to modify its policies again in response to the wants and desires of one person.
Here’s the background you need to know. When the city passed a downtown development incentives policy in 2011, here’s what the city said was its goal: “The business plan recommends the development of a prudent public investment policy that is clear, predictable and transparent, maximizes public investment and enhances market-driven development.” (emphasis added)
The meeting minutes contained further elucidation: “Scott Kneibel Planning Department stated the purpose of the policy is to put in place something that is clear and predictable in terms of how the public would invest in downtown projects through partnership with the private sector. Stated that sort of statement by this governing body has not been made to date. Stated that is the purpose of this policy so that developers will know what types of investments the City of Wichita is interested in making and how the City of Wichita will make those decisions.” (emphasis added)
But as in the past, we find city proposing the change the standards in the middle of the game. Here’s an excerpt from the agenda packet for Tuesday’s meeting, in which a large incentive package for the redevelopment of Union Station may be considered: “In the opinion of the evaluation team, the established criteria do not adequately address projects such as Union Station where the requested incentives do not involve City debt.”
For this project we see that city policy is being modified on the fly to meet the circumstances of a particular project. This is not necessarily bad. Entrepreneurship demands flexibility. But the city promises policies that are clear, predictable and transparent, and city officials say Wichita has a transparent, open government.
Can you imagine conscientious developers who want to invest in downtown Wichita, but after studying the city’s policies, realize their projects don’t conform to the city’s published standards? How many moved on to other cities, not realizing that our standards can be altered and waived?
As Wichita voters consider the value to give to promises from city hall, they should consider these episodes when the city promises there will be “established policies” for the spending of economic development funds generated by the proposed sales tax.
Documents the Wichita City Council will use to evaluate a development proposal contain material errors. Despite the city being aware of the errors for more than one month, they have not been corrected.
On August 19, 2014 the Wichita City Council considered an agenda item titled “Resolution Considering the Establishment of the Union Station Redevelopment District, Tax Increment Financing.” The purpose of the item was to set October 7, 2014 as the date for the public hearing on the formation of a TIF district. The council passed this resolution.
On August 27 Bob Weeks inquired this of Wichita city officials based on information contained in city documents that were prepared for the August 19 meeting:
“On the Union station TIF proposal, there is mentioned ‘$3,766,156 in monetized historic tax credits.’ Do you know whether these are federal or state tax credits, and the face value of the credits? I presume that ‘monetized’ means the value the developers expect to receive when selling the credits at a discount.”
That same day he received this response from Allen Bell, the city’s Director of Urban Development.
“The Developer has not yet provided the City with details on the tax credits. However, staff analyzed the project to ascertain a ballpark estimate of how much it could generate in both state and federal tax credits and came up with a similar amount. We assume that $3,766,156 is the amount of net proceeds to be injected into the project from the sale of tax credits and that it is discounted from the face value of the credits.”
On follow up, Weeks asked this:
“I was also wondering which incentive program allows for the sales tax exemptions included in the CEDBR analysis.”
The response from Bell was:
“The only incentive program available to Union Station that would provide a sales tax exemption is IRBs. The Developer did not request IRBs or a sales tax exemption. I would guess that CEDBR factored it into the cost-benefit analysis to be extra conservative.”
CEDBR is the Center for Economic Development and Business Research at Wichita State University.
In addition to Bell, other city officials participating in these emails were Van Williams, Public Information Officer; Mark Elder, Development Analyst; and Scott Knebel, Downtown Revitalization Manager.
On October 2, when the city released the agenda packet for the October 7 meeting, the tax credits and sales tax information was not changed.
By the city’s admission, the value of tax credits for this project is a guess, and we don’t know if the project is actually eligible for these tax credits. The sales tax exemption included in the CEDBR is an incentive this project is not eligible for and will not receive. Despite several city officials being aware of these errors, the material the city council will consider on October 7 has not been corrected.
In this episode of WichitaLiberty.TV: Considering the proposed Wichita sales tax, looking at unmet maintenance needs, claims that we have few economic development incentives, the cost of the sales tax to families, the taxes already going to the transit system, and the bad choice the city gives us for water. View below, or click here to view at YouTube. Episode 61, broadcast October 5, 2014.
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.
Next week a Wichita real estate developer will ask the Wichita City Council to approve a package of incentives for the redevelopment of Union Station in downtown Wichita. The proposal contains many facets that citizens need to understand. Additionally, the city’s handling of this matter is something that voters will want to keep in mind as they make their decision on the proposed Wichita sales tax in November.
Union Station LLC is asking for TIF, or tax increment financing. Most commonly, TIF works like this: A city borrows money (by issuing bonds) and gives the cash to a development. After the project is built and has a higher assessed value, the city uses the increased property tax payments (the “increment” in TIF) from the development to pay off the bonds. This obviously is risky for cities, because if the development doesn’t generate sufficient increment in tax payments to cover the bond payments, the city will have to make up the difference. This has happened in Wichita.
In recent years a new type of TIF has been created by statute, the “pay-as-you-go” TIF. Here, instead of issuing bonds and paying off the bonds with the incremental taxes, the city simply refunds the incremental taxes to the development. City documents describe: “The TIF statute also allows for projects to be financed on a pay-as-you-go basis, to reimburse the developer for eligible costs as TIF funds are received.”
This has less risk for cities, because if the hoped-for incrementally higher property taxes don’t materialize, the development doesn’t receive TIF proceeds. There are no bonds that must be paid. The developer just doesn’t receive what was projected. This is why the city claims that pay-as-you-go TIF has no risk to the city.
(Under pay-as-you-go TIF, since the city is essentially refunding nearly all property tax payments back to the development, we have to wonder why the city requires the taxes be paid at all. Also, there is the charade of spending TIF money only on “eligible” project costs. But the criteria for eligibility is broad, and we can be sure that developers will do all they can to make sure costs are characterized as eligible. But the eligibility criteria allows cities to appear to be fiscally prudent. Cities say they don’t allow TIF proceeds to be spent on just anything, but only on eligible costs.)
Here’s what the agenda packet says about this TIF: “Union Station LLC proposes to combine pay-as-you-go TIF with private financing to finance the proposed redevelopment project. The developer will finance through private sources all costs of the redevelopment project, including TIF-eligible project costs. Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis with proof of expenditure of TIF-eligible redevelopment project costs.”
Buried in this paragraph is some financial slight-of-hand. Wichitans need to understand this so that they can be fully informed on this proposed transaction.
The problem lies is the meanings of the terms “to finance” and “to pay for.” Financing is the process of securing money to pay the costs of acquiring something. If financing is in the form of a loan, the economics of the transaction is that the borrower receives cash (assets go up) but also incurs an obligation to pay back the cash (liabilities go up by the same amount).
Then, when the borrower uses this cash to buy something — like a historic train station — one form of asset is exchanged for another. Cash is exchanged for title to the property.
It’s in the future, as the loan is repaid, that needs examination. The goal of real estate development is that the developer creates a project that generates more money coming in than loan payments going out. If this happens, it is a signal that the developer has met customer needs and has used capital in a way that makes everyone better off.
But there’s a confounding factor involved in the “pay for” part of the transaction that the city council will consider next week. The burden of some of the loan repayments will be born by the taxpayer. We don’t know for sure, but undoubtedly Union Station LLC will borrow money to make the project work. Proceeds from the TIF will be used to make at least some of the loan payments.
This is where the slight-of-hand comes in. The city says “The developer will finance through private sources …” That much is true. The city is not loaning any money. But some of the money used to pay back the private loans will come from TIF proceeds. So it is property tax payments being re-routed back to the developer that actually pays for part of the development: “Pay-as-you-go TIF revenue will be used to reimburse the developer on an annual basis …”
This is the heart of the transaction. It’s what citizens need to understand. Instead of Union Station LLC’s property taxes being used to pay the cost of government, nearly all of these taxes will pay off the owner’s loans.
The purchase of the property
Here’s what city documents state regarding the purchase of the property: “The $6,226,156 in equity is proposed to be in the form of $1,500,000 from the purchase of the property that will be contributed as collateral, $3,766,156 in monetized historic tax credits, and $960,000 in cash.”
It’s the “purchase of the property” that needs scrutiny. More from the city documents: “The developer would be compensated for the fair market value of the land where public access improvements would be located, not to exceed the $1,500,000 actual site acquisition cost. The Public Access Easement attachment illustrates that the portions of the site where a public access easement would be acquired is 274,059 square feet and that the average land acquisition cost of 10 comparable downtown properties is $6.71 per square foot, placing the fair market value of the land where the public access improvements would be located at $1,839,147.”
What’s happening is that part of the land area of the project is being called “public access improvements.” These are things like, according to city documents, “parking structure, pedestrian boardwalk, paving, utilities, and landscaping.” The city is proposing to pay the developer $1,500,000 for these areas.
If the council agrees to this, new avenues will have been opened for spending taxpayer funds. It places other commercial developers and landlords at a disadvantage. Consider, say, the recent Whole Foods Market that opened in Wichita. What Union Station LLC wants is like that developer asking to be reimbursed for the shrubs and grass that was planted, or the parking spaces that are provided. The public will, after all, view the sunlight reflected from the grass and breathe the oxygen generated by the shrubs. And, the public will park in the spaces. These “public access improvements” are part of what is necessary to provide an attractive and desirable development. It’s part of what businesses do to attract customers and earn profits. But the Union Station developer is asking that the city pay him for providing these things. If the council agrees to this, we can expect to see this template applied repeatedly in the future.
The missing tax credits
City documents state this regarding the sources of funds for the project: “Private to Public Investment Ratio — The proposed private capital investment is $36,578,000, and the proposed public capital investment is $17,321,000, resulting in a private to public capital investment ratio of 2.1 to 1.” But missing from this calculation is the contribution of taxpayers in the form of historic preservation tax credits. As reported above, the city reports the project will receive $3,766,156 in monetized historic tax credits.
(Tax credits are economically equivalent to a grant of cash from government. Commonly their value is used to boost the “private” equity contribution to the project. But since the tax credits come from government, we ought to call it the “peoples’ equity.”)
I inquired of city officials whether the historic preservation tax credits are federal, state, or both. The answer I received: “The Developer has not yet provided the City with details on the tax credits. However, staff analyzed the project to ascertain a ballpark estimate of how much it could generate in both state and federal tax credits and came up with a similar amount. We assume that $3,766,156 is the amount of net proceeds to be injected into the project from the sale of tax credits and that it is discounted from the face value of the credits.”
So it seems like the city is surmising things that may or may not be part of the developer’s plan.
False sales tax exemption applied
There’s another level of uncertainty in the city documents. In the analysis performed by Center for Economic Development and Business Research at Wichita State University, about $1.8 million in sales tax exemptions are included in the analysis. In my reading of the project documents, I didn’t see the project qualifying for sales tax exemptions. Upon inquiry to the city, I received this response: “The only incentive program available to Union Station that would provide a sales tax exemption is IRBs. The Developer did not request IRBs or a sales tax exemption. I would guess that CEDBR factored it into the cost-benefit analysis to be extra conservative.”
It appears there is a lack of communication between the city and CEDBR. More surmising. Exactly which incentives are available to be tapped by this project, and in what amount? Can we trust the analysis from CEDBR if it includes incentives that the project has not requested and is not eligible to receive?
Benefit-cost ratios
Benefit-cost ratios of Union Station LLC project for City of Wichita. Click for larger version.The city has a policy that economic development projects should have a benefit-cost ratio of 1.3 to 1 or greater. For this project, CEDBR reports these ratios:
City General Fund, 1.04
City Debt Service Fund, 1.15
Total City, 1.08
Sedgwick County, 1.06
State of Kansas, 1.66
School district, 7.19
For the city and county, the ratios are far below 1.3 to 1. There are many exceptions and loopholes in the incentive policy that allows the city to participate in projects with less than the 1.3 ratio.
The (un)certainty of city policies
For this project we see that city policy is being modified on the fly to meet the circumstances of a particular project. This is not necessarily bad. Entrepreneurship demands flexibility. But the city promises certainty in its standards, and city officials say Wichita has a transparent, open government. The Public-Private Partnership Evaluation Criteria for the redevelopment of downtown Wichita states “The business plan recommends public-private partnership criteria that are clear, predictable, and transparent.”
But as in the past, we find the city’s policies are anything but predictable and transparent. City documents state: “In the opinion of the evaluation team, the established criteria do not adequately address projects such as Union Station where the requested incentives do not involve City debt.” So we see the “clear, predictable, and transparent” policies discarded and reformulated. How are future developers supposed to know which policies can be waived or rewritten? How are citizens supposed to trust that city hall is looking out for their interests when policies are so fluid?
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.
There are a variety of ways to measure the economic performance of states and countries. Job growth is one. Output, or gross domestic product, is another.
Real GDP by state, Kansas highlighted, through 2013. Click for larger version.
The nearby chart contains two views of GDP for Kansas and nearby states. Kansas is the dark line. The charts shows GDP for private industries only. (By using the interactive visualization, you can show other industries, time periods, and states.)
The top chart shows the percentage change in GDP from the previous year. The bottom chart shows the cumulative growth in GDP since 1997. Both charts illustrate that the performance of the Kansas economy is nothing to crow about, and it’s been that way for a long time.
You may use the visualization yourself. Click here to open it in a new window. There are other visualizations of data, including jobs creation by states, available here.
