In this episode of WichitaLiberty.TV: Wichita sells a hotel, more subsidy for downtown, Kansas newspaper editorialists fall for a lobbyist’s tale, how Kansas can learn from Arizona schools, and government investment. View below, or click here to view at YouTube. Episode 131, broadcast October 30, 2016.
Shownotes
Article: Wichita, give back the Hyatt proceeds. Instead of spending the proceeds of the Hyatt hotel sale, the city should honor those who paid for the hotel — the city’s taxpayers.
Article: Topeka Capital-Journal falls for a story. The editorial boards of two large Kansas newspapers have shown how little effort goes into forming the opinions they foist upon our state.
Article: Kansas and Arizona schools. Arizona shows that Kansas is missing out on an opportunity to provide better education at lower cost.
In the campaign for Sedgwick County Commission, the incumbent Tim Norton touts his experience, judgment, “intellectual stamina, thirst for data and feedback,” and his efforts in economic development. Following, from January 2013, an example of how uninformed he is regarding basic facts about the Kansas economy.
In Sedgwick County, Norton’s misplaced concern for an industry
Specifically, Norton said “Agribusiness is the third largest economic driver in our community, in our region.”
But is this true? Using 2010 figures from the Kansas Statistical Abstract, these are the largest industries in Kansas in terms of gross domestic product:
Agriculture ranks below many other industries, contributing 3.7 percent of Kansas Gross Domestic Product. In most years agriculture would rank even lower, but because of high farm prices in recent years, it ranks higher than it has.
Norton also expressed concern that humans with large home lots would deplete the land available for agriculture. But he need not worry, as I show in Saving farms from people.
An interactive visualization of Wichita-area employment by industry.
The Bureau of Labor Statistics, part of the United States Department of Labor, makes monthly employment statistics available. I’ve gathered them for the Wichita metropolitan area and present them in an interactive visualization.
This data comes from the Current Employment Statistics, which is a monthly survey of employers.1
The three tabs along the top of the visualization represent three different views of the data; one table and two charts. Employment figures are in thousands. All series except one are not seasonally adjusted.
A downtown Wichita project receives a small benefit from the city, with no mention of the really big money.
Today the Wichita City Council approved a subsidy for a project in downtown Wichita.
The city will lend the developer of a project at 303 S. Broadway $620,000 to improve the building’s facade. The property must repay this amount through an assessment on its property tax. The benefit to the property is that the city is able to borrow money at a lower interest rate, and this reduces the cost of borrowing for the project.
The agenda packet for this item states: “The Office of Urban Development has reviewed the economic (“gap”) analysis of the project and determined a financial need for incentives based on the current market.” This stems from the city’s policy on facade improvement projects, which is that the project would not be feasible except for this loan.1
Upon inquiry to the city, I was told that the facade improvement program would increase the developer’s return on investment from 7.06 percent to 8.35 percent. This seemed a stretch; that a small savings on interest costs on a small portion of the project cost could have such a large effect on profitability.
I asked the city for supporting documents that hold the figures used to calculate these amounts, but the city believes the Kansas Open Records Act does not allow it to release the records. In the past, however, I have received this information on request.
So, we’ll have to trust the city on this matter. I’m not comfortable with that. This is another example of the city conducting business within a cloud of secrecy.
Here’s the real money
The cost savings on borrowing $620,000 is just a small portion of subsidy this project will receive. Through tax credits, this project likely will receive over two million dollars in a form equivalent to cash.
The property was listed on the Register of Historic Kansas Places in August. This entitles the project to a tax credit of 25 percent of qualified expenses.2 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,250,000.
From the National Park Service, a credit of 20 percent may be awarded.3 With a project cost of $5,000,000, according to city documents, this tax credit could be worth $1,000,000. It is not known at this time whether this project has qualified for this tax credit.
Together, the tax credits are worth potentially $2,250,000. Not all citizens may be aware of the mechanism of tax credits. In the case of the state of Kansas, the Department of Revenue will — figuratively — print a certificate that says the holder of this certificate may use it to pay $1,250,000 of state tax liability. It costs the state nothing to create this certificate. When the Department of Revenue receives the certificate instead of cash, the state gains nothing of economic value. The net economic effect is that the holder of the tax credit has been enriched by $1,250,000, and the state misses out on the same amount of revenue.4 Unless the state reduces its spending by the amount of the tax credit, the taxpayers have to make up the lost revenue.
This is not all. The project may apply for Industrial Revenue Bonds. This is a mechanism whereby a project may avoid paying property taxes and sales taxes.5 This property is located within a TIF district, so it is ineligible for property tax abatements. But, a sales tax exemption could be possible, if the developer applies.
That application is likely, as this developer did just that on another downtown Wichita building, also located in a TIF district, but eligible for sales tax exemption on purchases related to the redevelopment.6
Of note: This developer actively campaigned for the proposed 2014 Wichita city sales tax, offering free office space to the effort.7 Should he apply for a sales tax exemption on this property, this is another example of low-income families in Wichita paying sales tax on groceries, but well-off developers escaping paying that same tax.
The council meeting
At the council meeting, a citizen remarked how this project is good for the tax base. But, being in a TIF district, the incremental property taxes from this property will go to the TIF district, not the city, until the TIF debt is retired.
Council Member Janet Miller (district 6, north central Wichita) noted that the city is not contributing to the project, that the developer pays all the costs of the facade improvement loan. But of a direct contribution to the project, she said “Although I wouldn’t probably complain if that was a request.” I’d suggest that Miller read up on the economics of tax credits, and of a possible sales tax exemption. She might be surprised to learn how much cash this project is receiving.
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Notes
“Owner shall provide financial information that substantiates the need for the City’s facade loan in order to complete the redevelopment project, including the overall sources and uses of funds and pro forma cash flow analysis that shows a reasonable return on owner’s investment.” City of Wichita. Facade Improvement Program Policies and Procedures. Available at www.wichita.gov/Government/Departments/Economic/EconomicDevelopmentDocuments/Facade%20Improvement%20Program%20Policy.pdf. ↩
An interactive visualization of gross domestic product by state and industry.
The Bureau of Economic Analysis, a unit of the U.S. Department of Commerce, gathers data about economic output, known as gross domestic product. The visualization presented here presents this data in tabular and graphic form.
The GDP figures are real, meaning adjusted for inflation. They are annual numbers through 2015.
BEA industry classification, showing subtotal and total classificationsAs illustrated below, the visualization has three tabs, meaning three different views of data. By using the controls at the right of the visualization, you may select one or more states, and one or more industries. By clicking on entries in the legend, you may highlight one or more series. (Use Ctrl+click to select more than one.)
As indicated in the nearby table, some of the “industries” are actually subtotals of several industry components. The industry “All industry total” is the total GDP of all industries.
An interactive table and charts of populations in the states and regions, starting in 1929.
How have the states grown in population since 1929? Growth varies greatly.
In the accompanying visualization, one chart of the growth of population uses a logarithmic scale. This better shows a wide range of values. On this scale, negative values can’t be shown. The example shown in this article highlights Kansas against the other states.
Kansas government spending, starting in 1967. Total spending and per capita spending, adjusted for inflation. Also spending as percent of Kansas GDP.
Sources of data:
* Kansas Fiscal Facts 2016
* 2016 and 2017 are approved figures, not actual spending
* 2015 and beyond population are my estimates
* CPI is Consumer Price Index – All Urban Consumers, CUUR0000AA0
* 2016 and later GDP is estimated
The depreciation expense of Intrust Bank Arena in downtown Wichita recognizes and accounts for the sacrifices of the people of Sedgwick County and its visitors to pay for the arena.
The true state of the finances of the Intrust Bank Arena in downtown Wichita are not often a subject of public discussion. Arena boosters cite a revenue-sharing arrangement between the county and the arena operator, referring to this as profit or loss. But this arrangement is not an accurate and complete accounting, and hides the true economics of the arena. What’s missing is depreciation expense.
There hasn’t been much talk of the arena’s finances this year. But in February 2015 the Wichita Eaglereported: “The arena’s net income for 2014 came in at $122,853, all of which will go to SMG, the company that operates the facility under contract with the county, Assistant County Manager Ron Holt said Wednesday.” A reading of the minutes for the February 11 meeting of the Sedgwick County Commission finds Holt mentioning depreciation expense not a single time.
In December 2014, in a look at the first five years of the arena, its manager told the Wichita Eagle this: “‘We know from a financial standpoint, the building has been successful. Every year, it’s always been in the black, and there are a lot of buildings that don’t have that, so it’s a great achievement,’ said A.J. Boleski, the arena’s general manager.”
I didn’t notice the Eagle opinion page editorializing this year on the release of the arena’s profitability figures. So here’s an example of incomplete editorializing from Rhonda Holman, who opined “Though great news for taxpayers, that oversize check for $255,678 presented to Sedgwick County last week reflected Intrust Bank Arena’s past, specifically the county’s share of 2013 profits.” (Earlier reporting on this topic in the Eagle in 2013 did not mention depreciation expense, either.)
All of these examples are deficient in some way, and contribute only confusion to the search for truthful accounting of the arena’s finances. As shown below, recognizing depreciation expense is vital to understanding profit or loss, and the “net income” referred to above doesn’t include this. In fact, the “net income” cited above isn’t anything that is recognized by standard accounting principles.
The problem with the reporting of Intrust Bank Arena profits
There are at least two ways of looking at the finance of the arena. Most attention is given to the “profit” (or loss) earned by the arena for the county according to an operating agreement between the county and SMG, a company that operates the arena.1
This agreement specifies a revenue sharing mechanism between the county and SMG. For 2105, the accounting method used in this agreement produced a profit of $1,150,206, to be split (not equally) between SMG and the county. The county’s share was $375,103.
While described as “profit” by many, this payment does not represent any sort of “profit” or “earnings” in the usual sense. In fact, the introductory letter that accompanies these calculations warns readers that these are “not intended to be a complete presentation of INTRUST Bank Arena’s financial position and results of operations and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America.”2
That bears repeating: This is not a reckoning of profit and loss in any recognized sense. It is simply an agreement between Sedgwick County and SMG as to how SMG is to be paid, and how the county participates.
A much better reckoning of the economics of the Intrust Bank Arena can be found in the 2015 Comprehensive Annual Financial Report for Sedgwick County.3 This document holds additional information about the finances of the Intrust Bank Arena. The CAFR, as described by the county, “… is a review of what occurred financially last year. In that respect, it is a report card of our ability to manage our financial resources.”
Regarding the arena, the CAFR states:
The Arena Fund represents the activity of the INTRUST Bank Arena. The facility is operated by a private company; the county incurs expenses only for certain capital improvements or major repairs and depreciation, and receives as revenue only a share of profits earned by the operator, if any, and naming rights fees. The Arena Fund had an operating loss of $4.1 million. The loss can be attributed to $4.4 million in depreciation expense.
Financial statements in the same document show that $4,443,603 was charged for depreciation in 2015, bringing accumulated depreciation to a total of $30,791,307.
Depreciation expense is not something that is paid out in cash. Sedgwick County didn’t write a check for $4,443,603 to pay depreciation expense. Instead, depreciation accounting provides a way to recognize and account for the cost of long-lived assets over their lifespan. It provides a way to recognize opportunity costs, that is, what could be done with our resources if not spent on the arena.
But not many of our public leaders recognize this. In years past, Commissioner Dave Unruh made remarks that show the severe misunderstanding that he and almost everyone labor under regarding the nature of the spending on the arena: “I want to underscore the fact that the citizens of Sedgwick County voted to pay for this facility in advance. And so not having debt service on it is just a huge benefit to our government and to the citizens, so we can go forward without having to having to worry about making those payments and still show positive cash flow. So it’s still a great benefit to our community and I’m still pleased with this report.”
Earlier in this article we saw examples of the Sedgwick County Assistant Manager, the Intrust Bank Arena manager, and several Wichita Eagle writers making the same mistake.
Intrust Bank Arena commemorative monumentThe contention — witting or not — of all these people is that the capital investment of $183,625,241 (not including an operating and maintenance reserve) in the arena is merely a historical artifact, something that happened in the past, something that has no bearing today. There is no opportunity cost, according to this view. This attitude, however, disrespects the sacrifices of the people of Sedgwick County and its visitors to raise those funds. Since Kansas is one of the few states that adds sales tax to food, low-income households paid extra sales tax on their groceries to pay for the arena — an arena where they may not be able to afford tickets.
Any honest accounting or reckoning of the performance of Intrust Bank Arena must take depreciation into account. While Unruh is correct that depreciation expense is not a cash expense that affects cash flow, it is an economic fact that can’t be ignored — except by politicians, apparently. The Wichita Eagle aids in promoting this deception.
We see our governmental and civic leaders telling us that we must “run government like a business.” Without frank and realistic discussion of numbers like these and the economic facts they represent, we make decisions based on incomplete and false information.
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Notes
Management Agreement between Sedgwick County and SMG. August 1, 2007. Available here. ↩
The Operations of INTRUST Bank Arena, as Managed by SMG. December 31, 2015. Available here. ↩
Sedgwick County. Comprehensive Annual Financial Report of the County of Sedgwick, Kansas for the Year ended December 31, 2015. Available here. ↩
From the Wichita Pachyderm Club: Don Sherman, Vice President Community Relations and Strategic Partners with Westar Energy introduced Jeff Beasley, Vice President of Customer Care with Westar for an informative presentation titled, “An overview of Westar Energy — Solar, Conservation, Community.”
This was recorded August 12, 2016. Click here for the audio presentation. Click here for the slides.
Expressing concern about a large industry that he said is important to Sedgwick County and Kansas, 
In December 2014, in a look at the first five years of the arena, its manager 
From the