Voice For Liberty

Tag: Subsidy

  • Waterwalk hotel deal breaks new ground for Wichita subsidies

    On Tuesday, the Wichita City Council will consider an agreement with a hotel developer that, besides awarding the usual subsidies to politically-favored developers, breaks new ground in the use of subsidy. Additionally, the deal contradicts recent promises made by a top city official.

    The proposed hotel, a Marriott Fairfield Inn and Suites Hotel, would be located immediately south of the WaterWalk Place condominium building, at the northwest corner of Dewey and Main Streets.

    Site of proposed hotel at Dewey and Main Streets, Wichita 2010-01-10 02
    Site of proposed hotel at Dewey and Main Streets. View is looking northeast. WaterWalk Place is the large building at the left. The Intust Bank Arena can be seen in the distance.

    Information from the city’s Office of Urban Development indicates these subsidies are proposed for the hotel developers:

    • The city will provide a cash contribution of up to $2.5 million to help pay for building the hotel.
    • The city will create a Community Improvement District to benefit the hotel. Community Improvement Districts, which are a creation of the Kansas Legislature last year, allow a district to charge up to an additional two percent in sales tax. The proceeds from the tax are used for the exclusive benefit of the developers.
    • The project will use Industrial Revenue Bonds. The usual benefit of these bonds is the accompanying property tax exemption. But since the location of the proposed hotel is within a TIF district, this benefit doesn’t apply. Instead, in this case the benefit of the IRBs is that the hotel will escape paying an estimated $328,945 in sales tax.
    • The city will lease the land under the hotel for $1.00 per year, for a term of 99 years. There is a provision that if the hotel performs very well financially, the city will be entitled to additional rent.
    • The hotel will be able to use the WaterWalk Place parking garage for its clients. There is a provision to install a gate so that some parking spaces will be available only to hotel guests and condominium owners. The value of this parking to the hotel developers is huge.

    There is a contingency. The city will conduct a study to determine the impact of the proposed hotel on the financial performance of the city-owned Hyatt Regency Hotel that is located nearby. If the study shows a negative impact on the Hyatt, the city “may rescind the Letter of Intent and halt development of the hotel.”

    Analysis

    This proposal is perhaps the most egregious example of corporate welfare to be proposed to the city council, and one that should be rejected. There are many areas of concern.

    Holiday Inn and Suites, Wichita 2010-01-10 07The Holiday Inn and Suites near the proposed hotel. Will the city conduct a survey to see if this hotel will be harmed?

    Perhaps most important to public policy, the city has now recognized that when it provides subsidy to one business, it may harm other businesses. This is something on which I’ve written extensively, and I’ve spoken to the council several times on this topic. I’ve been concerned about the effect on privately-owned businesses. The city has shown little concern for this.

    But now that a city-owned business — the Hyatt Hotel — may be imperiled, all of the sudden the effects of city subsidy on competition is a concern. This is a slap in the face of all businesses in the city that have faced competition from a city-subsidized competitor. In particular, there is a Holiday Inn and Suites just three blocks away from the proposed hotel. Will the city survey to see if this hotel will be harmed by a subsidized competitor?

    There’s also the credibility of the people involved in this deal. The new owner of the WaterWalk development, Jack DeBoer, was quoted in a Wichita Business Journal article in November saying “I don’t want any more money from the city.”

    In the same month the Wichita Eagle quoted him saying “I’m not going down to City Hall with my hand out. I can’t. The city has put their money in it, and I’m happy with that. We’ve put a lot of our own money in and that’s OK. Now, time to deliver.”

    DeBoer isn’t going to own the proposed hotel. But it’s part of the WaterWalk development that he owns.

    More troubling is the turnaround by Wichita City Manager Robert Layton.

    In October the Wichita Eagle reported: “Layton was clear earlier this week: No more city money is available for WaterWalk.” Other Eagle articles quoted Layton stating “We don’t have any other resources to put in.”

    Now the city is proposing huge and unprecedented subsidies for this hotel.

    The cost of this hotel needs to be questioned, too. The projected cost divided by the number of rooms comes out to around $100,000 per room. I’ve been told that this is very expensive for a hotel of this type. While not a cut-rate budget hotel, this Fairfield Inn won’t have a restaurant. In my experience, they don’t have bars or comfortable lobbies.

    If we want to have robust development that has deep roots, grounded in solid finances and the discipline of free markets instead of crony capitalism, we need to turn away from highly subsidized ventures like this proposed hotel. Relying so extensively on public subsidy results in development with shallow roots. As an example, the city is currently facing a huge problem with the Broadview Hotel. This hotel was scheduled to be renovated by its new owners, the purchase and renovation made possible by large subsidies by the city. Tax credits from the state were to play a large part, too. But last year when the state realized that it couldn’t afford to be so lavish with tax credits and placed a cap on them, the Broadview renovations were put on hold.

    There are many questions about this project that need answers, and I’ve submitted a few to the city. From a public policy standpoint, the problem is that citizens have a very short time in which to ask questions and receive answers. The document that details the proposal appears to have been created at around 5:00 pm on Thursday January 7. The city council meeting is on the next Tuesday morning. There just isn’t time for citizens and journalists to submit questions and get answers. Performing any independent investigation in such a short time is nearly impossible.

    The developers who are in line to receive millions in subsidy, however, have been working with the city on this matter for much longer. There’s a reason why this work is done in secret: Citizens ought to be outraged at this deal. Better to give them little time to object.

    Letter of Intent Relating to Development of WaterWalk Hotel 2010-01-12

  • ‘Efficiency Kansas’ introduced in Wichita

    At stops in Topeka and Wichita, Kansas officials introduced the Efficiency Kansas loan program.

    This is a program funded by the American Recovery and Reinvestment Act of 2009, better known as the stimulus bill. In Kansas, the State Energy Office, a subsidiary of the Kansas Corporation Commission, was awarded $38 million to foster energy efficiency for homes and businesses in Kansas. That office will manage the program.

    Kansas Treasurer Dennis McKinney was in Wichita to introduce the program and help give tours of a demonstration home in west Wichita. In his remarks he said that the program engages private sector forces so that the program runs effectively and efficiently.

    The program starts when a homeowner or business owner contacts a participating lender or utility company. The customer selects an energy auditor from a list of those qualified to work in the program, and the energy audit is performed. The result is a plan. Then, the customer seeks bids from contractors based on the plan. If the State Energy Office approves, work can start.

    Homes can receive up to $20,000 in improvements, while small businesses can receive up to $30,000.

    In this program, it is participating banks or utility companies, not the state, that make the loans and it is they who bear the risk of credit loss. The loans are fixed-rate, up to 15 years term, with an interest rate of not more than 4%. The State Energy Office provides rebates to lenders to cover $250 of loan origination fees.

    For the demonstration house in Wichita, a three bedroom ranch-style house of 1,440 square feet built in 1963, the cost of the recommended improvements is $2,922. Estimated monthly energy savings are $35, and the monthly payment on the loan is $24. The demonstration house in Topeka required $7,617 of work, with monthly savings estimated at $89, and payment of $57.

    Analysis

    In the press release, Kansas Governor Mark Parkinson said “this program will help save jobs and put more Kansans back to work.” Many would disagree with this assessment, as the program is paid for with borrowed money that must be paid back at some later date. The taxes necessary to repay this borrowing will reduce jobs in the future.

    I asked McKinney that if these energy efficiency investment are wise economically, why can’t we let people make them on their own rather than having the federal and state government involved. His answer was that the program makes loans available at 4% interest rather than 8%, and the program would gain the attention of entrepreneurs to help get more homes upgraded.

    As with many government programs, this essentially boils down to a subsidy. The program participants will be able to borrow money at a below-market interest rate.

    While some people might feel it is worthwhile for the government to subsidize low or modest income homeowners, the owners of the Wichita home probably don’t fall into that category. According to the Sedgwick County Treasurer, the house has an appraised value of $99,800. There was a large flat-panel television among its furnishings. Should Americans of all income levels pay taxes so that this family can save a few dollars a month on a loan?

    Further, although the program is touted as being low cost to the state, the state pays $250 for each loan to the lending bank. The first 1,000 participants will receive $350 to help pay for the energy audit.

    Prior to this program, the State Energy Office had just five employees and a budget of $500,000. Now the office’s website lists ten employees. While the costs of this program are paid for by the federal government, this should be of little comfort to taxpayers.

    Surprisingly, there was no mention of this program’s role to potentially reducing carbon emissions.

  • Uncertainty over Broadview’s future doesn’t bother Wichita

    Yesterday the Wichita City Council approved plans for riverbank improvements that would benefit the Broadview Hotel in downtown Wichita. The cost is $2,200,000.

    One of the problems with this action is that the renovation of the hotel is on hold, according to recent reporting. The reason given by the hotel’s owners, Drury Southwest Inc., is a problem with tax credits issued by the State of Kansas.

    These tax credits, which are in effect a free grant of money to the hotel’s owner that does not need to be repaid, could potentially be worth 25% of the renovation project’s budget of $19 million. That’s up to $4,750,000 that the taxpayers of the state would be giving to the hotel owners.

    This year the Kansas legislature realized that these tax credits are costly to the state, and facing a very tight budget, it placed a cap on the amount of tax credits that could be given.

    By all accounts, the legislature will be facing an even tougher situation in January when it returns to the statehouse for its 2009 session. With everyone scrambling to find cost savings (and new sources of revenue), the tax credits for historic renovation could face an uncertain future.

    How does the uncertainty surrounding the tax credits affect the plans for the Broadview’s renovation? I don’t know. A telephone call and email message to Drury Southwest Inc. seeking an update on its plans was not returned.

    In his remarks after the unanimous vote passing the improvements, Mayor Carl Brewer thanked representatives from Drury for attending the meeting. He noted the budget challenges at the state level, and pledged that the city will continue to work with them on the tax credits. He said he appreciates the work they’re doing and thanked them for their commitment to the city. The hotel is important to the city, he said, as commitments have already been made to lease rooms in the Broadview.

    Analysis

    Because of the uncertainty surrounding the future plans for the Broadview Hotel’s renovation, the city should have delayed these riverbank improvements.

    A problem is the shaky economics surrounding this hotel. Besides the tax credits, the hotel received a 10-year exemption from paying property taxes and a sweetheart deal on a parking garage across the street. It’s little wonder representatives from Drury traveled to Wichita for the council meeting. They have a lot of taxpayer subsidies to protect.

    If we want a thriving and vibrant downtown Wichita — including a convention hotel that can be relied on — we need to rely on something more than massive taxpayer subsidies and the mayor’s appreciation to those who receive them.

  • Wichita planning puts freedom, prosperity at risk

    Remarks to be delivered to the October 13, 2009 meeting of the Wichita City Council.

    Mr. Mayor, members of the council,

    I’m here today to ask this council to put aside consideration of this proposal. My reasons are not particular to this proposal or planning firm, but rather I am concerned that we believe we have the ability to successfully plan at all.

    Here’s just one reason why I’m concerned: Wichita’s favorite method of financing developments is the TIF district. Recognizing this, the Goody Clancy proposal under the heading “Opportunities” mentions “Continue to employ established TIF funding mechanisms.”

    But as documented by the Wichita Eagle last year, our city has a poor record of financial performance with TIF districts.

    Another reason I’m concerned is that our attempts at downtown redevelopment so far have produced mixed results. In particular, the WaterWalk project in downtown Wichita has so far consumed $41 million in public subsidy, and we have very little to show for it. Shouldn’t we see if we can nurture this project to success before we take on projects that are much larger?

    Then there’s the presumption expressed by city leaders that downtown must be revitalized for the sake of our entire city. Several months ago I asked Mr. Williams to supply me with references that provide evidence for the claimed benefit of downtown redevelopment. At first he referred me to the mayor’s vision statement. But with all due respect, Mr. Mayor, your visions and dreams aren’t evidence.

    We do have a document that describes what’s been built in several cities. But the mere fact that buildings were built or renovated is not evidence of success. In these descriptions there’s no discussion of the cost, or the public subsidy needed to redevelop these downtowns, and importantly, no discussion of the effect on the entire city.

    When we look at the effect of things like TIF districts on an entire city, we find evidence like economists Richard F. Dye and David F. Merriman found. They concluded that yes, development happens in the subsidized TIF district. But it’s often at detriment to the entire city.

    Besides TIF districts, I’m also concerned about the use of other public subsidy, including a sales tax that some are talking about. I’m also concerned about the potential for eminent domain abuse. This summer I traveled to Anaheim, California to learn about a redevelopment district where the city decided not to use these techniques. The article Anaheim’s mayor wrote about this planning effort is subtitled “Foundation of Freedom Inspires Urban Growth.”

    That’s what I’m really concerned about: freedom.

    Why aren’t we satisfied with letting people live where they want to live? Why aren’t we satisfied with letting developers’ capital flow to where they think it finds its most valued use? Why do we think that centralized government planning can do a better job of making decisions and allocating resources than the dispersed knowledge of all the people of Wichita?

    Randal O’Toole has written about the impossibility of the planning task. In his book The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future, he writes this about urban planners: “Because they can build a house, planners think they can design an entire urban area.”

    He expands on the difficulty of the planning task at length in his book.

    These difficulties can be summed up like this: If we think that we can plan the revitalization of downtown Wichita, we ought to heed this quote from Friedrich Hayek’s book The Fatal Conceit: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

    Mr. Mayor and members of the council, our efforts at downtown redevelopment have produced mixed results at best. Yet we have a lot of development — commercial and residential — taking place in Wichita. It’s just not happening downtown. Instead, it’s happening where people want it to happen. It’s happening without TIF districts, public subsidy, or the use of eminent domain.

    Why can’t we be happy with that?

  • Cable television, but no paint?

    While I was watching the City of Wichita’s cable channel 7 (where it’s all things good about Wichita, 24/7) Mary K. Vaughn, Director of Housing & Community Services appeared with an announcement:

    The city has a free paint program. If homeowners meet income guidelines and their houses are located within certain areas of town, the city will give them free paint.

    Here’s my question: If someone can afford cable television — that’s where the city’s channel 7 appears — can’t they buy their own paint?

  • I’m not proud of Wichita’s airfare subsidy

    In today’s Wichita Eagle, editorialist Rhonda Holman gives Wichita a big pat on the back for its subsidy given to a low-cost air carrier. She goes so far as to mention a recent New York Times article that tells how Wichita was one of the first cities to do this.

    It reminds me of how a few years ago Sam Williams, a Wichita advertising executive and onetime Chairman of Fair Fares, likened Wichita’s subsidy to the role of Kansas during the Civil War.

    It’s all a little over the top, to say the least. But this is all in the spirit of the claims made to support the necessity of the subsidy. At one time, subsidy supporters claimed that the value of the subsidy would be $4.8 billion per year to Kansas. I think that number is larger than the state’s general fund spending at the time, and certainly not supported by any reasonable interpretation of facts.

    Whether the subsidy paid to AirTran is a success is hard to say. If your inclination is towards ever-increasing government involvement in commerce, you probably like the subsidy. Never mind that it may not be providing the benefits we really need.

    But when a city will loan money to a private condominium association to make repairs to its building, what’s a few million dollars paid to an airline?

    At one time it was thought that the subsidy would be temporary. All that was needed, leaders such as former mayor Bob Knight said, was to give AirTran a jump start, and in a few years it would then be able to sustain itself without continued subsidy. Now, however, the subsidy is a permanent fixture, even though Holman raises alarm as to whether the state of Kansas will continue its $5 million annual contribution to the subsidy.

    My question is this: will AirTran ever report a profit on its Wichita service, thereby reducing the subsidy it receives?

    What, are you kidding?

  • In Wichita, waiving guidelines makes for bad policy

    Remarks to be delivered to the August 18, 2009 meeting of the Wichita City Council.

    Mr. Mayor, members of the Wichita City Council,

    I am here to ask you to deny the request for special assessment financing for the Lofts at St. Francis homeowners association to make repairs to their building.

    I’ve spoken to this council about how the facade improvement program, in general, is bad public policy. In this case, it’s bad public policy compounded by the waiver of principles or guidelines that this council recently set in place.

    I realize that special assessment financing means that the city is not making a grant of money to the homeowners association. Instead, the city is making a loan, which is required to be repaid over time.

    What concerns me about this situation is that two guidelines in the city’s facade improvement program must be waived for this project to obtain special assessment financing.

    The first is the private investment match. This is designed to ensure that the property owners have “skin in the game” and that the taxes will be paid back.

    Here, the city is proposing that since the building’s owners have made a past investment in this property, there’s no need to require a concurrent investment. It hardly needs to be noted that anyone who has purchased property has made a past investment in that property.

    Second, facade improvement projects are required to undergo a gap analysis to “prove” the need for public financing. According to the city’s report: “This project does not lend itself to this type of gap analysis; however, staff believes that conventional financing would be difficult to obtain for exterior repairs to a residential condominium property like this.”

    So the city proposes to waive this requirement as well.

    There seems to me to be a defect in the manner of ownership of this building. While the homeowners association and the individual condominium owners might not have anticipated that repairs would be needed so soon after the building’s opening, they must have contemplated that repairs and maintenance — to either exterior or interior common areas — would be needed at some time. How does the association plan to pay for these?

    So what will happen if the city council doesn’t approve the special assessment financing? The agenda report states “Each individual condo owner would be required to fund a share of the cost.”

    Isn’t that what private property owners do: fund the cost of repairs to their property?

    According to the Sedgwick County Treasurer’s office, the appraised values of these condos range from $103,000 to $310,200, with an average value of $201,943. The maximum amount being added to each condo’s assessment is $4,022, although I have learned that the actual amount may be closer to $3,000.

    That’s along the lines of what it might cost to perform a few repairs and paint a house that’s worth what these condos are worth. So I think it’s hard to make the case that these property owners can’t afford to make these repairs on their own without a loan from the city.

    Furthermore, if the goal of the facade improvement program is to provide an incentive for property owners to fix up their buildings, I would submit that such incentive is not necessary in this case. This building is a valuable residential property, and the homeowners have a strong incentive to maintain the integrity and value of their property.

    Mr. Mayor and members of the council, let’s ask these owners do just what thousands of homeowners in Wichita do every year: take responsibility for the maintenance of their own property without looking to city hall for help.

  • Wichita special assessments for repairs is bad policy

    Lofts at St. Francis, Wichita, Kansas

    At Tuesday’s meeting of the Wichita City Council, a privately-owned condominium association is seeking special assessment financing to make repairs to its building. In order for the association to succeed in its request, the council will have to waive two guidelines of Wichita’s facade improvement program.

    Special assessment financing means that the cost of the repairs, up to $112,620 in this case, will be added to the building’s property taxes. Actually, in this case, to each of the condominium owners’ taxes. They’ll pay it off over the course of 15 years. (A conversation with the president of the homeowners association brought out the possibility that the actual assessment may be in the neighborhood of $75,000.)

    So the city is not giving this money to the building’s owners. They’ll have to pay it back. The city is, however, setting new precedent in this action.

    Special assessment financing has traditionally been used to fund infrastructure such as streets and sewers, and new infrastructure at that. The city, under its facade improvement program, now allows this type of financing to be used to make repairs and renovations to existing buildings. That’s if the building is located in one of the politically-favored areas of town.

    By using special assessment financing in this way, the city seeks to direct investment towards parts of town that it feels doesn’t have enough investment. This form of centralized government planning is bad public policy. The city should stop doing this, and let people freely choose where to invest.

    Besides this, two guidelines in the city’s facade improvement program must be waived for this project to obtain special assessment financing.

    The first is the private investment match. This is designed to ensure that the property owners have “skin in the game” and that the taxes will be paid back.

    Here, the city is proposing that since the building’s owners have made a past investment in this property, there’s no need to require a concurrent investment. It hardly needs to be noted that anyone who has purchased property has made a past investment in that property.

    Second, facade improvement projects are required to undergo a gap analysis to “prove” the need for public financing. According to the city’s report: “This project does not lend itself to this type of gap analysis; however, staff believes that conventional financing would be difficult to obtain for exterior repairs to a residential condominium property like this.”

    So the city proposes to waive this requirement as well.

    There seems to me to be a defect in the manner of ownership of this building. While the homeowners association and the condominium owners might not have anticipated that repairs would be needed so soon after the building’s opening, they must have contemplated that repairs and maintenance — to either exterior or interior common areas — would be needed at some time. How does the association plan to pay for these?

    So what will happen if the city council doesn’t approve the special assessment financing? The agenda report states “Each individual condo owner would be required to fund a share of the cost.”

    Isn’t that what private property owners do: fund the cost of repairs to their property?

    According to the Sedgwick County Treasurer’s office, the appraised values of these condos range from $103,000 to $310,200, with an average value of $201,943. The maximum amount being added to each condo’s assessment is $4,022, although the actual amount may be closer to $3,000.

    That’s along the lines of what it might cost to perform a few repairs and paint a house that’s worth what these condos are worth.

    Let’s ask that these owners do just what thousands of homeowners in Wichita do every year: take responsibility for the maintenance of their own property without looking to city hall for help.

    Lofts at St. Francis Agenda Report 2009-08-18

  • Someone in California understands TIF

    In California, they’re called redevelopment districts. In Kansas, we call them tax increment financing or TIF districts. By either name, they provide a way to channel money to politically favored developers.

    The back-door way by which this is done benefits both parties: It hides what is really happening. A recent Los Angeles Times story held this:

    “If the state Legislature were asked to directly appropriate money for local shopping centers or any of the other endless private economic development that local officials like, they would never do it,” said former assemblyman and Sacramento mayor Phil Isenberg, who championed redevelopment reform when he was in the Legislature. “Because the current state subsidy is mostly hidden, it continues. … You have to ask if it is worth the expenditure of massive state funds to continue the process.”