Wichita takes a big risk entering in a public-private partnership without knowing its partners.
When entering a public-private partnership, the City of Wichita tells us it vets its partners thoroughly. But this can’t be the case for the partners in the new Wichita baseball stadium and surrounding land.
That’s because we don’t know the identities of all the partners. All we know is that one Lou Schwechheimer is a majority owner. When asked what proportion of the team he owns, the city replied, “Over 50%.” Either the city does not know the number, or is not willing to tell us. 1 There’s a big difference between owning 51 percent of something and, say, 95 percent.
We are supposed to learn these names at some time. The development agreement passed by the city council on March 19, 2019 holds this:
Section 2.03 Conditions to the Effectiveness of this Agreement. Contemporaneously with the execution of this Agreement, and as a precondition to the effectiveness of this Agreement, to the extent they have not already done so, the Developer will submit the following documents to the City:
…
(c) the identity of the manager of the general partner of the Developer;
(d) a list of the Principals of the Developer
I’ve asked the city when the agreement might be executed and become effective.
Once the city receives the names, will it release them to the public? If we’ve learned anything lately, we know the city withholds information from the public. Even when it does not need to.
Will the list of principals reveal the share of ownership of each of the principals?
Is the list of principals that own the team the same as the owners of the surrounding land the city is selling?
What if we don’t like principals? What if they have unsavory reputations or a poor business and credit history? What do we do then?
The City of Wichita plans subsidized development of a sports facility as an economic driver. Originally published in July 2017.
West Bank Redevelopment District. Click for larger.This week the Wichita City Council will consider a project plan for a redevelopment district near Downtown Wichita. It is largely financed by Tax Increment Financing and STAR bonds. Both divert future incremental tax revenue to pay for various things within the district.12
City documents promise this: “The City plans to substantially rehabilitate or replace Lawrence-Dumont Stadium into a multi-sport athletic complex. The TIF project would allow the City to make investments in Lawrence-Dumont Stadium, construct additional parking in the redevelopment district, initiate improvements to the Delano multi-use path and make additional transportation improvements related to the stadium project area. In addition to the stadium work, the City plans to construct, utilizing STAR bond funds, a sports museum, improvements to the west bank of the Arkansas River and construct a pedestrian bridge connecting the stadium area with the Century II block. The TIF project is part of the overall plan to revitalize the stadium area and Delano Neighborhood within the district.”3
We’ve heard things like this before. Each “opportunity” for the public to invest in downtown Wichita is accompanied by grand promises. But actual progress is difficult to achieve, as evidenced by the examples of Waterwalk, Kenmar,and Block One.4
Trends of business activity in downtown Wichita. Click for larger.In fact, change in Downtown Wichita — if we’re measuring the count of business firms, jobs, and payroll — is in the wrong direction, despite large public and private investment. 5
Perhaps more pertinent to a sports facility as an economic growth driver is the Intrust Bank Arena. Two years ago the Wichita Eagle noted the lack of growth in the area. 6 Since then, not much has changed. The area surrounding the arena is largely vacant. Except for Commerce Street, that is, and the businesses located there don’t want to pay their share of property taxes. 7
I’m sure the city will remind us that the arena was a Sedgwick County project, not a City of Wichita project, as if that makes a difference. Also, the poor economic performance cited above is for Downtown Wichita as delineated by zip code 67202, while the proposed baseball stadium project lies just outside that area, as if that makes a difference.
By the way, this STAR bonds district is an expansion of an existing district which contains the WaterWalk development. That development has languished, with acres of land having been available for development for many years. We’ve also found that the city was not holding the WaterWalk developer accountable to the terms of the deal that was agreed upon, to the detriment of Wichita taxpayers. 8
Following, selected articles on the economics of public financing of sports stadiums.
The Economics of Subsidizing Sports Stadiums
Scott A. Wolla, “The Economics of Subsidizing Sports Stadiums,” Page One Economics, May 2017. This is a project of the Federal Reserve Bank of St. Louis. Link.
“Building sports stadiums has an impact on local economies. For that reason, many people support the use of government subsidies to help pay for stadiums. However, economists generally oppose such subsidies. They often stress that estimations of the economic impact of sports stadiums are exaggerated because they fail to recognize opportunity costs. Consumers who spend money on sporting events would likely spend the money on other forms of entertainment, which has a similar economic impact. Rather than subsidizing sports stadiums, governments could finance other projects such as infrastructure or education that have the potential to increase productivity and promote economic growth.”
What economists think about public financing for sports stadiums
Jeff Cockrell, Chicago Booth Review, February 01, 2017. Link.
“But do the economic benefits generated by these facilities — via increased tourism, for example — justify the costs to the public? Chicago Booth’s Initiative on Global Markets put that question to its US Economic Experts Panel. Fifty-seven percent of the panel agreed that the costs to taxpayers are likely to outweigh benefits, while only 2 percent disagreed — though several panelists noted that some contributions of local sports teams are difficult to quantify.”
Publicly Financed Sports Stadiums Are a Game That Taxpayers Lose
Jeffrey Dorfman. Forbes, January 31, 2015. Link.
“Once you look at things this way, you see that stadiums can only justify public financing if they will draw most attendees from a long distance on a regular basis. The Super Bowl does that, but the average city’s football, baseball, hockey, or basketball team does not. Since most events held at a stadium will rely heavily on the local fan base, they will never generate enough tax revenue to pay back taxpayers for the cost of the stadium.”
Sports Facilities and Economic Development
Andrew Zimbalist, Government Finance Review, August 2013. Link.
“This article is meant to emphasize the complexity of the factors that must be evaluated in assessing the economic impact of sports facility construction. While prudent planning and negotiating can improve the chances of minimizing any negative impacts or even of promoting a modest positive impact, the basic experience suggests that a city should not expect that a new arena or stadium by itself will provide a boost to the local economy.
Instead, the city should think of the non-pecuniary benefits involved with a new facility, whether they entail bringing a professional team to town, keeping one from leaving, improving the conveniences and amenities at the facility, or providing an existing team with greater resources for competition. Sports are central to cultural life in the United States (and in much of the world). They represent one of the most cogent ways for residents to feel part of and enjoy belonging to a community. The rest of our lives are increasingly isolated by modern technological gadgetry. Sport teams help provide identity to a community, and it is this psychosocial benefit that should be weighed against the sizeable public investments that sports team owners demand.”
Professional Sports as Catalysts for Metropolitan Economic Development
Robert A. Baade, Journal of Urban Affairs, 1996. Link.
“To attract or retain a team, cities are offering staggering financial support and rationalize their largesse on economic grounds. Do professional sports increase income and create jobs in amounts that justify the behavior of cities? The evidence detailed in this paper fails to support such a rationale. The primary beneficiaries of subsidies are the owners and players, not the taxpaying public.”
“Ten years ago, Elizabeth Stevenson looked out at the neighborhood where a downtown arena would soon be built and told an Eagle reporter that one day it could be the ‘Paris of the Midwest.’ What she and many others envisioned was a pedestrian and bike-friendly neighborhood of quaint shops, chic eateries and an active arts district, supported by tens of thousands of visitors who would be coming downtown for sporting events and concerts. It hasn’t exactly turned out that way. Today, five years after the opening of the Intrust Bank Arena, most of the immediate neighborhood looks much like it did in 2004 when Stevenson was interviewed in The Eagle. With the exception of a small artists’ colony along Commerce Street, it’s still the same mix of light industrial businesses interspersed with numerous boarded-up buildings and vacant lots, dotted with ‘for sale’ and ‘for lease’ signs.” Lefler, Dion. 5 years after Intrust Bank Arena opens, little surrounding development has followed.Wichita Eagle. December 20, 2014. Available at http://www.kansas.com/news/local/article4743402.html. ↩
Growth of employment in Wichita compared to the nation.
Overall, since 2001 — roughly the end of the Great Recession — Wichita has been gaining jobs, evidence being its trend line above zero in the nearby chart which shows the change in jobs over the same month one year ago. But the line has not always been above zero, indicating months where the Wichita metropolitan area had fewer jobs than the year before.
Since that time, Wichita’s growth rate has almost always been below the nation’s rate, and by no small amount. The state of Kansas has been lagging behind the nation, too.
For the Wichita metropolitan area in January 2019, jobs are up, the labor force is up, and the unemployment rate is unchanged when compared to the same month one year ago. Seasonal data shows a slowdown in the rate of job growth and a rising unemployment rate.
Data released this week by the Bureau of Labor Statistics, part of the United States Department of Labor, shows a mostly improving employment situation for the Wichita Metropolitan Statistical Area, although some areas are not improving.
Click for larger.
Total nonfarm employment rose from 292,900 last January to 297,900 this January. That’s an increase of 5,000 jobs, or 1.7 percent. (This data is not seasonally adjusted, so month-to-month comparisons are not valid.) For the same period, jobs in the nation grew by 2.0 percent.
The unemployment rate in January 2019 was 4.1 percent, unchanged from one year ago.
Considering seasonally adjusted data from the household survey, the labor force rose by 739 persons (0.2 percent) in January 2019 from December 2018, the number of unemployed persons rose by 769 6.8 percent), and the unemployment rate rose from 3.6 percent to 3.9 percent. The number of employed persons not working on farms fell to 299,090 in January from 299,120 the prior month, a decrease of 30 persons, or 0.0 percent.
BLS is revising some data and presented this monthly release in a slightly different format than usual.
The City of Wichita says it has safeguards built in to the proposed baseball park land development deal.
This week the Wichita City Council will consider a land development deal for land surrounding the new ballpark on the west bank of the Arkansas River downtown. The city assures us that there are safeguards in the deal that protect Wichitans.
We need safeguards. The city is borrowing to pay for the project, and the city expects to collect a lot of money from surrounding development, necessary to pay off the borrowed money. 1
To spur this development, the city plans to sell (about) 4.25 acres of land to the development team for $1 per acre. If the developer does not perform by building commercial space according to a schedule, the city can buy back land at that same price.
This — the buyback of the land — is promoted as security for the city. There are protections, the city tells us. The city also acknowledges that some past deals like WaterWalk have not had the type of protections built in to the ballpark deal.
But really: What is the value of the safeguards in the ballpark land deal?
If the ballpark developers fail (I’d like to name them, but we don’t know anything about them except for one person 2), the city can get its land back. But what then? Who pays the bonds? (Some of the borrowing is in the form of STAR bonds, which are not obligations of the city. But if these bonds went unpaid, it would be a very large and bad blot on the city’s reputation.)
The city says it would hurry to find another developer. But finding reputable developers willing to take over a failed effort might be difficult. Principal and interest must be paid during this time.
This doesn’t seem like much protection.
Walk away from WaterWalk
Critics of city development projects point to WaterWalk as an example of a failed downtown development. Some $41 million of city funds were spent there with few positive results, and with the recent closing of the Gander Mountain store, fortunes are not looking up.
But WaterWalk is different, the city says. In a recent social media town hall, the city stated, “Waterwalk wasn’t the deal we put together nor did it have the safeguards of this project. Waterwalk is not a city owned development.” 3
I guess it depends on the meaning of “we.” True, most city officials weren’t in office at the time of the WaterWalk deal. Accountability belongs to others is the attitude of Wichita Mayor Jeff Longwell and others.
But most of the people of Wichita are still here, and still waiting for the city’s promises to be realized.
While the city criticizes the WaterWalk deal for not having safeguards, the protections built in the baseball deal aren’t very strong. And while the city says “WaterWalk is not a city owned development,” neither is the ballpark land development deal. Remember, the city is selling the land.
The protections
In the Wichita city council agenda packet for March 19, 2019, we find this in item IV-1:
City grants the Developer an initial, exclusive right to purchase the Private Development Site for the development of the hospitality, commercial, retail, office and residential uses, as contemplated herein, for $1.00 an acre. This opportunity extends for ninety (90) days after the start of the first full season of the team’s residency in Wichita.
The next point requires the developer to exercise the purchase rights and meet a series of benchmarks, with a first phase of 30,000 square feet of development starting in 2021, with a second phase of 20,000 square starting the following year, and another 15,000 square feet after that.
Then the purported safeguards:
If the Developer fails to Commence Construction on any Phase by the appointed time or fails to complete construction of any Phase of development within the appointed time. The Developer can forestall a default by providing personal guarantees and making the CID and TIF shortfall payments. The Developer will also forfeit any right to any future phase of development. The City may repurchase any unaffected phase property for the original sale price. If the Developer fails to make the shortfall payments, the City may collect on the personal guarantees and exercise all legal remedies.
There is an escape clause:
Developer may provide personal guarantees reasonably satisfactory to the City as security that Developer will make the City whole for the lost revenue stream required to satisfy the state and local STAR bond repayments, CID and TIF District financing pro forma on an annual basis (Shortfall Payments).
As for accepting personal guarantees, we don’t know the identities of the developers, except for majority owner Lou Schwechheimer. 4 We don’t know the size of the share he owns, except the city tells us it is over 50 percent.
In this short video, John Todd tells us why the city is not acting in the best interest of citizens regarding the land development deal near the new Wichita ballpark. View below, or click here to view at YouTube.
The City of Wichita tells us it has thoroughly vetted the majority owner of the new Wichita baseball team.
It appears that the owners of the New Orleans Baby Cakes baseball team talked with the City of Wichita before the team received permission from Minor League Baseball. The Wichita Eagle reports: “A Minor League Baseball team may have violated league rules by talking to Wichita Mayor Jeff Longwell before seeking approval from the league, according to a letter from the league’s attorney.” 1
While the letter doesn’t name the New Orleans team, the Eagle reported in the same story, “A city official confirmed Wednesday night that Longwell was communicating with the Baby Cakes.”
This revelation is relevant for a few reasons.
First, if we look at the timing of this letter, the city — at least Wichita Mayor Jeff Longwell — knew of this transgression over a year ago. 2
These rules of minor league baseball were considered so sacred that the mayor used them as a pretext for conducting negotiations in secret, particularly withholding disclosure of a side land development deal. (Although the city did disclose, at least somewhat. 3) Apparently, these rules didn’t mean much to the majority owner of the New Orleans team — someone the city says it has “thoroughly vetted.” Now we know that Schwechheimer is alleged to have these rules regarding moving his team to Wichita.
By the way, the rules of minor league baseball that the city shared applied to the team, not the city. The letter the mayor received warned the team could be fined, not the city.
When the city was notified that the team had broken the rules, didn’t this raise a warning flag?
Second, the city says it vets its partners thoroughly, including baseball team majority owner Lou Schwechheimer. But in this case, we don’t know the identities of all the partners. All we know is that one Lou Schwechheimer is a majority owner. When asked what proportion of the team he owns, the city replied, “Over 50%.” Either the city does not know the number, or is not willing to tell us. 4 There’s a big difference between owning 51 percent of something and, say, 95 percent.
The team owners are breaking their stadium lease in New Orleans in order to move to Wichita. There is much press coverage of the owners making grand promises to the people there, only to start planning to move the team within two years. 5
Now the majority owner makes grand promises to Wichita. But the city says he’s been “thoroughly vetted,” and relies on long-term agreements with him.
Why won’t Schwechheimer reveal the identities of his partners or the percent of the team he owns? Why is the city willing to enter expensive and long-term agreements without knowing this?
Part of the agreement with the new Wichita baseball team is, apparently, unknown.
In the September 2018 agreement between the City of Wichita and the owners of the new Wichita baseball team, there is this regarding an air travel fund: 1
Section 10.6 Emergency Air Travel Fund. The City and the Team acknowledge and agree that, as a condition of the Pacific Coast League and Minor League Baseball approving the relocation of the Team to Wichita, the City and the Team must establish a fund (the “Travel Fund”) to be used to address some of the concerns raised about accessibility, frequency and ease of travel into and out of Wichita. Each of the City and the Team will be required to make an initial deposit of $100,000 into the Travel Fund, for a total of $200,000, and each Party will be required to replenish the Travel Fund each year in case of claims made against the Travel Fund during the prior year. The terms and conditions for the payout of funds and other issues related to the Travel Fund will be as set forth in a separate agreement among the City, the Team and the Pacific Coast League.
In October the city produced a formal agreement (marked “execution copy”) between the city and the baseball team owners. That document references a travel fund in a general way, saying it is attached as exhibit D. 2
But exhibit D is blank.
I’ve asked the city for the travel fund agreement. It hasn’t been supplied.
We can easily see that Pacific Coast League baseball team owners might seek to make maximum use of the air travel fund. And why not? To them, it’s just asking for free money.
I’m sure the mayor and city officials will tell us to trust them and the team owners. They may cite the term “reasonable.” But this is a mayor that withheld the fact of a side land deal until recently, and now expresses regret for doing so.
This is one more action by the city that breeds distrust. Until we know more, we need to delay any further decisions.
And: Wasn’t years of subsidies and a shiny new airport supposed to fix the problems with air travel in Wichita?
—
Notes
City of Wichita agenda packet for September 11, 2018, item IV-3 ↩
“17.9 Emergency Air Travel Fund. The City and the Team acknowledge and agree that, as a condition of the PCL and MiLB approving the relocation of the Team to Wichita, the City and the Team must establish a fund (the “Travel Fund”) to be used to respond to reasonable claims presented by other teams in the PCL relating to accessibility, frequency and ease of travel into and out of Wichita. The Emergency Air Travel Fund Agreement is attached hereto as Exhibit D.” City of Wichita. BALLPARK FACILITY USE AND MANAGEMENT AGREEMENT BETWEEN THE CITY OF WICHITA, KANSAS AND YES2NO, LLC, A MASSACHUETTS LIMITED LIABILITY COMPANY Authorized to do business in Kansas. October 23, 2018. Available at https://www.wichita.gov/Stadium/Documents/Facility%20Use%20%20Management%20Agreement%20-%20Final.pdf. ↩
In a presentation, Wichita economic development officials ignore the cost of borrowing money.
In a presentation to the Wichita City Council on March 5, 2019, the council was shown a pro forma cash flow statement regarding the new baseball stadium.
Presentation to Wichita city council. Click for larger.The conclusion reached by city officials was: “The $38M equates to over 50% of the $75M stadium debt repayment.” 1
$38M, or $38,000,000 refers to the sum of the amounts the city expects to receive from these sources:
Incremental sales tax (used to pay STAR bonds)
TIF revenue (incremental property tax revenue)
CID (the extra sales tax customers will pay)
Naming rights
Management fee (the rent the new team plays the city)
The pro forma statement shows these cash flows starting in 2020 and continuing through 2042.
$75M, or $75,000,000, refers to the cost of the baseball stadium. (In this illustration the city has not included the $6,000,000 the city plans to borrow to pay for the pedestrian bridge and riverfront improvements.)
What’s missing? Interest on borrowed money.
If the presentation said, “The $38M equates to over 50% of the $75M stadium debt principal repayment,” that would be correct. But to tell the council that it costs just $75,000,000 to repay the stadium debt ignores the fact that the city is borrowing this money.
There will be a lot of interest to pay. We don’t know how much, as the bonds have not been sold, except for the STAR bonds. The city has planned to borrow $42,140,000 in STAR bonds. In the disclosure for these bonds, the interest payments alone total $24,647,850. In some years the interest payment alone is $1,828,556. 2
Citizens should ask the city what will be the total cost of repaying the stadium debt, and not settle for answers that ignore millions of dollars in interest.
Municipal Securities Rulemaking Board. CITY OF WICHITA, KANSAS SALES TAX SPECIAL OBLIGATION REVENUE BONDS (RIVER DISTRICT STADIUM STAR BOND PROJECT), SERIES 2018 (KS). Available at https://emma.msrb.org/IssueView/Details/ER387382. ↩
