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In Wichita, an incomplete economic development analysis

From August 2015.

The Wichita City Council will consider an economic development incentive based on an analysis that is nowhere near complete.

Tomorrow the Wichita City Council will consider granting a sales tax exemption for a real estate development in northeast Wichita. (For background, see In Wichita, benefitting from your sales taxes, but not paying their own.)

As evidence of the goodness of the project and why the city should forego collecting sales tax, the council has been presented with these benefit-cost figures:

City of Wichita General Fund: 44.67 to 1
City of Wichita Debt Service Fund: NA
Sedgwick County: 100.23 to 1
USD 375: NA
State of Kansas: 65.28 to 1

Undoubtedly council members will congratulate themselves on their wisdom and foresight for being able to invest $1.00 and get back $44.67 in return. And look at what a favor the council is doing for the county and state! For an investment of $1.00, they’ll get back $100.23 and $65.28.

If only these numbers were a true and accurate representation.

The source of these numbers is that the city is giving up a relatively small amount of sales tax revenue, but gaining a lot of property tax (and other tax) revenue in the future. This is true, as far as we can predict these things.

The problem is that one of the numbers used to calculate the benefit-cost ratio is incomplete, and far from being complete. (Click here to view the analysis prepared for the city.)

The source of the calculation starts with the city giving up $16,227 of its share of sales tax revenue, based on the action the council will likely approve on August 11. This is the city’s cost, according to city documents. Then, future tax revenues are estimated, discounted to present value, and compared to the cost. The result is the benefit-cost ratio.

This calculation could make sense if the city included all costs in the calculation. But it hasn’t done that. First, the project benefits from STAR bonds. These bonds carry a sales tax exemption on goods purchased with bond proceeds, which means that the city (and other jurisdictions) are forgoing the collection of other sales tax revenue in addition to the sales tax used in the present calculation. This foregone revenue is of precisely the same nature as other foregone sales tax revenue that the city includes in its calculation.

Additionally, the project benefits from up to $7,525,000 in STAR bonds financing. These bonds will be repaid by sales tax collections from the project and surrounding merchants. This represents more sales tax revenue that the city and other jurisdictions will not be able to spend on anything except paying principle and interest in these bonds.

If these costs were included in the benefit-cost ratio calculation, I don’t know what the result would be, except that it would be different, and probably a great deal lower. It might even be below the city’s threshold for projects.

No matter your opinion on the wisdom of the city investing in public-private partnerships, the city council ought to insist on complete information. That hasn’t happened in this case. The city is using only part of its costs, but pretending that these costs are responsible for producing all revenues.

Who do we hold accountable for this? The benefit-cost ratios are computed by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. It uses figures provided by the city. In the past, when results like these have been questioned, the city has cited the economists at CEDBR as evidence that the figures are valid and reliable. By splitting the responsibility for these calculations, accountability is avoided.