ULI hosted a panel of experts to discuss economic development incentives in Kansas City.
Development incentives are a hot topic of concern in Kansas City. Questions prevail of whether certain these tools should be used at all, how they should be used, and whether they should be used.
Thanks to the Urban Land Institute, a group of experts gathered to debate incentive use, and how to best maximize the return on investment. The group included Charles Renner, Husch Blackwell; Bob Langenkamp, CEO of the Economic Development Corporation; Kevin Masters, KCMO School District; Patrick Tuohey, The Show-Me Institute; and Kerrie Tyndell, director of economic development at the City of Kansas City, Mo. Here’s a glimpse of that conversation.
Do we need tax incentives to assist development? If Kansas City was to cut back its use of these tools, what would happen?
CHARLES RENNER, Husch Blackwell
“There are two issues; One is whether to have the tool and the second is how to use it. The question as to why you need them is proven. I am a believer that most economies at a municipal level have a fixed or growth model. The growth model is continuing to grow the economy and the fixed model is a fallacy in my view. I don’t think you can ever reach a fixed point and stay there, because things age and change, so you’re either pushing forward or slowly falling backward. If you were to remove a tool from a community’s toolbox, it’s less equipped to grow. I think they’re significant and it would be unfortunate if the city was to remove them rather than improve their use.”
PATRICK TUOHEY, The Show-Me Institute
“What you have to believe in order to believe that incentives matter is that development doesn’t happen unless government subsidizes it. The University of North Carolina-Chapel Hill did a study in Chicago and found that the “but for” part of development subsidies was absolutely meaningless, that if the city had done nothing, development would happen anyway. If you read a TIF report, you’ll find that the “but-for” analysis is just an affidavit from the developer saying ‘We won’t do this without the money.’ And the cities chip in, spending money that would go to other taxing jurisdictions, and there’s nobody on the other side of the table to say ‘Stop,’ because TIF commissions are stacked with city appointments. So what you have over time is this perversion of what maybe would have been a good idea when it started, but what it’s come to be in Kansas City and around the nation is an abomination. You may be able to point out anecdotes, but when you look at the research overall, it doesn’t make a difference to a city’s growth how much incentives they use.”
KEVIN MASTERS, KCMO School District
“While we don’t necessarily believe that the economic development incentive policy in Kansas City right now is a good and moral and effective policy, we’re also not on the extreme side where we say there’s no good incentive. We think there are areas in Kansas City that are severely economically depressed. Some of those are agricultural areas, industrial areas, residential areas. There is potentially a need but that need should be based on real market data -- not necessarily data that’s assimilated out by the developer or individuals doing the development. The market should populate more of the funding analysis and data.”
BOB LANGENKAMP, Economic Development Corporation of KC
“Economic incentives are a tool. They are a means to an end and there should be a public policy goal that you’re utilizing these tools for. I think it’s hard to make a sweeping generalization about them because it’s so very different from one project to the next. I’ve worked for a long time on different projects and they come up for all kinds of different reasons. Kansas City is a little unique from other places in the country. We have this two state structure. We have competition that goes back and forth. Sometimes not just at a municipal level but at a state level. We find ourselves in KCMO competing against not just another municipality but an entire state. We utilize incentives as furiously as we can when we’re in competitive situations to try to keep jobs Kansas City already has or attract new jobs. The incentives can be involved in leveling the playing fields. In KCMO, I have a different cost structure than someone has in a different municipality. KCMO has decided for public policy reasons that minimum wage, prevailing wage scale is very important. That affects the cost of a project. KCMO has decided it wants MBE/WBE policies. There’s several social good or whatever type of elements that our council has decided are important. But those affect the cost of a project. Just like if you’re trying to build structured parking for an office building downtown at $24K a square space or out in a suburban community where it’s maybe $2K a space. We use incentives to try to level the playing field so we can be as competitive as possible. Would projects be built anyway? The art of what we do, what everyone wants to do is figure out the minimum amount of public support that has to go into the project to make it occur but not provide incentives one penny over what that level is. That’s a difficult job; I think it’s a job that in Kansas City we’ve been working on pretty aggressively for the last five or six years in terms of increasing the due diligence. That’s a trend you’re going to see in municipalities going forward -- trying to make sure there’s not an over-incenting of a project.”
KERRIE TYNDELL, Director of Economic Development at KCMO
“Incentives are a tool we use to correct for market factors outside our control. Bob talked about leveling the playing field. The way that plays out is in cost of construction, extraordinary site costs associated with the redevelopment of a particular site, but it also can be in terms of actually the market potential that’s out there for developers to then be able to generate revenues to help pay for that investment. Unfortunately because of past development problems throughout our city, there are areas where we’re not able to attract the level of investment and revenues necessary in order to do that kind of redevelopment. That’s why incentives are there. I look at them as a great opportunity for us to partner with the private sector. While public entities want to see development occur in certain areas of the community, that may be a very risky area from a real estate developer’s perspective. I view my role as trying to create an environment where that risk is mitigated and/or minimized and/or the public sector then partners with the private sector investors to try and push the envelope.
At the end of the day, we’re trying to work together to make sure that we have jobs, we’ve eliminated blight, and that we’re creating safe, quality neighborhoods. In terms of where we’re at now versus where we’re at historically, I think the good and the bad news is that there’s still a lot of work to do. There are a lot of properties throughout our urban core and through many of our neighborhoods that need a lot of attention. Kansas City has a lot of real estate to cover and there are a lot of things that could merit the type of investment we’ve seen. But at least in downtown and other areas where we have strategically targeted our resources, I think we’re beginning to see the benefits of those investments and I think we have a national profile now in Kansas City amongst the development community that we hadn’t had previously. That’s great, because that’s bringing in new investment resources, capital resources from elsewhere in the country to infuse into our community and help rebuild our city.”
Which incentive programs have been most effective? Which need reform or elimination?
KEVIN MASTERS, KCMO School District
“We think they all need reform. From our perspective, TIF (tax increment financing) is the one tool where we have more skin in the game, because not only is it your property tax, now you put the earnings tax and utility tax in. In 2015, we had somewhere in the neighborhood of $16 million of TIF revenue that should have gone into public education. When I say public education, not just public schools but it includes charter schools. $16 million – and that’s just in one year. There’s another $15 million redirected through other incentives like PIEA, LCRA, etc. Altogether, $25 to $30 million in one year directed out of public education that are real operational costs. TIF is deeply concerning to us moreso than others because others are abatements. If a development occurs, and the development is receiving an abatement, the biggest investor is actually public education in that case. From our perspective, the whole system needs revamped. At the heart of the philosophical discussion for us, you have a taxing entity - the city - making decisions on how other jurisdictions will utilize their resources.”
PATRICK TUOHEY, The Show-Me Institute
“The point of TIF was to say there are bad parts of town where we want to encourage business to develop in. You’ve got them all over the east side. The idea is to partner with private business to lighten the load. We say if you’re willing to invest in this part of town, we’ll help redirect some of the taxes back to you. That’s reasonable. But the problem in Missouri and everywhere else is that the development never went there. The development goes to the nice parts of town. We’re building luxury apartment buildings with a policy meant to help the urban core. The data nationwide shows that TIF doesn’t work, probably because we guard who we give the money to. Everyone is allowed in. So we end up with this hodge podge that really has no impact. If we say TIF will be applied to certain areas, maybe determined based off property value or poverty numbers or something, and say this is where we’re going to apply TIF, and if free marketers and developers want to develop elsewhere in the town, you are welcome to do so. We encourage it, but we’re not going to pay for it. So with that background, imagine the idea of TIF isn’t so objectionable because it’d be targeted to, say, the east side of Kansas City. But what it’s become is something else entirely. With that caveat, I’m not opposed to any type of incentive policy. But what we’ve got today is never what was intended.”
CHARLES RENNER, Husch Blackwell
“One thing that is excellent about the tools we use is they are not bumper sticker absolutes, yes or no. There is the ability to ‘right size’ them. There are a number of projects where the result is that an investment happens, incentive is used, and it’s not a 100 percent deal. So taxing jurisdictions have some positive results. Details matter. The state has a certain obligation to fund education, and they don’t always do it. That doesn't mean that the programs themselves are poor. As an example, any absence of payment to the school district is taken into account with the school’s foundation formula. If the state was meeting its obligation there, the impact would be different. Thirdly, every state has and uses these tools. They’re relevant, impactful, and make a big difference. It still takes private investment, public participation, and an agreement on priorities to get things done. But when you have that, the development community, city government actually works together to accomplish things. Most of the examples we put up are going to be successful, and most of them are not going to be all-or-nothing deals.”
Tuohey says since the inception of the Power & Light District, liquor licenses and health cards issued has remained the same, while only 50 percent of the jobs developers promised have actually been delivered. Image courtesy of VisitKC.
PATRICK TUOHEY, The Show-Me Institute
“What EDC folks want you to believe is that if they had not participated in this project, it wouldn’t have happened. And therefore all the good things that resulted are a result of their promise. That’s just not realistic. Does anyone really believe that Burns & McDonnell wouldn’t have built their headquarters next to their current world headquarters at 95th and Bannister? We all know it’s absurd. But the EDC counts that as a success. Look at all the jobs. With the Power & Light District, I found the number of liquor licenses and health cards issued every year for the past 15 years. That number is flat. All we did in the P&L District was divert development from elsewhere in the city to one particular place in town. But the aggregate number of liquor licenses and restaurants serving alcohol is the same. Is that success? If you look at the state of Missouri’s annual report on TIF, you find that we only achieve about 33 percent that developers tell us are going to result from TIF. And the Power and Light District is 50 percent so maybe that’s a success. What you have to believe is that these developments wouldn’t have happened without a subsidy. And that just isn’t true. Developers know that they’re going to make use of this tool or tools elsewhere to get money, and who can blame them? If you’ve got a fiduciary responsibility to your shareholders, you go get the best deal you can. But I wish our city leaders would stop being suckers about who they give money to.
"Perhaps we should put a cap on the amount of abatement or TIF we have citywide. I understand right now it’s about 14 percent. I don’t know what number is too high but we’re not collecting tax on 14 percent of the value of KCMO. Maybe we put a cap on it. Maybe developers come before the TIF commission and say we know there’s a cap, and pit two developers against each other and make them do the hard work. Right now, they just come up and says here’s my stuff, and the council rubber stamps it, and we’re off.”
Should incentives be reformed? What is the prospect for reform? What will happen without reform?
BOB LANGENKAMP, Economic Development Corporation of KC
“We’ve started doing cost-benefit analysis where we go in and look at each of the different taxing jurisdictions. This project is going to add two students to the school district and the district spends X amount to educate a student, so we try and estimate what that cost is. Then you look at the revenue streams coming in from the project and whether they’re running a positive or a negative. These things are like mini computer models; they’re estimates based off a lot of assumptions. These are elements you have to look at. I disagree that we’re taking away money from the school district. [Taxes] weren’t being generated on this property before the project and now they’re being diverted, but they wouldn’t have existed if we hadn’t done the project in the first place.”
KERRIE TYNDELL, Director of Economic Development at KCMO
“There are reforms already underway and reforms that have already taken place. In 2007, the city undertook a major initiative to reform economic incentives and there were a lot of stakeholders involved and a lot of specific recommendations that came out of that process, including a recommendation to take the “but for” analysis and have that conducted by a third party independent entity. There was a concern about transparency and accountability, and that issue has been addressed. Additionally, there were concerns about the impact in taxing jurisdictions. There was a cost-benefit analysis that was now done on project because that was identified as a concern and it’s been addressed. There are a variety of different policies that are on the docket and being discussed at city hall on an ongoing basis to address policy issues as they come up on a case-by-case basis. We’re working to improve things over time.
"I see change forthcoming. I want to be clear: this is not an issue that the city ignores or that we haven’t tried to improve over time. One other big thing we did in 2012 was undertake a strategic plan called Advance KC to identify our strengths and weaknesses as a community and where we needed to focus resources. Out of that came an effort to target specific industries for job attraction and retention because we know those are growth industries. That’s where we have opportunities for job creation and business development, so instead of focusing on everyone, we also made some substantial changes in terms of governance and process and how projects are vetted to try and bring the other taxing jurisdictions to the table and make them part of the conversation.”
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