May 27, 2015

Convention Hotel Justification Built on Fiction

Kansas City Mayor Sly James has announced an effort, long discussed at City Hall, to subsidize a convention hotel downtown. Part of the justification for this expense is the need to attract more conventions to Kansas City, despite the fact that the convention industry is already crowded and in decline.

In Kansas City’s case, justification for this expense is also built upon a fiction. When the effort to bring the GOP convention to Kansas City fell apart last year, the Kansas City Star reported a local consultant urging coworkers on the convention bid to stay on message:

“Nothing negative,” one public relations consultant wrote. “The reason given for the decision should be a lack of downtown hotels. Period. Please stick to this messaging. . . . Let’s all take care of one another. We’re still a team.”

Reporter Dave Helling revisited this argument recently. In the email exchange, another person responded:

I couldn’t agree more. Thanks for reminding us all to stick together. The only thing I would add is a lack of downtown hotels IN CLOSE PROXIMITY TO THE CONVENTION SITE.

It appears everyone fell in line. In Helling’s story about Kansas City’s elimination from hosting the GOP convention, written as soon as the decision was announced and before he received the internal documents mentioned above, he wrote that there were several reasons being offered:

Kansas City’s relative lack of enough high-quality hotel rooms close to the Sprint Center.

The city’s potential struggle to raise $60 million for the event.

Poor rail transit.

That same story goes on to detail the politics included in the GOP’s decision, including this telling part:

“The competition was tough,” said Brenda Tinnen, chairwoman of the Kansas City Convention and Visitors Association. “There are politics involved in these decisions. . . . I’m not sure that there was any one thing that said, ‘OK, this city is better than that city.’”

Tinnen is likely correct. There always are many reasons a convention does not come to a city. It is rarely the case, as some in Kansas City government want us to believe, that conventions are lost because of any one thing. But that is what we hear from the “team” of consultants, government officials, and public relations professionals.

Taxpayers should be wary. Such expensive decisions should be based on sound policy and economics, not a mere fiction promulgated by some on the convention “team” who write about the need to “take care” of one another—whatever that means.

May 22, 2015

Convention Hotel: Power & Light District v. 2.0?

Just in case you thought the city actually had learned its lessons from the Power & Light District debacle, recent reports will disabuse you of that notion. We were initially told that there only would be a $35 million payout from the city, financed by bonds. The rest of the $150 million in city support would be made up of abatements, TIF, and a Commercial Improvement District (CID) tax.

Steve Vockrodt at The Pitch considers other costs that the city doesn’t seem to be including in their estimates:

The property upon which the hotel will be built (bound by Truman Road and 16th Street and by Baltimore and Wyandotte) is mostly city-owned, which means that it currently generates no property taxes. Troy Schulte, the city manager, has said the land is worth $13 million.

Assuming that valuation is correct, it means that the land—if the city sold it to a developer and it returned to the tax rolls—would generate $333,998 a year in property taxes. Under TIF, the development captures all that money.

Given these arrangements, then, the public subsidy for the hotel is going to be a lot more than $35 million. About half the cost of the $300 million project will wind up being paid for by public taxes.

But wait, there’s more. The Kansas City Business Journal adds:

In addition, the just-released copy of the memorandum states, the city will pay fixed annual management fees to the hotel owner through the 15-year catering agreement. The fees, ranging from $2.4 million to $5.4 million, have a net present value of $47.3 million, according to the [Memorandum of Understanding] MOU.

And if event gross revenues are insufficient to make the scheduled fee payment, the MOU states, “the city shall pay from any legally available city funds.”

In other words, if the project underperforms, taxpayers will make up the deficit. Sound familiar? The MOU also requires that taxpayers subsidize the construction of the hotel by forgoing tax income on the materials; income from the sale of the site to be used; and a cap on the fees required for construction. These costs likely are not counted in the project total, but they are real funds the city would forgo. The Journal continues:

In addition, the developers will receive a sales tax exemption on construction materials, and the city, which owns three-quarters of the proposed hotel site, will donate that land (though it will be due payment if the hotel is ever sold).

The MOU also calls for the city to cap the developer’s fees for zoning, permits, inspections and reviews at $800,000 and to provide no subsidies to any competing hotels for 10 years after the new Hyatt’s opening.

That last part is the kicker. Hyatt realizes that the deal it wantswith its myriad subsidies, tax breaks, and payoutsif directed toward other hotels, would hurt their business. It only follows that the deal they are asking for now will hurt the hotels already downtown.

Who on the City Council is going to stand up for (1) those existing hotels who likely will be hurt by this project and (2) the taxpayers who are being asked to underwrite something that will undercut previous subsidized investments?

May 21, 2015

The Convention Hotel’s Tax Breaks and Gimmes

Reviewing the Memorandum of Understanding (MOU) between the city of Kansas City and the developers who want to build a convention hotel, I see that the developers are asking to be exempted from all sorts of taxes. You can read your own copy of the MOU here:

It appears that, unlike most TIF projects, the developers want 100 percent of incremental economic activity taxes, including sales taxes and the earnings tax. Page 11 of the MOU states,

The City will . . . redirect through its annual budget the City’s portion of the Project TIF for a period of 23 years and Super TIF for a period of 30 years generated from the Project’s tax revenue sources . . .

In  other words, they want the half that they get from the TIFs directly, and then they want the city to give them the rest through the appropriations process. Here is the tax revenue the developers want to keep:

  • Tax Increment Financing (TIF): as mentioned above, all economic activity taxes collected by and for the county, school district, library district, and the zoo will be redirected back to the project for 23 years.
  • A Super TIF that collects for 30 years the tax not captured in the TIF above, including the convention and visitors tax, and redirects it to the developers.
  • A 100 percent exemption on sales taxes on construction materials and real/personal property taxes.
  • The creation of a 1 percent Community Improvement District (CID) tax that will then be redirected back to the developers.

Here are some extra freebies the developers want:

  • A cash contribution of $35 million.
  • The city’s portion of the land, valued at $13 million.
  • Fees generated by zoning, permits, inspections, etc., capped at $800,000.
  • A management fee to the hotel for catering amounting to $62,363,816 over 15 years. Should the event fees be insufficient to cover this, the city will pay, “from any legally available city funds,” just like we do with the Power & Light District.

Here are some possible problems for the city, based on past issues:

Not mentioned in the MOU is any exemption from the streetcar Transportation Development District (TDD). Apparently, funding the downtown streetcar is more important than funding the city, county, schools, libraries, and zoo. What does that say about the City Council’s view of the rest of Kansas City?

Kansas City’s Convention Hotel Memorandum

The City Council of Kansas City is considering subsidizing half of a $300 million downtown convention hotel adjacent to Bartle Hall. There is a lot to be considered in the deal, the least of which being whether the city should be using taxpayer dollars to build hotels when the city seems unable to provide basic services.

As we examine the deal, we wanted to share the Memorandum of Understanding with our readers. You can find a copy of it here.

May 14, 2015

If the Riverfront Stadium Plan Had Two Wheels, It’d Be a Bicycle

Recently, Dave Peacock, the head of Missouri’s stadium task force, spoke at a Commercial Real Estate Women of St. Louis breakfast. He discussed changes to how a riverfront stadium would be publicly funded. He also talked about how a new stadium could not only keep the Rams, but also transform the North Riverfront.

Originally, the plan was for the state, the city, and the county to extend bonds meant for the Edward Jones Dome to raise about $350 million to fund a new stadium, with an additional $50 million in state tax credits making up the rest of the public support. This changed when Saint Louis County, which was threatening a public vote on the issue, was dropped from the funding plan. Peacock confirmed that with the county out it will be left to taxpayers statewide to pick up the $100 million bill—a bill unlikely to be offset by any economic activity generated by the team.

In a sense, the new funding plan is just rearranging deck chairs on the Titanic; large public subsidies for sports stadiums do not make economic sense regardless of the city/state/county funding ratio. The growing list of contingencies—none of which local governments control—that Peacock’s plan relies on for everything from stadium funding to economic development is getting more preposterous. These include:

  1. Getting a team owner and the NFL to cover $450 million in costs for a new stadium. No team owner, especially the Rams’ owner, has expressed any inclination to do this.
  2. As things stand, a plan to fund a new stadium needs to go to a public vote in the city. Residents might vote no.
  3. Getting an MLS soccer team in Saint Louis.
  4. After getting an MLS soccer team, getting (and funding) a soccer hall of fame.
  5. Funding an entertainment center at the Union Electric Light and Power Company building.
  6. And finally, because Peacock thinks the Rams owner is committed to relocating to L.A., getting Kroenke to sell the Rams to another owner who will keep the team in Saint Louis.

You got all that? If city residents and the state government agree, against the advice of economists, to publicly fund a new stadium, and the Regional Convention and Sports Complex Authority (RSA) uses eminent domain to bulldoze the North Riverfront, we can then hope the NFL will force/convince Kroenke to sell the Rams to an owner who, along with the NFL, may decide to fund half the costs of a new stadium, which in turn might just convince an MLS team to move to Saint Louis, which then might prompt the MLS (no doubt with some tax dollars) to locate their hall of fame at a new entertainment complex (funded by…someone) at the old power building. That’s some plan.

May 13, 2015

Collaboration and Competition

On Friday afternoon, Ronald Garan Jr., a retired U.S. Air Force colonel and NASA astronaut, addressed about 40 students at a charter school in Kansas City, Mo. His talk featured plenty of pictures and videos of his time aboard the Space Shuttle Discovery and the International Space Station. Garan’s talk was about cooperation and collaboration to solve the world’s challenges.

Garan_v2I had the opportunity to visit briefly with Garan after the talk. I wanted to know how he squared the principles of collaboration and cooperation with competition. After all, everything that made his career in the space program possible was accomplished through competition—whether a space race between nations or a bidding process among companies seeking to sell products to the U.S. government. That is when Garan distinguished between proper competition and destructive competition.

Proper competition gets us better good and services. It comes from having an even playing field; the company with the best product wins. A destructive competition does not bring us those things because it often lacks the necessary rigor, data, and transparency.

Without rigor and data, good intentions fail. To make his point, he offered an example from his experience working with developing countries. An organization might have a splashy website and a compelling celebrity endorsement. The company may show off the new wells they put in place, but if no one is focusing on whether those are working properly the whole effort is wasted. Garan said, “Sometimes there is too much emphasis on the new and shiny and not the tried and true.” No one wants to watch a TED Talk on the same old ways of doing things, he suggested, even if those ways are the most effective.

Therein lies the real lesson: Open yourself to rigor, data, and transparency. For governments it means fostering the productive competition that leads to legitimate innovation and improvement. For the taxpayers it means not getting caught up in new things simply because they are new; value what works, even if it is less flashy. And always make sure that government is transparent.

May 11, 2015

Shocking Support for Taxing Bed and Breakfasts

Bed & breakfasts (B&Bs) have a long history in this country. To many they are associated with comfort and an antique ambiance. To the taxman they are a prime opportunity to raise revenue.

bb-signLast week, the St. Louis Post-Dispatch reported that Saint Louis bed & breakfast owners are upset over the city assessor’s decision to assess their property (or at least the part used as B&Bs) as commercial properties. I can understand why these owners would be upset. According to the way properties are assessed for property tax purposes, if B&Bs were even partially assessed as commercial properties, the owners’ property tax bills would go up substantially.

I sympathize with any business owner that is facing a higher tax bill. However, I do not oppose this change. Saint Louis is doing the right thing here. If a property is engaged in commercial activity, the city should assess it as a commercial property. The situation is trickier with people renting rooms through airbnb. These lodgings are not necessarily full-time establishments, and so some mechanism needs to be in place to make sure they don’t get a tax advantage compared to traditional B&Bs.

Having a large property tax base is important. It’s especially important in Saint Louis because it can serve as a way to reduce (or even eliminate) the earnings tax. The Show-Me Institute released a paper arguing that the earnings tax could be replaced by a two-tier property tax (this differs from a traditional property tax in that the two-tier approach taxes the land more heavily than any improvements on the land). Even if the city sticks with a traditional property tax system, a wider base can generate more revenue to offset any reductions in the earnings tax.

Paying more in taxes is never fun, but low taxes for some shouldn’t come at the cost of a hollowed-out property tax base.

May 8, 2015

Millennials Prefer Suburbs . . . and Cars

If you live in Kansas City, you’ve doubtlessly heard breathless paeans to millennials from city leaders and how we must spend public money to attract them. From entertainment districts to apartment buildings, airports to convention hotels, restaurants to streetcars, everything has been sold on the premise that we must cater to the creative class.

Nevermind.

Millenials-in-AdulthoodResearch featured in Business Insider tells us that millennials aren’t much different from their parents’ generation.

“They still want good restaurants, but now it’s also about space, affordability and being able to send their kids to a good public school,” said Paternite, 45, who added that about 70% of her business now comes from young families who are making the move from Brooklyn or Manhattan.

Millennials, typically defined as those born between 1981 and 1997, may be turning into their parents after all. A generation that’s been stereotyped as urban, single, and aghast at the idea of a car-based life in the suburbs is starting to age, prompting fund managers to bet on companies that should benefit if the US birth rate reverses a six-year slump.

Oh, and their supposed desire to get away from cars? Also false:

The generation once seen as shunning cars accounted for 27% of new auto sales in the US last year, up 9 percentage points from 2010, according to a recent study by JD Power and Associates.

The stereotype was probably never true, yet it has driven so much of the policymaking, rhetoric, and spending from City Hall. Readers of this blog see nothing new here. We’ve been debunking the millennial myth here and here and here.

In the meantime, the rest of the city—where people are actually living—has been neglected and left to dry up. Rather than chase mythical populations of the future, we need to fix the real problems that impact the quality of life for millennials—and everyone. This means streets, sewers, schools, crime, and we need to do so efficiently while keeping taxes low.

Courts Should Avoid Setting Policy in Columbia Schools

Decorative Scales of Justice in the Courtroom

The Columbia Public School District (CPS) and the union representing teachers in the district, the Columbia Missouri National Education Association (CMNEA), are embroiled in a labor dispute. The union wants a labor agreement with a pay increase for its members, while the district, in a tight place financially, wants to keep costs down. Unfortunately, because of recent court decisions, the courts might get involved here, substituting their judgment for that of the negotiators.

In 2012, the Missouri Supreme Court expanded its jurisdiction by reading a duty of “good faith” collective bargaining into the state constitution. The words “good faith” do not appear in the text of the constitution, but the supreme court has spoken and lower courts will follow the supreme court’s lead. As a result, courts throughout the state may now intervene in government labor relations if they determine this duty is not being honored.

The new “good faith” standard could affect the labor situation at Columbia Public Schools. The union and the school board met several times this year but did not come to a final agreement by the last scheduled bargaining session. Oddly enough, even though there are no more bargaining sessions scheduled this year, CMNEA is showing up to the school’s administrative building and “waiting” for a CPS bargaining team to arrive. In the Columbia Daily Tribune, one union official described the district’s refusal to continue negotiating after the last scheduled bargaining session as a failure to negotiate in good faith.

If the courts get involved here, it would be bad news for Columbia citizens. Columbia voters elected a school board to manage their public schools. Not a union. Not the courts. If a court steps in and forces a binding labor agreement that the duly elected school board didn’t agree to, the court would be setting school district policy against the will of the people.

April 30, 2015

Promise Zone Just the Latest of Many Development Zones for Saint Louis

This week, the Obama Administration announced that parts of Saint Louis City and North Saint Louis County would become the latest federal “Promise Zones,” a designation that will put these areas in the front of the line when it comes to getting federal poverty aid and Department of Housing and Urban Development (HUD) funding. While there is hope that the zone can be a catalyst for change in Saint Louis, this is hardly the first time the Saint Louis region has become part of a federal zone or the target of HUD aid.

Creating special zones to channel development is not a new concept in Saint Louis. Much of the city is part of a federal “Empowerment Zone,” which gives distressed areas tax incentives and federal grants. East Saint Louis is already part of an Empowerment Zone and an “Enterprise Community.” Saint Charles became a federal “Renewal Community” following flooding in the 1993. In addition, areas of North County have Foreign Trade Zone (FTZ) status (the entirety of the city and county are FTZ eligible), which qualify some businesses for customs-free imports. Much of the city and parts of the county are in “HUBZones,” which are designed to give federal procurement preference to small businesses in distressed areas.

EmpII
HUbII
Even at the state level, the Saint Louis area has special development zones. Much of Saint Louis City is an “Enhanced Enterprise Zone,” which provides state tax credits to certain types of businesses setting up in certain areas. Nearly 100 census tracts in the Saint Louis area are designated as distressed communities, making businesses eligible for large tax credits through the state’s Rebuilding Communities program.

Aside from special zones, the Saint Louis area has been the recipient of just about every type of development aid that HUD has available. In the 1990s, the state received $15 million in Section 108 grants to spend on housing. In the late 1990s, the city received $20 million in Community Development loans and $2 million in Community Development grants. The city spent that money on the Renaissance Center hotel, which turned out to be a financial disaster. More recently, HUD gave a grant for the planning of the Lemay Community Center. The only major HUD programs the Saint Louis region has not benefited from are those targeted at rural areas and arson/terrorism.

When we consider that Saint Louis City, North Saint Louis County, and East Saint Louis have, since the early 1990s, benefited from exactly the kind of federal attention the “Promise Zone” would bring, it is difficult to conclude that adding yet another zone is part of the answer. Given the continued “disinvestment” in these targeted areas over the last 20 years and the growing evidence that such zones do not generate progress, it may be time to consider other policy solutions to combat economic decline.

April 27, 2015

Power Play: State to Give Special Electricity Deal to Favorite Business

Have you ever taken a look at something and thought to yourself, “Wait a minute, I don’t think you’re using that right”? Kinda like that scene in Tin Cup when Kevin Costner uses a shovel instead of a 3 wood when golfing. Well, it appears that the Public Service Commission (PSC) has decided to get in the economic development game.

The PSC serves to regulate utilities in the state so that Missourians receive safe and reliable services while the utility companies charge rates that allow them to earn a reasonable rate of return on their investments after they recoup project costs.

winnersHowever, the PSC recently instructed its staff to prepare an order granting Noranda (an aluminum company in Southeast Missouri) a reduced rate on the electricity it consumes. The reasoning behind this decision is to allow Noranda to save on costs so that it can improve its financial position and avoid financial difficulties in the future.

This is yet another attempt by the state to help improve Noranda’s bottom line. Noranda already pays the lowest electricity rates in Missouri. Since it is the largest consumer of electricity, I can understand why that would be the case (bulk discounts for large purchases aren’t uncommon). However, the state also specifically passed legislation that allows Noranda to shop for its electricity provider. No other person or business in the state has such a privilege.

Now the state wants to lower Noranda’s rates even further. Why? That’s simple: to save jobs, which is a noble sentiment, but this is not the role of the PSC. This order amounts to the government picking winners and losers, just through a different means than what we’re typically used to seeing.

I want Noranda to stay in business, but it’s not the PSC’s job in order to guarantee that. If we work to keep the cost of doing business low in Missouri, everybody, including Noranda, will benefit.

April 25, 2015

Traffic Fine Law on the Verge of Passing

On April 22, SB 5, which greatly strengthens a law that limits how much revenue a city can raise via traffic fines, passed the Missouri House.

The bill has changed somewhat since it was introduced in the senate. Starting in 2016, the cap on how much a municipality can raise from traffic fines will fall from 30 percent to 20 percent of general revenue, unless the municipality is within Saint Louis County, where it will fall to 15 percent. These provisions are somewhat weaker than the original bill, which would have brought the cap down to 10 percent in populous counties. The amended bill includes more provisions that make courts transparent and protect people arrested due to unpaid fines.

The bill’s text still includes the enforcement provisions that the existing law, known as the Macks Creek Law, lacks. No enforcement has meant fines have become a significant revenue stream for cities, especially in Saint Louis County.

nstl

If this bill passes, revenue from fines and fees will be well defined, reporting requirements will be strict, and penalties for failing to comply are significant, including triggering a vote on disincorporation.

Many municipalities still object to the law, claiming that this prevents them from enforcing the law. But as we wrote before:

This argument falls flat because revenue collected in excess of SB 5’s provisions is simply remitted to the state, which in turn gives that money to the school systems in the county of the municipality in question. If police in local cities need to fine people to protect health and safety, they can still do so. But SB 5 takes away the narrow financial interests of the city government.

If the senate agrees to the house’s alterations to the bill, SB 5 will only require the governor’s signature to become law.

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