Spree of tax breaks has some wondering if KC has gone overboard

Certainly, TIF has been good for Kansas City, but how good and at what price? It turns out, TIF in many ways is the economic equivalent of going on a fad diet - it may work but often not as well as you hoped.

A four-month examination of TIF by The Kansas City Starfound that Kansas City has gone on a TIF-ing spree beyond other big cities the newspaper checked. While downtown's revival has grabbed headlines, the local landscape is littered with TIF projects that have overpromised and underproduced. As a result, critics say, there's less tax money for neighborhoods and school districts.

TIF is a development tool in which half or more of the taxes generated by a new shopping center, office complex or hotel are then funneled back into those projects instead of paying for basic government services such as street paving. Developers like it because it gives them tax dollars to mitigate the risk of building challenging projects. City development officials like TIF because it helps attract private investors who might not otherwise come - and keep companies that might otherwise leave.

But outside the development community, there's a growing concern among academics, corporate watchdogs and even elected officeholders that Kansas City has reached a point where it's using TIF too much with too little return.

Kansas City has been operating without a policy guiding the use of TIFs and the city government is finally working on one, with a task force report due later this week. As that work progresses, The Startallied up TIF's impacts in a way City Hall hasn't done before by analyzing TIF reports and researching individual projects.

The Starfound that:

Kansas City has agreed to divert, over decades, about $3 billion in general tax revenues to TIF projects - six times more than the TIF subsidies approved in either Milwaukee or St. Louis, other cities where TIF is used aggressively.

KC's TIFs are not performing nearly as well as they've been touted. While the city's economic development agency claims TIFs have created about 23,000 total new jobs, The Star'sanalysis shows it's likely that TIFs have created about half that number.

The city has ended up focusing TIFs in a few areas such as downtown, leaving large parts of the city with little TIF investment. For instance, of the $232 million in TIF tax dollars the city had actually spent through 2005 in TIF districts, the Northland and the Country Club Plaza received $112 million, or almost triple what's been spent across the entire East Side and Southland.

Kansas City's use of TIF accelerated during Mayor Kay Barnes' eight years in office, which ended this past spring.

She contends the city would "go down the drain" without TIF and needed it to reverse decades of decline downtown.

"The important basic point is, were it not for tax increment financing, these projects would not have occurred," Barnes said. "It's that simple."

But her successor, new Mayor Mark Funkhouser, thinks TIF is so out of control he demanded that a task force draft new TIF guidelines.

"We have to be much more controlled and focused and disciplined about what we're doing," Funkhouser said. "We can't stop because there are going to continue to be public purposes that we need to serve. But we cannot keep doing what we're doing."



12 Sprint arenas

Maybe you've been to dinner at Lidia's restaurant downtown. Or shopped at the new grocery on Blue Parkway. Or visited a friend who bought a house in Shoal Creek valley in the Northland.

Those all opened or happened partly because of TIF. The tax break doesn't mean customers or tenants get lower prices. But it makes the development deal more likely to get done in the first place.

TIF's impacts on everyday life are sprinkled across the city. You may work in a TIF'ed office building. Your out-of-town friends may stay at a TIF'ed hotel. You may drive on newly paved roads in a TIF district, especially across the Northland.

The fruits of TIF are most visible downtown, where half of all TIF districts are located. Corporate stalwart Kansas City Southern consolidated into a new office tower off Broadway. Vacant historical buildings like the New York Life and the President Hotel reopened.

"Walk on any street in downtown and you will see new life in the buildings," said Kansas City Southern executive and downtown booster Warren Erdman.

Across Kansas City, there are now 55 active TIF districts. TIF is only one tool in the city's economic development tool box, but it's the biggest.

The city doesn't tally up its TIF approvals, but The Stardid and determined the government has approved $3.1 billion in past, present and future public commitments to those projects. That's the equivalent of almost a dozen Sprint arenas.

Those billions may not all get spent because not all of Kansas City's projects will come to fruition. Still, based on available government reports and academic research, The Stardidn't find another similar-sized city that came close to Kansas City's level of approved TIF subsidies.

Milwaukee has approved nearly the same number of TIF projects as Kansas City, but only $443 million in taxpayer subsidies. St. Louis has created more TIF districts but only granted $481 million in total subsidies.

Those cities started using TIF in 1990, just a couple of years after Kansas City. Like Kansas City, they use other incentive programs, but also like Kansas City, they make TIF their main incentive for major development projects, according to officials in those cities.

Clearly, Kansas City has been more generous to developers. The city's $3.1 billion in taxpayer funding is supposed to leverage $6 billion in private investment, for a 34 percent public subsidy.

Meanwhile, according to The Star'sresearch, St. Louis has provided, on average, 18 percent of a TIF project's costs, while Pittsburgh, another city that uses TIF aggressively, has averaged 15 percent.

"Kansas City has had the most liberal approach to the use of incentives of any city we've studied," said Robert Cornwell of CSG Advisors in San Francisco. His firm has studied TIF across the country and now it is part of a consulting team studying Kansas City's economic incentives this year.

The Economic Development Corporation of Kansas City oversees the TIF Commission, and agency president Jeff Kaczmarek said Kansas City has used TIF a lot because it competes against other cities and suburbs holding out the same development carrot.

"Kansas City needed to jump-start things," Kaczmarek said. "They had this tool available, and they decided to use it aggressively."



Rosy projections

In two primary measures of economic growth - new tax revenues and new jobs - the promises made by TIF developers have often come up short.

In terms of tax revenues, even the city's Economic Development Corp. acknowledges that nearly two-thirds of TIF projects hadn't met projections through 2005, the latest year available.

In terms of jobs, the TIF Commission's latest annual report also showed two-thirds of TIF projects - either completed or long-running - hadn't delivered as many jobs as pledged.

Also, The Star has determined the development agency's tally of total new jobs is considerably overstated.

Based on last year's TIF annual report and projects that have opened since then, the Economic Development Corp. claims TIFs have created more than 23,000 new jobs. But that tally tends to include jobs that already existed and merely moved within the city.

So The Starexamined the job projections by checking where companies were previously located, verifying how many jobs companies currently have and interviewing developers in some cases.

Consider a warehouse and distribution center in the East Bottoms, called the Universal Floodwater Detention plan. The city agreed to build some storm drainage ponds, while the developer promised to create 6,000 jobs.

Over the years, ponds were built, but because many of the companies occupying new warehouses simply moved from elsewhere within Kansas City's city limits, the TIF has produced just a few hundred net new jobs, according to The Star's estimates.

"We had a pretty big slump in the industrial space market," explained Jim Wiss, who oversees the TIF and concedes it hasn't met projections. "I think ours has done pretty well, because we've developed millions of square feet of warehouses and cleaned up some of the drainage issues."

In downtown, the Grand Boulevard TIF created 275 new jobs when UMB moved into its Technology Center building, according to TIF's annual report. However, UMB merely consolidated staff from other downtown locations, and a UMB spokeswoman confirmed that no new net jobs were added.

Then there's the Uptown Theater TIF along midtown's Broadway corridor. TIF's annual report lists 377 new jobs created, but since the biggest addition to that corridor has been a Walgreens drug store, even the TIF's developer disputes the jobs figure.

"I would say we have not created 377 permanent new jobs," said Larry Sells, the theater's owner. He guessed the actual number was less than 100, far from the original projection of 800 jobs.

"Projections are projections, right?" Sells said. "A lot of time, they don't mean anything."

The city's Economic Development Corp. contends it has no control over the job figures it reports. They come directly from developers. Not only does the agency not check them, but some developers acknowledge they calculate them the way they choose to.

Of course, a few TIF projects have exceeded their job projections. Take the renovated Freight House building downtown, for instance. It was expected to open with a couple of hundred new jobs, but Lidia's, Fiorella's Jack Stack and City Tavern restaurants combined for more than that.

Overall, though, The Starestimated Kansas City's TIF projects have created not 23,000 new jobs but about 11,700. The Star'sestimate isn't exact, but the total is close to a city analysis that completed or long-running TIFs have created 11,363 jobs, although that count doesn't include a few newly opened projects.

The Star'scalculation includes jobs that moved into the city from elsewhere in the metro area, but not jobs that moved just within Kansas City's city limits. The calculation also doesn't account for spin-off jobs that might have been created because of new economic momentum. But neither does it account for jobs that might have been lost when, for instance, a retailer or restaurateur closed because a competitor opened in a nearby TIF district.

The gap of more than 10,000 jobs between the development agency's and The Star'sestimates is important because when developers repeatedly underestimate jobs, the city brings in less revenue from earnings and other taxes.

"They (developers) have to be held accountable for the astronomical promises that they make," said Jim Sweere, a Teamsters union forklift driver who's become so concerned about TIF that he spoke out at a meeting of the task force drafting new TIF guidelines. "I think we're being shortchanged and cheated out of our money."

What's more, the city may be paying too much to create too few new jobs. The Starestimated the city's approved taxpayer subsidies amount to more than $100,000 per new job in almost 70 percent of completed or long-running TIF districts. Even using the Economic Development Corp.'s higher tally of new jobs, the per-job subsidy in half of those TIF districts still exceeds $100,000.

Meanwhile, a few states have capped their per-job subsidies with any economic tools at $10,000 to $25,000, according to Washington D.C.-based corporate watchdog group Good Jobs First.

However, well-known local development attorney David Fenley contends that new jobs shouldn't be the only consideration. TIFs are also important for keeping jobs in the city that might move elsewhere.

"The reality is, they do move," said Fenley, an attorney who has represented several high-profile TIFs such as H&R Block's. "The city has to take that into consideration."



Downtown first

The city's philosophy with TIF has been, in the words of the Economic Development Corp.'s Kaczmarek, to "fix the downtown first, then spread the wealth to the neighborhoods."

But there's little evidence the wealth is spreading to areas like the East Side, with its rundown housing, broken sidewalks and vacant storefronts.

"I love downtown's resurgence," said Swope Parkway-Elmwood neighborhood leader Cynthia Canady. "I'd just like to see more of it on the East Side."

Indeed, TIF's benefits have been largely confined, geographically. So while TIF was originally conceived in state legislation to help overcome blight, most blighted parts of town haven't directly benefited from new development.

TIFs cover parts of only three of 47 neighborhoods in the central city east of Troost Avenue and north of Brush Creek. But in newer parts of the city north of Gladstone, one-third of the 17 city-designated neighborhoods are part of some TIF district.

That disparity makes a difference to neighborhoods because TIFs represent real investment.

According to figures compiled by the city auditor's office through 2005, Kansas City has sent $91 million of TIF subsidies to the Northland for streets, sewers, even to repair homes. The corresponding total for the central city east of Troost and north of Brush Creek: $111,000.

"The original intent of TIF was a very laudable goal, but the way it's been evolving over time, it's gotten way off the mark from that original intention," said Michael Kelsay, a University of Missouri-Kansas City economics research professor who studied the distribution of TIFs here.

The city's Economic Development Corp. contends that TIF depends on a private developer willing to invest, and there are fewer of those on the East Side. "We need to go out and find developers willing to do that," the agency's Kaczmarek said.



Small returns

Overall, one of the Economic Development Corp.'s top priorities is to expand the community's tax base. In fact, the agency claims TIF projects have contributed $156 million in net new revenues to the city and other taxing jurisdictions since the early 1990s.

But city budget officer Troy Schulte says that's not necessarily new money to the city's bottom line.

Consider a couple of examples. One day in January, Wal-Mart closed its supercenter in south Kansas City, and the very next day it officially opened a new Wal-Mart at the TIF'ed site of the former Blue Ridge Mall.

Elsewhere, a TIF'ed shopping center called Barry Towne opened off Barry Road in the Northland in the late 1990s with big-box stores like Target and Circuit City.

However, the area outside the TIF district lost retailers. The number of retail businesses in Barry Towne's 64155 ZIP code actually declined 18 percent from 2000 to 2005, the latest year available from U.S. Census data. Officials speculate that some retailers left because of the TIF'ed competition.

"These incentives have apparently severely damaged existing businesses," said Clay County Auditor Vic Hurlbert. "Metro North (mall) and Antioch (center) are dang-near ghost towns."

The bottom line is, Kansas City's retail sales tax revenues available for general city spending haven't kept up with the rate of inflation the past three years, after factoring out new tax increases, according to a city budget analysis.

Growth in the city's earnings tax, its largest revenue source, has kept pace with inflation but has not gotten a bump from TIF, said budget officer Schulte.

All this affects city services. While sales tax reimbursements to developers climbed dramatically in the past year, sales tax allocations for capital improvements, police stations and the bus service actually declined. TIF isn't the only influence, but it's clearly a factor.

"The net result is less money for basic services," Schulte said.

TIF supporters argue that without development incentives, Kansas City's tax base would have been much worse, with more companies fleeing to the suburbs.

Concerns about the tax base, though, extend outside City Hall. Take the North Kansas City School District.

This Northland district estimates it has lost out on $29 million in property tax revenues redirected to TIFs in the past decade. Just this year, it's a $5 million hit, which could have paid for 100 new teachers at a new high school, according to the district's chief financial officer, Paul Harrell.

School district officials wonder whether some of those TIF projects would have occurred even without TIF, and then the district would have captured some of the taxes. As it is, the district had to raise the property tax levy to hire those teachers.

In fact, the district has raised taxes four times in the last eight years to offset TIFs and sluggish overall growth. Those higher levies are costing the owner of a $250,000 house an extra $594 in taxes this year.

"They're taking funds away from educating our students," said longtime school board member Terry Ward. "We're talking about a generation and a half of kids who haven't been supported by new construction."

Compiling the data Here's how The Star put together some of the figures that appear in the story. OTHER CITIES Information and statistics on tax-increment financing is not widely available. Unlike Kansas City, for instance, some big cities don't prepare a TIF annual report or make public all financial details about a TIF project. But The Kansas City Star was able to find TIF data on St. Louis, Milwaukee, Denver and Pittsburgh from a variety of sources. Milwaukee is one city that lists all its TIF projects in an annual report. St. Louis TIFs were listed in Missouri's annual report on TIF activity. Denver's TIF information came from a report prepared by the Front Range Economic Strategy Center, a public policy group there. Pittsburgh's compilation came from a University of Pittsburgh research report. Kansas City's first TIF project was in 1988. St. Louis and Milwaukee began in 1990, while Pittsburgh and Denver followed in 1994. City and development officials in those cities said they use TIF aggressively and for most of their major development projects. In Denver, for instance, TIF is helping with the redevelopment of the old Stapleton airport. In St. Louis, TIF is aiding many downtown condominium projects. NEW JOBS The Star also researched the number of new jobs created in TIF districts in Kansas City. That was done on a project-by-project basis by checking where companies were previously located before moving to a TIF district, verifying how many jobs companies currently have in a TIF district and interviewing TIF developers. The resulting tally of jobs created in TIF districts isn't exact - some companies don't have an exact count of job increases themselves over certain time periods. But The Star's figure represents a best estimate of job activity within TIF districts.

Two sides Among the benefits that proponents cite and the concerns that opponents offer about TIF, Kansas City's development tool of choice: TIF BENEFITS It sparked interest in and eventual reopening of long-vacant historic downtown buildings, such as New York Life, President Hotel and the Freight House. It led to renovations on more than 425 housing units in TIF districts around midtown and the Main Street and Chouteau Trafficway corridors. Tax reimbursements totaled $99 million during the last three years for roads, sewers and parking garages within TIF districts, especially downtown. TIF CONCERNS Developers often promise levels of new jobs and tax revenues that don't pan out, shortchanging the city government. Kansas City uses TIF so much that developers get to the point of feeling entitled to the tax break for every major project, no matter the location. While TIF projects appear to be self-financing, taxpayers outside the districts also subsidize them by paying for the projects' increased service needs for such things as police and fire protection.

COMING MONDAY: You might be surprised at the profit levels of some TIF projects. Who's looking out for the taxpayer?

To reach Jeffrey Spivak, call 816-234-4416 or send e-mail to jspivak@kcstar.com To reach Lynn Horsley, call 816-234-4317 or send e-mail to lhorsley@kcstar.com