KC invested $175 million in development subsidies in 2018. The return is a mixed bag

Aug. 24--Kansas City mayor Quinton Lucas has adopted a new measuring stick to evaluate whether tax breaks for real estate development projects are working.

"Is the quality of life for the average kid in the Kansas City, Missouri, School District on the East Side of Kansas City better today than it was in 1990?" Lucas told The Star in a recent interview.

Has Kansas City's use of development incentives met that test so far?

"My answer would be no," said Lucas, who grew up in the 1980s and 1990s enmeshed in the East Side's cycle of poverty.

A little more than three weeks into his term as mayor, Lucas' skepticism reflects a broader concern about Kansas City's widespread use of development incentives.

The incentives are criticized for Kansas City's tendency to use them to promote development in well-established areas like downtown and the ritzy Country Club Plaza, while overlooking impoverished areas like the East Side, as well as lacking transparency and policies for using these tools.

At the same time, advocates for these tools say it can attract new jobs, hundreds of millions of dollars in construction activity and increased future tax revenue.

Kansas City has shown little appetite over the last 10 years to restrain its use of incentives. City documents show that since 2009, the amount of taxes that get redirected to development projects through an array of tax break programs has increased by 74%.

But talks are underway now about rethinking how Kansas City uses these tools.

Thanks to new municipal accounting rules, the public now has a better idea of how much in taxes gets sent to development projects.

In Kansas City last year, at least $175 million in new tax money that would have gone to city, county, school district and library district budgets, among others, instead subsidized development projects that received tax breaks or are supported by city debt.

The city's share of that amount in tax redirections was nearly $94 million last year. That's more than the city spends on basic services like sidewalks, street and bridge maintenance, snow removal and trash and recycling combined.

The amount of tax breaks Kansas City has granted puts Kansas City Public Schools high among school districts that have potential revenue abated from incentives.

In 2017, $24.4 million in property taxes otherwise due to the district were abated or redirected for development tax breaks. That was enough to rank Kansas City 17th among 5,600 school districts nationwide in abatement revenue losses, according to a study by corporate welfare watchdog Good Jobs First.

In 2018, that number grew to $26.8 million. The next highest school district in Missouri was St. Louis Public Schools at $10.4 million.

What's the return on incentives?

An example of Kansas City's generous approach toward granting economic development incentives was highlighted in a study commissioned earlier this year by VisitKC, the city's convention and tourism bureau. It showed that construction of new hotels, almost always supported by tax incentives, in recent years had resulted in too much supply of new hotel rooms and not enough demand to fill them.

Another example that has grabbed the attention of policymakers was the Port Authority of Kansas City announcing last month that it would offer Google, a search engine behemoth whose parent company's 2018 revenues approached $137 billion, an exemption from real and property taxes to build a $600 million data center project in the Northland. The project would create only 30 jobs.

City Hall officials say it's difficult to establish what Kansas City gets in return for it its investment in incentives.

Kerrie Tyndall, director of economic development for Kansas City, said the benefits of incentives are spread over several years and agencies and, thus, "extremely difficult to quantify."

Even so, she points to substantial construction activity -- more than $1 billion in the 2017-18 fiscal year alone -- new jobs and new future taxes.

She adds that from 2013 to 2031, there will be a projected cumulative increase of $44 million in new tax revenues that had previously been redirected to development incentives.

Visually, the results are easy to see: A rejuvenated downtown, new places to shop and eat and modern office spaces for companies to put their employees to work.

"I think it's a better city to live in for lots of us, myself included," Lucas said. "But I think the question that should be asked is, a better city for whom?"

Whether incentives, which are often awarded in the name of broadening the city's tax base and providing a boost to business, translate into meaningful economic growth is another question.

"The fundamental problem in Kansas City is we think real estate -- shiny new real estate -- is economic development; it's not," said R. Crosby Kemper III, director of the Kansas City Public Library. "Jobs and GDP (gross domestic product) and economic growth are and we don't have those."

Data supports at least part of Kemper's view. Information from KC Rising, an initiative by major civic organizations like the Kansas City Area Development Council and the Civic Council of Greater Kansas City, shows the Kansas City region is lagging, and in some cases falling behind, peer cities in key economic metrics like GDP, productivity and quality jobs.

Experts caution that not all of Kansas City's challenges in economic growth can be laid at the feet of its use of development incentives.

Joe Parilla, a fellow at the Brookings Institution who studied incentives and their value for a 2018 research report, said it's difficult to know what development projects would have happened without incentives.

"Would Kansas City be even more worse off?" Parilla said

National studies indicate that incentives have modest benefits for local jobs and income.

"From a national perspective it's very inefficient, even from a local and state perspective," Parilla said. "I think the main challenge is these incentives need to be better targeted."

A 2018 report by the Upjohn Institute says that incentives have potential to boost employment and income. But it also warns about the effect of incentives leading to neglect in public services and K-12 education.

Effects on schools

Mark Bedell, superintendent of Kansas City Public Schools, is among those discussing reform to economic development incentives, given its effect on district finances.

Bedell is careful not to claim that that a full $26.8 million from 2018 was lost from the district budget. It's difficult to say whether a project would happen without incentives or not.

Most tax break programs in Kansas City effectively forgo increases in a property owner's property tax bills after improving, say, an abandoned building that's been transformed into new apartments. That tax break can last from 10 to 25 years, depending on the arrangement.

But Bedell can say what the district could accomplish if it were able to capture even a sliver of that abated property tax revenue.

To illustrate his point, he recounted in an interview a conversation he had with Sly James as the two discussed the former mayor's failed plan to raise sales taxes to fund early childhood education.

"If we got just $10 million of all these abatements, we would be able to increase significantly the number of seats we can offer for early childhood," Bedell said.

Bedell said about $100,000 can fund an early childhood class of up to 20 students supervised by a teacher and paraprofessional.

"What could $10 million do?" Bedell said.

He stresses that the school district doesn't oppose incentives or the pursuit of new development in Kansas City. But district officials are all too familiar with the practice of finding out about a proposed development project lined up for incentives far too late to have meaningful input into the matter.

"I said that from day one," Bedell said. "I said the concern I have is I just want the system to be a fair system. I want us as taxing jurisdictions to be able to have a voice and some say in terms of what projects take place, where they take place and when are they to take place and for how long."

Bedell isn't the first superintendent to explore changes in Kansas City economic development incentive strategy. But improvement in student performance during his three years in charge of the historically troubled district has brought Kansas City to the brink of accreditation and, in turn, makes Bedell's voice more prominent.

Critics of incentives in Kansas City say the district's concerns have been ignored for too long, while tax breaks are arranged in ways that are more beneficial to suburban school districts like those in the Northland, where district leaders have traditionally had more political clout.

"I think we made this deal that kind of said well, our (urban) schools are underperforming anyway and...who cares if they lose money?" Lucas said. "I think that has been terribly unfair."

Bedell on Aug. 5 sent a letter to Lucas and the Kansas City Council outlining proposed reforms to incentives. They largely center on providing school districts and other jurisdictions more transparency, accountability and a more judicious use of tax breaks.

Bedell also said he would like to see incentives for development in areas of his district, primarily the eastern half, that don't often receive much investment.

A map of Kansas City's incentives shows tax breaks are predominantly used in affluent areas, like downtown and the Country Club Plaza. Less often are they used in areas where blight, the problem incentives were designed to fix, exists in abundance.

"It would be great to have businesses up and running in some of the neighborhoods where our schools reside where it can serve as an economic engine for the revitalization of a community," Bedell said.

Changes ahead?

The school district isn't the only organization girding for discussions about rethinking Kansas City's strategy on economic development incentives.

Joe Reardon, chief executive of the Greater Kansas City Chamber of Commerce, is preparing to assemble a task force to study development incentives. Its co-chairs are Dave Harrison, president of prolific development firm VanTrust Real Estate, and Dave Frantze, a sought-after development attorney in his own right.

The inclusion of the two men has drawn some concern among taxing jurisdictions and city officials that the task force will take a decidedly pro-development approach, supplementing the development community's already-powerful presence at City Hall.

Reardon insists that the task force wants to hear from taxing jurisdictions like the school district and others affected by incentives to arrive at a sensible development strategy.

"Can we get a broad and thoughtful conversation started about incentives," Reardon said. "We do think the public is interested in that, but the business community is, too."

For his part, Lucas is not yet keen on imposing changes to development incentives through legislative action.

For now, the new mayor hopes to influence policy on incentives by naming his own appointees to boards and commissions in charge of granting tax breaks who would reflect his priorities.

One of his key priorities is more discipline in awarding incentives to developers. He says that's what the voters said they wanted earlier this year when they went to the polls.

"Certainly in the last election, when you look at the people who were elected," Lucas said, "a number of them said we understand the need for a more judicious use of incentive tools."

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