TIF plans look good on paper because they’re not telling the whole story

You know a shopping center is in distress when the Big Lots moves out.

Big Lots is a closeout store. It left Brywood Centre last year. Hollywood Video is gone, too.

But the strip mall, at East 63rd Street and Blue Ridge Cutoff, is poised to make a comeback. Last year, the City Council in Kansas City approved a plan to assist its redevelopment with $5.6 million. Help arrives in the form of tax-increment financing, a mechanism that plows tax revenue back into the developments from whence they came.

TIF is the subject of frequent debate in Kansas City. Critics think the tool has been used too liberally, and, as a result, the city has given away tax money it needs to pay for cops and sidewalks. TIF supporters, meanwhile, say we’d be Wichita without it. “Kansas City, to be frank with you, is not considered a hot city,” Jeff Kaczmarek, the chief executive at the Economic Development Corporation, which administers TIF, said in 2007.

TIF has been around for a while, and it seems fair to say that the evidence favors the opposition. TIF plans tear off an increasingly large share of the city budget, casting real doubt on their powers to rejuvenate the economy.

Why do TIF plans promise more than they deliver? Partly because of the goofy way bureaucrats analyze their merits.

As TIF plans go, Brywood Centre’s is pretty straightforward. The City Council OK’d the plan with the idea that Kansas City would make out in the end, even after the developer walked away with his incentives. Analysts at Kaczmarek’s EDC — an agency that receives city funding but operates outside of City Hall — performed a cost-benefit analysis showing that the city would be richer for having approved the TIF.

Slight problem, though. The analysis took into account good things that happen when development occurs but omitted some of the bad things.

Allow me to illustrate: There’s a Price Chopper at Brywood Centre. In the plan that the developer, Chicago-based Tri-Land Properties, submitted to the TIF Commission, the supermarket would expand. Let’s say the expanded supermarket hired a new butcher. We’ll call him Sam.

Under the terms of the TIF statute, the city and the developer would split the 1 percent tax on Sam’s income. But Sam’s importance to the local economy doesn’t stop at his earnings. He’s also a consumer.

The economic activity that Sam would generate when he’s not behind the meat counter — when he’s eating out or buying clothes — is called “off-site revenue.” But there’s also a cost to having Sam around. His trash needs to be picked up. His tires chew up the streets. His girlfriend, Alice, uses the free health clinic.

Manish Patel, a financial analyst at the EDC, performed the cost-benefit analysis for Brywood Centre. Patel’s report accounts for the tax revenue that off-site employees like Sam create. But it also determines that the cost of providing city services to these workers will be … zero.

“We don’t think that balances out,” says Jeffrey Yates, the city’s finance director.

A cost-benefit analysis without any costs is bound to be a crowd-pleaser. Sure enough, the EDC’s analysis of Brywood Centre showed a net benefit of $5.7 million.

The numbers team at the EDC has played hide-the-costs with other plans, too. A 2007 vetting of the proposal to attract Lowe’s and other retailers to North Oak Trafficway counted tax revenues from off-site employees but discarded the costs. Ditto for the new J.E. Dunn headquarters downtown.

This type of optional accounting has led to tension and confusion. The most striking example occurred when the owners of the Kansas City Wizards introduced a plan to redevelop the land underneath the old Bannister Mall.

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EDC analysts said the project (a new soccer stadium, surrounded by shops and offices) would be a $49 million benefit to the city. But city finance officers ran the numbers and reached a different conclusion. Yates’ people said the project would cost the city $41 million.

It was as if one report was written in Portuguese and the other in Klingon.

The numbers disagree in part because the city and the EDC use different models to evaluate projects.

The folks on the third floor of City Hall, where the Finance Department is based, use a model that concentrates on what happens within the bounds of a given development. But over at Town Pavilion, where the EDC is located, they use a model that’s more like a camera with a wide lens; this model sees our friend Sam not just as someone who generates new earnings taxes but also as a guy who buys a car and makes other contributions to the local economy.

Taking the wider view makes a lot of sense. But even the best model will fail if it’s analyzing garbage.

The EDC analysts’ treatment of the Wizards project, for instance, assumes that the new employees, when they spend money, will buy stuff in Kansas City 48 percent of the time. OK, fine.

But if you’re going to count these workers’ happy hours and Plaza shopping sprees, shouldn’t you also calculate the cost of providing them with police services? Alas, the EDC analysts did not. “Off-site employee effects” at the Wizards project account for $28 million of the difference between the EDC’s let’s do this! number and the city’s whoa, whoa! number.

Another problem with the EDC’s work is that it assumes new developments create wealth out of thin air.

The city’s analysis of the Wizards project determined that 75 percent of the spending at the site would be new to Kansas City — the rest would have simply moved from someplace else within city limits.

When the city’s numbers people accounted for “displacement” — the simple notion that a new mall takes business from an existing one — $45 million disappeared from the EDC’s analysis of the Wizards project.

Displacement is one of the reasons that there are so many critics of the way Kansas City uses TIF.

After the City Council approved the subsidies for the Lowe’s on North Oak, Clay County Auditor Vic Hurlbert complained about the effect it would have on a Home Depot a half-mile away. The deal looked good to Kansas City because the Home Depot is in Gladstone.

Clay County, however, collects sales taxes from both stores. From the county’s perspective, more isn’t necessarily better because a portion of Lowe’s tax revenue goes to the developer. The Home Depot’s taxes come with no strings attached.

Addressing an economic-development task force that Mayor Mark Funkhouser convened in 2007, Hurlbert called for an end to TIF’s “taking” of county sales taxes. He also suggested that an independent agent conduct the cost-benefit analyses. The EDC, it’s been frequently noted, has an incentive to look favorably on TIF projects, because the agency takes a small cut from deals that get the go-ahead.

The handling of economic-development proposals produced a snag in the recent city budget negotiations. Funkhouser and others complained that cuts in the Finance Department would remove a line of defense between the EDC and the City Council members, who make the ultimate decision on TIF plans. “We need to have our checks and balances,” Councilman Terry Riley tells me.

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Kaczmarek defends his shop’s work. He downplays the differences in the models that his staff and city staff use. “We don’t see them as competing,” he tells me. He attributed the $90 million difference in the analyses of the Wizards project to “technical calculations.”

EDC and city staff are in discussions about what the analyses will look like in the future. They’d better hurry because, with each passing budget, more and more money is racing down the TIF rabbit hole.

Plus, Sam and Alice may decide to have a baby.

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