Category: Kansas City Chiefs

We finally have a number for how much tax money Wyandotte County could hand over to Kansas City Chiefs owner Clark Hunt following last Thursday’s vote to funnel virtually all sales and hotel taxes from a 200-acre stadium district in Kansas City, Kansas to help pay off $2.775 billion in state STAR bonds for stadium and related construction. Or rather, a couple of numbers:

The local tax breaks could total $350 million to $450 million. The Unified Government expects the project to generate $488 million in revenue, netting the county at least $38 million over 30 years.

I have questions! So many questions:

• How did the county estimate $350-450 million in tax expenditure (over 30 years, it sounds like, which would be more like $190-230 million or so in present value) when it’s unknown exactly what the Chiefs plan to build on the 200 acres?
• How did the county come up with that $488 million estimate for new tax revenue, and did it account for money cannibalized from other spending that would have taken place in the county even without a stadium?
• Since the state is planning on going ahead with the stadium regardless of whether Wyandotte County chips in, wouldn’t it get any new tax revenue either way, making the tax breaks a net loss?

Todd LaSala, a private attorney who serves as an economic development consultant for the Unified Government, attempted to answer the last question, at least, speculating that Hunt could build his stadium in a different part of the state if the county didn’t agree to the funding: “If you voted no, it sends an interesting, if not a dismissive message to the Kansas City Chiefs, who want to choose Wyandotte County as their home.” LaSala didn’t indicate why the Chiefs owner would balk at a Wyandotte stadium site when he’d be getting the same amount of STAR bonds for it regardless, but it is important to remember that if you want to remain attractive to the local billionaire, you must never speak your mind and learn how to light his cigar right.

As for the other questions, I’ve gone through all the documents presented for last week’s county commission vote, and I can’t find anything giving details about how those tax break and tax revenue projections were calculated. Given that when the state of Kansas tried a similar exercise with its own $3 billion-plus in Chiefs tax breaks, economists deemed the resulting figures to be “incredibly optimistic,” “insane,” and “just not credible,” it’s probably a good idea to take these latest numbers with a grain of salt — even before considering that these tax subsidies look to be money that Wyandotte County is voluntarily giving up to land a stadium it would get regardless. I’ve reached out to both the county and LaSala with the above questions, and will post an update here if I hear back from them.

Both Wyandotte County, where a new Kansas City Chiefs stadium would be built under a proposal by the state of Kansas, and the city of Olathe, where a Chiefs training facility would go, held hearings yesterday to hear from residents on whether they should kick in local tax money to help the state pay off what could total $4 billion in subsidies for the combined project. Despite only having since Friday to look over the plans, residents turned out in force to speak their minds:

• In Olathe, the hearing was “standing room only” as “many spoke against the ordinance, while a few spoke in support of the proposal,” according to KSHB, with many wondering if the city will be able to make up for the lost tax revenues and complaining about the rushed timetable for the proposal to give the Chiefs virtually all city taxes from a 165-acre sports district: “I feel this is not a public hearing, this is a presentation of what has already been decided,” said one resident, Pete Marsh. This proved to be foreshadowing, as the city council listened for two hours, then promptly approved the tax district in a unanimous vote.
• In Wyandotte County, which under its proposal would kick in all of its future sales and hotel taxes from a 200-acre district around a new stadium in Kansas City, Kansas, more than 50 residents testified, many likewise expressing concerns about the cost in lost taxes and the lack of information on the hastily arranged deal: “I think the people need more information,” one speaker said. while another pleaded, “Please, be transparent.” Unlike in Olathe, Wyandotte commissioners said they would put off a vote — for two whole days, with a final decision on the tax district to be made in another hearing tomorrow at 5:30 pm.

To be clear, neither of the new local tax districts would increase the total amount of money going to Chiefs ownership. Rather, city and county tax money would defray some of the state’s costs of paying off $2.775 billion in bonds for the stadium and surrounding development, which otherwise will come from state taxes collected across a mammoth 293-square-mile swath of Wyandotte and Johnson Counties. (This is a different tax district from the Olathe and Wyandotte County tax districts, something one article in particular seems very confused about.) And while some may insist that redirecting all the tax money collected by the county and city in and around the stadium and practice facility for the next 30 years is bonkers, local officials insist that the lunch will be entirely free:

“As I see it, we’re not currently generating any sales tax on this otherwise empty spot of land, there’s really nothing to lose here,” Olathe Councilman Matthew Schoonover said.

Yes, it’s the Casino Night Fallacy again, where any money that is so much as touched by a team is considered to belong to the team, even if it’s tax money that any normal business would pass along to pay for government services. To follow Schoonover’s argument to its logical extreme, no one should ever pay any taxes, because if you didn’t exist, the government wouldn’t collect anything — try telling the IRS that “I should owe no income taxes this year, because if I had quit my job I wouldn’t have earned any income” and see how far that gets you, but when you’re a sports billionaire, suddenly this is standard business practice.

Instead of Schoonover’s “What if nothing were built?” thought experiment, let’s consider this in terms of two other hypotheticals:

• What if the city and county held on to the land and it were used for something else? Once the Chiefs tax districts are carved out of local budgets, that land and any money it could generate is gone forever. Losing the opportunity to make future tax revenues off a parcel of land may be a bit more abstract than losing tax dollars that are currently being collected, but it’s just as much of a cost to local taxpayers.
• What if spending in the Chiefs tax districts gets cannibalized from elsewhere in the local area? If somebody builds a restaurant across from a Chiefs stadium and the only people who eat there are fans who otherwise would have spent their money across the border in Missouri, that’s indeed a net positive; if anybody eats there who would otherwise be eating somewhere else in the county, though, that’s money coming directly out of local government’s existing budget, no future hypotheticals needed.

Or looked at yet another way: Chiefs owner Clark Hunt wants to get the benefit of intercepting all the taxes paid in and around his team facilities and spending it on himself, while all costs associated with any new development — roads, police and fire protection, any schools needed to educate the kids of new residents in a mixed-use district — will fall entirely on city and county taxpayers.

Exactly how much city and county tax money is at stake here? We don’t know, as neither Olathe nor Wyandotte County appears to have tried to calculate the total tax expenditure during the four whole days legislators had to think about it. Wyandotte commissioners promised more information at tomorrow’s meeting; hopefully residents will have time to read it before the commission votes to rubber-stamp the deal.

Two local Kansas governments will be holding public hearings tomorrow on possible subsidies for a new Kansas City Chiefs stadium to defray the state’s possibly insurmountable costs. Wyandotte County holds its first public hearing at 5:30 pm, and the city of Olathe in neighboring Johnson County, where a Chiefs practice field would be built, will follow at 6 pm. Olathe apparently plans to vote on stadium funding at its meeting, and accordingly has published its plan, which is a doozy:

• The legislation would create a 165-acre tax district around the new facility for diverting city taxes.
• Within that area, all city sales tax revenues, the city’s share of county sales tax revenues, and 7% of the 9% city hotel tax — except for any money already pledged to paying off other projects — would be redirected to the Chiefs to cover the team’s development costs.

Economist J.C. Bradbury weighed in over the weekend to call this “bonkers,” and it indeed would break new ground in siphoning off tax money for a stadium: Olathe wouldn’t be just giving up increased tax revenues like in a TIF, but all sales and hotel tax revenues within the tax district, for the next 30 years. (At least the tax district is smaller than the state’s incredible 293 square miles, but that’s a low bar for comparison.) The likely practice field site is currently undeveloped, at least, so Olathe wouldn’t be losing much in existing taxes; unless, of course, a Chiefs development lures away businesses that would otherwise locate elsewhere in Olathe and moves them to the tax-subsidy district, which is pretty likely.

Meanwhile, economist Geoffrey Propheter chimes in to note that rezoning the practice field site as exempt from property taxes would cost the city about $37 million in present value of lost future tax revenue. No one has yet attempted to calculate how much Olathe would give up in future sales and hotel tax money.

At this point, the best-case scenario for Olathe might be that it turns out no one wants to open a ton of hotels and restaurants and other businesses around a practice field that’s only open to the public a handful of days a year, and there’s not so much local tax revenue to lose. Or the city council could just say, “We get all the hassle of hosting a Chiefs practice field but the Chiefs keep all the tax money? No thanks.” We’ll find out tomorrow night.

The commerce committees of the Kansas state house and senate spent an hour yesterday investigating the “real facts” of the Kansas City Chiefs stadium deal, as House commerce chair Sean Tarwater put it, and naturally enough they started by talking to … the Chiefs’ lawyer?

Korb Maxwell, the attorney representing the Chiefs, repeatedly asserted that the team’s move is all upside for Kansas taxpayers — a claim that experts have cast doubt on. “It’s a great day to be a Kansas taxpayer because we pulled . . . all of this off without raising taxes on Kansas taxpayers, without using any base revenues from the State General Fund, and without pleading the full faith and credit of our state to the bonds,” said Maxwell, who called Kansas’ STAR bonds “tried, true and tested.”

Maxwell is correct that the Chiefs stadium would not directly raise taxes — it would only siphon off future taxes as spending rises with inflation, forcing the state to raise other taxes if it wants to backfill to pay for the services that money would otherwise have covered. And he’s likewise correct that it won’t use “base revenues” from the general fund, at least unless the state chooses to backdate the baseline year for the tax increment in order to keep the STAR bonds from being underwater, in which case it absolutely will.

And Maxwell didn’t stop there:

Maxwell said that if the stadium were privately owned, the $1.8 billion in STAR bond funds would be subject to federal income taxes and 45% of the public incentive money would end up in Washington D.C. “That would blow a huge hole in the budget for this project, and frankly would not allow it to move forward,” Maxwell said. “The fix to that is having a public authority.”

What? No, that’s only if they funded the stadium using private bonds, it has nothing to do with who owns the building. Also, there hasn’t been a tax bracket as high as 45% since the Carter administration, are you drunk, sir?

State Rep. Rui Xu then pushed back on the “no new taxes” trope, pointing out that “even if we just have inflation — let’s say 3% over 30 years — that means prices in 30 years will be 150% what they are today, just with compounding. And if we’re not allowed to capture that full growth . . . I don’t see how it’s possible that the priorities can’t shift as a result of just that.” To which Maxwell replied, “This is really about growing the pie for our state, not just arguing over the current pie out there,” which is either missing the point entirely or grasping the point and attempting to redirect people’s attention through images of sweet, beautiful new pie.

These are all good reasons to call people for testimony who are not the mouthpiece for the entity lined up to get a $4 billion check from your state, but commerce committees gonna commerce committee. Fortunately, some other Kansas locals are asking other pointed questions:

• Wyandotte County and the city of Kansas City, Kansas, which share government leadership, are still considering whether to kick in their own shares of sales taxes from the stadium district so the state isn’t on the hook for all of it. (Wyandotte and KCK would benefit by, I dunno, something about pie?) The city and county’s chief financial officer, Shelley Kneuvean, said her staff will be conducting an independent financial analysis to figure out how to devote future city and county tax revenues without adversely affecting public services, good luck with that.
• State senator Kenny Titus expressed concern that the Chiefs could move again once their lease runs out in 30 years, leaving an empty stadium. “We absolutely plan to be there for the very long term,” replied Maxwell, though not in any kind of legally binding way.
• The city and county are already redirecting more than $5 million a year to pay off four other STAR bond projects, including the Kansas Speedway, reports the Kansas City Star.
• Speaking of the Kansas Speedway project, Rep. Lynn Melton has some thoughts on that: “I went to the community meetings, and we were told that once the bonds were paid off, there’s going to be no school bonds being floated, our taxes will go down because there will be all this revenue. And now we’ve seen the STAR bonds paid off early, that’s all fine and dandy, but we’ve not seen any of that.”

These are all issues that could use more attention, if Maxwell weren’t soaking it all up himself. Maybe first do the independent financial analysis, then ask the team spokesperson about the findings, rather than acting like a real estate lawyer understands how the substitution effect works? Just a thought.

The Kansas City Star ran an informative article on Sunday on questions still outstanding about the plan to give Kansas City Chiefs owner Clark Hunt $2.8 billion in Kansas state tax money to build a new stadium, (With other tax breaks and financing charges, the total cost to the state would end up more like $4 billion.) “How exactly — or easily — will Kansas generate enough sales tax revenue to pay for the bonds?” ask sports reporter Sam McDowell and government reporter Matthew Kelly. “Will potential investors see them as too risky?”

Opinions, as they will, differ. University of Chicago finance professor Justin Marlowe tells the Star, “I think it’s fair to say that they won’t have any trouble selling these bonds,” but the article also notes that “vocal detractors [are] questioning whether the math will add up to bring the project to fruition.”

To understand the dispute here, let’s take a step back and talk about how bonds work. A government entity — in this case, the state of Kansas — sells bonds to private investors, effectively borrowing the money from these investors and repaying them with interest. One kind of bonds is general revenue bonds, which are repaid with cash from the state treasury, a source that is essentially bottomless unless Kansas declares bankruptcy. The STAR bonds, however, are dedicated tax bonds, meaning the only pool of money they can use to repay bondholders comes from specific tax revenue streams — in this case, increased sales and liquor taxes from within a designated stadium district.

If you’re drawing up a dedicated tax bond, the first trick is to make sure that that pool of tax revenue you’re setting aside to pay bondholders with is actually enough to cover your principal and interest payments. One way to do that is to make the stadium district really, really big: The preliminary sketch covers 293 square miles, including all of Wyandotte County (where Kansas City, Kansas is and where the Chiefs stadium would go) and a large chunk of Johnson County to the south (where the Chiefs practice facility would be built, in the city of Olathe). And the state could still make the district even bigger, which would increase the tax pool that could be used to pay off the bonds.

Another option for bringing in more money is to redefine what “increased” means in “increased sales and liquor taxes.” STAR bonds utilize incremental tax revenues, meaning the state locks in the current amount of taxes being collected in the stadium district, sets that aside to keep going to  the general fund, then allocates any money above that level to be siphoned off for the development project. (The idea behind this is that all the new tax revenues wouldn’t have happened without the development, so it’s free money; we’ll get back to that in a minute.) “Current,” though, could mean 2026, or 2025, or 2015 for all you want — Kansas officials haven’t yet set a baseline for what year they’ll be calculating the increment relative to, and the earlier they go, the more money will be siphoned off.

And there’s yet a third option, which is to throw additional taxes into the pot. STAR bonds are by law only allowed to use sales and liquor taxes, but so far it’s only the state that’s approved kicking in its share of taxes. State officials are also asking Wyandotte County and the cities of Kansas City and Olathe to kick in county and city sales taxes — something that local officials would be crazy to go along with, given that it would just shift costs from the state to the county and cities, but the state is leaning hard on them to do so.

If the amount of revenue collected by an expanded stadium district, a flexible tax baseline, and grabbing local tax revenues isn’t enough, what happens? The bondholders would have no recourse to make the state pay them out of the general fund, so they would end up taking a loss on their investment. That’s a risk, and the way that bond buyers deal with risk is to demand a higher interest rate, something that Marlowe says could end up being a part of the Chiefs deal:

Kansas officials have emphatically said taxpayers won’t be left on the hook if the project fails to live up to expectations. Having no security pledge on the bonds would very likely ratchet up the cost of debt service payments, Marlowe said.

“Investors are going to see the bonds as more risky, and they’re going to price that into the yields that they demand to buy the bonds,” he said.

A higher interest rate means the state would need more money to pay off the bonds — Patrick Tuohey of the Better Cities Project has speculated the rate could be as high as 6% — which means that the state would have to expand the stadium district, reset the baseline, or include more local taxes to pay them off. With that in mind, it’s more likely that the state would just make those adjustments up front, creating a bigger tax revenue pool and calming bondholders’ fears enough that interest rates can be kept to a dull roar.

And if the revenue collected is indeed enough to pay off the bonds, everything is cool, right? If you’re a nervous bondholder-to-be worried about your investment, sure. If you’re a Kansas resident, though, not so much: Siphoning off taxes from a bigger area, from more of the existing tax base, and from more jurisdictions makes it way more likely that you’re eating into tax revenue that has nothing to do with the Chiefs, and which in the absence of a stadium deal would be collected by the state and used to pay for public services. To take this to the most absurd extreme: Kansas could legally expand the stadium district to be the size of the entire state, and set the baseline back to 1861 when Kansas was first admitted to the union — that would thrill bond buyers, but would also effectively mean that the state’s entire budget could be used to pay off Hunt’s stadium bills, despite the fact that Kansas had a functioning economy before the Chiefs arrived.

When people ask “Will the Chiefs stadium pay for itself?” then, it’s really conflating two different questions: Will the amount of tax money Kansas is setting aside be enough to pay off its bonds? and Can the state pay for this without costing Kansas taxpayers money they otherwise could use for schools and roads and whatever? At this point, the answers to those two questions appear to be “sure, maybe, depending” and “hahahahaha LOL no.” They’re both going to be important as the Chiefs stadium deal continues to be negotiated — and make no mistake, there’s still lots of negotiating to go — but it’s important to keep in mind that there are two different ways for a stadium deal to fail, and it can be a success on the bond market and still be disastrous for state residents.