Former Waddell & Reed exec warns Kansas City against incentives to move firm downtown
In the waning hours of a contentious debate over generous tax incentives for Waddell & Reed, Kansas City officials are weighing new concerns about the firm’s financial footing.
The City Council is set to vote Thursday on whether to give $39 million in local tax incentives to the financial services firm, which is also receiving $62 million from the state of Missouri to move its headquaters from Overland Park to downtown. It’s expected to be among the last skirmishes in the states’ “border war,” the long-running practice of using taxpayer-funded programs to poach jobs from each other.
Two days before the vote, however, some council members received an email from a former executive of the company, who warned of its financial fitness.
“Frankly, I am appalled that Waddell & Reed is attempting to secure tax incentives from Kansas City for the purposes of moving their headquarters from Overland Park,” said Rick Perry, a former senior vice president. “I would caution the KC Council and others to be very careful in entering into ANY long-term financial arrangement with Waddell & Reed. The company may have been something in the past that it is NOT now.”
Reached by phone Wednesday, Perry didn’t want to comment beyond his email to council members.
In a statement, the company said Perry’s comments “do not merit a response,” noting he was dismissed for violating company policy. The company did not directly address the former executive’s concerns about its financial state.
If the council approves the deal as it stands, Waddell & Reed would receive $39 million in local incentives, including a 15-year property tax abatement worth about $23 million for its new headquarters at 14th Street and Baltimore Avenue. For 10 years, 75% of the property taxes at the site would be abated. After that, the abatement would drop to 37.5%. The company is also seeking a sales tax exemption on construction materials worth $2.7 million and a redirection of half of the new earnings and utility taxes created at the site, netting it about $13 million.
The total package including state incentives would be $101 million.
Concerned council members
Kansas City Public Schools opposes the project, and its board last week took the extraordinary step of adopting a formal resolution criticizing the deal, arguing it would deprive schools of essential resources.
Councilman Eric Bunch, 4th District, who had already been concerned about the deal, received the email. He said that while he couldn’t take it at face value without further analysis, it “does at least merit further research on our part.”
“If it is true, that’s very concerning,” Bunch said.
Bunch said the council hadn’t discussed the company’s stability.
“The idea that this is a very healthy and growing company underpins the deal itself,” Bunch said. “If it is true that this is not a company that’s in that good of shape, then it really does do some harm to the validity of the project.”
Councilwoman Andrea Bough, 6th District at-large, who also received the email said she was trying to do her “due diligence” and research the issue and discuss it with fellow council members.
“Anytime that we are bringing a world headquarters and someone raises concerns, we want to make sure that we have investigated and completed our due diligence,” Bough said. “There are also clawbacks in the agreement.”
“Do we want to get there? No, we absolutely don’t,” Bough said. “And if we have some indication that there is a problem, of course, we want to not get in a position that we have to use those clawbacks.”
Councilwoman Melissa Robinson, 3rd District, said she was uncomfortable with the precedent of asking council members to assess a company’s financial standing.
“If we’re not measuring the stability of every company, then why would we start with this project?” she said. But she said she is concerned that no third party analyzed whether the requested incentives were appropriate.
In a statement, Mayor Quinton Lucas’ spokeswoman, Morgan Said, said the city relies on the Economic Development Corporation and the Missouri Department of Economic Development “to ensure the vibrancy of all long-term incentive projects in our community.”
“And this project is no exception,” Said said. “The mayor will always work to ensure that any project produces as many jobs as promised.”
The state’s economic development department did not respond to The Star’s questions about how it vets companies receiving incentives.
A changing industry
Waddell & Reed’s stock traded at just under $17 per share at market close on Wednesday — less than half the $48.96 price of five years ago. The stock traded close to $30 a share a decade ago.
Annual reports show how Waddell & Reed’s business has changed in recent years.
Assets under management — a key metric for a firm like Waddell & Reed — dropped from $123.6 billion in 2014 to $65.8 billion in 2018. That’s close to the $69.8 billion the company managed in 2009, amid the Great Recession, and does not reflect the record growth of the stock market in recent years.
Its workforce has also shrunk. The company reported 1,462 employees in 2009 and 1,648 in 2014. The number dropped to 1,332 people in 2018.
Waddell & Reed in 2016 offered a voluntary separation program to employees but turned to layoffs to reach a 10 percent reduction in full-time employees. In late July of this year, Waddell & Reed informed Kansas regulators of plans to cut 158 jobs.
But the firm is a money maker: It earned $184 million in 2018 profits, according to last year’s annual report. Executives frequently talk about the firm’s “transformation,” touting the company’s work to remain competitive.
The financial services sector has experienced a major shift as many investors have signed onto free or low-cost online trading platforms. Waddell & Reed’s own disclosures point to “increasingly fee sensitive” clients who choose low-fee, passive products like Exchange Traded Funds or ETFs, over more expensive and actively managed products like mutual funds.
Those dynamics have forced many financial services firms to slash prices, during an era dubbed as “feemageddon” by some analysts, the Financial Times reported.
In a June news release announcing the move to Missouri, Phil Sanders, CEO and chief investment officer of Waddell & Reed Financial Inc., said the company had “taken very deliberate and necessary steps to strengthen the foundation of our business” over the last two years.
“With the progress we have made over the last two years, we are now in a position to look at the next phase of our business transformation focused both on organic and inorganic growth. As we look to the future, we must have a workplace environment that meets the needs of the workforce of tomorrow, enabling us to attract and retain top talent.”
In a February filing with the Securities and Exchange Commission, Waddell & Reed explained its current office footprint to investors: Its home office spans nearly 300,000 square feet in Overland Park along with another 38,000 square feet for a disaster recovery facility.
“In the opinion of management, the office space owned and leased by the Company is adequate for existing home office operating needs,” the company wrote at the time.
An agreement with clawbacks
The agreement up for consideration at City Hall contains a clawback. In the latest version publicly available, if the company’s payroll dips below targets set forth in the agreement, the city can recoup millions in property taxes.
For example, if during the first 10 years of the deal, the company’s payroll fell to 80% of targets, some of the property tax abatement would drop by 20%. If payroll drops below half of the projections, that portion of the abatement dries up.
If the company’s payroll doesn’t meet projections, its economic activity tax incentive will inherently shrink. The agreement doesn’t include clawbacks for that incentive or the sales tax exemption on construction materials.
Waddell & Reed’s $101 million incentive would cover more than 70% of the project’s $140 million budget.
The generous incentive is reminiscent of packages Kansas and Missouri officials say they will no long offer companies to jump the state line. The practice was criticized as a waste of taxpayer funds because it didn’t always create new jobs for the region. This summer, officials agreed they would no longer do that and instead, only offer incentives to companies creating net new jobs for the area.
Waddell & Reed’s move was grandfathered in because it was already in the works before the truce took effect.
This story was originally published December 19, 2019 at 5:00 AM.
