Will KC get a law to rein in development incentives? One councilman is trying

BNIM was hoping to move its headquarters to this empty building at 1640 Baltimore Ave. But the firm abandoned its plans after parents in Kansas City Public Schools sought a petition initiative to reverse tax increment financing benefits awarded to the project. They took a dim view of awarding tax benefits to a wealthy developer when those incentives arguably affect the struggling school district.
BNIM was hoping to move its headquarters to this empty building at 1640 Baltimore Ave. But the firm abandoned its plans after parents in Kansas City Public Schools sought a petition initiative to reverse tax increment financing benefits awarded to the project. They took a dim view of awarding tax benefits to a wealthy developer when those incentives arguably affect the struggling school district.

During the sweltering month of June, Kansas City Councilman Quinton Lucas had plenty of private meetings with businesses about an ordinance he first broached when the weather was much cooler.

In May, Lucas introduced a measure that would reform economic development incentives — the subject of much local controversy over the years. Crucially, it would limit the tax abatement or tax redirection a project could receive.

Since then, he has yet to have a public meeting where his Kansas City Council colleagues would discuss his measure; it’s been held off the docket of the Planning, Zoning & Economic Development Committee without a hearing for more than a month.

Scott Taylor, chairman of the committee, said the type of policy change that Lucas contemplates requires further discussion with stakeholders.

“We definitely don’t want to implement something that would shut down the economy, as we’re creating a lot of new activity, jobs and new investment in Kansas City that will help our city grow,” Taylor said.

Lucas doesn’t believe his ordinance would shut down development. He thinks it would help clear up some of the controversy that’s enveloped the process.

He doesn’t mind that it’s been held off the docket until now, but he also doesn’t want to wait around forever.

“It’s not something that’s angered me, necessarily,” Lucas said. “It will if we get past the summer and we’re not sure which direction we’re going.”

The Lucas measure seeks policy changes for the tax abatements and subsidies that Kansas City can offer to economic development projects. In general, the measure proposes to reduce the amount of tax abatement or tax redirection a project can receive by 25 percent.

For example, a standard inducement offered by the Planned Industrial Expansion Authority abates as much as 100 percent of property tax increases on development projects for the first 10 years after approval, and then by 50 percent for the following 15 years. Under Lucas’ bill, the expansion authority could abate 75 percent of those taxes for 10 years, then 37.5 percent for 15 years.

It would affect tax increment financing, another popular incentive program. Under normal circumstances, TIF captures 100 percent of increases in property taxes generated by a development project, along with 50 percent of economic activity taxes (earnings, sales and utility taxes) and makes them available to reimburse developers. Under Lucas’ ordinance, property tax redirections would be limited to 75 percent, and economic activity tax redirection would fall to 37.5 percent.

Lucas’ ordinance includes several exceptions, namely for projects that qualify for historic tax credits, that receive LEED designation for environmental sustainability or those in economically distressed census tracts. Another exception is for projects deemed “high impact” under the city’s economic development and incentive policy, usually for developments that include high-paying jobs.

Not exactly new

In 2014, Kansas City Mayor Sly James proposed paring back tax abatements by twice the level that Lucas contemplates. James said at the time it was meant to start a conversation, which generated heavy criticism from the development community.

“(Former) Councilman (Ed) Ford led those discussions, which unfortunately resulted in an inability of stakeholders to come to an agreement on any significant change to our economic development policy,” James wrote in an email to The Star.

James’ experience, and that of predecessor and incentive critic Mark Funkhouser, shows that suggesting changes to economic development incentives involves political risk. Development incentives help not only developers, but construction, architecture, engineering and law firms — all of which are influential in municipal politics and financing of elections.

But Lucas has an advantage: His ordinance has six other co-sponsors on the Kansas City Council. That theoretically gives him a seven-vote majority on the 13-member council.

Lucas said he suggested his ordinance as something of a compromise between developers who frequently request public assistance for projects and a groundswell of dissatisfied citizens who believe Kansas City awards tax breaks for private projects too often.

Pockets of those dissatisfied citizens have used the petition process to wield influence against incentives, although it’s been largely on a project-by-project basis.

The prime example was the collapse earlier this year of philanthropist Shirley Helzberg’s plans to refashion an old warehouse in the Crossroads Arts District into a new headquarters for architecture firm BNIM. The firm abandoned its plans after parents in Kansas City Public Schools sought a petition initiative to reverse tax increment financing benefits awarded to Helzberg’s project. They took a dim view of awarding tax benefits to a wealthy developer when those incentives arguably affect the struggling school district.

That episode has partly influenced Lucas’ legislation.

The low threshold for petition initiatives — 1,700 signatures can force the City Council to reconsider an ordinance or put the matter to a public vote — has led to a precarious development climate in Kansas City. Some developers think twice about pursuing a development that seeks tax incentives if a petition initiative can sink a project.

“I think it was harder to do business in Kansas City with the unpredictability of the petition process,” Lucas said.

The petition process joins with long-standing criticisms of tax abatements from taxing jurisdictions like school districts and library districts. Schools and libraries get most of their funding from property taxes. When development projects receive abatements, taxing jurisdictions say their budgets suffer.

Surprising reactions

Some taxing jurisdictions seem lukewarm about Lucas’ proposal.

“It’s an improvement, but they’re still going to be taking a majority of our tax revenues in these deals,” said R. Crosby Kemper III, executive director of the Kansas City Public Library and a frequent critic of development tax breaks. “It would be marginally better.”

Meanwhile, groups that have generally applauded the role in tax incentives in redeveloping languishing areas of Kansas City, particularly downtown, said they’re keeping an open mind about revisiting the terms of these tools.

“We’re in a very different place today in 2016 than we were in 2010, 2006 or 2002,” said Bill Dietrich, president and chief executive officer of the Downtown Council of Kansas City. “To take a look today at the current incentive policy and make it contemporary to today’s conditions makes a lot of sense to us.”

Dietrich added that the Downtown Council has not taken a position on the proposed ordinance.

Nor has the Greater Kansas City Chamber of Commerce, according to its spokeswoman Pam Whiting, who adds that its board has monitored the ordinance.

“He thinks he has the votes, but there’s a huge amount of pressure coming from the development attorneys and the development community,” Kemper said.

Lucas doesn’t call it pressure, but acknowledges his ordinance might displease some in the business community.

“I’ll say they’ve been fair,” Lucas said. “I think it’s been clearly suggested that this is a significant change, and there would be people who are very unhappy with it.”

Charles Renner, a real estate attorney with Husch Blackwell, agrees the specter of petitions injects uncertainty into development projects.

“I suspect I’m not alone in saying that the risk factor is greater today than it has been,” Renner said.

Does reducing the level of tax abatement and redirection as contemplated in Lucas’ bill create financial challenges for developers?

“In broad terms, it does create a challenge,” Renner said. “You have to look at each particular project to understand what the implications are. There are some that can comfortably address that cap, and there are some that can’t.”

Can the ordinance work?

There’s some question about whether the city can impose terms on certain incentive programs, particularly those that are created by state law.

A good example is the Port Authority of Kansas City. Port KC is a political subdivision of Missouri, although the mayor of Kansas City appoints its commissioners. Port KC can, and recently has, awarded tax exemptions to development projects.

“I believe the statutes are pretty clear that the municipalities cannot govern the Port Authority,” said Dan Fowler, a Kansas City councilman from the Northland and a Port Authority commissioner.

Michael Collins, president of Port KC, said he’s had discussions with Lucas about his ordinance.

“I will say we are a political subdivision of the state of Missouri,” Collins said. “We want to make sure we are working well with the City Council and City Hall and all the constituents of Kansas City. … Councilman Lucas is wanting to make sure everyone has an equitable piece at the table. He was very open with talking to us and meeting with us.”

Politics of incentives

Indications were that Lucas’ bill might get a public hearing at the Wednesday Planning, Zoning & Economic Development Committee. But it appears that it may be held off the docket again.

The same committee also has held off on a resolution sponsored by James and five other council members, none of whom sponsors Lucas’ bill.

James is proposing what’s called a Shared Success Fund. James’ proposal calls for a fund that earmarks certain money from tax-abated projects to provide assistance for redevelopment proposals in economically distressed census tracts.

Lucas’ incentive reform bill also includes a Shared Success Fund concept. While both Shared Success Funds bear similarities, differences exist.

James’ measure suggests forming an advisory committee to help evaluate where and how to spend the Shared Success Fund.

“I would appoint a committee of people vested in the community and familiar with community development to vet and make recommendations to the Planning, Zoning and Economic Development Committee on which projects should be awarded SSF funds,” James said in an email. “I continue to think that this is the most reasoned approach to this fund, but I am open to discussing alternatives.”

Lucas wants to give that power directly to the Kansas City Council.

“I don’t think it helps Kansas City to have another committee of people controlling a pot of money,” Lucas said.

Lucas’ ordinance is sponsored by council members Teresa Loar, Katheryn Shields, Jermaine Reed, Alissia Canady, Heather Hall and Lee Barnes. Supporting James’ ordinance are Jolie Justus, Dan Fowler, Scott Taylor, Scott Wagner and Kevin McManus.

The Lucas ordinance has also surfaced against the backdrop of City Hall’s effort to study the city’s return on investment for economic development incentives.

City staffers are evaluating bids from outside companies to do a comprehensive analysis of how incentives have performed. There’s no timeline on when that study will be finished.

“Such an analysis, if done correctly, will take some time to complete, however, we will be working to complete it as soon as possible,” James wrote in an email. “The report will provide the sort of data and facts that can lead to reasonable and responsible improvements to our economic development policy.”

Lucas said he doesn’t believe a vote on his ordinance needs to wait for the completion of that study. He wants a final vote by August.

“I’m not willing to let this wait for some indeterminate amount of time and let it die a slow death,” he said.

Steve Vockrodt: 816-234-4277