Government & Politics

‘Ultimate pork project’: Kansas’ mega tax breaks don’t deliver as promised

Two race tracks in eastern Kansas are separated by 60 miles along Interstate 70, as well as a veritable chasm in one’s success and the other’s struggle.

The first, the 48,000-seat Kansas Speedway, draws thousands of NASCAR fans and has been key in transforming the western edge of Wyandotte County from windswept fields to a booming retail, entertainment and employment sector.

The other, in Topeka, is the Heartland Motorsports Park, which has performed so far below expectations that the city has to cough up $1 million a year to pay back investors.

Underpinning both projects is taxpayer assistance in the form of sales tax revenue (STAR) bonds, powerful inducements that were originally designed to encourage exceptional attractions that bring in tourists from far away.

The Kansas Speedway demonstrates what is possible with the bonds, while Topeka and other developments in recent years show what the program has become.

“The use has been perverted to gas stations and car lots and mainstream consumer goods,” said Doug Spangler, an Edwardsville Democrat who served in the Kansas House from 1994 to 2002, the period when the bonds were conceived. “It was originally supposed to be utilized only for activity related to a destination resort, so that’s a big difference.”

The Star’s analysis of the bonds found:

A pattern of overpromising and under-delivering. The Star examined six projects, comparing annual revenue projections with reports from the Kansas Commerce Department. Over five years, the projects missed by $41.1 million.

A glut of projects that seem to subvert the STAR bonds’ mission. In their first 10 years, 1999 to 2009, the bonds were used sparingly, for only four projects, including the Kansas Speedway. Since then they’ve been used for at least 16 developments, including more routine projects such as new turf for soccer fields in Wichita, a shopping center in Overland Park and an aquatic center planned for Goddard.

A lack of accountability. The Kansas Commerce Department’s STAR bond guidelines stipulate that developments should draw a certain percentage of visitors from out of state. But the state has no mechanism for tracking those numbers, and what data it has is spotty.

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The Stryker Sports Complex, an indoor soccer arena in Wichita, put in new turf with the help of STAR bonds. Wichita Eagle

As a result, the state so far has seen more than $235 million in sales tax revenues going to pay off STAR bond principal, with another $465 million remaining to be paid off. That’s money going to investors rather than for health care, prisons and other government programs and services. Critics say the bonds have become a cash grab that cities and developers tap into when they want a new project.

“It’s the ultimate pork project,” said Kansas Sen. Molly Baumgardner, R-Louisburg.

Johnson County’s dueling projects

Baumgardner’s district stretches into south Overland Park, where developers are pursuing more than $60 million in STAR bonds for the Bluhawk project, a hockey arena and retail hub at 159th Street and U.S. 69.

Over in Olathe, on the site of the former Great Mall of the Great Plains, a rival hockey arena project called Mentum also wants $60 million in bonds, underscoring Baumgardner’s skepticism.

“The purpose was to bring economic development opportunity and guaranteed jobs through something very unique to that particular region,” Baumgardner said. “The fact that we now have two tentative projects less than 10 miles apart, that really defies being something that would be regionally unique.”

Tim McKee, chief executive of the Olathe Chamber of Commerce, said STAR bonds are a valuable tool. He said Mentum would draw athletes and families from long distances, and it won’t happen without the bonds.

“I can tell you 100%: But for STAR bonds, you’re not going to have an arena,” he said.

That’s a trade-off one Overland Park City Council member is willing to risk: Faris Farassati said neither the Olathe hockey project nor the one in his own city should qualify for STAR bonds.

“It’s simply not of that caliber,” Farassati said. “I don’t think people are going to drive hundreds of miles to come and play. It’s a local amenity developed by a private corporation for local people. Therefore, in the context of the STAR bonds, it really doesn’t meet any of those requirements.”

Overland Park issued nearly $65 million in STAR bonds for the Prairiefire development, which includes the struggling Museum at Prairiefire. Keith Myers The Kansas City Star

In Farassati’s own ward, Overland Park has already had one STAR bond project fall short of expectations: the Prairiefire development along 135th Street between Nall and Lamar avenues.

Overland Park issued $64,990,000 in STAR bonds for the retail and entertainment development in 2012. Bonds are often issued in tranches, the French word for “slices.” The maturity date for the first $15 million tranche is fast approaching in 2023. Prairiefire has only paid back $130,000 of the original principal, leaving a $64,860,000 outstanding balance after seven years.

Prairiefire applied for the STAR bonds with the promised attraction of the $27 million Museum at Prairiefire, which at its inception was supposed to host traveling exhibits from the American Museum of Natural History in New York.

The Star reported last year Prairiefire’s contract with the famous New York museum concluded, and its exhibits are no longer on display in Overland Park.

Annabeth Surbaugh, former chair of the Johnson County Commission, said she visited Prairiefire recently and wondered whether the museum was the type of attraction STAR bonds were supposed to fetch.

“I just thought it was going to be more,” Surbaugh said. “I thought STAR bonds meant more than what I saw.”

Further evidence of Prairiefire’s difficulties is revealed by other financing issued separately from the STAR bonds. Prairiefire has repaid none of the principal on some $13 million in community improvement district bonds issued by Overland Park. Prairiefire has reached into a reserve fund to make interest payments because it hasn’t generated enough sales tax on its own. It most recently tapped the reserve fund, kind of like a savings account for the project, on June 21.

Prairiefire developer Fred Merrill Jr. did not respond to a request for comment.

Erosion of mission

Experts who study development incentives say it’s common for the original mission to erode into something else.

Greg LeRoy, who researches and often criticizes tax incentives and corporate tax breaks for Good Jobs First, said one of his first studies examined trends in tax increment financing and enterprise zones.

“The recurring theme was that they get deregulated,” LeRoy said. “That is, they start out fairly narrowly targeted to areas that most reasonable people would agree are really in need of help … but over time, the targeting rules get loosened so you can have one in every state senatorial district, you can have on in every suburban office park, you can have one gerrymandered anywhere you want.”

The Kansas Legislature created STAR bonds as a windfall for the Wonderful World of Oz project, an interactive theme park dreamed up by a Los Angeles entertainment lawyer in the 1990s first for Wyandotte County and later for the Sunflower Army Ammunition Plant in western Johnson County.

Local officials shot it down when they began to suspect there was no private money behind the deal.

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The Kansas Speedway in Wyandotte County is an example of how STAR bonds are meant to work, spurring tourism and more development in the area. David Eulitt The Kansas City Star

But STAR bonds proved useful a few years later when Wyandotte County used them to attract a NASCAR race track, one that was originally planned for Platte County but went across the state line after lawmakers in Missouri dragged their feet on approving the project.

Here’s how STAR bonds work: Cities sell bonds to provide upfront capital that a developer can pour into a project. The bonds are paid back over 20 years with the sales tax generated by the development. Cities aren’t usually on the hook for failed projects, but Topeka backed the bonds to refurbish its aging racetrack in 2006 to get the deal done.

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The Legends, part of the Village West development near the Kansas Speedway, has been a boon to western Wyandotte County. Mike Ransdell The Kansas City Star

After bonds for the Kansas Speedway were approved, they were issued again for the Village West retail project nearby.

Both projects are often held up as examples of the benefits of STAR bonds. In Village West’s case, the bonds were paid off ahead of schedule because shoppers generated plenty of sales tax. After the bonds were retired in 2017, Kansas City, Kansas, used a $12 million windfall from Village West sales taxes for modest reductions in the city’s notoriously high property tax rate, conferring a benefit to residents throughout the city.

The Kansas Commerce Department, not elected lawmakers, ultimately decides which projects get STAR bonds, and critics say that a lack of oversight has led to the issues with the program today.

Kansas Sen. Julia Lynn, R-Olathe, said that instead of building tourism destinations, the bonds are now used for local “quality of life” projects.

Goddard, a suburb of Wichita, issued $30 million in STAR bonds for an aquatic center, sports fields and a hotel, which have yet to be built. Courtesy illustration

An example: Goddard, a suburb of Wichita, was approved for $30 million in STAR bonds in 2014 for an aquatic center and sports fields that city officials said would draw in visitors for tournaments or swim meets. But so far, the city has run into troubles with contractors, and the attraction hasn’t been built. Over the last five years, the Goddard project has fallen $22 million short of projected revenue.

But despite the lack of an attraction, Goddard has paid back nearly $3 million on its STAR bonds. The city drew the STAR bond district to include a new Walmart, so the store’s sales tax is paying back the bonds instead of going into city and state coffers.

STAR bonds are now “something that the public, not just Joe Taxpayer, but also businesses and bankers, are asking if this is appropriate public policy,” Lynn said.

She notes that the use of STAR bonds has changed without a change in the law.

“I think we have not provided appropriate oversight,” said Lynn, who is chair of the Senate Commerce Committee, which oversees the Commerce Department.

Robert North, chief counsel of the department, said the intent of STAR bonds is to provide regional or national tourism destinations to bring new people and new spending to the state.

“So part of the goal is we are not trying to slice the existing pie differently, we’re trying to grow the pie, and we want new people and new dollars,” North said. “That remains the objective and the intent.”

But the Commerce Department does not track whether STAR bond projects actually attract that new spending to Kansas. Guidelines said 20% of visitors to STAR bond projects should come from another state, while 30% should come from more than 100 miles away.

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Field Station: Dinosaurs, an animatronic dinosaur park, opened in May 2018 in Derby, Kansas, with the help of more than $20 million in STAR bonds. Jaime Green The Wichita Eagle

North pointed out that some attractions keep track of where visitors come from, but he and the state acknowledge they do not have numbers. In Derby, for example, Field Station: Dinosaurs, a theme park of animatronic dinosaurs, gathers patrons’ ZIP codes through credit cards and by asking ticket buyers, but that information is not reflected in state STAR bond reports.

“You could have somebody counting license plates, I guess, and that could be their full-time job,” North said, “but it’s a little more difficult with some attractions than it is with others to look at visitation.”

Lynn said she is concerned about the state’s inability to measure whether tourists are coming to these projects.

“That’s obviously a big giant hole that needs to be in the law,” Lynn said.

Future of STAR bonds

With lawmakers raising concerns over the program and the retail industry in flux, the future of STAR bonds is murky.

Efforts to reform STAR bonds in 2018 fell short after developers resisted the changes, but the Kansas Legislature this year did pass a measure to require more analysis of the program.

The state’s coffers often take the biggest hit because the Kansas sales tax rate of 6.5% dwarfs city sales tax rates. The state isn’t paying the bonds back directly, but is instead not collecting the millions of sales tax dollars from these projects. Lynn sees that as a problem: In essence, Kansas taxpayers subsidize what are increasingly becoming local amenities.

“It’s not an equal share,” Lynn said. “The state gives disproportionately more.”

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The Heartland Motorsports Park in Topeka was refurbished in 2006 with the help of STAR bonds, but it has not attracted the crowds that were projected. Allison Long The Kansas City Star

Proponents of STAR bonds say it’s too early to dismiss the entire program. In Topeka, Doug Gerber, the deputy city administrator, expects the struggling Heartland Motorsports Park to turn a corner. Though Topeka taxpayers will be paying down the bonds until 2025, he said, the track is a huge attraction, drawing thousands each year to the city. The recent announcement that Heartland would permanently host the Country Stampede music festival, formerly held outside Manhattan, as well as the track’s new ownership, ,mean the development is poised for growth.

“The track is becoming more transformational,” Gerber said. “And I think it’s going to pay dividends for Topeka in the future.”

Despite issues with STAR bonds, Overland Park’s Farassati doesn’t think they should go away entirely. He believes the program should redefine what projects qualify and hold the developments accountable to stick to those qualifications.

“But we need to review it and make it logical and sound,” he said. “We don’t throw something out just because it needs to be repaired. You repair it and use it when the time comes.”

Baumgardner of Louisburg agreed, saying the scant information provided by the Commerce Department is “a lot of dog and pony show.”

“Before you can make a decision, you need very real data and you need very accurate data,” she said. “We should not be making any awards on new STAR bonds until we know exactly where we are on existing projects.”

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