Kelly admin wants extra funding for STAR Bonds. Critics say that’s proof it doesn’t work
For years, a controversial sales tax incentive in Kansas has been billed as a way to build transformational tourist destinations that draw visitors from across the region.
Kansas STAR Bonds have helped to build well-known attractions like the Kansas Speedway and Children’s Mercy Park in Kansas City, Kansas. But state leaders have often over-promised and under-delivered on STAR Bonds projects, allowing the bonds to fund more mundane uses like adding new turf to soccer fields or creating shopping centers.
The program is now at risk because of its reliance on local taxpayers to pay off project debts.
Officials say 15% of STAR Bond revenue comes from food sales tax, which is set to be eliminated by 2025 and which Democratic Gov. Laura Kelly and state lawmakers might eliminate sooner.
Kelly’s Department of Commerce is asking the Legislature to allocate roughly $15 million annually to cover the cost of food sales tax revenues lost by STAR Bonds projects. A provision was included in the state budget last year to cover the costs for the year but the bill would make the change permanent.
The Kansas House voted 72-49 last month to approve the measure and send it to the Kansas Senate.
Some view the governor’s request as further evidence that the program hasn’t lived up to its promises.
A 2021 study from the state’s Legislative Post Audit Division found that only three of 16 reviewed projects met the state’s tourism-related goals.
“When I think of tourism, I don’t think of going to the grocery store,” said Rep. Tory Blew, a Great Bend Republican who voted against the bill. The state, she said, was “giving money away” to a failed program.
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, though some, like Topeka, have backed the bonds.
The state characterizes STAR Bonds as “a municipal financing program intended to create tourism and entertainment attractions, drawing visitors from across the region and out of state.”
In order to be considered a major commercial entertainment and tourism area, a proposed project must be capable of being characterized as a statewide and regional destination, and include a high quality innovative entertainment and tourism attraction, containing unique features which will increase tourism, generate significant positive and diverse economic and fiscal impacts and be capable of sustainable development over time. Public benefits must exceed public costs.
Despite the focus on tourism, six of the state’s STAR Bonds projects, including one in Overland Park and another in Wichita, are taking in sales tax revenues from a grocery store. The lost revenue, a spokesman for the department said, needs to be covered by the state to protect bondholders.
“Bonds were bought under a certain set of circumstances. If any circumstances change, they need to be accounted for in order to protect the bondholders,” Patrick Lowry, a spokesman for the department, said in an email.
Greg LeRoy, executive director of incentive watchdog group Good Jobs First, said the cost of wiping away the grocery taxes has exposed a fundamental problem with the STAR Bonds program. Though the state has long touted the program as creating regional tourism destinations, LeRoy said the legislation serves as an admission that the program doesn’t work as intended.
“It’s bailing out the projects and it’s kind of bailing out that argument,” LeRoy said. “It says that the tourism model really wasn’t working.”
Advocates for the measure say the move will help bondholders pay off the debt earlier and allow that sales tax to once again be used for state and local services.
“The sooner we can pay off STAR Bonds the sooner the state is going to see the money,” Department of Commerce’s general counsel Bob North told lawmakers last month. He noted that paying the bonds off earlier would minimize the amount of interest accrued.
But a 2021 study of the program by the nonpartisan Kansas Legislative Division of Post Audit, which studies state programs for the Legislature, found that the state may not recoup lost sales tax from the projects for more than 50 years.
The study was conducted before lawmakers began reducing the food sales tax.
The Overland Park Prairie Fire project, a museum and entertainment district which has faced repeated problems paying back investors, was expected to be recouped in 2046 at the earliest and 2104 at the latest. The Wichita project was closer with estimates that could be recouped in 2030 at the earliest and as late as 2076.
Kimberly Svaty, a lobbyist who testified to lawmakers on behalf of the City of Derby, said the city’s STAR Bond project was predicated on the Target and Aldi included in that district. That project features an outdoor exhibit with animatronic dinosaurs, a miniature golf course and a sports complex.
“It does have an impact on our ability to pay back our STAR Bonds in a more expedited manner,” she said.
Since 2017, the state has issued more than $70 million in STAR Bonds to help fund the Derby developments. More than $48M in bonds are still outstanding, according to a 2022 state report.
Some STAR Bond district boundaries have been specifically drawn to include retail stores to provide much needed revenue to pay back investors. That was the case in Goddard, a suburb of Wichita, where the state approved $30 million in bonds for a new aquatic center and sports complex.
But years of problems with contractors delayed the development. Instead, the city relied on a new Walmart drawn into the STAR Bond district that diverted millions of dollars in sales taxes to investors, rather than going to city and state coffers.
Rep. Sean Tarwater, a Stillwell Republican who chairs the House commerce committee, voted to provide the funding but expressed frustration that Commerce had requested it.
“We’re not on the hook for the bonds and, quite frankly, they never should have drawn Walmarts into the STAR Bonds district because that’s not the attraction,” he said.
The bill is now in the Senate where Sen. Renee Erickson, a Wichita Republican who chairs the Senate Commerce Committee, said last month she was open to considering the proposal because she viewed the STAR Bonds issue as an “unintended consequence of a good piece of legislation.”
“Cutting the food sales tax is a good thing,” Erickson said. “How do we properly address that?”
