Saturday, November 18, 2017

Heartland Park sales-tax plan insufficient to meet annual bond payments Topeka will require property tax revenue to fill shortfalls in 11-year deal

HPT

Copied and pasted from CJONLINE.COM
DOCUMENTS REVEAL:

■ Plans dedicating state and city sales tax revenue to bond debt on Heartland Park falls $550,000 short in four of initial five years of deal. Local property taxes must cover deficits.

■ The Kansas Department of Commerce intends to keep state sales tax generated by a Walmart in Heartland Park’s bond repayment zone. The exemption would be unprecedented.

■ A Heartland Park consultant’s estimate the motorsports track created $160 million annually in economic development may be exaggerated by two-thirds.

ONLINE
By Tim Carpenter
timothy.carpenter@cjonline.com

A City Hall strategy to rescue Topeka taxpayers from millions of dollars in old debt associated with the beleaguered Heartland Park racetrack falls $550,000 short of meeting bond payment obligations in the initial five years of the deal.

That previously undisclosed gap, city officials said, would have to be made up with local property taxes.

A Kansas Open Records Act request also revealed intent of the Kansas Department of Commerce, for the first time, to withhold sales tax revenue generated by a retailer in a STAR bond district from being used to service debt on an economic development project. In terms of Heartland Park, Walmart wouldn’t help pay bond debt.

Meanwhile, a city official said it had been unwise to promote without verification a Heartland Park consultant’s claim the track was responsible for $160 million annually in economic benefits. The impact may be overstated by two-thirds.

Long-term focus

In response to KORA requests, the state released a document demonstrating state and city sales tax designated to pay old and new Heartland Park bond obligations would be insufficient to consistently meet annual requirements until 2019. Over 11 years, it would miss the mark in years two through five.

Topeka City Attorney Chad Sublet said information city staff shared with the public during the past 10 months on Heartland Park didn’t include the year-by-year analysis revealing local taxpayers would be on the hook for the $550,000 shortfall.

He said financial disclosures by city officials focused on a pledge to address all bond debt affiliated with the motorsports complex by 2025.

“Our interest was assuring the public, the council, anybody that would listen, this is a plan to address our debt service problem over 11 years,” Sublet said.

Doug Gerber, the city’s director of administrative and financial services, said drawing upon state tax revenue to pay the bulk of the debt while filling shortages with Topeka property tax revenue was preferable to the city absorbing the entirety of debt on the racetrack bonds.

Topeka is ineligible for additional state money to pay previous STAR bonds without issuing a supplemental set of STAR bonds, he said.

“This is in the long-term best financial interest of the city,” Gerber said. “I’m way more comfortable with that than having an $8.2 million deficit, which is what we have now. I’ll take those numbers anytime.”

Gut check

Information about the repayment issue surfaced as the Topeka City Council prepared for a presentation Tuesday by city administrators on the quest to save Heartland Park by satisfying financial demands of racetrack operator Ray Irwin of Jayhawk Racing as well as expectations of CoreFirst Bank and Trust, which is owed millions of dollars by Irwin.

Topeka City Manager Jim Colson scheduled a vote May 5 by the council — four members recently took office — to determine whether a majority favored proceeding with framework of the deal negotiated by representatives of CoreFirst, Jayhawk Racing, City Hall and the Department of Commerce.

The city of Topeka, which owns the combination dirt-, drag- and road-racing property, would be solely responsible for paying existent STAR bonds if CoreFirst exercised its right to foreclose on Irwin. The city is keen to buy out Irwin’s “reversionary” interest in the track, which gives him the right to claim the property after all bond debt was satisfied.

If the city council commits to bonding, Colson would submit a final STAR bond application to the commerce department. The city would move to wrap negotiations with a company capable of managing the track. Bonds would be issued. CoreFirst and Irwin would be compensated. The city would obtain clear title to the Topeka track that opened in 1989.

Colson said the objective was to provide an opportunity for Heartland Park to serve as “a world-class motorsports venue.”

Big money, fight

Fate of Heartland Park has been the focus of legal, financial and political intrigue since the city council formally took up the STAR bond concept in June. An appeal of lower court decisions in litigation resulting from an attempt to compel a public vote on the deal is pending before the Kansas Supreme Court.

Senate Minority Leader Anthony Hensley, a Topeka Democrat who requested a legislative audit of the Heartland Park proposal, said the controversy demonstrated necessity of amending state law governing STAR bonds. He said reform was needed to guarantee cities and counties were held accountable when bonding commercial, entertainment or tourism developments.

“There’s no question they’ve used faulty numbers to make it look better than it is,” Hensley said.

In 2006, the city issued $10.4 million in STAR bonds for Heartland Park. Tax revenue projections regarding payment of that debt were flawed. The city’s annual subsidy on those bonds ranged from $241,000 in 2011 to $682,000 in 2008. Without intervention, the city’s subsidy could balloon to $800,000 annually.

If $5 million in new sales tax revenue bonds were issued in 2015, the city would pay Irwin $2.4 million and CoreFirst would receive $1.9 million.

Overall, the state would contribute $16.4 million in sales tax revenue to service public debt on the complex. The city of Topeka would provide $1.6 million from sales taxes and fill gaps with property taxes.

Walmart anomaly

Documents obtained under KORA included a series of emails tied to work by the Legislature’s auditing division.

In a March report, auditors concluded the Heartland Park project was atypical but eligible for STAR bonds. The oddity was that new bonds were sought to save a destination venue rather than create a fresh attraction. Auditors challenged elements of the Heartland Park plan and issued recommendations for strengthening Kansas law guiding issuance of STAR bonds. A reform bill is pending in the Senate.

The emails indicated the commerce department has been developing an unprecedented repayment map for the Heartland Park bonds.

The project requires geographic expansion of the district from which state and city sales tax revenue would be diverted to pay old and new STAR bonds. The district would extend north along Topeka Boulevard to capture two major revenue generators in the vicinity of 37th Street — Walmart and the Bozarth automobile dealership.

Commerce Secretary Pat George has yet to make a final ruling on the map, but the state and city appear to have agreed sales tax revenue from Walmart shouldn’t apply to retiring Heartland Park’s debt. That cash will continue flowing to the state’s treasury.

“STAR bonds give the secretary a great deal of latitude and discretion in administering the program,” said Matt Keith, a spokesman for the agency.

Emails revealed the Kansas Department of Revenue recommended the bond-repayment map be modified to expel Walmart rather than pursue the administrative adjustment.

Mistaken stat

The city officially projected sales tax revenue in the newly defined Heartland Park district would grow 1 percent annually.

However, communications divulged through KORA indicated a city employee calculated annual sales tax growth in the zone to be 0.5 percent in the previous decade. That was an error, said a city spokeswoman, who indicated the correct rate stood at 3 percent.

Gerber, the city’s director of administration and finance, said 1 percent was appropriately viewed as conservative “especially as we’re trending upward.”

The rate projection is significant because a 1 percent adjustment resulted in the projected deficit in four of 11 years in the amount of $550,000. Slicing the rate in half would produce a sales tax revenue deficit in 10 of 11 years totaling $925,000.

Without Walmart contributing to bond retirement, Bozarth must remain a viable business in its current location to make the Heartland Park venture succeed.

“We’re pretty confident,” said Sublet, the city’s attorney. “They’ve also invested quite a bit of money in that facility in the last few years.”

“Could something catastrophic happen in the future?” Gerber said. “Of course.”

Exaggeration

For months, the city’s campaign to generate support for the STAR bond correction included statements declaring the racetrack contributed $160 million each year to the economy.

That statistic was drawn from a 2012 market research report prepared by Hedges & Co. Hedges was hired by Irwin’s Jayhawk Racing — the business with the most to gain if the bond deal goes through.

Sublet said state auditors indicated Heartland Park’s influence was far less than $160 million.

“What they said in post audit was we believe it’s a third of that,” Sublet said. “It’s $53 million in economic impact.”

Legislative auditors pointed to “bias or slant” in the Hedges assessment and found there was “not clear and convincing evidence” to support the report’s central conclusion.

In response, auditors recommended the Legislature and Gov. Sam Brownback amend Kansas law to require economic impact studies related to STAR bond proposals to be conducted by independent firms selected by the commerce department.

The 50-50 split

The state’s STAR bond law dictates tax subsidies not constitute more than 50 percent of an economic development project’s cost. Current state law doesn’t penalize cities, counties and their private business partners that fail to comply.

Chris Imming, who led the legal fight to require a public vote on Heartland Park, said an October report on the previous STAR bonds showed Irwin was $3.4 million short of the minimum.

“The ignorance of the requirement, unwillingness to comply or inability to meet the requirement for the existing project should be a concern to Kansas Department of Commerce when considering approval of the city’s new request,” Imming said.

Initially, Topeka city officials and Jayhawk Racing’s attorney John Frieden proposed a novel method of matching the investment guideline on $5 million in new bonding.

They pointed to a $15.3 million appraisal of the motorsports facility and suggested that represented the actual value of Irwin’s reversionary interest. After the city used bond proceeds to pay Irwin and CoreFirst, they proposed, Irwin would contribute $5 million of his excess reversionary interest to the project. The commerce department and the Legislature’s auditors rejected the plan. In effect, Irwin would have been allowed to sell his interest in the track and count that as an investment in the track.

Frieden’s law firm submitted a letter to the commerce department in September listing 16 hypothetical upgrades to Heartland Park costing $5 million to $7 million. Contents of the document remained confidential until unearthed in February through a KORA filing.

Imming said the list submitted by Irwin’s attorney carried no legal weight but appears to have been accepted by the state as valid.

“The city council did not approve the amended project plan provided the Department of Commerce,” Imming said. “This is not a function that can be delegated.”

Tim Carpenter can be reached at (785) 295-1158 or timothy.carpenter@cjonline.com.
Follow Tim on Twitter @TimVCarpenter. Read Tim’s blog.

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