Worse Than Great Recession? Pandemic May Force Kansas City To Change Expensive Ways
No city will escape the economic pain of the coronavirus, but Kansas City may be in worse shape than most.
A recent study by the Brookings Institution ranked Kansas City, the only local municipality with an income tax, among the nation’s top 20 cities that will feel the most immediate fiscal impacts from COVID-19.
To make matters worse, tax pros expect the city to pay back refunds next year as out-of-towners claim earnings tax refunds after working at home — outside the city limits — for months on end.
Michael Pagano, co-author of the Brookings report, says the hit to Kansas City’s revenues will come swiftly.
“There's no lag. You don't get your paycheck, you don't pay the city. The second thing you don't do is you don't buy anything,” he says.
By several measures, Kansas City’s budget picture was already souring well before the pandemic. In 2012, a special commission on municipal revenue warned that Kansas City’s future expenses would outpace revenues without spending cuts, tax hikes or other reforms.
Kansas City has increasingly come under pressure for investing in new developments — stretching already thin resources and undercutting revenue streams.
And several outside studies have highlighted the fact that Kansas City carries a higher debt burden than its peer cities, cramping its ability to tighten the budget during difficult times. This year, the city plans to spend nearly $200 million on debt and interest payments. By comparison, the city’s general fund this year was budgeted at $565 million, which pays for police, roads and other services.
That debt doesn’t account for hundreds of millions in unfunded pensions, healthcare liabilities and deferred maintenance. For example, almost half the city’s roads are classified as poor or failed.
The debt burden is a big reason the nonpartisan think tank Truth in Accounting ranks Kansas City 56th on its Financial State of the Cities report, which examines the books of 75 U.S. cities.
Researchers figured that the city’s debt has left each local taxpayer with an individual burden of nearly $10,000. And before the pandemic, the city’s net position — a key measurement of the government’s solvency — declined over the last four budget years, according to city documents.
“It’s getting worse in the last four years, not better. And that's before the crisis hit,” said Bill Bergman, research director at Truth in Accounting. “They should be very concerned.”
He said the city’s debt load is evidence of a government that spent more than it brought in long before the pandemic.
“Effectively, Kansas City has pushed off a day of reckoning in a way that makes future taxpayers pay for the cost of past government services,” he said.
In May, the city budget office predicted a worst-case scenario could force Kansas City to cut more than $300 million out of its budget over five years.
Last week, Kansas City’s finance department told the city council they should brace for a $50 million cut in year one.
Officials are recommending a 4.5 percent budget reduction across all departments. To get by, department heads have proposed selling off park land, eliminating 172 uniformed police officer positions and nixing plans for a new soccer complex in the emerging Twin Creeks area of the Northland.
They also propose reducing mowing services, holding off on streetlight fixes and cutting recycling pickup.
No one can predict the long term toll from the pandemic, but finance director Tammy Queen said she doesn’t expect the worst case. The fiscal year only just started on May 1, giving City Hall 10 months to make cuts and changes.
Queen said Kansas City’s strong reserve fund and diverse mix of sales, earnings and property taxes will prove advantageous.
“We’re not a Las Vegas, where they rely almost solely on their convention and tourism tax,” Queen said. “That's just a fraction of our total.”
But aside from a hiring freeze, Kansas City had yet to take any proactive steps until last week’s budget discussions.
Depending on which member of the city council you ask, the pandemic is anything from a “hiccup” to the city’s revenues to a disaster as bad — or worse — than the Great Recession.
$43 MILLION SOCCER COMPLEX
Even as the economy was slowing amid stay-at-home orders that closed stores and businesses, the city council was moving forward with large spending projects.
The council approved a plan to finance a $43 million Northland sports complex, which would be owned by Kansas City and operated by Sporting Kansas City, at the end of April.
That’s the same month, incidentally, that the national unemployment rate shot to its highest level since the Great Depression.
While that project may now be on the chopping block, developers have already invested heavily in the area, bringing in tidy subdivisions full of new homes and a big shopping center complete with a Costco and Target. But so has the city: it spent some $40 million to build 10.5 miles of sewers in the area, which was largely rolling hills and woods before.
It’s the kind of endeavor opposed by a small group of community leaders who say city officials must rethink their approach to growth. It’s difficult enough keeping up with the significant web of sewers, roads and water lines already installed, they say, let alone adding more pipes and roads to serve new development.
Unfortunately, I feel like the city is too worried about the big and bright projects that they're doing: you know, the street car, the downtown expansion, the soccer field, this and that, and this and that.
Nowhere does that message resonate more than in the Swope Ridge neighborhood, which has waited for decades to move away from leaky septic systems to the modern sewers most other city residents use.
But promised improvements to the neighborhood were never delivered and special funds set aside for sewers instead were diverted to help finance another sports complex, the nearby Swope Soccer Village.
“Unfortunately, I feel like the city is too worried about the big and bright projects that they're doing: you know, the street car, the downtown expansion, the soccer field, this and that, and this and that,” said Patricia Losiewicz. “And they need to take care of their infrastructure because we're the people that are living here, paying taxes. We have a right to have adequate services inside the city limits.”
Losiewicz moved into the neighborhood, which sits between Swope Park and Interstate 435, about 25 years ago. Even then, residents heard promises of moving to sewer systems.
Sewers did eventually connect to the Winchester Business Park up the hill, which houses two television stations, the United States Department of Agriculture and several other businesses.
But dozens of homes in the Swope Ridge neighborhood still rely on septic systems. Across the city, officials say about 5,000 homes use septic systems.
“It’s a good thing I plan on living here until I die because I probably could not sell this house living on a septic tank,” Losiewicz said.
Hers is an old brick pit covered with a loose top. It and others in Swope Ridge will often overflow during heavy storms, she said, eventually making a path to the soccer fields down the road.
“It’s a hole in the ground full of poop,” she said. “There’s no other way to put it.”
The city did offer an allowance for residents to make septic upgrades, but several neighbors haven’t taken advantage of those grants, saying they wouldn’t cover the enormous cost of improving their decades-old septic systems.
The president of the neighborhood association, Losiewicz said she also fought for five years to get a small section of Bennington Road repaved. By comparison, it took less than six months to erect the massive Swope Soccer Village.
While that project brought new fields to the area, they came with tall fences and rental fees, taking away a playground spot for neighborhood kids.
“Why do I have to keep asking them to fix something they should already be taking care of?” she said, appalled the city has been planning to invest in another set of soccer fields 20 miles to the north. “Their first priority needs to be to take care of the infrastructure we have now and stop with these grandiose projects.”
KC’s DEBT BURDEN
Over the last two decades, Kansas City has seen its debt burden grow by hundreds of millions of dollars.
Much of that is traced to major loans that helped build Power & Light’s KC Live!, improve Bartle Hall and construct the Sprint Center. The debt on government activities has been at or above $1.5 billion for at least the last decade. That figure excludes other debt payments on water, sewer and aviation projects that have their own fee structures backing loans. Collectively, the city’s debt portfolio approaches $3.5 billion.
In this fiscal year alone, Kansas City is set to pay up to $20.5 million in debt service on KC Live! City officials expected to offset that payment with $7 million in revenue from the district, but with many bars and restaurants still closed, revenues are likely to come in far lower.
The city plans to make debt payments on that project until 2039.
“The overall debt burden of the city is high,” said Queen, the city finance director. “If you read any of our credit rating reports, that's one of the things they cite about us.”
The debt is a non negotiable line item that must be paid before the city spends on parks, police or roads. This year, Kansas City will spend about $200 million on debt service for government activities.
Mark Funkhouser, mayor from 2007-11, said Kansas City’s budget picture had been improving in the years since the Great Recession. But he believes the city should be bracing for a budget shock, particularly because of its reliance on the earnings tax.
“I’m glad I’m not the mayor right now,” he said. “This will be worse than the Great Recession. That’s looking across the country. How it will work in Kansas City, I don't know specifically. But this is bad.”
But Queen said not all debt is bad. And she noted that Kansas City is set to make significant progress on its debt. If the council doesn’t borrow for new projects, the city is set to pay off nearly two-thirds of its $1.5 billion debt over the next decade.
Queen said city leaders have changed their views on issuing debt for projects like KC Live! But officials still continue to invest in costly new projects.
City officials were “blindsided” to learn in February that the city would have to dip into its general fund to support the Loews Convention Hotel downtown. As part of an incentive package in 2015, the city agreed to pay for certain catering contracts from revenues from a hotel-motel tax. But those revenues fell short, leaving the city on the hook to make up the $4.4 million difference.
And even a scaled-back incentive package for the speculative Strata office tower could cost the city millions. In addition to substantial tax breaks, the council agreed to guarantee $36 million in debt on the building’s 750-space parking garage.
To Funkhouser, those projects are evidence of the ruling class in Kansas City, who he has identified as the “BS Party.”
The way he sees it, Kansas City politics are largely driven by one central idea: Build Something.
CITY: DEVELOPMENT CREATES JOBS, SPENDING
Kansas City Mayor Quinton Lucas knows the city will make tough choices as it cuts spending. But he said it was still important for the city to invest in new projects that can help grow the tax base when the economy picks back up.
“You do need to have some spending to create jobs, to create further spending in our economy,” Lucas said.
Before the parks department proposed canceling the new Northland soccer complex last week, Lucas characterized the financing plan as a “prudent” move.
Second District Councilman Dan Fowler, a big proponent of the soccer fields, is confident the complex would stimulate commercial development, and eventually benefit the city as a whole.
“By building this, we’re adding to our tax base,” Fowler said.
But while the city invests in new neighborhoods, some of its oldest continue to struggle.
Rachel Riley has been begging the city for years to invest in the East 23rd Street Pac neighborhood, which sits between Interstate 70 and Van Brunt Boulevard on Kansas City’s East Side.
Tidy, well-kept homes sit next to overgrown lots and boarded up houses. Neat playgrounds on freshly mowed lawns are marred by piles of trash left on street corners that overflow into the street.
“Children have to actually veer over into the street to get around all this blight,” she said.
Riley, who ran unsuccessfully for city council last year, says she’s heard over and over from city officials that there’s isn’t enough money to address all of her neighborhood’s needs.
And she said seeing crumbling sidewalks and dilapidated houses in your own neighborhood can have a lasting effect on a child.
“It’s one thing to see this, but down deep in your spirit it’s like, ‘Why do I have to live like this,’” Riley said.
IS KANSAS CITY OVERBUILT?
Over the last two years, the Kansas City Public Library has hosted the “Making a Great City” speaking series, bringing together urban planners, tax experts and public policy pros.
Each time he speaks, Dennis Strait begins with a simple, but damning, proclamation: “We’ve built a city we can’t afford.”
The series, inspired by the national “Strong Towns” movement, has asked Kansas Citians to completely rethink longstanding development patterns and to reject the idea that growth and expansion are always meritorious.
In essence, its leaders argue, we have overbuilt infrastructure that taxpayers cannot afford to maintain.
“We’re trying to help people understand why it's hard to do simple things like repair potholes,” said Strait, a principal at Gould Evans architecture firm. “That’s just a cosmetic issue that exposes the maintenance issues we’ve been putting off for years and years.”
To underscore the problem, Strait harkens back to 1950, when Kansas City was home to about half a million people living within 81 square miles. Now, the population is roughly the same, but the city’s footprint has nearly quadrupled, leaving each taxpayer to shoulder more of the costs of roads, water pipes and sewers.
Think of a new subdivision development: What city wants to say no to a developer’s proposal to bring new homes — and ostensibly an expanded property tax base — to the city limits?
For the first few years, such an expansion does bring new revenue. But eventually, the new subdivision doesn’t drive enough growth in property taxes to cover the long-term costs of the underlying infrastructure, Strait says.
The proposed fix is a mix of public policy changes. The city could hike on additional fees for new single family development, he said. But ideally, developers would focus on more dense development — currently, the city as a whole is less dense than the beloved Brookside neighborhood. Even duplexes and triplexes offer more bang for taxpayers’ buck, Strait says.
“We aren't saying everybody ought to live in the central city and suburbs are wrong,” he said. “We’re just trying to show people there's a cost associated with certain styles of development.”
Strait understands a back-to-basics message about potholes and sewers isn’t as sexy as some of the big projects that get discussed at Kansas City Hall.
“I get that, but we’re trying to help people understand it’s not the city council’s city. It's our city and we have to take ownership of that,” Strait said. “We have to recognize the city we have, we have to take care of if we’re going to hand off anything to our kids and the next generation.”