Even Overland Park Feels Pandemic’s Economic Pain. Will It Force Change On Taxes?
If any city were immune to the economic effects of the coronavirus pandemic, you might think it would be Overland Park.
The city proudly noted in its 2020 budget document that Money magazine in 2018 named it one of the Best Places to Live, “based on great schools, low crime, shopping and restaurant options, healthcare access and a strong job market.”
In 2018, the city boasted $800 million in public and private investments, a record, and 2019 wasn’t far behind.
And Overland Park has the lowest property tax rate of any first-class city in Kansas, one reason that many people choose to live there.
But the pandemic has laid bare something else: the fiscal vulnerability of otherwise prosperous cities like Overland Park that rely to a great extent on sales taxes to fund essential city services.
“When something like the pandemic hits and consumption is reduced dramatically, the revenue stream is also reduced dramatically,” said Dolores Furtado, a former Johnson County commissioner and a resident of the city.
With the sales tax spigot virtually turned off since government-ordered lockdowns took effect, Overland Park in March furloughed part-time staff, postponed pay raises for all city employees and considered canceling road and infrastructure repairs.
“We’re expecting a significant hit to the current 2020 budget. What that will be exactly, we’re still trying to calculate,” city spokesman Sean Reilly told The Kansas City Star at the time.
Obviously over time, what we’ve seen is that cities that rely more heavily for their revenues on sales taxes and income taxes tend to feel economic declines much more quickly, as well as economic upswings.
More recently, at a June budget presentation, city manager Bill Ebel told members of the city council that Overland Park is “in a financial structural deficit,” meaning its revenues don’t match its expenditures.
With money from sales taxes projected to be nearly 15% lower than in 2019, the city expects a $25 million revenue shortfall. As a result, it’s dipping into its reserves to the tune of $3 million to $4 million, Ebel said.
“And this is going to require expenditure management in the area of continuing the hiring freeze, restricted travel, training …,” Ebel told the city council.
None of this suggests that Overland Park confronts anything like the stark fiscal realities facing Kansas City and Kansas City, Kansas. The cuts it’s making — to building and parks maintenance programs, equipment replacement and capital projects — won’t begin to approach the kinds of cuts its neighbors will be forced to make.
But they do highlight the extent to which its tax structure skews heavily in favor of sales taxes, which were already taking a hit with the decline of brick-and-mortar retailers as Americans gravitated toward online shopping.
The city’s current revenues derive from four main sources: sales tax, which make up nearly 40 percent; city-generated revenue, which include franchise fees, user fees, licenses, permits and the like, which make up about 28 percent; property taxes, which make up another 28 percent; and intergovernmental revenue, or money from federal, state and county sources, which make up about 5 percent.
“Obviously over time, what we’ve seen is that cities that rely more heavily for their revenues on sales taxes and income taxes tend to feel economic declines much more quickly, as well as economic upswings,” said Christiana McFarland, research director of the National League of Cities.
McFarland, who co-authored an article at the end of March titled “When will your city feel the fiscal impact of COVID-19?” says that even for wealthy suburbs like Overland Park, “the pandemic-induced recession doesn’t discriminate.”
“Most communities across the country actually had very well-established sorts of rainy day funds,” McFarland says. “They were prepared for a recession, generally speaking. But what we’re finding is that this is just so unanticipated in terms of the expenditures, so unanticipated in terms of the revenue loss, that even the most well-positioned cities are struggling.”
Tax incentives questioned
When a supermajority of the Overland Park City Council approved the massive $2 billion Brookridge redevelopment project near Antioch Road and 103rd Street in December, Bob Miller was livid.
The 77-year-old retired salesman has lived in a middle-class neighborhood near the golf course since 1978 and raised his three children there.
The proposed mixed-use redevelopment includes luxury apartment units, retail shops and offices, which Miller thinks are out of character and too dense for the neighborhood.
But beyond that, he’s incensed that the developer, Chris Curtin, is getting more than $200 million in tax incentives, including tax increment financing, which is supposed to be used to redevelop blighted properties.
“When it comes to Brookridge, I’m really pissed,” Miller said. “I think the citizens of Overland Park have been hoodwinked and the city council hasn’t done anything to prevent projects of this sort.”
It’s exactly at times like these, critics say, that the city shouldn’t be forgoing money when it can least afford to do so by showering wealthy developers with tax giveaways.
“If this was detrimental to Overland Park before the pandemic, it’s fatal to Overland Park right now,” said Overland Park Councilman Faris Farassati, a vocal opponent of tax giveaways who is contemplating a run for mayor.
At the heart of the debate over whether the city should continue to grant tax incentives when its revenues are dwindling is the question of whether vehicles like tax increment financing, a popular economic development tool, do in fact promote economic development.
It’s a debate that has gone on for years in neighboring Kansas City and, while not often questioned in Overland Park, has assumed increasing salience during the pandemic.
The idea behind such incentives is to stimulate economic development that wouldn’t otherwise occur by reducing a developer’s property and other taxes over a designated period of time. In theory at least, the development will still generate more taxes than would have been the case had nothing been built.
The Overland Park Chamber of Commerce backs them as a means to attract Class A office space to the city and spur development on the city’s own timetable.
“We know that when the economy recovers and we’re back on the upswing, we have to have space for companies to locate in or we don’t even make it to the next round of discussions,” said Beth Johnson, the chamber’s senior vice president of economic development.
The problem, as various studies have pointed out, is that incentives like TIFs often fund projects that don’t require such incentives.
That’s the argument that Farassati made in early June when the city proposed to reduce the property and sales taxes for a proposed office building near Interstate 435 and Nall Avenue.
Two buildings have already been built there, replacing an aging CenturyLink building that was demolished by the developer behind the project, Creative Planning Inc., in 2017.
Creative Planning is a Leawood-based wealth management firm that moved its headquarters into the first building in 2018. The company has more than $45 billion under management and Farassati says it can well afford to build the third building without any tax incentives.
The city is issuing $35.5 million in private activity revenue bonds for the project, although it won’t be on the hook for them if Creative Planning defaults. But the city has agreed to forgo at least $600,000 in property taxes over 10 years and nearly $264,000 in sales taxes to induce Creative Planning to go ahead with the project.
A lawyer for the company told the city council that Creative Planning would not go ahead with the building without those incentives, which include not just the abatement of sales taxes in Overland Park but in Johnson County and other jurisdictions as well — a total of more than $5 million over 10 years.
Farassati is dubious. On his Facebook page the day after the council approved the tax incentives, he wrote that businesses “are very important” for Overland Park “and we welcome them to our city.”
“However, they need to pay their fair share of taxes. Taxes that enable city services that make OP a desirable city for these businesses to prosper.”
Mayor weighs in
Carl Gerlach has little patience for such arguments. The four-term Overland Park mayor, having presided over the city for nearly a quarter of its existence, says that Farassati cannot prove that projects receiving tax incentives from the city would occur without them.
Nor, he insists, do they cost the city anything.
“The city is not using any city expenditures to pay the tax incentives, right? He’s completely ignoring that all the money that comes back to the developer comes out of the project as it increases the property tax on the property.”
Johnson, of the Overland Park chamber, says that to encourage growth, “you incentivize what you want to see happen.”
“So the city sets goals, and one of those goals is Class A office space. For downtown Overland Park, it was to get housing to facilitate redevelopment. … That is faster than waiting until somebody comes along and does it — whether it’s for retail or housing or office space.”
But as critics of tax increment financing point out, TIFs too often have become an all-purpose tool to woo developers rather than a means of targeting development that is unlikely to occur without them. And that means they can end up starving local governments’ general funds — which pay for most city services — because the property taxes are going to a TIF district instead.
“The Kansas TIF statute is such that you don’t just give it for anything,” said Mark Hunter, a lawyer who lives near the Brookridge project and opposes it. “You give it for blight and, you know, there’s no blight over there.”
David Merriman, a University of Illinois at Chicago professor who has written about the need to reform the use of tax increment financing, says they should be for a public purpose that benefits the community “beyond the costs that the city is paying supporting those kinds of developments.”
“It’s certainly more suspect in an area where there seems like there’s a market demand for development in the area,” he said.
If nothing else, the COVID-19 pandemic has forced Overland Park to begin a perhaps overdue reckoning on where its future priorities lie and how to fund them. It’s a measure of the pandemic’s impact that even Gerlach, who has long supported the way the city does business, is now willing to adjust his thinking.
“Five years ago, sales taxes were growing dramatically and we were doing very well,” Gerlach said. “It hasn’t been growing, but it didn’t decrease until the pandemic came. … and if it stays down there then I think we will have to make some changes.”
Still, he can’t resist adding: “But I think the citizens should appreciate the low property taxes too.”