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Upside Down-Land: Cerner's TIF Transplant

Flatland and The Pitch Explore who gets what in tax incentives

Illustration of upside down people with coins Artwork courtesy of The Pitch

Neal Patterson personifies 21st-century Kansas City entrepreneurialism.

He is his generation’s Henry Bloch or Joyce Hall, the head of a company he started from nothing — Cerner Corporation — and made KC’s most prosperous business.

Cerner, a health-information technology firm, makes more than $3 billion a year. The company’s market capitalization — the value of its outstanding shares — is $22 billion. And it has made a significant imprint on the skylines of North Kansas City; Kansas City, Kansas; and Kansas City, Missouri.

As Bloch’s H&R Block and the Hall family’s namesake greeting-card company have fallen on hard times in recent years after decades of flourishing, Cerner has only continued to grow. In July, the company secured an $11 billion contract with the U.S. Department of Defense.

Patterson has been richly rewarded for his work. His net worth, estimated by Forbes magazine, reached $1.9 billion in 2015. That makes him one of the 1,000 richest people in the world and the third richest in Kansas City, behind Garmin co-founders Min Kao and Gary Burrell. Patterson’s partner from the outset, Cliff Illig, has a $1.2 billion net worth.

Patterson also embodies another element of Kansas City’s corporate reality: the use of public funds to ensure his company’s continued success.

Cerner has embarked on redeveloping south Kansas City’s former Bannister Mall site into a $4.3 billion office complex. Through a maze of public incentives, 40 percent of the project’s cost — about $1.7 billion — will be covered by taxpayer sources.

City officials are keen on leveraging two forms of tax-increment financing — a heavily used development tool in Kansas City (see sidebar) — to secure what Cerner says will be an additional 15,000–16,000 jobs in one of the metro’s most moribund zip codes. And Cerner, of course, is keen to write off close to $2 billion in project costs.

Cerner officials say the company would lose money without the incentives. Even with the incentives, they claim, the campus is a “break-even” proposition.

“It turns out to be break-even for us,” says Mike Nill, chief operating officer for Cerner. “For us, it’s not a real-estate investment transaction. It’s a transaction to provide office space and develop a part of the city.”

The dead zone that once housed Bannister Mall was at one time slated to become the site of a new soccer stadium for what was then the Kansas City Wizards, a team owned by OnGoal LLC, a partnership involving Patterson, Illig and others. Corporate entities, some tied to the Cerner co-founders, spent $30 million buying up 200 acres in and around the Bannister Mall site. But the Wizards were lured to Kansas City, Kansas, by a flotilla of state and local incentives there. The entities that had picked up the Bannister Mall property sold it to Cerner for less than the appraised value, as determined by an independent study, opening the door for Cerner to seek TIF.

Greg LeRoy, executive director of the corporate-subsidy research organization Good Jobs First, says Cerner’s TIF deal is the largest of its kind. Anywhere. “Head and shoulders, it’s the biggest,” he tells The Pitch.

It’s also the largest economic-development project ever undertaken in Missouri.

Ed Ford served on the City Council and was chairman of the influential Planning, Zoning & Economic Development Committee when the Cerner TIF was passed. He says the Cerner proposal goes beyond typical new class-A office space.

That’s the idea, Nill says.

“Inside the buildings, we’re going to have a lot of great amenities for our associates,” Nill tells The Pitch. “Cerner is obviously very focused on health — the health of our associates and the care aspect as well. There will be a fitness center. It will feel like a healthy environment when you drive onto the campus.”

The project will be built in 16 phases over 10 years, resulting in 4.7 million square feet of new development, giving Kansas City, Missouri, its long-sought Corporate Woods–scale project. (That Overland Park office park is now on the market and expected to fetch as much as $350 million, a considerable profit above its most recent sale price of $290 million in 2006.)

“To attract the type of employees they believe they’re going to need to make this work, they really have a Taj Mahal office complex going on,” Ford says. “And is it reasonable to expect taxpayers to pay for that increase?”

Ford and the rest of the City Council were unanimous in answering that rhetorical question: Yes.

Update: The vote was not unanimous. Councilman Russ Johnson was the sole vote against the Cerner TIF, citing its excessive use of Super TIF and the “car-centric” nature of the plan.

“I guess my answer was, in that particular case, given the circumstances, the number of jobs, the fact that it was the old Bannister Mall site, the opportunity to take what I think is blight that might not develop for years — if ever — and replace it with an office complex that employs tens of thousands of folks, I think that instance you weigh everything,” Ford tells The Pitch. “You say, ‘I prefer not to go that high, but this is really a transformational project for south Kansas City.’”

The lure of jobs, new businesses and reshaped skylines is all but impossible for politicians to turn down. Developers understand this — especially here, where TIF is rubber-stamped almost every time it’s requested.

TIF deserves credit for refashioning downtown Kansas City. A similar sprucing up is under way now on the Bannister Mall site, with cranes positioned to start work on the first two buildings of the Cerner campus (where 3,500 employees will work).

The Cerner TIF directs all new taxes — property and economic-activity — in the Bannister Mall development area back to the company to assist with costs.

But the tool has also had the tendency to not perform to expectations. More often used in tonier enclaves of Kansas City than in poorer ones, it can divert millions from school districts, libraries and municipal budgets.
As California’s population and economy surged in the early 1950s, housing needed to keep pace. In this climate, TIF was born.

The idea was simple: Cities and counties, anticipating future tax revenue from a development project, offered to temporarily forgo that revenue and instead redirect it back into that project. Developers who might not otherwise consider redeveloping blighted areas now had an incentive to build in what before had been risky areas.

The idea worked well enough to spread across the United States, landing in Missouri in 1982. At one point, all but one state — Arizona — had TIF laws on their books.

And then the idea worked too well — for developers. In 2012, California abolished TIF after it had ballooned into an $8 billion business.

In Missouri, attempts in the past few years to curtail TIF have fizzled out in the Missouri General Assembly. For lawmakers, TIF’s appeal to developers as a means to finance large-scale projects outweighs its effect on schools and other tax-funded public concerns.

In Kansas City, where there are 66 active TIF projects, $35 million in tax revenues will bypass city coffers on its way back to developers. That’s more than the city’s most recent budgets for neighborhood and housing services ($32.1 million), public health and medical care ($30.3 million) and street maintenance ($13.6 million).

City leaders cite the promise of jobs as a key justification for TIF projects. But TIFs don’t always yield the number of jobs that developers promise.

According to a Missouri Department of Revenue annual report for TIF in 2013, all of Kansas City’s TIF projects combined should have resulted in 20,581 jobs. But the report  shows that 15,971 were realized. (TIF fares better at retaining jobs, keeping 11,572 within Kansas City. But those same TIF projects were supposed to retain 12,025.)

Downtown Kansas City is a tapestry of TIF projects. City leaders lavished the tool on the south loop and the Crossroads Arts District in the late 1990s and early 2000s, hoping to reverse decades of urban-core decline. Today, almost all of the south loop — notably the Power & Light District — is within a TIF district. The improvements are undeniable, but so is the ongoing cost. Taxpayers give up $12 million-$15 million a year to finance the city’s P&L debt, and downtown lost 16,000 jobs from 2001 through 2011.

In Kansas City, where there are 66 active TIF projects, $35 million in tax revenues will bypass city coffers on its way back to developers.

Across Missouri, 185,136 jobs were anticipated over the years among the 451 TIF districts that reported to the Department of Revenue. As of February 2, 2014, 67,627 had been created. In all, nearly $5 billion in TIF-reimbursable project costs were listed among the $24 billion in development.

TIF’s purpose is to spur development in blighted areas where a developer couldn’t otherwise attract enough private capital to make a financial pro forma add up. In Kansas City, however, TIF projects often overlook the most troubled census tracts in favor of already attractive ones. In 2007, University of Missouri–Kansas City economics professor Michael Kelsay found that 88 percent of KC’s TIFs were concentrated in four of the city’s six council districts. The two council districts left out, the 3rd and the 5th, sit predominantly on the East Side, where poverty and unemployment are prevalent.

Little has changed since then. The Brywood Centre is an example of a rare East Side TIF. Located at 63rd Street and Blue Ridge Cutoff, the small strip mall is home to an assortment of stores. One of them is a payday-loan business, an enterprise that’s notorious for exploiting poor people. Despite the help that TIF provided, the project defaulted on its bonds in 2013.

Much of the Country Club Plaza is within a TIF district. One such project helped along by TIF was the development of the Plaza Colonnade, which includes the Plaza Branch of the Kansas City Public Library and an office tower. That tower brought jobs, most of them from law firm Husch Blackwell; however, most weren’t new jobs but instead workers from the firm’s former location in Crown Center.

Another TIF project on the Plaza: Kirkwood, a luxury condominium tower. That $17 million project was able to leverage $12 million from TIF.

TIF has been a useful tool in redeveloping languishing parts of Kansas City’s urban core.

The Midtown TIF, for example, replaced dilapidated, crime-ridden housing along Main Street and Linwood Boulevard with a suburban-type shopping district anchored by Costco and Home Depot. (The TIF also includes the Sun Fresh-anchored shopping center in Westport.) The TIF cleared truly blighted property, provided employment opportunities for inner city job seekers, and developed or rehabbed single-family housing nearby.

It’s one of former Kansas City Councilman Jim Glover’s favorite topics.

“The idea was, we use TIF to create housing in the area so more people would shop at the shopping center,” he tells The Pitch. “More people would use the Home Depot, and more people would use the Sun Fresh. The market is constantly rebuilding itself. There are more people living in midtown because of the housing program off the shopping center than ever before. That means the sales [at the shopping center] are higher.”

A TIF commission — an 11-member board in any city that offers TIF — vets developers’ proposals and then makes recommendations to the city council, which has final say. The boards all share a built-in imbalance: Six of the members are appointed by the mayor of the city, whereas school districts and counties have two members each. A last member represents libraries and other smaller taxing jurisdictions.

Potter voted on the Bannister Mall redevelopment three separate times. He says he voted in favor of the Cerner redevelopment because it included what’s called a Super TIF, a financing arrangement that redirects not only 100 percent of property taxes but also 100 percent of economic-activity taxes to a project rather than just 50 percent.

Under Super TIF, cities have more at stake because more of their revenue goes into a project.

“The thing that made me feel good about this — if you can feel good — is everyone was all in because it was a Super TIF,” Potter says. He adds that the aggregate effect of TIF on Mid-Continent means that about $3 million in tax revenue which would go to his library district gets redirected to development projects. For a library, $3 million isn’t insignificant.

“Frankly, money like that would probably allow us to operate longer, would have allowed us to give our employees pay raises over the last couple of years, let us look at approving our buildings without taking out bonds,” he says.

Taxing jurisdictions such as libraries and schools exist in constant tension with TIF. Dennis Carpenter, superintendent of the Hickman Mills School District, said on an episode of KCPT Channel 19’s “Kansas City Week In Review” earlier this year that economic development was one of the bigger ongoing challenges facing his school district. With respect to the Bannister Mall redevelopment, he said: “We’re excited to have Cerner as a neighbor, and they are going to do great things for our students with partnerships and the like. But at the end of the day, we’re a school district with $66 million in deferred maintenance that’s out there. And Cerner — over the life of the TIF, conservative numbers tell us they’re going to abate $400 million in taxes.”

Cerner says it’s mindful of this effect. To assuage concerns, the company has earmarked $8 million for a community-improvement fund, $6 million of which would go to Hickman Mills for general use and for career-
preparation programs.

Potter says discussions have taken place in recent years to determine whether there’s a way to make TIF more equitable between cities and other taxing jurisdictions. A working group during the past two years floated the idea that taxing jurisdictions would get to start with a 50 percent diversion of their future tax revenues instead of the full 100 percent. That would make things relatively equal with cities.

Potter says Kansas City representatives stood in the way.

“The most interesting thing that happened when we proposed that was one of the representatives from the city said, ‘We can’t do that. We’re putting our money at risk,’” Potter recalls. “I said, ‘Welcome to the party, pal. That’s what we’ve been living with for 30 years.’”

This story was produced in collaboration with The Pitch, where it also appears at www.pitch.com. Watch for an on-air discussion with Pitch reporter Steve Vockrodt and Flatland reporter Mike McGraw on KCPT’s “Kansas City Week in Review,” hosted by Nick Haines, this Friday, 7:3opm, on KCPT. These stories are part of KCPT’s “Getting By” series exploring economic, education and health disparities and their impact on Kansas Citians. 

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