Recently, we watched Star Bonds lure the Kansas City Chiefs across the state line under the banner of “It won’t raise taxes.” But that’s a bit of political sleight of hand, since the claim only covers sales taxes. The subject should receive scrutiny in the new year, but will it? Over the last ten years, Wyandotte County, home of the Legends, has seen property tax revenue increase by more than 300% since 1997.
Most people don’t really understand how Star Bonds work. Simply put, they’re municipal bonds that enjoy a federal tax exemption on the interest they pay, meaning no state or federal taxes if you’re a Kansas resident.
The basic idea behind Star Bonds is that the recipient, usually a developer or business, will generate enough new sales tax revenue to pay off the bonds’ principal and interest. In theory, building something like a stadium should bring in more total sales tax (because of higher volume) than simply raising the sales tax rate. It’s essentially a Tax Increment Finance (TIF) district on steroids. The logic is straightforward: sales taxes on beer, hot dogs, popcorn, tickets, and parking will increase revenue because they didn’t really exist at that location before, and will exceed what a racetrack (hosting just a few events each year) could generate.
Star Bonds not always successful
Not all TIF financing or Star Bonds are a slam dunk. The TIF financing of Sutherlands in Harrisonville, for example, didn’t bring in as much revenue as projected. Kansas City has its own high-profile misses; the Kansas City Star building was a huge loss for the city and taxpayers paid for it. The Power & Light District hasn’t met expectations, and over in Kansas, many of the original Star Bonds issued for the Legends haven’t been completely refunded. To politicians, these tools seem magical – until they aren’t. Kansas City’s loss on the Kansas City Star project alone is estimated at $25 million in interest and principal.
The original concept was called an industrial revenue bond. A business would ask the local municipality to issue revenue bonds in order to attract that business, then employ people who would pay income, sales, and property taxes, all of which would benefit the community. Those employees would spend money locally, magnifying the impact, and local retailers would see increased business (and more taxes collected). That’s basically how Johnson County Kansas developed in the 1960s and 1970s, when only majority approval from a city or county council was needed to issue bonds. In Missouri, by contrast, issuing a bond took a two-thirds vote of the people, so a lot of the development went to the Kansas side.
Congress changed the rules for industrial revenue bonds in 1986 after multiple abuses by local municipalities and states, including Lawrence, Kan.
Congress changed the rules for industrial revenue bonds in 1986 after multiple abuses by local municipalities and states. For example, one of those abuses was in Lawrence, Kansas, where one company persuaded the city to issue industrial revenue bonds to build its new facility, supposedly employing 25 people. A Lawrence bank underwrote the deal, and the business then bought back the entire bond issue, returning the bonds to the city over 20 years in a lease-purchase arrangement. Over that period, the business essentially got a free building and pocketed $11 million in tax-free interest.
Star Bonds are an expansion of those old industrial revenue bonds, now covering larger areas and even multiple cities and counties. But like other revenue bonds, they offer no guarantees if revenue falls short of projections.
I wonder if a Star Bond district in western Johnson County might be pushing it
Much of the success of the Chiefs’ Star Bond project depends on “cross sales”– for example, people shopping at Nebraska Furniture Mart after catching a Chiefs game, or eating at Dave’s before kickoff. I wonder if a Star Bond district in western Johnson County might be pushing it, especially given possible shortages in infrastructure and public transportation, where in Kansas City, the light rail costs an astonishing $100 million per mile to build.
As the original bonds for the Legends mature, we’ll see how those projections compare with reality. From what I’ve heard, some will likely succeed, but others will not. Kansas taxpayers could benefit from the arrangement. If it doesn’t go as planned, they’ll be on the hook.
–Robert White, CFP, and has experience with bond underwriting. He works with local chamber of commerce organizations, city and county governments.
