By Morgan Chilson
TOPEKA — Kansas counties issued $18.3 billion in industrial revenue bonds to new and existing businesses between 2010 and 2024, leaving about $1.1 billion in potential property taxes on the table, legislators learned Wednesday.
The Legislative Post Audit Committee reviewed an audit of industrial revenue bonds with the goal of answering three questions: fiscal impact of the bonds on state and local governments; what estimates cities and counties report to the Board of Tax Appeals about property tax exemptions; and how many foreign companies received industrial revenue bonds.
Industrial revenue bonds are issued by cities, counties and the Kansas Development Finance Authority, and proceeds are used for companies expanding or locating new or existing facilities, according to the Kansas Department of Commerce. Benefits of the bonds include a low interest rate and partial or full property tax abatement for up to 10 years.
Sen. Joseph Claeys, R-Wichita, said “you can’t lose taxes on a building that was never built,” and told the committee the $1.1 billion of abated property taxes wasn’t a firm number. Some projects may have been canceled if business owners hadn’t received the economic development support, he said.
“Half the people in this building might say, well, it’s a $1.1 billion giveaway, and the other half might say that it costs nothing, and your report says both of those interpretations would probably be wrong, because the honest answer is somewhere between zero and 1.1 billion,” Claeys said.
Matt Fahrenbruch, supervisor of the audit team, said the number of industrial revenue bonds issued annually doubled from 39 to 82 during the 14-year audit period studied, from 39 to 82, and the value increased from $336 million per year to $3.2 billion.
Fahrenbruch reported that property tax revenue would have gone to the state, counties, cities, school districts, and other local taxing units.
“The largest amount, or about 40%, would have gone to school districts, followed by counties, cities, and other local taxing units,” he said. “By other local taxing units, that means things like townships, water, fire, hospital districts, libraries, park and recreation funds, etc. Only about 13 million, or 1%, would have gone to the state.”
Rep. Sean Tarwater, a Stilwell Republican and committee vice-chairman, questioned the effects of property tax abatement on schools and whether schools have any input on the issuance of economic development incentives.
“With all the craziness going on with school finances … if they’re just taking away the opportunity for schools to collect property tax, that affects all of us,” he said.
Costs and benefits
Fahrenbruch said state law requires local governments to prepare cost benefit analyses to the Board of Tax Appeals before they issue the bonds. Several people noted that determining future economic and fiscal impacts of each project, including job creation and other benefits and costs, that early in the process is difficult.
Auditors reviewed 23 industrial revenue bonds issued by five local governments to determine the difference between the analysis’ estimate of lost property tax revenue and actual lost revenue, Fahrenbruch said.
“The estimates of foregone property tax revenue in the 23 (cost benefit analyses) we reviewed were between 94% lower and in one case over 6,000% higher than actual county appraiser values,” he said.
Several issues can cause the estimates to be off, including a few analyses that underestimated the property’s final appraised value, Fahrenbruch said. An example was a large distribution facility that was expected to have an appraised value of $30 to $40 million in the first year of the property tax exemption, he said.
However, the property appraised for $167 million, Fahrenbruch said. A few years are left on the business’ exemption period, but the cost-benefit analysis estimates have been about 90% lower than actual appraiser totals, he said.
On the opposite end of the spectrum, industrial revenue bonds issued to help a business do asbestos remediation work and install a new heating and air system was estimated to result in a “significant increase in the appraise value,” Fahrenbruch said.
Project delays occurred and there was little impact on the appraised value, putting cost-benefit analysis estimates 6,000% higher than the county’s actual appraised value, he said.
Foreign companies
Fahrenbruch said the audit determined three U.S.-organized subsidiaries of foreign businesses received $282 million in industrial revenue bonds in 2024.
Camso Manufacturing USA received $60 million to expand its agricultural equipment manufacturing operation in Junction City; Garmin Realty LLC received $62 million to renovate two buildings on its Olathe campus; and CFC Global received $160 million to build a refrigerated food distribution facility in Salina.
Benefit of analysis
Claeys questioned whether the cost-benefit analysis was useful.
“Did your team find a single instance, just one, where the CBA, the cost benefit analysis for those watching at home, actually changed a decision to grant or deny an exemption?” he asked Fahrenbruch. “Because if the answer is no, then the statute isn’t really requiring an analysis. It just seems like it’s some sort of compliance theater that’s happening. We have these billion dollar revenue decisions being looked at without really any rigorous study, which, as a taxpayer, I would find that to be more than a little problematic.”
Fahrenbruch said in the 23 analyses the auditors examined, they didn’t see a decision change because of the analysis. However, he said, local government representatives said they used the analysis to talk with the company if the numbers or ratios weren’t good and encourage the business to revise their proposal to be more acceptable.
Local government compliance
Fahrenbruch said the audit found that some counties didn’t submit the cost-benefit analyses to the Board of Tax Appeals as required by statute. In particular, Sedgwick County officials raised the issue of problems with the bond application process in their county, he said.
State law requires local governments to submit bond applications to the county appraiser, who then verifies the property’s value and eligibility, and recommends approval or denial of the application, Fahrenbruch said. Then the application moves to the Board of Tax Appeals.
“County officials told us in the course of this audit — they were still assessing the situation, but at the time of this audit — they had identified at least 112 (industrial revenue bond applications) dating back to 2015 that weren’t properly sent to Board of Tax Appeals for approval,” Fahrenbruch said. “However, they said that this may have been an issue for up to 30 years.”
Kristen Wheeler, chairwoman of the Board of Tax Appeals, told the committee she would like to see the Legislature set a deadline for county appraisers to submit the applications to the board once they receive them.
“The additional information we wanted the Legislature to have when considering that is that we have no enforcement mechanism over county officials,” she said. “We don’t have a way to monitor county systems to know when an appraiser has received an exemption application and failed to forward that to us.”
Sen. Caryn Tyson, R-Parker, said she intends to ask for a 100-hour audit going into more detail about the industrial revenue bond process.
She said the numbers in the report regarding inaccuracies in projecting foregone tax collections confirm “what many people’s guts had been telling them.”
