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Chapter 4
Common Problems In Fiscal Impact Analysis

It is important to be aware of certain thorny issues that tend to recur in fiscal impact analyses and that may be difficult to resolve. These may distort the findings of the analysis or render it incomplete in providing an assessment of a project's impact on local finances. Some of these issues are inherent in the state of the art of fiscal impact analysis, while others can be overcome with use of better methodologies. Most are related to the tendency of fiscal impact analysis to take too narrow a focus in one way or another.


OVERLAPPING CITIES, COUNTIES, AND SERVICE DISTRICTS

Throughout much of the United States, local government services are provided by more than one public entity. For example, a household in a city may receive primary law enforcement services from the city police department, but the county sheriff may provide dispatch, 911, and search-and-rescue functions. The county may provide health and human services to city residents, but the city may operate its own parks and library. Meanwhile, local public schools may be the responsibility of an independent school district, and the water and sewer service may even be provided by a separate regional authority. Roads may be provided by any combination of city, county, state, or special improvement districts, while public transit service may be a regional function.

Most fiscal impact analyses, however, concern themselves only with a single jurisdiction, typically the one having the authority to approve the proposed land use in question. When only one of several overlapping governmental entities is addressed, a fiscal impact analysis may not yield a complete picture of the impact of development on local taxpayers and ratepayers. In fact, the fiscal impact of a project or development scenario on one government entity may differ substantially from its impact on other local governments or service providers.

For example, a development or land use scenario might be fiscally beneficial for a county government but fiscally negative for the overlapping school district. But county taxpayers must pay local school district taxes as well, sometimes in larger amounts than those they pay to the county. In such cases, if the project results in a negative fiscal impact for the school district and a positive, yet smaller, fiscal impact on the county government, the overall fiscal impact of the project on the taxpayers will be negative. In fact, partial analyses occur most frequently when the decision-making body does not have responsibility for local schools, as is the case in the majority of states with independent school districts.

Jurisdictional overlap can also confound fiscal impact analyses when, as noted above, county governments provide services to residents and businesses in the county's cities as well as to those in the non-municipal portion of the county. In these cases, the county government is often the primary service provider in unincorporated parts of the county but only a supplemental or partial service provider in the cities. Difficulties can arise in evaluating fiscal impacts of significant new development in these situations, particularly when average per capita methods are used. If the balance of people and jobs in the cities and the county is expected to change, then the county's average per capita costs may not be representative of new development.

For instance, if significant new development is expected outside the county's cities, the county may have to provide primary services to an increasing portion of its overall population, particularly if it is becoming more suburban. Costs can be affected by both a shift in the balance of the county's population as well as demands for higher levels of service. Conversely, if the balance shifts towards more people and jobs within the county's cities, the county's per capita costs for some services may decline.

The effects of these changes can be significant for taxpayers, but the effects may be different on city dwellers than on those living elsewhere in the county. And the effects on both may need to be considered regardless of where the new development will be placed. Unfortunately, many fiscal impact analyses fail to do this. Finally, annexation policies or extra-territorial service agreements between cities and counties can also have a significant impact on the public-sector costs and revenues associated with new development. Fragmented approaches to fiscal impact analysis are common because they mirror the fragmented land use planning and zoning processes typical throughout much of the United States.


CUMULATIVE IMPACTS IN CHANGING COMMUNITIES

Virtually all project-level analyses are incremental in that they address the impact of only one project at a time and in isolation from other projects. This piecemeal approach can yield misleading results, because the combined fiscal impact of multiple new projects can significantly differ from the sum of their impacts when considered one at a time. In particular, a smaller individual project, considered alone, will rarely cause a shift in the revenue base or service demands for a jurisdiction, which in either case can dramatically affect the jurisdiction's fiscal position. But several smaller projects or a few larger projects, considered together, can indeed cause such a shift.

A cumulative approach can often yield a better view of how new development can affect a jurisdiction's fiscal position. Discussed briefly above, cumulative analyses are concerned with the expected fiscal impact of all anticipated projects within a jurisdiction over time. This ordinarily corresponds to fulfillment of the community's comprehensive plan and may sometimes be referred to as the "build-out" analysis.


Service costs in rapidly developing jurisdictions

Significant shifts in a jurisdiction's revenue base or service demands are most likely to occur in communities experiencing rapid new development that differs significantly in rate, type, character, location, or intensity from previous development. Over time, as the community increasingly begins to reflect the characteristics and preferences of new residents and businesses, its demand for services and revenue-generating capability will be increasingly influenced by its newer development. In rapidly growing communities undergoing a transition from rural to suburban, or from small to midsize or midsize to large, such a shift can begin in only a few years. In jurisdictions undergoing transition from a lower to a higher level of development, service costs rarely remain constant on a per capita basis over an extended period.

For communities facing these types of transitions, fiscal impact analyses that rely on constant service levels or revenues (as when existing per capita costs and revenues are used to estimate the impact of new development) can seriously misrepresent the actual fiscal impact of new development. For an example, we return to Loudoun County, Virginia, which has been one of the fastest-growing counties in the United States since the mid-1980s. As shown in the table below, relative per capita operating outlays (in inflation-adjusted dollar terms) have increased substantially for all the county's major service functions, from 27 percent for the judicial branch of government on up to 350 percent for public works between 1985 and 1997. The county's annual relative debt service per capita has exhibited a similar pattern. Between 1988 and 1997 it rose by 230 percent in constant dollar terms. Most of the change in these outlays has been statistically correlated with changes in the county's land use, economic, and development characteristics.


Per Capita Operating Outlays, Loudoun County, Virginia (in constant 1997 dollars)
Function19851997Percent Increase 1985 to 1997
General Government$74$150102.7%
Judicial222827.3%
Police5910476.3%
Fire305686.7%
Corrections314029.0%
Public Works1568353.3%
Parks and Recreation608033.3%
Health and Welfare13819440.6%
Total$429$72067.8%


The tendency for per capita operating costs to increase as jurisdictions become more developed has been demonstrated in other studies as well.[9] The lesson here is that a fiscal impact analysis for a rapidly growing jurisdiction should consider the extent to which service levels are likely to change as a result of cumulative development and to account for these changes in the evaluation of costs and revenues.


Service costs in fully developed communities

Interestingly, this pattern of increasing costs may not hold to the same degree for jurisdictions that are already largely built out, in which new development tends to be on infill sites and can take advantage of existing service patterns and infrastructure. For example, a cross-sectional analysis of Florida cities and counties found that per capita costs for general government services in cities (representing primarily developed areas) tend to decline with changes in economic and demographic variables that are associated with new development, even though they increase in counties representing newly developing areas.[10] Similarly, an analysis of 29 Minnesota counties found that the overall per capita cost for county-owned and -maintained roads tends to decline as the percentage of people residing within a county's cities increases. [11] This is likely due to the concentration of new development and traffic in areas with excess capacity and already-high levels of service.

Per capita operating costs for local roads, pupil transportation, water distribution, and wastewater collection also generally tend to decline when development is concentrated near the built infrastructure. These declines in costs tend to become more pronounced as linear and developed area density increases.


Economies of scale in very small jurisdictions

For smaller jurisdictions (typically less than about 10,000 - 20,000 residents), staffing patterns and facility requirements for some local services may be such that, up to a certain point, new growth can cause a decline in the jurisdiction's per capita costs for some services. Beyond that point, the more typical patterns described above tend to prevail.


Revenues in changing jurisdictions

The revenue side of the budget is also sensitive to changes in developing jurisdictions. In particular, local revenues may be sensitive to the incomes of new residents, the market value of newly developed property, and changes in the type and amount of employment within the jurisdiction. If new residents have higher incomes on average than existing residents, and the per capita market value of new development is also greater than that of existing development, then revenue sources that are sensitive to income levels and property values can also be expected to increase over time on a per capita basis.

A revenue category that tends to be a notable exception to this pattern is state aid for local public schools. Statutory aid formulas typically create an inverse relationship between local wealth and income and the per-pupil amount of basic state aid for local public schools. As the average income or wealth per pupil increases in a school district, the per-pupil level of state aid tends to decline. To compensate for decreasing state aid, either the local share of per-pupil outlays must increase or service levels may decline.

This effect can be significant because local schools often rank among the most costly of local government functions. Furthermore, the per-pupil costs for local schools have also been shown to be sensitive to the underlying economic and demographic characteristics of the school district, with per-pupil operating outlays for local schools tending to increase along with increases in the per capita and per-pupil income and market value of property. As a result, local schools can be placed under fiscal pressure from two sources -- at the same time they face an increase in costs, they may be eligible for less state aid on a per pupil basis.


RESIDENTIAL IMPACTS FROM COMMERCIAL PROJECTS

According to conventional wisdom, commercial projects make money for localities. The general belief is that they yield a net surplus since they generate both real property taxes and business tax receipts, but impose fewer costs than residential developments (no school-related expenses, for example). Given this expectation, jurisdictions are often eager to attract commercial development. Many may even offer substantial subsidies and tax breaks to do so.

However, what often gets overlooked is that commercial development may generate a demand for additional nearby residential development, which in turn brings additional costs that may wholly or partially offset the fiscal benefits of the commercial development. To put it simply, new workers must live somewhere. Whether they will create a demand for housing within the locality, or commute from elsewhere, depends on the size and location of the jurisdiction (in the case of a small jurisdiction, the surrounding communities may bear some or most of the burden of new housing), the location of the commercial development within the jurisdiction, the attractiveness of the surrounding area, and the available labor force.

Before embracing a commercial project, localities may wish to examine closely the likely level of demand for residential development that it may generate. When the fiscal impact of the related residential demand is also taken into account, jurisdictions might better consider the combined fiscal impact, particularly if any tax breaks or other subsidies are to be provided to the new commercial development.

Such a study in Montgomery County, Maryland, found that while business activities alone produced positive net fiscal impacts, those positive impacts were greatly reduced (to the point where some land use types resulted in a net fiscal deficit) when employee residences were included in the calculation. [12] The case study of a mixed-use development in Loudoun County, Virginia, illustrates the same point (see below; note the difference between the findings of the various "views" that did and did not take into account the new demand for housing.)


Calculating off-site residential impacts: One Loudoun Center

One Loudoun Center was studied as a proposed mixed-use commercial development with a modest residential component in Loudoun County, Virginia. The project's residential component comprised about 550 residential units, including large-lot detached homes, townhouses, and 180 restricted elderly housing units. The project also included several million square feet of premium office space and a modest amount of retail space. The average incomes of the residents in the on-site housing and of the households generated by the office space were estimated to be substantially higher than that of existing households within the County.

An analysis of the project prepared by its developers presented three "views" of the project's likely fiscal impact on the county government, including the county schools. The first view examined the impact of the project's residential units only. Although the housing was geared to upper-income residents and its age-restricted units would generate fewer public-school students per household than the county average, the project's residential units were projected to produce only a minimal cumulative surplus to the county of $507,000 over a twelve-year period, or just over $40,000 per year ($72 annually per home) -- essentially a break-even impact.

The second view examined the combined impact of the project's residential and commercial components. This approach yielded a much more favorable result, a likely surplus of some $23 million over a twelve-year period -- or about $2 million dollars annually. So far, so good. But the third and broadest viewexamined not only the impacts of the residential and commercial components within the site but also the likelihood that a large number of other new households would be generated off the development site (but still within the County) as a result of the new on-site jobs. The total fiscal impact of the project using this more comprehensive approach was estimated to be $7.2 million over a twelve-year period -- or about $600,000 annually. This is significantly less than the surplus estimated using the more common approach for individual projects, which would have ignored the impact of the induced, off-site households.[13] The more typical approach of examining only the on-site impacts resulted in an estimate of a fiscal surplus that was almost three times greater than that of the comprehensive approach.

Although both the more typical and the comprehensive views showed the project to generate a surplus for the county government, much of this surplus was attributable to the development having substantially higher housing values, a lower number of school-age children, and substantially higher incomes for workers to be employed in the proposed office space, compared with the average for current and new county residents. It is important to emphasize that this may not always be the case, however. A study of another large commercial development (MCI-WorldCom headquarters) proposed for the same county found that the impact of that development would turn negative for the county if more than about one-third of the new households induced by the jobs projected for the development were to locate within the county. [14]


ROSY REVENUE PROJECTIONS

Finally, some fiscal impact analyses not only underestimate costs but also overestimate the revenues likely to be associated with a project. Two mistakes are particularly common.

First, developers may have unrealistic expectations about their ability to capture a share of the local or regional market for housing and commercial space. The developer of a commercial project, for example, may base the project's fiscal impact analysis on 100 percent of the planned space being developed and occupied. Yet the project may not achieve full "build-out" for several years or decades, if ever. Large projects are often "phased" by their developers, with later portions developed over the course of the development only if the previous phases are successful and local economic conditions are favorable. Particularly if a commercial or mixed-use project fails to achieve build-out of a significant portion of its commercial space, the project's impact on the local jurisdiction's budget will likely be affected significantly.

In reality, each individual project competes with similar projects within the market area for whatever growth the jurisdiction can reasonably be expected to capture. Not all will be successful. Fiscal impact analyses of speculative projects should consider the impact of a range of build-out scenarios so that reviewers can assess the risks of partial or complete market failure of such projects, in terms of both market absorption and assumed sales prices or rents.

Second, some analyses take "credit" for various planning and permitting fees paid by the developer to local governments. These fees are collected to offset the cost of providing administrative and other development-related public services to developers. But the costs associated with those services may not have been included in the fiscal analysis. Credit should not be taken unless the costs are also assessed.



Notes

9. See, for example, Helen F. Ladd, "Population Growth, Density and the Costs of Providing Public Services," Urban Studies, Vol. 2 (1992).

10. Siegel, M., based on cross-sectional analysis of Florida cities and counties, unpublished, 1999.

11. Siegel, M., Duncan, J., Mullen, C., Cost of Public Services Study, Minnesota Department of Agriculture, 1999.

12. Alan A. Altshuler and Jose Gomez-Ibanez, Regulations for Revenue: The Political Economy of Land Use Exactions, Washington, DC and Cambridge, MA: Brookings Institution and Lincoln Institute of Land Policy, 1994.

13. B. Campbell, J. Fore, M. Siegel, Fiscal Impact Analysis, One Loudoun Center, Loudoun County, Virginia, October 1, 1998. The third "view" in this analysis followed the procedures of an earlier study of the proposed WorldCom-MCI corporate headquarters, prepared on behalf of Loudoun County by Dr. Thomas Muller and Michael Siegel. T. Muller, M. Siegel, Fiscal Impact of Proposed Concept Plan for WorldCom Corporate Office Headquarters in Loudoun County, Virginia, June 1998.

14. Muller and Siegel, op. cit. Virginia cities and counties are independent of each other, and local school district boundaries are co-terminal with city and county boundaries. Virginia provides a particularly "clean" view of fiscal impacts on local governments, since problems associated with overlapping boundaries by multiple local service providers are eliminated.

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