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Chapter 1
Introduction: Why Care About Fiscal Impact Analysis? [*]

When considering development or land-use planning proposals, interested parties -- such as citizens, planners, elected officials, and developers -- have a keen interest in how given options may affect their local governments' costs and revenues. If a particular development or plan will bring more in revenues than it will cost in services, it might help ease local financial burdens and allow the locality to improve services or cut taxes. Conversely, if it will require service costs that exceed revenues, it could increase pressure to raise taxes, find additional sources of funds, or curtail community services. Moreover, when there are alternatives for developing a particular parcel of land, it is likely that they will differ from each other with respect to costs and revenues. The process of estimating these likely impacts is called "fiscal impact analysis." In many communities, it can be an important consideration for approval or disapproval of a proposal or plan.


AN EXAMPLE: GROWTH COMES TO RIVER COUNTY

To illustrate, let's imagine a midsize U.S. county, and call it River County. River County is well loved by its residents for its many streams, ponds, and scenic valleys, as well as its quality of life. Even though new developments have been sprouting up here and there, much of the county retains a predominantly rural flavor. However, the state's largest city has grown so rapidly that now its outer suburbs are within driving distance of River County. County residents increasingly realize that the next wave of suburban growth is heading its way. Already, demand for land has increased as developers are looking at building new housing in this attractive area. In addition, the county seat, River City, is looking for ways to attract new businesses and residents in an effort to stimulate its own economic growth.

Three development proposals are now before the local authorities. In one, a development company proposes to build 150 "country estates" and recreation facilities in what is now an undeveloped valley, made up of farms and open fields. In another, a developer wants to construct a "village center," consisting of a mixture of townhomes, a common green space, and a section devoted to small businesses on an abandoned site just outside of River City, once used by a factory that has gone out of business. In the third proposal, a large national retailer hopes to build a new, 80,000-square-foot store, with parking for 500 cars, on what is now forested land near an Interstate highway. These proposals all have the potential to change the character of River County, and citizens and county officials alike are concerned that they be evaluated fairly and accurately.

Among their many concerns is the impact that each proposal will have on the county's financial situation. Indeed, this is a particular worry given that costs and taxes have been steadily rising over the years, causing some longtime property owners to question whether they can afford to stay.


GOOD REASON FOR CONCERN

The taxpayers and leaders of River County have good reason to be asking these questions. While new developments typically do bring in new sources of revenue in the form of property and (for businesses) sales taxes and certain fees, they also bring costs. They may require new or improved roads, drinking water systems, sewers, and schools. New residents and businesses will need to be served by police, firefighters, trash collectors, and other government workers. The list goes on. The community at large will reap fiscal rewards in each case only if the revenues from the development outweigh the costs of building and maintaining the new infrastructure and providing necessary services.

If the citizens of River County examine the experience of other locations, they will find ample evidence that local governments across the country have experienced fiscal strain along with growth. Jurisdictions large and small, from the rapidly growing Sun Belt states to aging industrial regions in the Northeast and Midwest, have all felt the crunch of providing costly public services with limited fiscal resources. In many places the strain has occurred despite a booming national economy. It can be especially evident in fast-growing suburban jurisdictions where, according to Maryland Governor Parris Glendening, "Every new classroom costs $90,000. Every mile of new sewer line costs roughly $200,000. And every single-lane mile of new road costs at least $4 million." [1]

Such costs can lead to higher taxes or deteriorating services. For example, in the 10 fastest-growing towns in southern Maine, property tax rates increased 43 percent between 1990 and 1995. A suburban Chicago high school has become so large and overcrowded that administrators have lengthened the time between classes to allow students to navigate crowded hallways; they have also transformed every vacant space into classrooms and have had to cut the 48-minute lunch period in half, while extending the time that students eat lunch from 10:30 AM until 2:30 PM.[2] These situations are familiar in many fast-growing localities across the country.


DIFFERENT IMPACTS FROM DIFFERENT DEVELOPMENTS

There is substantial evidence that different types of developments have different revenue-to-cost characteristics. For example, large-lot development, such as the "country estates" proposal in our River County example, typically leaves more space between houses and may require more infrastructure and longer service routes per unit than does more compact development, such as the "village" proposal. As a result, its per-unit infrastructure and service costs may be higher. Likewise, "leapfrog" development that skips over undeveloped land can also require the extension of new infrastructure and longer service routes.[3] Moreover, some types of housing may be more likely than others to attract families with school-age children, and thus incur higher education-related costs; commercial developments, such as the retail store proposed for River County, typically house no on-site residents at all and may have different needs for roads, police and fire protection.

And costs, complex as they may be, represent only one side of the equation. Revenue patterns may differ too, if different types of developments attract residents of different incomes or, in the case of commercial development, different property values or business activities.


An important caution

Evaluating the likely fiscal impact of a new development is important: the dollars lost or gained by a municipality translate into taxes raised or lowered, or services cut back or improved for the average citizen. But it should not be the only deciding factor. Other, less easily measured values, such as environmental quality, sense of community, and social considerations, also are important. Questions concerning development should be informed, but not necessarily controlled, by solid financial analysis.


THINKING ABOUT FISCAL IMPACT ANALYSIS

Fiscal impact analysis can be a difficult process. At best, a particular analysis can be only as good as the information used in performing it, and it can be no better than the state of the art in projecting fiscal performance. At worst, a flawed analysis can lead to false or vastly mistaken claims about the likely fiscal performance of a project or plan. Nevertheless, fiscal impact analysis remains the best available technique we have for evaluating the impact of development on local government budgets.

Frequently, a fiscal impact analysis is prepared by or on behalf of a developer. This may be done voluntarily, in support of a project's application for rezoning or other approval, or at the request of the affected local government. Occasionally, fiscal impact analyses may be prepared directly for local governments or other interested parties.

Stakeholders interested in the likely impacts of a proposed development should ask whether such an analysis has been prepared and if so, to review it, along with any underlying fiscal documents. If a fiscal impact analysis has not been prepared by the developer or the government, stakeholders may want to request that one be performed. In some important cases, interested parties may even want to consider commissioning their own fiscal impact analysis of a proposed project or of alternative development scenarios.

In the remainder of this discussion, we walk the reader through some of the main features, analytical methods, and issues associated with fiscal impact analyses. Even though much of the discussion is inevitably somewhat technical, the reader should be warned that it is still too brief to do justice to this complex subject. In many cases, stakeholders and decisionmakers evaluating the likely impacts of a particular proposal will want to consult with expert analysts who are familiar with public finance or economics to help them with these issues. We hope our work will serve as an introduction and a reference guide, and that it will help readers know what to look for, understand the documents prepared by others, and ask good questions when considering the fiscal impacts of development.



Notes

* This section was authored by Jutka Terris and Kaid Benfield.

1. Glendening, remarks at the Brookings Institution (1997), as cited in F. Kaid Benfield, Matthew D. Raimi, and Donald D.T. Chen, Once There Were Greenfields, New York: Natural Resources Defense Council, 1999, p.91. Note: Costs for roads can be highly variable.

2. Benfield, op. cit., Chapter Three.

3. Ibid.

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