ll lll‘lllllllllt p L in . a x y m 800 8447 ‘ Illlllllj 1 3123 Michigan SW University This is to certify that the thesis entitled A Fiscal Impact Analysis Framework: The Methodological Characteristics, Uses, and Misuses of Cost-Revenue Analysis presented by Mark A. Wyckof f has been accepted towards fulfillment of the requirements for Master degree in Urban Planning / e 1 f ‘ \ H‘ ‘ [jet/l J l l (”giro-LL! ‘ .1 - _ J r Major professor Date / —//7’77 0-7 639 A at —_—___ #13154“ .~ W. A. ‘0' A FISCAL IMPACT ANALYSIS FRAMEWORK: THE METHODOLOGICAL CHARACTERISTICS, USES, AND MISUSES OF COST- REVENUE ANALYSIS By Mark A. Wyckoff A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER IN URBAN PLANNING School of Urban Planning and Landscape Architecture 1977 ABSTRACT A FISCAL IMPACT ANALYSIS FRAMEWORK: THE METHODOLOGICAL CHARACTERISTICS, USES, AND MISUSES OF COST- REVENUE ANALYSIS By Mark A. Wyckoff This thesis identifies fiscal impact analysis as an important local planning tool for assessing the fiscal impacts of development alter- natives. It summarizes the basic characteristics of nine common cost- revenue methodologies and seven principal types of cost-revenue studies. This information is used to construct a framework that a local planner could use to: l) evaluate a fiscal impact study performed by someone else; 2) initiate the development of local fiscal impact methodologies; and, 3) understand the proper context for the use of fiscal impact tools. Locally prepared cost-revenue studies and two recent state-of-the-art reports are relied upon as the basic research materials. This study indicates that future research should focus on refinement of current methodologies to improve study accuracy and reduce methodological limi- tations. Without these efforts, persistent questions on study credibility will diminish the utility of fiscal impact analysis as a local planning tool. TO MY PARENTS, without whose love, moral and financial support my university education would not have been possible. ACKNOWLEDGMENTS The author wishes to acknowledge a debt of gratitude to several individuals without whose influence and assistance this thesis would not have been completed. My thesis committee, composed of Professors Keith Honey, Roger Hamlin and Donn Anderson, provided me with the guidance necessary to put the thesis in its present form. Special thanks go to Professor Honey for his expedient and numerable readings of the thesis as my major pro- fessor. Dr. Hamlin is owed particular mention for his incisive, yet constructive, criticism of the thesis draft and for providing me with the necessary incentive to complete the thesis this year. Special thanks are extended to Michael S. Levin, for not only the education he provided me as co-author of the Urban Development Cost- Revenue Model, but also for his insightful comments on the thesis draft. My appreciation goes also to my friends and former staff workers at Tri-County Regional Planning Commission, Lansing, Michigan, who worked with me and provided me with the opportunity to enter into the field of cost-revenue analysis. Particular thanks is extended to Sam Burns and Dick Hearin. Without having worked on the formulation of the Urban Development Cost-Revenue Model, undoubtedly this thesis would never have been written. My colleague, Bob Craig, economic analyst at the Division of Land Resource Programs, Department of Natural Resources, State of Michigan, iii .a I.'A : ht- is also thanked for his review comments and service as a "sounding board" throughout the thesis development. Susan Krawczyk is complimented for typing a very difficult thesis draft, as is Loreen Morgan for the prepara- tion of the final draft. Last, my admiration, appreciation and respect are extended to my very special friend, Leslie, whose patience, support and timely "care packages" made more bearable the necessary isolation and preoccupation during the time needed for this undertaking. iv TABLE OF CONTENTS COST-REVENUE ANALYSIS: AN IMPACT ASSESSMENT TOOL . . . . Environmental Impact Analysis ............ Fiscal Impact Analysis: Focus of the Thesis ..... The Fiscal Impact Analyst: For Whom the Thesis is Written ................... Purposes of the Thesis ................ Outline of Thesis Contents ..... . ........ FISCAL IMPACT ANALYSIS: WHAT IT IS, WHY AND HOW IT IS USED, ITS RELATIONSHIP TO THE PLANNING PROCESS AND COMMON CRITICISMS OF IT ............... Introduction . . . . ................. Chapter Purpose .................. Outline of Chapter Contents ............ Definition of Cost-Revenue Analysis ......... Problems Defining Cost-Revenue Analysis ...... A Definition ................... As Contrasted to Cost-Benefit Analysis, Cost Effectiveness Analysis and PPBS ....... Why and How Cost—Revenue Analysis is Used ...... Underlying Reason ................. Contemporary Need for Factual Fiscal Informa- tion As A Decision-Making Aid ........ Benefits of Using Fiscal Impact Analysis ..... General Benefits ................ Improved Communication Benefits ........ Other Benefits of Use Over Time ........ Improper Reasons for Using Fiscal Impact Analysis .................. Relationship of Cost-Revenue Analysis to the Planning Process ................ Land Use Planning Process ............. Use of Cost-Revenue Analysis in the Land Use Planning Process .............. Relationship to Growth Management ......... V Page COS-h 00d —‘ I4 I4 l4 I4 15 15 16 T7 20 20 21 24 24 26 27 3O 3O 30 35 Chapter Common Criticisms of Cost-Revenue Analysis ..... Basic Types of Criticisms ............ Selected Criticisms: A Review of a Repre- sentative Critique ............ "Crude," "No Established Methodology" . . . . Inconsistent Results ............. Predictable Results ............. Overreliance on Fiscal Criteria . . ..... Incomplete Analysis of All Costs and Benefits . . . ............. Must Development Pay Its Own Way? ...... Relationship of Fiscal Impact Analysis to Fiscal and Exclusionary Zoning ...... Chapter Summary .................. 3. A TYPOLOGY OF THE PRINCIPAL STUDY TYPES AND METHOD- OLOGICAL APPROACHES USED IN FISCAL IMPACT ANALYSIS Introduction .................... Chapter Purpose ................. Outline of Chapter Contents ........... Establishing A Typology of Cost-Revenue Analyses . . . Establishing A Typology: Purpose and Cautions Historical Perspective ............. Two Principal Organizing Dimensions of the Cost-Revenue Typology ........... Principal Study Types ............ Principal Methodologies ........... Community Standards Methods . . ...... Demographic Patterns and Residential Multiplier Techniques ........ Assessed Valuation and Tax Base Alloca- tion Techniques ........... Case Study Approaches ........... Accountants Approach ........... Time-Series Approach ........... Cross-Sectional Approach ......... Fiscal Flow Approach ........... Econometric Methods . . . . ........ A Fiscal Impact Analysis Typology ........ Basic Characteristics of Principal Cost-Revenue Methodologies ................ Introduction .................. Two Basic Cost Allocation Principles ...... vi Page Chapter Basic Characteristics of Cost-Revenue Methodologies ................ Scope of Application .............. Data Requirements ............... Resource Requirements ............. Assumptions of the Methodology ......... Community Operates in Fiscal Isolation No Major Change in Service Delivery System or Level of Service Provided . . Services to Non-residents and Non- taxpaying Land Uses Will Remain Unchanged ............... Standards and Multipliers are Reflective of Local Community Service Demands and Characteristics . ......... Characteristics of New Residents and Business Resemble Those of the Existing Community .......... Projection Variables Adequately Reflect New Demand/Service Costs ....... v Special Assumptions ............. Limitations of the Methodology ......... Limited Scope ................ Average Vs. Marginal Costs ......... Long-term Vs. Short-term .......... Excess Capacity ............... Scale Economies ............... Input Orientation .............. Special Limitations ............. Accuracy of the Methodology .......... Other Common Issues Associated with Cost- Revenue Methodologies ............ Inflation .......... . ........ Predevelopment Costs and Revenues ....... Present Value ................. Secondary Fiscal Impacts ............ Chapter Summary ................... 4. FRAMEWORK FOR INITIATING OR ANALYZING A FISCAL IMPACT STUDY ...................... Introduction . . . .................. Chapter Purpose .................. Outline of Chapter Contents ............ vii Page 100 100 101 102 103 105 III III III III Chapter Performing Cost-Revenue Analysis as a Part of an Environmental Impact Assessment Process . . . . Relationship of Cost-Revenue Analysis to an Environmental Impact Assessment Process Relationship of an Environmental Impact Assessment Process to the Planning Process .................. A Framework for Initiating or Analyzing A Fiscal Impact Study . ............. A Three Process Framework ............ I. Performing A Fiscal Impact Assessment: The First Process ........... A. Deciding whether an assessment is necessary: threshold levels of impact . . B. Existing community characteristics . . . . C. Background information on the fiscal impact study ............... D. Description of the development alter- natives to be considered ......... E. Scope of the study ............ F. Technical characteristics of the cost-revenue methodology ......... II. Analyzing the Results of a Fiscal Impact Study:. The Second Process A. Examining the results for reason- ableness . . ............. B. Establishing the methodological accuracy or uncertainty surrounding the results ............... C. Identify ways to mitigate negative fiscal impacts . ........ . . . . . D. Analyzing the results within the context of the local community . ..... E. Documenting the study methodology and study results ............ F. Reporting the results to decision- makers .................. III. Feedback--Evaluating the Fiscal Impact Assessment Process Over Time: The Third Process ........... A. Importance of periodic review and re-evaluation . . . ........ B. Monitoring the cumulative fiscal impact of development .......... viii Page 112 112 113 116 116 119 119 122 125 127 129 132 136 136 137 138 140 144 144 147 147 147 Chapter C. Checking the accuracy of the fiscal impact methodology ........ D. Need for operable information gathering, storage and retrieval Chapter Summary .................. SUMMARY AND RECOMMENDATIONS FOR FUTURE RESEARCH . . . . Introduction .................... Summary ...................... Recommendations for Future Research ........ Technical Improvements ............. Mechanism for Statewide Application and Education ................. APPENDIX: A SUMMARY OF PRINCIPAL COST-REVENUE STUDY TYPES AND METHODOLOGIES . . ................. Introduction . .................... A Summary of Principal Cost-Revenue Study Types with Examples .................. Plans . . ..................... Projects . . .................... Financing and Budgeting Programs .......... Area Specific Service Costs and Revenues ...... Proposed Policies and Legislative Actions ..... Interjurisdictional Fiscal Flows and Com- parative Analyses .............. A Summary of Principal Cost-Revenue Methodologies . Community Standards Methods ............ Summary Description ............... Basic Characteristics .............. Demographic Patterns and Residential Multi- plier Techniques ............... Summary Description . .............. Basic Characteristics .............. Assessed Valuation and Tax Base Allocation Techniques .......... . . ...... Summary Description ............... Basic Characteristics .............. Case Study Approaches . .............. Summary Description ............... Basic Characteristics .............. ix Page 148 151 157 157 157 161 161 166 172 172 173 173 176 178 179 181 182 183 185 185 187 189 189 191 193 193 196 198 198 200 Chapter Page Accountants Approach ................. 202 Summary Description ................ 202 Basic Characteristics ............... 203 Time-Series Approach ................. 205 Summary Description ................ 205 Basic Characteristics ............... 205 Cross-Sectional Approach ............... 207 Summary Description ................ 207 Basic Characteristics ............... 208 Fiscal Flow Approach ................. 211 Summary Description ................ 211 Basic Characteristics ............... 211 Econometric Methods ................. 213 Summary Description ................ 213 Basic Characteristics . .............. 214 Revenue Projection Techniques ............ 216 Real Property Tax Revenues ............ 217 Per Capita Tax Revenues .............. 219 Estimated Formula Revenues ............ 221 Summary Table of the Basic Characteristics of Principal Cost-Revenue Methodologies ...... 223 LIST OF REFERENCES ....................... 229 Table LIST OF TABLES Principal cost-allocation methodologies as identified by two prominent research studies ..... . ...... Fiscal impact analysis typology ............. Basic characteristics of principal cost-revenue methodologies ...................... Relationship between the basic characteristics of principal cost-revenue methodologies .......... xi Page 71 78 84 LIST OF FIGURES Figure Page 1. Interrelated Community Decision-Making, Planning, Growth Management and Impact Assessment Processes . . . . 115 2. Aids for Development Decisions . . . . . . . . . . . . . 146 3. Monitoring Cumulative Fiscal Impact of Development . . . 149 4. Monitoring Local Government Facility Capacity ...... 150 xii CHAPTER 1 COST-REVENUE ANALYSIS: AN IMPACT ASSESSMENT TOOL Environmental Impact Analysis Spawned in large measure by the National Environmental Policy Act (NEPA) enacted in 1969, and more recently from state and local "little NEPA's," environmental impact assessments typically evaluate the natural, social and economic environmental impacts of growth. Each of these three categories of impact assessment have been developed into increasingly sophisticated areas of study and applied research. Within each area are a variety of fields which, while re- lated to the area of which they are a part, have unique characteristics and a growing body of literature of their own to delineate them. These fields were not automatically created with NEPA in 1969, rather various areas of study, which had existed for many years, were given a new focus and organizing structure around which to develop. Many of these fields have produced a variety of new tools or planning analysis tech- niques for improving our ability to evaluate and predict the conse- quences of alternative development decisions. These tools have wide applicability within the framework of the conventional land use plan- ning process. One of these fields, and its many methodologies and tech- niques, is the subject of this thesis. Known synonomously as cost-revenue analysis and fiscal impact analysis, it encompasses a variety of methods for evaluating the direct fiscal impacts of develop- ment on a community. Although cost-revenue analysis is a field within the larger area of economic impact assessment, it is not concerned with the entire range of economic impacts of development, only with the fiscal consequences on various governmental jurisdictions. As an impact assessment tool, cost-revenue analysis has many of the characteristics and much the same reputation as is associated with the more comprehensive environmental impact assessments. The environmental impact statement has been described as: . . one of the most maligned, admired, loathed, loved, controversial five-year-olds in the country today. On the one hand, environmentalists find the technique important for protection of environmental values; on the other, plan- ners see the method (in some cases) as a useful control tool for guiding development; and still others--as developers-- may see such procedures as burdensome and costly. . . . But it also has had a larger impact on the development of this country than most legislative enactments will have in a lifetime. While NEPA is now an "eight year old," its impact is still expanding, as more and more state and local units of government require the preparation of environmental impact statements before making deci- sions on public and private development alternatives. Despite the varying opinions about NEPA's impact, one thing is certain; NEPA and its local offspring have changed the process by which decisions are made about alternative projects. Many communities have now created on-going development assessment processes to replace ad hoc investiga- tions. These on-going assessment processes recognize that all develop- ment taking place in a community affects the community's composition and its future and, therefore, should be thoroughly evaluated before decisions are made. Thus, it comes as no surprise that some writers in evaluating NEPA's widespread influence have concluded that "the best regulatory mechanism so far for development review is environ- mental impact analysis."2 Fiscal Impact Analysis: Focus of the Thesis As an impact assessment technique, cost-revenue analysis can contribute to the information about proposed development alternatives, before costly decisions are made. While it can be used independent of full environmental impact assessments by communities who may perform such analyses on an ad hoc, as opposed to continuing basis, its utility is greatest when it is used in conjunction with other assessment proce- dures and growth management tools. In this way impact assessments pro- vide a perspective which is more complete and better suited for policy makers to make the necessary decision trade-offs. The remainder of this thesis is offered in the spirit that it is important for prospec- tive or practicing fiscal impact analysts to learn to recognize not only (1) the narrow sphere of fiscal impact considerations but also (2) the pervasive and often insidious nature of local interest in the fiscal impacts of development, and (3) to also recognize the importance of linking fiscal impact assessments with other assessment information in order to create a complete picture of development impact, before decisions are made. These points will be stressed throughout this thesis. The Oil-r2] ‘ hi i ‘ l ‘11:: :1 14R. - . ‘ "$.51 The Fiscal Impact Analyst: For Whom the Thesis is Written This thesis is written primarily for the prospective fiscal impact analyst. This may be a student, a practicing planner, a local government official or even a staff person of a land development com- pany. Although this potential audience is somewhat wider in occupa- tional scope than the narrowness of the area of study may indicate, it is, however, reflective of the variety of interests concerned with fiscal impact considerations. As used in this thesis, a prospective fiscal impact analyst is a person with a basic understanding of govern- ment service delivery systems who seeks either to (l) critique a fiscal impact analysis prepared by someone else, or (2) to gain a basic under- standing of the principal components of fiscal impact analysis in order to know how to begin preparing such a study for his/her agency. The fiscal impact analyst must be a technician with a social conscience. The technician must competently and fairly apply system- atic and objective skills within established methodological frameworks in the process of preparing fiscal impact forecasts, which are as bias- free and value-free as possible, and which clearly state all relevant assumptions and limitations; yet, the analyst's responsibility does not stop there. The analyst must carefully put the results of fiscal im- pact analysis into a more comprehensive framework in order to present the results in a proper perspective. This is where social conscience comes in. Proper utilization of fiscal impact studies requires they be examined along with the results of specific natural, social and economic impact assessment information. This analysis does not require imparting evaluative characteristics to the results where individual social values will bias the evaluation--that is properly the role for the decision-makers. It does require evaluating results in recogni- tion of local policy and state and federal laws and within the context of what proper and improper applications of fiscal impact analysis include. Interjection of unacceptable evaluative considerations during the process of fiscal impact assessment will bias the results, reflect negatively upon the analyst's competence and credibility, and negate the usefulness of the information for decision-makers. For these rea- sons, the fiscal impact analyst must be knowledgeable of the field, of his task, must be honest in the study, thorough in the assessment, comprehensive in perspective and fair in those difficult "gray areas" in order to remain credible and truly professional. If a local decision is made after evaluation of the impact assessment results, which is contrary to local policies and state or federal law, the analyst must speak out. As a technician with a social conscience, the analyst is responsible for seeking to protect the rights of all residents, not just those who own land, are wealthy or scream loudest and longest; but also for the poor, the elderly and those with less opportunity. If fiscal impact assessments are used to justify illegal fiscal zoning activities, the analyst must speak out with facts. Properly following established assessment procedures will provide much of the factual basis necessary for defending against actions taken contrary to established local policy or contrary to the general welfare. goo-r81 .l\ u" ' 1 ufln A :12 J "H a. (1' Lil :nglf‘a. I turd. it‘fi'zr 'il 1‘1 fir‘nq ' "i o 1 v 4 . "no 4;. , J'iiv ~.' "-3 ' ”31141.1 Purposes of the Thesis The author's interest in writing this thesis on the field of cost-revenue analysis grew out of his two years of experience in the development of a cost-revenue model for the Tri-County Regional Planning Commission in Lansing, Michigan. The project creating that model was a cooperative agency-consultant venture under contract with Barton- Aschman Associates, Inc., of Evanston, Illinois. Most of the work pre- paring the Urban Development Cost-Revenue Model (UDCRM) was performed jointly by Michael S. Levin, then of the Barton-Aschman staff, and by the author of this thesis. The author's experience in the development of UDCRM suggested a number of paradoxical relationships between the scholarly field of cost-revenue analysis and its practical application in the preparation of development impact studies. This thesis is based on the premise that there is a common resolution to these problems which this thesis seeks to address. Consider, for example, the following observations: (1) Nearly all communities have a considerable (perhaps dispropor- tionate) amount of interest in the fiscal impacts of development, but (a) in many of these communities understanding of and use of fiscal impact methodology by planning staff, local advisory and decision-making bodies is low to non-existent. (b) in other communities where fiscal impact analysis is used, it is used to justify local exclusionary practices or is used as an elementary, indiscriminate "decision rule," to decide whether proposed development should or should not be permitted. If a fiscal impact analysis shows it pays its own way, it is allowed; if it appears it will not, it is denied. (2) Many critics of cost-revenue analysis point to improper applica- (3) (4) tions of cost-revenue analysis or to some of its limitations as evidence of its inappropriateness as a planning tool. These critics either offer cost-benefit analysis as the only appropriate alternative or offer no alternative at all. These criticisms are made completely without regard for: (1) the large interest in knowing development-related fiscal impacts; (2) the duty local units of government have to responsibly manage their fiscal re- sources and rationally guide their community development; and (3) the potential that exists for improving fiscal impact analysis techniques with proper research and experience gained from its application. The current cost of performing "one time only" fiscal impact studies or of developing model methodologies is quite high and often beyond local means and staff abilities, thus requiring outside assistance. Yet, while the public costs of not assessing the fiscal impacts of development are unknown, they may be con- siderably higher than the costs of creating and using appropriate fiscal impact analysis tools. Without the local capability to assess development-related fiscal impacts, a study prepared by a developer which purports to justify a proposed development on fiscal grounds may not only be beyond the ability of a local staff to evaluate, but may thereby put the J: 31 7-2": .“I . F I“ ' \I developer in an unfair position of advantage in his public arguments regarding the proposed development. What happens to the public interest or the general welfare in a situation like this? The developer claims his project is a huge fiscal plus, "guaranteed" to lower the tax rate by increasing the tax base. Under these circumstances the community may be hard pressed to prove otherwise or even put the information, if accurate, into the proper perspective. These observations indicate an apparent need to provide basic information on cost-revenue analysis to prospective fiscal impact analysts. This information should address the questions and problems implicit in each of the observations above. This information should be both normative and factually instructional in order to meet the needs of fiscal impact analysts as technicians, each with a social conscience. The necessary basic information, thus, must be largely educational and descriptive in its content, encompassing all the princi- pal aspects of the field. Stated concisely, the principal purposes of this thesis are to provide prospective fiscal impact analysts with a working knowledge of the field of cost-revenue analysis so that they might: (1) be able to competently evaluate a fiscal impact study prepared by someone else; (2) know basically what it takes to develop a reliable fiscal impact study locally; and (3) understand where fiscal impact analysis fits in relative to other assessment tools, what it does and does not do, and what it should ‘11 on. and should not be used for, so they can fairly present it as relevant and qualified information within the local decision-making process. To achieve these purposes, a framework for evaluating or pre- paring a fiscal impact analysis is presented and explained in Chapter 4. With these principal purposes in mind, it is also necessary to qualify the scope of this work. First, this thesis is neither a cookbook nor a handbook that explains the step-by-step procedure for calculating development-related fiscal impacts (although the Appendix does refer the reader to various existing cost-revenue models that do this). Secondly, the report is not totally comprehensive, in that only principal methods, applications, purposes, and problems of fiscal impact analysis are presented. This is because each technique has many unique characteristics worthy of considerably more discussion than can be pre- sented here, and also because principal characteristics of various approaches are sufficient for developing the evaluative framework pre- sented in Chapter 4. Third, no attempt is made to recommend particular fiscal impact methodologies or to evaluate their effectiveness in a given situation. Again, while perhaps desirable, this is not necessary to achieve the principal purposes of the study, nor is it feasible within the resources available to this writer. Last, while considerable mention is made of the need to directly integrate fiscal impact analy- sis with other local impact assessment procedures, no systematic attempt has been made to describe in detail these other impact assess- ment procedures or the details of an integrated assessment procedure in this work. 10 Outline of Thesis Contents Three chapters comprise the body of this thesis, and a technical appendix provides supplementary information. While obviously interrelated, each chapter has been written on a separate issue or group of concepts and could stand alone if necessary. This was done because the material contained in each chapter is relatively discrete and attempts to address a particular set of issues or characteristics of fiscal impact analysis. For the analyst who needs to refer back to a concept, it should be relatively easy to locate it and the context within which it was discussed. Additionally, extensive subheadings have been used throughout the text. This format will assist the reader in locating a particular concern without too much difficulty, since no index is provided. The second chapter opens with a basic set of organizing information upon which the remainder of the thesis is based. This chapter identifies what fiscal impact analysis is, and why and how it is used; it discusses the relationship of fiscal impact analysis to the planning process; and it examines common criticisms of it. A definition of cost-revenue analysis is offered and is contrasted with three other related analysis tools to clearly identify its scope. The significance of cost-revenue analysis as a decision—making aid and the attendant benefits thereof are identified in this chapter. Improper reasons for using fiscal impact analysis are also discussed, with particular atten- tion focusing on exclusionary and fiscal zoning practices. The rela- tionship of fiscal impact analysis to the land use planning process is :H + 1 ain'- £27011 11 put into the context of its application within a growth management framework. The examination of common criticisms of cost-revenue analy- sis is focused on a representative article critical of fiscal impact analysis in order to both refute improper criticisms and to put valid criticisms into a constructive perspective. The third chapter attempts to summarize basic information about the principal cost-revenue study types and methodological approaches most frequently utilized in the field. Particular emphasis is placed upon dissecting each of these dimensions into its basic characteristics. A typology is presented that illustrates how particular cost-revenue methodologies are often applied in particular cost-revenue study types. This chapter is supplemented with some information pro- viding a historical perspective on the field and also discusses basic issues that frequently appear in cost-revenue studies. The fourth chapter relies upon the information in the preceding chapters to establish a framework for a cost-revenue study. This frame- work can be used to evaluate a cost-revenue study prepared by some other party or to structure a local fiscal impact study. This framework is presented within the context of a comprehensive impact assessment pro- cess and is described relative to the conventional planning process. The framework is structured as three sequential processes which involve: (l) comparing a (proposed or completed) study with a basic format for performing a fiscal impact assessment, (2) analyzing the results of a fiscal impact study, and (3) establishing a process of feedback and evaluation of the local fiscal impact assessment process over time. The SITE? 1 ‘filflill ' 3.11) r" + I :rb 12 framework is presented as a series of questions the analyst must respond to in order to evaluate or prepare a fiscal impact study. Since each chapter is completed with a summary, the final chapter of the thesis concentrates more on restating some of the funda- mental points made in previous chapters than it does on once again summarizing their contents. Additionally, however, the fifth chapter discusses some implications suggested by this study for future research efforts in the area of applied fiscal impact analysis tools. The appendix provides a more detailed technical summary of the principal cost-revenue study types and methodologies identified in Chapter 3. These summaries systematically describe the basic character— istics of the principal cost—revenue methodologies according to the structure established in Chapter 3. Actual studies representative of particular cost-revenue study types are also identified for the reader's reference. 13 CHAPTER 1 Footnotes 1David L. Brower from Introduction to Chapter 15 "The Environmental Impact Statement" as found in Volume III of Management and Control of Growth, ed. by Randall W. Scott (Washington, D.C.: The urban LandTInstitute, 1975), p. 135. 2William K. Reilly, ed. of The Use of Land: A Citizen's Policy Guide to Urban Growth (New York: Thomas Y. Crowell Co., 1973), p.725. CHAPTER 2 FISCAL IMPACT ANALYSIS: WHAT IT IS, WHY AND HOW IT IS USED, ITS RELATIONSHIP TO THE PLANNING PROCESS AND COMMON CRITICISMS OF IT Introduction Chapter Purpose It is the purpose of this chapter to establish the foundation upon which the remainder of this thesis shall be based. This requires defining what fiscal impact analysis is; describing why and how it is used; explaining its relationship to the planning process; and discuss- ing corrmon criticisms of it. Outline of Chapter Contents There are four principal sections in this chapter. The first section defines fiscal impact analysis bcth in terms of its basic ele- ments and by contrasting it to similar analytical techniques with which it is commonly confused. The second section describes why and how cost- revenue analysis is generally used, focusing on the benefits it has to offer as a planning tool. The third section expands on this description by explaining the relationship of cost-revenue analysis to the conven- tional planning process. The fourth section of the chapter identifies and discusses common criticisms of fiscal impact analysis and attempts 14 :11 nli Jo. I 1b ‘4.- ..J. ‘ F‘. 15 to put the more substantive ones into proper perspective. A particular emphasis is placed upon discussing the relationship of fiscal impact analysis to fiscal and exclusionary zoning practices. Definition of Cost-Revenue Analysis Problems Defining Cost-Revenue Analysis Attempting to adequately define cost-revenue analysis is complicated by several factors, including: (1) the fact that many plan- ners and local officials have an erroneous preconceived idea of what it is; (2) the confusion that exists because of the similarity between fiscal impact analysis and other related analytic techniques, and (3) the confusion that exists because of the variety of differences between the actual methodologies employed in the many types of existing cost- revenue studies. The first and second of these complicating factors are related, in that generally planners preconceive fiscal impact analysis to be not what it is, but to be one of its generic analytic techniques. In order to help sort out this confusion, cost-revenue analysis will be differentiated from cost-benefit analysis, cost-effectiveness analysis and planning-programming-budgeting systems after a definition is offered. The third complication is addressed in Chapter 3 where various cost- revenue study types and methodologies are illustrated; in this way the entire scope of these studies can be observed and differentiated. Interestingly, few cost-revenue studies attempt to define fiscal impact analysis other than by its application in a particular study. However, for the purposes of this thesis, a very general ie“nitil ire grin: :vst-rew :sst-revq ITSQQJE‘ tftitudl inc: s 119 no P p‘. 15:45. lad 16 definition of cost-revenue analysis is offered that encompasses all the principal methodologies employed within the principal types of cost-revenue studies. Also please note that, as used in this thesis, cost-revenue analysis refers only to analyses involving the fiscal consequences of land development activities. It does not refer to the multitude of studies, which may also be called cost-revenue or fiscal impact studies, whose purposes relate to programs or cash flows that have no physical land development basis and no public service require- ments. A Definition Cost—revenue analysis (or synonomously, fiscal impact analy- sis) is an analytical procedure for estimating the public costs and revenues associated with public or private land development decisions. As applied in particular circumstances it is variously concerned with: recent past, present day, or probable future public costs and revenues; specific project or alternative plans; comparative community fiscal and land development inter-relationships; net fiscal flows between communities; and/or with the land use and fiscal impacts of various policy decisions. Most frequently, cost-revenue studies have as their purpose and scope that identified by Muller below: The purpose of fiscal impact studies is to determine whether development will generate enough new taxes to pay for the added public services they will require. This is not merely an accounting problem since future tax levels can affect pub- lic services and, hence, the character of the community. The growing interest in the use of fiscal analysis to evaluate (‘1) :31 17 the impact of land development projects on local government reflects the concern that some land uses may have adverse fiscal effects. Cost-revenue or fiscal impact studies range in scope from analyses of individual developments which consider only revenues and operating outlays to studies which examine the fiscal effects of alternative growth policies in large urban areas. Taken narrowly, cost-revenue studies deal with com- puting the amount of revenue contributed directly by a new development, and the cost of pgoviding services directly linked to the new development. As Contrasted to Cost-Benefit Analysis, Cost Effectiveness Analysis and PPBS Three related analytical techniques which are sometimes con- fused with cost-revenue analysis are: cost-benefit analysis, cost effectiveness analysis, and planning-programming-budgeting systems (PPBS). Cost-benefit analysis is much more comprehensive than cost- revenue analysis. Cost-benefit analysis examines the effects Of a given alternative on all resources utilized (not just fiscal resources), and the intangible and tangible benefits of each alternative action are considered within a uniform quantitative scheme. In the public sphere it is used to evaluate alternative public investment projects and their effects on society. Runyan has recently summarized cost-benefit analysis as follows: Cost-benefit analysis has become a very widely used technique for presenting physical and environmental impact assessments and has been used for discussing social costs and benefits. The various costs and benefits are separately estimated for a particular project, using any techniques available, and dis- counted to a present value. Since monetary units are used for all estimates, social impacts must be converted to dollar values for inclusion in the analysis. The technique in itself does not help predict what costs and benefits will occur, nor does it value them so they may be compared. It does provide 18 a framework for approaching an impact assessment problem which has been found useful in situations where monetary values of impacts can be estimated. Cost-effectiveness analysis was developed as a means of compar— ing programs, to determine either: (1) the most effective program for a given allocation of resources or, viewed in a slightly different con- text, (2) to determine the most efficient allocation of resources for a given objective. Again, as Runyan has summarized. Cost-effectiveness can be used for . . . impact assessment by specifying the unit cost of output for proposed service or other programs, allowing comparisons on the basis of cost efficiency. To the extent that future program costs and out- put can be estimated and quantified, cost-effectiveness pro- vides basic comparative information for alternative approaches to a particular problem. In impact assessment terms, it can help measure the cost of various levels of impact (measured in terms of program output) or the costs of alternative pro- grams for a given level of impact. If data are available, these costs and impacts can be disaggregatefl to local scale, allowing a focus on specific problem areas. (parentheses original) Roberts offers these examples to help clarify this difference: For redistributive services, analysts resort to a cost- effectiveness analysis. Given a decision to provide "x" level of education, for example, how can we do it most inexpensively? Alternatively, given a decision to spend "y" dollars on educa- tion, how can we get the best education for our money? Cost-effectiveness studies frequently will give the same kinds of results as benefit-cost analysis. For example, a benefit- cost analysis may show it is better to spend money improving city transit than building new freeways in the boondocks. A cost-effectiveness analysis may show it is cheaper to educate children in central areas with existing schgol capacity than to build new schools in the remote suburbs. While cost-benefit aims to establish the profitability of a project by comparing its costs to its benefits, and cost-effectiveness focuses on the unit costs of alternative program outputs within a cost efficiency perspective, planning-programming-budgeting systems were 19 developed as an internal means of projecting program activities, budgeting resources for them, and monitoring their utilization. Basically what this entire process is designed to yield--for any program consuming resources to accomplish a specified objective--is the development of the relationships, in a quantitative fashion, between the community's productive potential, the cost of ameliorating the problem, the magni- tude of the problem, its amendability to modern practices 6 and techniques, and a specif1ed public sector involvement. PPBS is a planned program of action with specific objectives that is tied directly to the budget and periodically evaluated against its objec- tives. In comparison with these techniques, cost-revenue analysis is concerned more narrowly with measuring fiscal costs and revenues to a community from land development. As a planning tool, cost-revenue analy- sis is not concerned with non-fiscal impacts as the more comprehensive cost-benefit studies are; nor with the program efficiency emphasis of cost-effectiveness studies; nor with the establishment of continuing allocation and control mechanisms of PPBS approaches. 0f the four tech- niques, cost-revenue analysis comes the closest to the conventional cost-accounting format used in the business world. Cost-accounting is a business-monitoring and decision-making technique (of which all four analytic techniques are, to some extent, variations) which has been applied to public sector decision-making. "Fiscal impact, profitability, or return on investment (whatever term you choose) has always been the overriding impetus in the operations of the private sector. However, it is only recently that the public sector has looked at this factor in such a methodical and rigorous fashion."7 (parentheses original) 20 Why and How Cost-Revenue Analysis is Used Underlying Reason There are many reasons why fiscal impact analysis is increasingly becoming a part of local planning and development-related evaluation efforts. Some of these reasons will be explored in this section. However, the underlying reason for evaluating the fiscal impact of development alternatives is to discover whether or not they will seriously affect the existing and future fiscal structure of the community and, if they will, to determine what mitigating steps are necessary to minimize any negative fiscal impacts. The obvious thrust of this reasoning is that such information is not only useful, but vital to making informed and, hopefully, fiscally rational decisions regarding future community growth and the provision of public services. This rationale applies if the analysis is of development alternatives or service options in many communities; of a single project in a single community; of fiscal flows between communities; or of alternative future community development plans. However, the initial premise that communities ought even be interested in the quantified fiscal impacts of development still seems to be in doubt in some American communities. In these communities, government is perceived to exist merely to supply services upon demand from the private sector, growth is actively sought, and government inter- vention into local private land-use decisions is limited to, at most, simple pyramidal zoning restrictions. These communities either look uncritically at all development as a positive fiscal asset, or else 21 categorize development into simple maxims such as "residential growth will cost us money and non-residential development will bring us money, so let's encourage the latter and discourage the former." Unfortunately, this superficial interest in the fiscal impacts of growth by some communities is also evident in the lack of public service expenditure research by the academic community. After commenting on the general paucity of research information regarding development-related public service fiscal impacts, James E. Frank, University of Florida, stated, "Until recently, the entire question of growth was surrounded by a cultural myth which characterized growth as unquestionably good and almost precluded asking the (appropriate) types of questions . . ."8 (parentheses added) Growth is not always unques- tionably good nor is it always a fiscal asset to the community. For example, many fast-growth communities, who are accutely aware of the fiscal impacts of growth, now cry for "No-Growth!" The pressures of development in these fast-growth communities have spawned recent attempts to marshall many planning tools into coordinated action under the rubric of growth management, in an attempt to carefully prepare these communi- ties for change. One of the tools designed to aid local decision-makers in determining the fiscal impacts of growth is cost-revenue analysis. Contemporary Need for Factual Fiscal Information As A Decision-Making Aid Gruen, Gruen and Associates aptly described the problem facing many American communities today and alluded to the need for fiscal man- agement tools in their heralded study, The Impacts of Growth. ‘A~%—-‘ii—f 22 Whether they like it or not, communities do have to make choices that will affect the kind of development that takes place within or near their boundaries. They make such choices whenever they adopt land use regulations, set tax policies, invest public funds, and act or fail to act on a host of public decisions that influence the cost and desir— ability of providing housing, commercial and industrial services from development on land within a community's political jurisdiction. But while the pressure of events and many private interests will force the public officials of all our communities to make such choices, they do not force them to go about the business of making these choices in any particular way. The important public decisions that influence the kind of development that might take place and determine which of these feasible types of development will be allowed to take place can be made implicitly 05 explicitly. They can be based on polemics or analysis. Fiscal impact analysis is an attempt to systematically and objectively provide information on the direct fiscal impacts of develop- ment so that informed decisions can be explicitly made. This applies to development decisions in fast-growth or slow-growth communities since responsible fiscal management should be both a goal and a practice of all communities. Making informed decisions about the fiscal impact of development alternatives is one way to practice responsible fiscal man- agement. The well-prepared HUD-sponsored report entitled, Cost-Revenue Impact Analysis for Residential Developments, opened with remarks echo- ing those stated above by saying: Many communities throughout the nation are faced with the problem of having to respond to proposals from developers for new projects. In some cases, the decision will be simply to approve or reject the development as proposed. In other cases, there may be considerable bargaining over the numbers of various kinds of housing units to be included in the development, and the kinds of facilities and services which will be provided by the developer or a private association, 23 as opposed to the community. But in all cases, there is a need for objective and realistic information on the impact which the new development would have on the community. All too often, decisions are made with incorrect or inadequate information. Under these circumstances, prejudices and myths can determine the outcome. 00 single-family houses, or apart- ments, pay their own way, or not? Will the approval of low or moderate income housing place burdens upon the community, or not? Opinions on these matters are held by many. But, in fact, there are no general answers to these questions which will hold true in every local community. The answers depend upon the specific characteristics of the community involved. Thus, there is a need for local analyses of proposed develop- ments so that decisions can be made on the basis of objective information. 0 So why do communities utilize fiscal impact analysis? In the broadest sense they use the objective, systematically derived information it provides as a decision-making aid. As a tool, fiscal impact analysis provides information not only on the direction of fiscal impact, but also provides an idea of the magnitude of that impact at particular points in time. It identifies future public service needs and necessary public service improvements as well as identifies the likely needs/means for financing them. It is a tool that assists in establishing responsible local fiscal management. It is limited to assessing the direct fiscal consequences of development and does not indicate the secondary impacts thereof; nor does it assess social, environmental or other economic consequences; it does not express local values regarding preferred aes- thetic design, or community land-use preferences (though communities who use it may do this); and it does not provide all the fiscal informa- tion that may be desired at any given time; but it can contribute considerably to local information regarding development decisions. 24 These are the principal reasons fiscal impact analysis is used. Some other reasons or benefits available to those using cost-revenue analysis follow. Benefits of Using Fiscal Impact Analysis Fiscal impact analysis provides decision-makers with relevant information revealing the fiscal implications of development, including but not limited to the following: General Benefits: 1. It identifies specific future public service needs/improvements and the means to finance them. When used consistently, it promotes economy and efficiency in fiscal management decisions; to the extent that fiscally unsound decisions are avoided, taxpayers' dollars are saved. It more readily identifies the points of policy choice available to decision-makers and can be used to establish the conditions for recommending necessary mitigating measures as part of the process rather than as an afterthought--particularly when clearly defined alternatives are compared. It can also be used when negotiating with private developers as to how public service responsibilities are to be allocated between the community and the developer. It can provide the basis for establishing better working relation- ships between developers and the public sector, especially where there are mutual benefits to be achieved by both working together, 25 such as when the developer seeks public financial assistance of some kind in return for embodying in his private development specific public objectives. It provides information which can be used to complement other impact evaluation assessments, such as social, environmental and economic, providing for more nearly comprehensive evaluations of development alternatives. It provides a basis for establishing local fiscal impact fees, man- datory land dedication schemes and differential assessment practices based on the results of consistent, sound, locally projected fiscal impacts, as opposed to arbitrarily adopting such schemes without sound local study. Local application of cost-revenue methods will teach the fiscal impact analyst very much about local service delivery systems, fis- cal flows, and/or how local services compare with those of other communities. This information is often more valuable than the information derived from the development review at hand. Often, for example, it provides insight into other previously undetected service delivery problems, or vice versa, other avenues for effec- tive public intervention into private land development decisions. The largely fiscal benefits of intervention may result in better community control over the location, type and timing of development as the community begins to get a better grasp of its service produc- tion system. 26 Improved Communication Benefits: 1. It can bring about greater public awareness of the apparent fiscal consequences of particular projects, or growth in general, in the community. As a result, either public pressure to act, or concensus on an issue may result from the heightened awareness. It often facilitates improved communication, uniform forecasting and standard language and analysis techniques between public service departments in the community. Other Benefits of Use Over Time: 1. Over time, the data base generated from many project assessments can be used to evaluate the consistency and continued relevance of exist- ing community plans through a feedback process. Over time, the effect of slack capacity in overdesigned systems and, vice versa, insufficient capacity in underdesigned systems will become more apparent, thus providing valuable policy input considera- tions. Over time, use of similar cost-revenue methodologies in many differ- ent communities will provide a better basis for comparing the effect of spatial location, density, community type, size, demographic structure and service delivery system differences with regard to fiscal impact. All of these benefits are offered as reasons for utilizing fiscal impact analysis. Most of them relate to its use in the evaluation of projects or community plans at a local level, though many of the benefits also apply to fiscal impact applications on an interjurisdictional r. i “\M (I alum 9 .\J an M13 D; .K S ale a ‘ p\¢ '11.. P! l P u 1 ’1 Ce ,h A) a. A IV I I :3 PM AIIIU pit . "i O IN «a»: t 111 Ill 5:... .6 U .0... in!“ “NI .hl 27 and regional or statewide comparative basis. However, since specific fiscal impacts of development depend so heavily upon the characteristics of the local community fiscal structure, its data base and upon the characteristics of the development being analyzed, the results of one fiscal impact study are not readily generalizable elsewhere. Attempts to circumvent direct local application of cost-revenue methodologies by assuming local analyses will mirror results achieved in other communi- ties may not bring the user those same benefits just described and may, instead, cause considerable future fiscal problems. Improper Reasons for Using Fiscal Impact Analysis Yet, while there are substantial benefits for those who properly use fiscal impact analysis as an aid in local development-related decision- making, some communities and planners have conceived of improper ways to use the tool. Improper applications often revolve around use of fiscal impact analysis not as a decision-making aid, but as inflexible decision rules that are not justified on the basis of legally protected individual rights and/or property rights. In many of these cases, fiscal impact analysis studies which purport to prove a particular view- point are relied upon as valid justification for taking a particular course of improper public action. Yet, too often these same studies are not technically valid, usually because of some deficiency in their scope. 28 Such applications are improper reasons for using fiscal impact analysis; they most often include utilizing fiscal impact analysis in any of the five following ways: 1. For the purpose of excluding certain housing types or income classes from the community, and thereby to further exaggerate problems in locating needed low and moderate income housing. To encourage exclusively certain housing types, or businesses, per- ceived to be positive tax ratables by large lot zoning, fiscal zoning and other means. To unconscionably blackmail a developer into providing public facili- ties and amenities, such as schools and parks, over and above his fair share, as determined by state and local law. This is done by withholding approval of a development permit or rezoning request unless the developer complies with the conditions being imposed upon him. It is blackmail if these conditions are not uniformly required of other developers and are not fully within the power of, and stated in, local regulatory ordinances. To simplify the development review procedure so that having a posi- tive fiscal impact (net revenues greater than projected expenditures) becomes the sole criterion, or rule, for making decisions on prospec- tive development, thus ignoring many important secondary effects, other intangible costs and benefits and other impacts such as environ- mental, social and economic. To tout use of fiscal impact techniques as the panacea for decision- makers. Planners are often tempted to do this because use of fiscal 29 impact analysis often brings acknowledged respect to a planning department which often lacks the same, at least from other local departments and politicians. This respect may come because fiscal impact analysis presents the results of development impact studies in a format familiar to, and of great concern to, many in local government--dollars and cents. Yet, while successful use of fiscal impact analysis may be noteworthy and a source of pride to planners who frequently fail to see implementation of plans and programs or to get recognition as anything other than "impractical ivory-towered idealists," its usefulness should not stop there. Comments like the one that follows fail to instill confidence that fiscal impact tech- niques will be consistently and fairly applied, as well as kept up to date for use as an important planning tool: "Finally, and most important, planners and academics can knock cost/revenue analysis all they want, but it feels so good when a sharp, specific locally oriented (fiscal impact) study emerges which backs up the local "'1 While no unbridled criticism is planners' favorite policies. intended, this quote can be read to imply that locally developed policies (prepared by planners) which are assessed by locally devel- oped fiscal impact studies (prepared by the same planners) are, by definition, correct and without bias. While perhaps true, it is not true by definition. Planners who think that results of fiscal impact analysis, standing alone without input from other analytic assess- ments, are both accurate enough and sufficient for decision-making, 30 are not supported by the analysis presented in Chapter 3, which discusses the limitations of fiscal impact analysis. Relationship of Cost-Revenue Analysis to the Planninngrocess Land Use Planning Process There are a variety of ways that cost-revenue analysis can be applied within a community's planning process. And while there are many accepted variations of the planning process, there is some general agreement that pertinent infonnation is identified, gathered and analyzed so as to create alternative programs or plans for action that, when implemented (and altered after evaluation, if necessary), seek to cor- rect a problem and/or to prevent future ills. Within the context of land development-fiscal interrelationships, the planning process gene- rally takes on the characteristics of the conventional land use planning process. It is the conventional land use planning process to which the following remarks relating to cost-revenue analysis are applied. Plan- ning textbooks readily identified with the land use planning process are F. Stuart Chapin, Jr.'s Urban Land Use Plannipg_and ICMA's Principles and Practices of Urban Planning, especially the chapter on land use plan- ning by Shirley F. Weiss and that on the comprehensive plan by Alan Black. Use of Cost-Revenue Analysis in the Land Use Planning Process In her chapter, Weiss notes that Chapin in Urban Land Use Planning: 31 lists a series of basic studies that furnish information on the use, non-use, and misuse of urban land. These include: (1) compilation of data on physiographic features, mapping and urban setting; (2) the land use survey; (3) the vacant land survey; (4) hydrological and flood potential study; (5) structural and environmental quality survey; (6) COST- REVENUE STUDIES OF LAND USE; (7) land value studies; (8) studies of aesthetic features of the urban area; and (9) studigs of public attitudes and preferences regarding land use. (emphasis added) Black also mentions the need to prepare "cost estimates for carrying out the plan."13 Chapin expands on his description of the use of cost-revenue analysis in land use planning by identifying several applications. First, he feels "Data on cost-revenue relationships for developments in varying locations, at varying densities and intensities of use, and information on the general pattern of land values and their trends in the urban area "14 should be available early in the analytical sequence. This reference is to pre-plan development. The principal focus of these early cost- revenue studies should be to examine prevailing public policies and practices in supplying services and facilities for various classes of land use in differing areas of governmental jurisdiction, and develop cost- revenue estimates indicating the implications for municipal finance of land development at various intensities and densi- ties under existing or assumed changes in prevailing policies and practices. These studies are concerned with the economy of land development as a public interest consideration as opposed to the economics of development arising through the operations of builders and developerg functioning within the framework of the urban land market. Chapin also discusses application of cost-revenue methodology at the subarea alternative plan development stage of the land use plan- ning process. 32 Thus, a primary element that must be taken into consideration in reaching land use planning decisions is how much it will cost to provide public improvements and services at particular locations in relation to revenues that can be anticipated at these locations. But density and intensity of development are related to location. Thus, for residential development, it is important to investigate differentials in cost-revenue relation- ships in fringe areas where scattered settlement patterns tend to occur as opposed to those of the more concentrated develop- ment found in closer-in locations. It is also important to know what the differential effects on these cost-revenue rela- tionships will be when development occurs in these locations at low, medium, and high densities. By the same token, in industrial, commercial, and retail business areas, it is important to know how these relationships will differ in devglggments ranging from an intensive to an extensive use of an . The next logical step is to "assess the net cost implications of providing improvements and services as set forth in the entire land "17 However, Chapin does not stop here; he puts in a development plan. plug for use of fiscal impact analysis in regional land use planning: The soundest approach (to addressing service policy differences and taxing differences between communities in metropolitan areas) would seem to be the pooling of effort on the part of the various planning agencies in the metropolitan area in the development of one urban-wide land use plan that is sound in every other respect, and then jointly testing such a plan for its cost-revenue imp ications under alternative combinations of service policies. 8 (parentheses added) While Chapin does extensively refer to the use of cost-revenue methodology in the land use planning process, he does not discuss its utility in analyzing specific project fiscal impacts. This is not what would be expected given that the largest number of fiscal impact studies are prepared to analyze individual projects and not community land use plans. In fact, one might expect that, since Chapin's text was in its eighth printing of the second edition in 1972 and is the standard land use planning text, the processes and planning steps it described would 33 be used as standard planning guides in community after community. Maybe it is followed, but few communities appear to apply cost-revenue tech- niques to proposed future land use plans. Conversely, use of fiscal impact analysis to analyze individual developments is quite widespread and the results are frequently published. Yet, just as importantly, Chapin is correct that cost-revenue analysis is a very useful tool within the land use planning process, particularly when applied to either alternative plan and project assessments, as is illustrated by the following quotation: In the broadest sense of the term, the "planning process" refers to all conscious and foresighted plans and actions undertaken by a community to guide the growth and develop- ment of that community. The specific types of plans, imple- mentation mechanisms and procedures used as a part of the planning process can vary significantly between jurisdic- tions. However, it is reasonable to assume that all communities acquainted with the planning process have some kind of development review procedures for evaluating new projects. The plans and review procedures insure new development will adequately fit into both the present com- munity structure, and in with the plans for future community growth. Therefore, it is apparent that as a tool the Urban Development Cost-Revenue Model may provide useful information at two points in the planning process: at alternative plan evaluation and at the evaluation of individual projects. Volume 2 of the Fiscal Impact Study for the County of Sacramento, entitled The Guidelines for Implementing the Sacramento County Economic/ Fiscal Impact Assessment Process, does an excellent job of describing how fiscal impact analysis is related to the planning process. It dis- cusses the application of fiscal impact analysis with regard to three distinct areas of activity in the planning process of local communities. This is illustrated with description of four planning scenarios repre- senting a range of local jurisdictions (on a continuum) with regard to 34 the level of their active planning functions. The three levels of the planning process it describes as affected by use of fiscal impact analy- sis are: (1) plan formulation, (2) review process, and (3) feedback process. Plan formulation is the level on which the plans and policies of local jurisdictions are prepared. The review process level includes all the daily decision-making which is reviewed for conformity with the adopted plans and policies. The feedback process level comprises the activities of reviewing and moni- toring the adopted policies and plans in light of newly 20 collected data and administration of the planning process. While this planning process varies relative to the sophistica- tion of different local planning efforts, thus making it difficult to define, it has been illustrated by describing the planning functions of four hypothetical jurisdictions as classified on a single continuum. At one end is Case A, representing jurisdictions undertaking impact assessment on a project-by-project basis in the absence of an adopted General Plan for which economic and fiscal impacts have been assessed. . . . Case D, at the other end of the continuum, represents a jurisdiction which has fully accomplished the integration of the impact assessment level with its other planning activaties. Cases B and C are mid- points on the continuum . . . While the above summary fails to adequately detail the planning process utilized in Sacramento County, the essential structure for suc- cessful, continuing, cost-revenue applications to a wide range of local community planning problems are evident in this approach. The Sacra- mento example suggests that the application of a broad range of planning tools within the even broader framework of the planning process provides great possibilities for planning successes in the future. One of the tools likely to have a prominent place in broad based planning programs is fiscal impact analysis. Coordinated applications of a variety of 35 planning tools to planning problems, particularly in the area of land development, are currently of great interest in planning literature, and are usually classified under the title of growth management. Relationship to Growth Management Urban Land Institutes' classic reference work, Management and Control of Growth: Issues Techniques, Problems, Trends, defines managed growth as the utilization by government of a variety of traditional and evolving techniques, tools, plans and activities to purpose- fully guide local patterns of land use, including the manner, location, rate and nature of develOpment. Ideally, managed growth consists of a well-integrated, efficient, and affirma— tive system where choices or decisions are made explicitly and with full knowledge of the variables and trade-offs involved, and where the programs are coordinated in furfiaer- ance of clear community growth and land use objectives. The awareness of the need for growth management as a necessary integration of various planning approaches extends beyond planning literature and now frequently appears in magazines and newspaper articles, but perhaps more importantly in reports, books, and pamphlets prepared by various groups for wide citizen distribution. Consider many of the references to the fiscal impacts of growth and the need for integrated planning tools within a growth management framework expressed in different contexts and from different perspectives in the references below. From New Hampshire, the townspersons perspective: Accompanying the runaway growth phenomenon in New Hampshire is also a growing suspicion by New Hampshire people that things are ppt_improving with the influx of new taxpayers, but they do not have facts at hand with which to generate community support for their feelings. If you're going to 36 argue for putting the brakes on growth, you're going to need facts and analyses (at least pointed questions) of your own to counter a developer's pitch or your town's head-in-the-sand posture. The idea is not to label developers as villains, but to make sure that, as useable land resources dwindle, full thought is given to the costs of continued development. A little home- work on town expenses associated with continued growth can go a long way as ammunition in the political discussions that must precede effective planning efforts. Armed with this kind of first-hand information on growth, you are in a good position to trace the unstated implications of existing plans and poli- cies, not only of planning boards but developers, utility companies, and state boards. If a community can base its decisions on the health and welfare of its people, then it gas a solid base for making stiff requirements for developers.2 (parentheses original) From Florida, a County's perspective: In many areas the provision of public facilities and services has not been able to keep pace with growth, resulting in congested highways, overcrowded schools, over-burdened utility systems, loss of open space, and numerous other problems. The most preva- lent form this growth has taken is urban sprawl, encouraged in part by FHA policies and the freeway system. Accompanying the sprawl has been leapfrog development, as developers in an attempt to minimize their land costs have bought land relatively far from other developments. Their development patterns are wasteful of land and are more costly and less efficient to serve with public services and facilities than more compact development. Some people are beginning to view growth itself as an enemy. It is important to keep in mind, though, that slow or little growth can be just as bad as rapid or enormous growth; a vital element is how it is managed. Thus, in growth management con- siderations, quality is just as, or perhaps more, important than quantity. Furthermore, the Task Force on Land Use and Urban Growth cautions that the management or limitation of population growth should not become a long-term goal in itself, but rather should be used as a means for obtaining other benefits. First and foremost, the citizsas of an area need to determine what kind of community they want. From Pennsylvania, a state perspective: 37 Part Four--Growth: How Much, What Kind, and Where. Until recently, growth of nearly any kind was welcomed. Growth meant jobs, tax revenue, progress, and profits. Lack of growth signaled stagnation, hard times, and less chance for individual or community betterment. This view is changing. Concerns over pollution, congestion, and quality of life "opportunities" now challenge the "bigger- better-busier" view. Some communities have tried to block growth, pleading environmental damage as their defense. The indirect costs and side effects of growth are of more concern, too; few coastal states want deepwater ports; few localities want nuclear power plants; few communities want more solid waste sites; few school districts want more children; few suburbs want more low-income housing. th growth is neces- sary, and facilities must go someplace. From the Council on Environmental Quality, its Fifth Annual Report, 1974: The discussion of the urbanization process at work in the United States indicates that we are just beginning to understand the significant environmental, economic, natural resource, and social implications of development patterns in our cities and outlying areas. While we are nowhere near developing a truly accurate methodology to foretell these implications in a given case, we have learned that some long-held beliefs about the development process need to be seriously questioned. *** In part, the need to question earlier assumptions rests on a growing realization that some of these assumptions were wrong or, at best, serious oversimplifications. It can no longer be assumed that single family homes are the cheapest and most efficient development pattern for localities on the urban fringe. The savings in public costs from higher density development, and the payoff from planning programs which set aside open space and provide public facilities as part of a rational plan established for the benefit of the whole com- munity, are becoming clearer and clearer. Nor can the savings in energy consumption and the ability to reduce pollution levels through improving the pattern of urbanization be over- looked. These issues are equally important in areas impacted by second homes and recreational lot sales. The long-term economic and environmental impacts on the community are becom- ing increasingly difficult to brush aside in the rush to invite developers with their promise of new tax revenues and economic growth. 38 None of this should lead us to conclude that growth is wrong or that land development should not occur. On the contrary, the market will demand new housing and new recreation opportuni- ties for a population that, even at current low birth rates, will continue to expand (for at least the next few decades) and become more affluent. The issue is not growth or no growth. Rather, it is Bow and where and under what conditions growth should occur.2 (parentheses original) While each of these quotations approaches growth from a dif- ferent perspective, they all reflect the nationwide concern for the need for explicit mechanisms for assessing development impacts, notably fis- cal, and for establishing mechanisms to mitigate these impacts and, thus, insure new development that is both beneficial, compatible, and high in quality. Coordinated growth management programs offer the promise of insuring these public concerns are adequately addressed in the future. Fiscal impact analysis is one of the available planning tools capable of fulfilling a vital role in these growth management programs. Common Criticisms of Cost-Revenue Analysis Basic Types of Criticisms We have examined what cost-revenue analysis is, why it is often used and how it is frequently applied. We have examined how it can be integrated into the planning process and have touched upon its place as a useful tool in growth management programs. We have surveyed some of the current land use problems whose fiscal impacts could be assessed with cost-revenue tools. It now becomes necessary to discuss some of the common criticisms of fiscal impact analysis so that future analysts 39 do not view its use as a panacea for development problems and to provide the proper perspective for its local application. As a general rule, there are three basic types of criticisms levelled at fiscal impact analysis. They are: (1) practical criticisms, (2) methodological criticisms, and (3) criticisms regarding the manner in which it is applied. The practical criticisms of cost-revenue analysis relate princi- pally to the resource and data requirements surrounding its use. Many fiscal impact methodologies require a considerable amount of data, manpower, money, lead time and users with the appropriate skills in order to properly conduct a fiscal impact study. If the local fiscal impact effort is sporadic or ad hoc, as opposed to directed towards establishing a permanent fiscal impact analysis framework and basic methodology, the effort may not be cost-effective and, therefore, not repeated or, worse, are improperly used. When these considerations are combined with some of the other criticisms of fiscal impact analysis, the result is often a determination that cost-revenue analysis is not feasible for use in a particular community or in a particular setting. Yet, to a great degree these concerns are not well founded. For example, in the last three years, several "model" fiscal impact methodologies have been prepared whose structure is such that they<:ouki be adapted to fit most local community needs within a reasonable time and cost and could provide at least a rudimentary fiscal impact mechanism. Some of these models are identified in the Appendix. The increasing importance of fiscal factors to local communities, notably reduced 40 local revenues and rising service costs, and the availability of these model methodologies makes it unlikely that this criticism will have many proponents in the near future. The criticisms concerning methodological deficiencies and criticisms or particular fiscal impact applications bear more serious consideration. No attempt will be made to identify all relevant criti- cisms of fiscal impact analysis; instead this effort will concentrate on those commonly expressed. Likewise, less emphasis will be placed in this section on specific methodological limitations because they will be discussed in detail in Chapter 3. Criticisms of fiscal impact analysis, particularly when it is used to justify fiscal or exclusionary zoning programs, are discussed in more detail in the following section. Selected Criticisms: A Review of a Representative Critique The focus of the remainder of this chapter is on representative criticisms of fiscal impact analysis, and in particular those presented in an article by Polly Roberts in the August, 1976 issue of Planning, published by the American Society of Planning Officials. This article is entitled, “Making Dollars and Sense Out of Fiscal Impact Analysis." Since one of the purposes of this thesis is to fill a void in the area of useable information regarding cost-revenue analysis, these criticisms are identified and discussed so that the kinds of problems Roberts and others have validly identified will not be unintentionally perpetuated in future uses of fiscal impact techniques. 41 "Crude,” "No Established Methodology": Fiscal impact studies have held a curious fascination for both opponents and proponents of development. Both groups hail these studies as the new, scientific way to make land use decisions. But, in fact, fiscal impact studies give incomplete and misleading information about proposed develop- ments. Even worse, fiscal impact criteria strongly bias local governments to exclude moderate and lower income persons who need services, notably families with children. In short, the use of fiscal impact criteria for making deci- sions about development acggunts to a major extent for our current land use problems. With this opening, Roberts begins her article. She goes on to allege "Local officials usually apply some crude measure of fiscal impact in deciding whether to encourage or discourage a particular development," adding "If revenues exceed costs, the development suppos- edly increases the tax base, and the locals roll out the red carpet. 28 She later charges But if costs exceed revenues, the door is barred." that fiscal impact analysis "has no established methodology." These arguments are similar. If she means fiscal impact studies are uncompli- cated and that there is no single uniform set of estimating techniques, she is correct. They are often complex, but rarely impossible to understand. If she is suggesting that because there is more than one method for performing fiscal impact analysis, it is thus no good as an analysis technique, she is mistaken. Various fiscal impact methodolo- gies have evolved to address themselves to particular fiscal impact problems, and while some techniques are unquestionably better than others, this fact attests more to the versatility and flexibility of these techniques than it serves as a criticism of them. The various cost-revenue study types presented in the following chapter illustrates 42 this fact completely. However, the accuracy of various techniques do need to be improved. But research is the answer to that kind of problem, not the abandonment of a useful tool. Additionally, recent efforts by Muller, and a cooperative research study by Rutgers University and 29 are likely to significantly improve both Barton-Aschman Associates, the information available about fiscal impact analysis and the quality of the techniques applied, thus further advancing the state-of-the-art. Inconsistent Results: Roberts notes that many studies either by developers, consult- ants or local units of government produce results that often conflict, while suggesting that, in part, it is because these studies have not been performed by economists (like she is) but instead by "lawyers, planners, "30 Even more unflatter- and engineers with little economic expertise. ingly, she suggests that the conflict is due in part, if not largely, to the fact that "parties with a significant economic or ideological 31 Unfor- stake in the results have commissioned most of the studies." tunately, these arguments, while perhaps true in some situation, do not offer much guidance for reform. Her central point, that various method- ologies will produce sometimes conflicting results, should not be too startling when one realizes that not every methodology is applicable at every scale of analysis with the same degree of accuracy; nor are any methodologies so rigid as to prohibit individual variations when warranted. Thus, the problem is not that study results differ, but that information regarding the use of cost-revenue methodologies is not yet in the hands of those who need it. Additionally, two studies of 43 the same development that are made public and whose results differ serve the very useful purpose of drawing attention to the details of the analysis and, thus, to stimulate more effectively discussion sur- rounding the accuracy of each study and the policy choices to be made. Such differences can lead to a determination of bias or procedural error on the part of one of the parties or the other, or both. This would seem to enhance the decision-making process, not detract from it. Predictable Results: Ms. Roberts is also in error when she states: "Fiscal impact studies of residential development can only prove something we already know: richer than average taxpayers, notably owners of commercial and industrial properties, help support services to poorer than average 32 This kind of blanket statement taxpayers: homeowners and renters." about the outcome of fiscal impact studies is not borne out in every instance by actual studies themselves. Instead, what does appear to be true is that study results tend to be very situation and location depen- dent even within the same community, because the marginal costs of providing public services depends to a great extent on existing service capacity in a particular location. When looked at in conjunction with the variety of revenue structures utilized across these United States and the increasing use of federal and state funds to pay for local service costs and, in particular, for large capital expenditures, the result is that development impacts are very localized, and generalized statements concerning land use impacts are not justified.33 44 Perhaps after application of the same cost-revenue methodology in one community or in many communities over time, some generalization, like the one she made, could be tendered; as yet, it is premature. Overreliance on Fiscal Criteria: Roberts points out that local governments have long had the incentive to regulate land use according to fiscal impact criteria and will continue to for many years. However, her causal chain is not cor- rect. The reason is not because of the existence or use of fiscal impact analysis nearly as much as it is because of the current heavy reliance on locally generated property taxes to pay for local services.34 The fact that communities utilize fiscal criteria in parochial ways that tend to "fortify economic segregation" and tend to "often conflict with the interests of society as a whole“ cannot be disputed;35 these actions should neither be encouraged nor condoned. However, as long as the incentive is there to create this condition (dependency on local property taxes to finance local services), this is going to continue to happen. Of course, the use of fiscal impact assessment techniques for exclusionary purposes is not justified, but the use of fiscal impact analysis to help communities manage fiscal affairs and sustain fiscal viability certainly is. Obviously, cost-revenue analysis cannot be used in isolation or other social goals may be ignored. For precisely this reason, fiscal impact analysis is not properly performed unless its results are put into a context where other natural, social and economic impacts are being evaluated in light of (1) other development currently taking 45 place in the community, (2) local goals and policies, and (3) the need for housing by low income groups. Incomplete Anal sis of All Costs and Bene its: Roberts takes this reasoning a little farther when she offers one of her most serious criticisms by saying: "Because they (fiscal impact studies) do not include all costs and benefits, and because they are biased against redistribution, fiscal impact studies simply do not "36 (parentheses supplied) provide a valid basis for land use decisions. To the extent that fiscal impact studies should not be the sole basis for land use decisions, she is correct, but to summarily reject what they do have to offer, solely because they are not cost-benefit or cost- effectiveness studies, is neither fair nor constructive. Part of Roberts' dismay with fiscal impact analysis appears to lay not just with its limited focus, but with the fact it is often confused with cost-benefit analysis, and because of this confusion it is accepted as being the more comprehensive, cost-benefit study. This problem does, in fact, exist. It is particularly worrisome because some studies which are cost-revenue studies refer to themselves as cost-benefit studies.37 Roberts notes: In brief, then, a fiscal impact analysis, unlike a benefit/ cost analysis, does not consider all benefits and costs. It considers only those that show up as cash flowing in cu: out of a particular local government treasury. Thus a fiscal impact analysis omits privately received costs and benefits within the local jurisdiction. Consequently, a project with a good benefit/cost rating may show a deficit on a fiscal impact analysis and vice versa. 46 A housing development justified by a benefit/cost analysis may show a fiscal deficit because taxes at existing rates collect only a fraction of private benefits. At a highgg rate, the same development might show a f1scal surplus. On these points Ms. Roberts is correct. Fiscal impact analysis does focus only on the direct fiscal impacts of development. If a com- munity has a low income housing program, and it should, and a prospec- tive low income project has a negative fiscal impact, that does not mean, however, that the project should not be approved. It may very well be beneficial to the community to allow such development if it achieved certain other community goals, such as providing decent housing for low income families and was suitably located. A negative fiscal impact means that the project will not return in revenues what it costs in terms of local services. It means the amount of local subsidy neces- sary for the project to fiscally balance will be able to be determined. And it means that discussion for both proponents and opponents will have to take place over systematically obtained, objective calculations and not over pure fears, fantasy or opinion. This information may be limited, but it is still very useful in helping decision-makers grapple with difficult questions. Must Development Pay Its Own Way? The use of fiscal impact analysis inevitably results in the following question being asked: "Must development pay its own way?" Underlying many of Roberts' comments is the implication that it must; that is, new development must not cost more to service than the revenues it generates. This cry is often heard from those who utilize 47 fiscal impact analysis for exclusionary purposes. And it is too often cited as the reason for performing fiscal impact studies. But this is not really the appropriate question nor is it an appropriate reason for using fiscal impact analysis, because a complete answer cannot be given and because it usually is transformed into an overly simplistic decision rule. For example, McDonald and Smart, Inc., a California-based planning consulting firm, offers the following wisdom concerning local requirements that all new development must pay its own way; they term it: . . . misleading because determining whether development on a specific site "pays its own way" does not determine whether the municipality and special districts are fiscally better off or not. To ascertain that would require including the consequences of all other development "associated" with the project. For example, a factory assumes the presence of workers who have homes, homes have shoppers, etc., until a full complement of urban development is involved. Finally, "Does it pay its own way?" is not worth the trouble because it is of limited policy value. Is housing to be rejected because its inhabitants require social service? Can older developments be eschewed because their tax value is less? "Does it pay its own way?" has usually been used by municipali- ties that occupy a part of an economic area and wish to be selective in the development they allow. The associated corol- lary is that they assume that neighboring communities should take the land uses that are less "profitable" than average. These remarks are not to say that fiscal impacts should be ignored. Indeed, they are the major focus of this report. But the purpose of the analysis should be the choice of alterna- tives that facilitate a better level of services delivered more efficiently along with an awareness of fiscal problems requiring attention. 9 In another publication, McDonald continues: In the general situation where elected officials make decisions, a cost-revenue study can be a source of information that does not guarantee a decision rule. We don't ask that social services for the aged "pay their own way," or that the medical care 48 program for the indigent have a favorable revenue-cost relationship. We do, however, ask what the costs and the revenues will be such that the political process can make the decision ased on as much factual information as can be provided.4 Another problem with the "pay your own way" thesis when used as a decision rule is that it is so highly dependent on timing and upon public plans for the larger geographic area within which the development is planned. The example offered below, again by McDonald, is illustrative: Consider a 100 unit subdivision that exceeds the capacity of a jurisdiction's water supply. In one sense, this project and only this project fails to "pay its own way," since its incremental public cost would be quite high. The projects that were initiated between the time the water supply was financed and the point where capacity was reached, on the other hand, may appear to have a quite favorable cost-revenue relationship. Only an areawide evaluation and one that con- sidered the probable future course of growth after the water supply was expanded again would produce the facts leading to a rational decision. It should also be noted that except for certain eastern state courts and the New Jersey Courts, in particular, the question of the propriety of using zoning and other land use regulations to bolster or protect the local tax base has not been extensively litigated. However, the recent New Jersey Supreme Court decision of Southern Burlipgton County N.A.A.C.P. v. Township_of Mount Laurel, 67 NJ 151, 336 A2d 713 (1975) not only addressed this issue, but specifically invalidated Mount Laurel's attempt to explicitly make each new residential development "pay its own way." One writer has summarized the court's decision with respect to this issue in the following way: . . . the Court concludes that its (Mount Laurel's) zoning ordinance is so restrictive with respect to the exclusion of multifamily housing, minimum lot area, lot frontage and building size requirements, that a facial showing of 49 invalidity has been made, shifting to Mount Laurel the burden of establishing valid superseding reasons for its action and non-action. Mount Laurel's principal reason in support of its land use plan and ordinance is that any municipality may zone extensively to seek and encour- age the best tax base and limit the permissible types of housing to those having the fewest school children or to those providing sufficient value to "pay their own way." This justification is rejected by the Court.42 This case suggests that, should communities use fiscal reasons in a decision rule framework requiring new development to pay its own way, such attempts may be invalidated by the courts. This then is even greater justification for caution in the manner in which the information produced by fiscal impact analyses should be used--it should not be used to validate decision rules that require new development to pay its own way. There is, however, as Dunham notes, one time when evaluating whether new development pays its own way is a very legitimate question; that is when all development is viewed in the aggregate either at the end of the year in an accounting sense or when considering the fiscal impacts 43 Under these circumstances the "bottom line" must of alternative plans. still balance, but not for each project. Despite the best of social intentions, a community which spurns all growth or accepts only develop- ment which is decidedly negative in its impact still is responsible for providing public services within its means and must not operate in the red for extended periods. Thus, ultimately, the "bottom line" cannot be forgotten. Fiscal impact assessment of the entire area or plan helps put these projects into perspective. The celebrated Barrington Area Study offers these additional insights: 50 It is also suggested that rou s of development projects proposed over a period of time (six months to one year) be evaluated together, particularly if they are located within one subarea or section of the study area. The combined impact of a series of contiguous and/or coordinated pro- jects, with possible internal cost-revenue trade-offs, should be estimated. This will give the rest of the area some indi- cation of the overall effects of especially active develop- ment efforts in some sector or subarea. 4 (emphasis original) All individual projects should not be expected to balance costs and revenues. From a fiscal point of view it is more important that the cumulative impact of projects not produce unacceptable deficits. A running account can identify the amount of alternative types of benefit-producing land uses that must be sought or promoted to maintain sound fiscal balance. Conversely, if the account exhibits a balance or a cumulative benefit, it indicates that certain types of development such as low- to medium-cost housing can be pro- moted to achieve broader social objectives without jeopardizing the fiscal position of the community. Relationship of Fiscal Impact Analysis to Fiscal and Exclusionary Zoning Many critics of cost-revenue analysis have suggested that it should not be utilized as a planning tool because of its potential to be used for exclusionary purposes, largely by presenting improperly pre- pared study results in a mystical air of numerical objectivity. Or, as Roberts suggests, it should not be used because "fiscal impact criteria strongly bias local governments to exclude moderate and lower income 46 Because there is the potential for this tool to be used in persons." this improper fashion, education of potential users of fiscal impact analysis is probably the most effective way to carry this message, short of totally abandoning the use of fiscal impact analysis. Thus, it is hoped the next couple of pages will effectively stimulate the social conscience of prospective fiscal impact analysts enough to examine both 51 the motives and results of fiscal impact studies that are improperly used to justify local exclusionary practices and to prevent similar future transgressions. Exclusionary zoning is a phrase used to describe the effect of various local land use controls, notably contained in zoning ordin- ances, in restricting or prohibiting the construction of residential dwellings for persons of low and moderate incomes, largely through regulations that increase the price of low and moderate income housing, in areas of demonstrated need for such housing, or in areas not accommo- dating their fair share of such housing. Six of the most common exclu- sionary devices used by communities are: (1) large minimum building size requirements, (2) prohibition of multiple dwellings, (3) prohibition of mobile homes, (4) restrictions on the number of permissible bedrooms in new dwelling units, (5) large lot width (frontage) requirements, and (6) large lot size requirements.47 When widely employed by suburban communities these devices effectively exclude, in particular, the poor, the elderly, and non-whites from opportunities for new homes, jobs, schools, and a chance to participate in the suburban lifestyle so often coveted. Exclusionary zoning is often practiced to prevent these groups from enjoying these opportunities because suburbanites feel their pro- perty taxes, jobs, schools and way of life will be jeopardized if their doors are open. Fiscal zoning is related to exclusionary zoning in that it can be used to protect or enhance the local tax base at the expense of pro- viding opportunities to those of low and moderate incomes. When large areas of a community are zoned for nonresidential land uses, it serves 52 to both avoid the additional public expenditures for sewers, streets and schools that would be incurred if the area developed as residences while, at the same time, speculating for that golden commercial goose whose large tax payments relative to service demands may help ease the local tax burden.48 Unfortunately, current laws require communities to rely on local property taxes thereby providing a definite incentive for communities to engage in fiscal zoning practices. Because fiscal and exclusionary zoning practices have the effect of reducing opportunity for those of low and moderate incomes, socially conscious planners must help take part in eliminating them and preventing future abuses. And, since fiscal impact analysis can be utilized to purportedly prove that an exclusionary policy was necessary for a community's fiscal viability, planners must also cast a critical eye at its application in this type of setting. However, if a properly prepared fiscal impact study does show the community will experience severely negative fiscal impacts from, in particular, a low income hous- ing project, then there is great likelihood the community is suffering from a multitude of fiscal woes, and their opposition is misplaced as more basic changes in their fiscal structure are necessary. More likely, however, improperly prepared studies could be presented (which show negative fiscal impacts) if the scope of the study was too narrow, by either not calculating impacts on all local services or by not including all revenues. Additionally, as has been emphasized, improperly relying solely on fiscal impact analysis without examining natural, social, economic and other environmental impacts (of not just this one develop- ment, but all developments taking place in a corrmunity over a period of 53 time) distorts the true relationship of proposed development and its impact on the community. A more positive thought, however, is that if properly prepared fiscal impact studies were to show in community after community that particular types of development, such as low-income housing, did result in severe and continuing negative fiscal impacts, then the basis for legislative reform and development of both mitigating and incentive programs would be established. It is possible that instead of being used to improperly justify local exclusionary programs, fiscal impact analysis could either expose the falsity of improper studies or the existence of a real dilenma in need of reform. However, until such time as either of these circumstances occurs, communities should remember Mount Laurel and the court's decree of the impropriety of exclusionary zoning. Franklin, Falk, and Levin of the Potomac Institute, have prepared In Zoning: A Guide for Policy Makers on Inclusionarnyand Use Programs. This book argues that communities need to initiate inclusion- ary land use programs. An inclusionary program must: (1) insure a sufficient supply of adequate, well-located land for housing low and moderate income persons; (2) avoid creating conditions resulting in excessive housing costs; (3) include a clear public policy statement regarding the desire to accommodate a reasonable amount of housing development for low and moderate income housing, in a certain volume, according to a specified schedule, and in particular locations.49 Fis- cal impact analysis can be of usefulness in the creation of these 54 programs by evaluating the fiscal impacts of acceptable alternative sites that have low public service costs and which are affordable for low-income housing. It can be useful in monitoring new development in a manner that provides for a continual record of the fiscal balance of all new development occurring in a community so that from a fiscal pers- pective the amount of excess revenues over expenditures from development with high tax ratables can be used to offset "losses" from development which requires public subsidy and which may or may not be housing for low or moderate income persons. Thus, fiscal impact analysis can play an important part in the development of inclusionary land use programs in a community. At the same time, well informed fiscal impact analysts can properly utilize valid cost-revenue analysis techniques to expose inaccurately prepared studies and improperly applied results. This thesis is written, in part, to provide the prospective fiscal impact analyst with the kind of funda— mental information necessary to do these things. Chapter Summary This chapter has presented basic information about fiscal impact analysis in order to establish an adequate foundation for more substantive discussions in the chapters that follow. The highlights of this material are summarized below. Cost-revenue analysis, as used in this study, is defined as an analytical procedure for estimating the public costs and revenues associated with public or private land development decisions. The chap- ter examined why and how fiscal impact analysis is used; it examined 55 what the relationship between cost-revenue analysis and the planning process is and could be; and it presented a discussion on common criti- cisms of cost-revenue analysis. Cost-revenue analysis was contrasted with three similar analytic techniques (cost-benefit analysis, cost-effectiveness analysis, and p1anning-programming-budgeting systems) in order to more clearly establish its scope and usefulness as a method for calculating the direct fiscal impacts of development. It was noted that the underlying reason for evaluating the fiscal impact of development alternatives is to discover whether or not they will seriously affect the existing and future fiscal structure of the community and, if they will, to determine what mitigating steps are necessary to minimize any negative fiscal impact. Thus, cost-revenue analysis provides systematic and objective information on the direct fiscal impacts of development that is useful to decision-makers as an aid in making development-related policy deci- sions. It was noted that conventional land use planning texts empha- size the utility of cost-revenue studies in the preparation of community plans, but an even more widespread contemporary application is in the evaluation of particular (smaller scale) development alternatives. These uses of fiscal impact analysis have considerable potential for broader application within the coordinated growth management systems being established in communities throughout the country. Evidence from local, state and federal levels of government was presented to support the contention that the need for and desirability of performing impact 56 analyses or development alternatives, particularly fiscal, are widely acknowledged today. A discussion of common criticisms of fiscal impact analysis was presented which included examining practical and methodological criticisms and criticisms of the tool as it is applied. An article by Polly Roberts was evaluated as a representative article that criticized more than praised the use of cost-revenue analysis. Both valid and non- valid criticisms were identified and discussed. Notably this discussion acknowledged the need for further research into ways to improve current cost-revenue methodologies and to more precisely define the accuracy of techniques currently in use. Material was also presented to illustrate that the use of cost-revenue analysis as simple decision rules, that is "New growth must pay its own way," is neither an appropriate question nor reason for using fiscal impact analysis because many other issues are involved. The New Jersey Supreme Court invalidated a local commun- ity's attempt to exclude when the community argued new development must pay its own way. Finally, the last section of the chapter identified and discussed fiscal and exclusionary zoning practices. This discussion focused on how fiscal impact analysis could be improperly used as justi- fication for local exclusionary practices and that such applications were both improper and deplorable, especially since the tool can be positively applied to help indicate how to best accommodate inclusionary land use programs in a jurisdiction. 57 CHAPTER 2 Ixauauazaa 1Thomas Muller, Fiscal Impacts of Land Development: A Critigue gg7M§thod51and Review of Issues (WaShington, D.C.: *The‘UrbanFInSEItute, 5 , p. . 2Ibid., p. 3. 3Dean Runyan, "Tools for Community- Managed Impact Assessment," Journal of the American Institute of Planners, 43 (April, 1977), 130. 41bid., p. 130. 5Polly Roberts, "Making Dollars and Sense Out of Fiscal Impact Analysis," ASPO Planning, 42 (August, 1976), 20. 6Consad Research Corporation, Guidelines for a Regional PPBS (Pittsburgh: Consad Research Corporation, 1968), p. 2. 6. 7Center for Urban Policy Research, Rutgers University, and Barton- Aschman Associates, Inc... Cost- Revenue Methods for Land Use Impact Analysis (New Brunswick: Center for Urban PoTicy ResearCh). Draft chap- ter prepared in December, 1975 entitled "The Geographical and Substantive Bounds of Cost-Revenue Practice," p. 1. 8James E. Frank, Fiscal Impact Research Project, Vol. 1: Report on First Generation Model Development*(Tallahassee,‘Florida: Department of Urban and Regional Planning, Florida State University, 1976),p p. 1.1. For a fuller discussion of this issue, see William K. Reilly, ed., The Use of Land: A Citizens' Policy_Guide to Urban Growth (New York: Thamas Y. Crowell Co. ., |§73), Chapter‘l TChallenging the Ideal of Growth. A New Mood in America," pp. 33- 73. 9Gruen, Gruen and Associates, The Impacts of Growth: An Ana- lytical Framework and Fiscal Example (Berkeley, Calif.: California Better Housing Foundation, Inc., 1972), p. 1. 10Connecticut Development Group, Inc, and Research Corp. of Connecticut, Cost-Revenue Impact Analysis for Residential Developments (Washington, D. C: Department of Housing and Urban Development, July, 1974 , p 3 1]David Williams and Earl Finkler, "Containing Growth Does Save Money," ASPO Plannjpg, 41 (January, 1975), 10. 12Shirley F. Weiss, "Land Use Studies," in Principles and Prac- tices of Urban Planning, ed. William I. Goodman and Eric C. Freund 58 (Washington, D.C.: International City Managers' Association, 1968), p. 107. 13 14F. Stuart Chapin, Jr., Urban Land Use Planning, 2nd ed. (Urbana, 111.: University of Illinois Press, 1965), p. 367. 15Ibid., p. 256. '51bid., p. 322. '7Ibid., p. 329. 18Ibid., p. 329. Alan Black, "The Comprehensive Plan," Ibid., p. 378. 19Michael Levin and Mark Wyckoff, User's Handbook to the Urban Development_gost-Revenue Model: A Fiscal Impact Model (Lansing, Mich.: TTW-County Regional Planning Commission, 1976), pp. 2-27. 20Duncan & Jones Urban and Environmental Planning Consultants, Fiscal Impact Study for the County of Spcramentgg_Volume 2: Guidelines for Implementing the Sacramento County Economic/Fiscal Impact Assessment Process (Sacramento, Calif: Community Development and Environmental Pro- tection Agency of the County of Sacramento, 1975), p. 7. 2'Ibid., p. 3. 22Randall W. Scott, ed. Management & Control of Growth: Issues, Techni ues Problems Trends, 3 Vols. (Nashihgton,‘D.Ci: The Urban’Land' Institute, 1975), Vol. I: "An Introduction and Summary," by Randall W. Scott, p. 4. 23Susan Redlich, Guiding Growth: A Handbook for New Hampshire Townspeople, 3rd ed. (Concord, N. H.: Society for the Protection of'New Hampshire Forests, 1975), p. 32. 24Hillsborough County Planning Commission, Managing Urban Growth: A Review of Current Techniques (Tampa, Fla.: Hillsborough County P1anning CommTESion, 1974), p. 1. 25Pennsylvania Land Policy Project, Apland Use Strategy for Pennsylvania:r,A Fair Chance for the “faire land" of William Penn (Pitts- burgh, Pa.: Pennsylvania Off1ce of State Planning and Development, 1975), p. 77. 26Council on Environmental Quality, Environmental Quality - 1974: Fifth Annual Report (Washington, D.C.: U.S.G.P. ., 1974), p. 26. 27 Roberts, Ibid., p. 19. 59 28Ibid., p. 19. 29 3o 31 See Footnote 13 in Chapter 3. Roberts, op. cit., p. 20. Ibid., p. 20. 32Ibid., p. 19. 33See for example, James E. Frank, Fiscal Impact Research Project, Vol. 1: Report on First Generation ModellDevelopment‘(Talla- hassee, Fla.: Department of Urban and Regional Planning, Florida State University, 1976), p. 1.3. 34See for example, Bruce W. Hamilton's article "Property Taxa- tion's Incentive to Fiscal Zoning," in Property Tax Reform, edited by George E. Peterson (Washington, D.C.: The urban Institute, 1973), pp. 125-139. 35Roberts. Ibid., p. 21. Also, to her credit, Ms. Roberts does offer some alternatives to financing services by the property tax, see p. 21. 351 id., p. 21. 37See for example, the following two cost-revenue studies which are improperly referred to as cost-benefit studies: Northern Virginia Planning District Commission, An Approach to Financial Benefit-Cost Analy- sis (Falls Church, Va.: Northern Virginia Planning District Commission, 1975), and City of Tucson Planning Division, Cost-Revenue Analysis by Land Use Zone (Tucson, Ariz.: City of Tucson Planning Division, 1974). While this later study is titled a cost-revenue study, it refers con- stantly to cost-benefit analysis and cost-benefit ratios while inconspic- uously defining benefits solely "as the revenues or value received from the services produced," p. 6. 38Roberts, Ibid., p. 20. 39McDonald & Smart, Inc., Fiscal Impact Study for the County of Sacramento: Volume 1 (Sacramento, Calif.: Community Development and Environmental Protection Agency of the County of Sacramento, 1975), p. 34. 4OAngus N. McDonald, Economic Impact and Allocating Environ- mental Costs: The When, How and Why of Economic Impact Analysis (San Francisco: McDonald & Smart, Inc., 1974), p. 11. 4'Ibid., p. 14. 6O 42Herbert M. Franklin, David Falk and Arthur J. Levin, lg: Zoning: A Guide for Policy Makers on Inclusionary Land Use Programs TWaShington, D.C.: The Potomac Institute, 1974), p. 211. 43Robert J. Dunham, Approaches to Fiscal Impact Analysis (New- port Beach, Calif.: Ashley Economic Services, Inc., 1974), p. 32. 44Barton-Aschman Associates, Inc., The Barrington, Illinois Area Cost-Revenue Analysis of Land Use Alternatives (Chicago, 111.: Barton-Aschman Associates, Inc., 1970), p. 56. 45Barton-Aschman Associates, Inc., The Barrington, Illinois Area Phase 2: Evaluation of Growth and Governmental Alternatives (Chicago, 111.: Barton-Aschman Associates, Inc., 1970), p. 80. 46 47Norman Williams, Jr. and Thomas Norman, "Exclusionary Land Use Controls: The Case of Northeastern New Jersey" in Land Use Controls: Present Problems and Future Reform, ed. by David Listobin (New Brunswick, Y12J1l3 Center for Urban Policy Research, Rutgers University, 1974), pp. Roberts, Ibid., p. 19. 48American Society of Planning Officials; Research Report No. 2: Problems of Zoning and Land Use Regulations (Washington, D.C.: ASPO for National Commission on Urban Problems, 1968), p. 69. 49Franklin, Falk, Levin, Ibid., various pages. CHAPTER 3 A TYPOLOGY OF THE PRINCIPAL STUDY TYPES AND METHODOLOGICAL APPROACHES USED IN FISCAL IMPACT ANALYSIS Introduction Chapter Purpose This chapter reviews contemporary literature on cost-revenue analysis in order to present a typology of the principal cost-revenue study types and methodological approaches most frequently utilized by fiscal impact analysts. The typology presented draws heavily from prom- 1 inent studies prepared by Mace, Muller,2 and a joint study currently underway by The Center for Urban Policy Research, Rutgers University and Barton-Aschman Associates, Inc.3 The principal purposes for creating this typology are: (1) to acquaint the reader with fundamental informa- tion concerning the principal types of studies and the basic character- istics of the principal methodologies used in fiscal impact analysis, and (2) to create the foundation for the Fiscal Impact Analysis Frame- work to be presented in Chapter 4. Outline of Chapter Contents This chapter is divided into two major parts. The first part discusses why a typology of cost-revenue studies and methodologies is created; describes the scope of the typology by qualifying some possible 61 62 unintended implcations; creates a setting for the typology by examining the historical perspective of past cost-revenue literature; describes the two principal organizing dimensions of the typology; and presents the typology. The second part of the chapter identifies and discusses the basic characteristics of cost-revenue methodologies. These characteris- tics include their scope of application, data requirements, resource requirements, assumptions, limitations and accuracy. Other common issues related to the application of cost-revenue methodologies are also dis- cussed before the chapter closes with a brief summary. Establishing A Typology of Cost-Revenue Analyses Establishing A Typology: Purpose and Cautions A typology of cost-revenue study types and methodologies, which classifies the field of cost-revenue analysis according to basic charac- teristics, is presented in this chapter for the following reasons: (1) to organize a large amount of material in a manner that makes communica- tion simpler and more precise; (2) to provide a framework for comparison and further analysis; and (3) to establish uniform terms and definitions for the analysis and discussion used in the remainder of this thesis. However, a potential problem with any typology is the tendency for the reader to presume it is either comprehensive or that its' components are indicative of a particular level of acceptable methodological quality, or both. In the case of the typology that follows, neither of these presumptions is correct. First, this typology is founded upon analyses performed by other prominent researchers of the field of cost-revenue 63 analysis; it is not based upon a complete or independent survey and analysis of all the literature in the field by this author, for that is outside the scope of this study.4 Secondly, since the typology is created around the two princi- pal dimensions of existing fiscal impact work--(l) study types and (2) methodologies--its focus is identification of the principal methodologies currently employed with particular study types. There is no intention for this typology to be read as implying that there is a best methodology for a particular study or application of cost-revenue analysis. Such an analysis is another study in and of itself. Instead, by presenting what is currently being done in the field, and then examining some of the characteristics and limitations of particular approaches, the reader should be able to develop some understanding as to whether a particular methodology will meet his or her study needs. This stance recognizes the variety of local cost-revenue applications and leaves ample latitude for innovative application of current fiscal impact techniques. Besides, as will become apparent, the choice of a particular methodology will often depend more on local data availability, time, technical resources and the ability to interpret and properly apply study results, than on the assets or liabilities of a particular technique. Historical Perspective While there have been untold thousands of cost-revenue studies performed since governments became concerned about where the fiscal resources for public services would come from, we are concerned in this instance only with those studies and techniques utilized since the 1930's 64 in the United States. And yet, even within this large time span, the history is not as complicated as might be expected. A review of cost- revenue literature reveals only two published, and one about-to-be- published, studies that attempt in any systematic fashion to review, analyze, classify and describe the field. The most recent of these studies is nearing completion, and its focus is the application of contemporary techniques for performing fiscal impact analysis.5 The first of these studies was undertaken by Ruth Mace while a graduate student at the University of North Carolina at Chapel Hill. Her research was published in 1961, and it is titled Municipal Cost- Revenue Research in the United States: A Critical Survey of Research to Measure Municipal Costs and Revenues in Relation to Land Uses and Areas: 1933-1960.6 This research is noteworthy because it adequately documents the kinds of studies and techniques that have lead to the development of today's methodologies.7 Mace's book examines many kinds of cost-revenue studies includ- ing some performed on slum projects, on suburban development and servicing problems, on annexation proposals, and some metropolitan and cross-city comparison studies. She analyzed the similarities between the results of like studies; she investigated the principal methodological approaches employed; she identified significant limitations of some of the studies; and she offered some insightful forecasts with regard to future applica- tions of cost-revenue analysis. Some of her conclusions will be refer- enced in the pages that follow. From our perspective today, her contribu- tion is particularly useful in that her study documented pre-1960 applications of cost-revenue analysis sufficiently well to allow ambitious 65 contemporary researchers to merely update cost-revenue applications since 1960. However, no one has systematically attempted to do this. Instead, recent efforts to determine the current state-of-the-art have looked less at the kinds of applications of cost-revenue methodologies being made and more at the various methodologies being employed. Despite research cur- rently underway, as described below, not enough effort is being focused on determining the accuracy of the results obtained from fiscal impact studies performed in the years since Mace's study. Even a cursory investigation of various cost-revenue biblio- graphies reveals, however, that after Mace's study fiscal impact analysis was not widely applied during the sixties, with very few significant advances in methodologies during this period. However, with the Barring- ton studies in 1968-1970,8 and with the advent of the environmental impact statement stimulating our subsequent impact consciousness, fiscal impact studies became more frequent again. Since 1973, about the time of the publication of ASPO's Planning Advisory Report No. 294, describing Munies'The Municipal Impact Evaluation System: Computer-Assisted Cost/ Revenge Analysis of Urban Development,9 there has been a virtual flood of both project-related fiscal impact studies and the development of cost-revenue model methodologies. These models are often computerized, thus providing the means to evaluate many projects using the same tech- niques. In January of 1974, the Urban Institute and The Office of Policy Development and Research of the U.S. Department of Housing and Urban Development sponsored a small conference at which many contemporary 66 fiscal impact studies were presented and discussed. Thomas Muller of the Urban Institute, himself a noted fiscal impact analyst and author of many cost-revenue studies, then undertook the task of concisely attempting to identify the state-of-the-art in a book entitled, fjgggl_ Impacts of Land Development: A Critique of Methods and Review of 10 Issues. This report was part of a broader research effort (one of several reports) on state and local government evaluation of land development, also prepared under HUD and Urban Institute sponsorship.n In April, 1974 the landmark study, The Costs oflSprawl, appeared. It was prepared by Real Estate Research Corporation for HUD, EPA, and CEO.12 This study dramatically illustrated the high costs of sprawled development patterns relative to more compact forms. Currently, HUD is sponsoring a research study jointly being prepared by the Center for Urban Policy Research at Rutgers University and Barton-Aschman Associates, Inc. of Evanston, Illinois (hereafter referred to as the Rutgers-BAA study). This two-year study, slated to be completed in the fall of 1977, will truly establish the current state- of—the-art and focuses not only on the applications, methodologies, limitations and prospects for fiscal impact analysis, but also notably examines: the legal status for its application in all fifty of these United States; presents detailed household survey data on some of the more difficult American households to project service needs for (such as the elderly, mobile home dwellers, and seasonal home residents); and it will present the results of several detailed re-analyses of the gptggl_ cost-revenue impacts of various land use projects that were projected by 67 fiscal impact studies prepared several years earlier. It is hoped these re-analyses will provide an indication of the accuracy of the original study projections and, hopefully, will shed some more light on the limitations of particular cost-revenue methodologies. A major portion of the funding for this joint project is for the dissemination of the study results through the preparation of a user's handbook and for con- ducting regional training workshops on the use of fiscal impact analysis throughout the United States. This effort is truly laudatory and should be of significant practical utility to planners across the country.13 Two Principal Organizing Dimensions of the Cost-Revenue Typology The principal study types and methodological approaches employed in fiscal impact analysis are the two basic organizing dimensions used to develop the typology described in this section. Each dimension is discussed separately. With the availability of the two recent state-of- the-art studies mentioned in the preceding section, the task of creating a typology becomes one of analysis and synthesis of the findings of these two studies, as supplemented by the writer's own experience. Each study has its strong points, notably Muller's work serves as the more compre- hensive summary of various study types and methodologies, while the Rutgers-BAA study is more detailed with regard to those methodologies it addresses. Principal Study lypes There are many ways to classify the types of studies that have applied one or more fiscal impact techniques to project costs and revenues 68 of development. Nearly any scheme will have some elements that could be classified under one or more of the categories selected. Listed below are seven general types of fiscal impact studies that are currently applied in American communities. A fuller description, and illustrative references to studies representative of each study type, is found in the Appendix. The study types are organized under two categories: (1) as they are utilized by individual communities and (2) as they are utilized in comparative analyses of studies or impacts between communities. The distinction between these categories is related more to who is performing the study and for what purpose than any other reason. The first category of users rely on fiscal impact analysis as an aid in local decision-making, while the second category of users takes a more academic and multi- jurisdictional policy interest in cross-community comparisons and inter- community fiscal flows. The five categories of principal cost-revenue study types frequently utilized in individual communities include the application of cost-revenue methodologies: 1. To evaluate community community PLANS such as: metropolitan area development plans; future land use plans; sector, corridor or neighbor- hood plans; or zoning plans. 2. To evaluate specific PROJECTS such as proposals for new residential, commercial, or industrial developments prior to granting approval for subdividing or rezoning; redevelopment projects; publicly-assisted housing projects; alternative hypothetical projects; or specific projects requiring fiscal impact analysis as part of an environmental impact analysis. 69 To assist in the preparation of FINANCING or BUDGETING programs such as a community's capital improvements plan, its coming-year program budgets, or a special financing program for a short-term service like emergency facility repairs necessary because of a local disaster. To determine AREA SPECIFIC SERVICE COSTS AND REVENUES such as from a neighborhood that is currently developed, or alternatively from an area proposed for annexation. Generally, the flow of funds from one area in the community to another is the focus of these studies. To evaluate a proposed new POLICY or LEGISLATIVE ACT that may have both land use and fiscal impacts on the community. This could be something as narrow as a tax abatement request, or an open space program, or as broad as an analysis of alternative development pat- terns for the community. The two categories of principal cost-revenue study types frequently utilized in comparative analyses of impacts between communities include the application of cost-revenue methodologies: To evaluate REGIONAL or INTERJURISDICTIONAL FISCAL FLOWS such as the servicing costs and revenues associated with existing living patterns (bedroom suburban residents vs. central city residents) or proposed projects, plans or programs whose fiscal impacts have a measurable effect on the cost-revenue balance of many adjacent communities. To compare costs and revenues for providing similar services across a number of communities, these CROSS-CITY comparative studies are often based on commonly derived measurement variables such as per capita revenues or expenditures and focus on fiscal variations 70 between communities, especially with regard to size and growth rates. These studies may also serve as supporting information in OPTIMAL CITY SIZE studies. By far the greatest number of cost-revenue studies are of the second type, project reviews. Plan analyses and annexation studies com- pose the next largest number of studies. Systematic comparative analy- ses, specific policy or legislative analyses, and financing or budgeting applications at the local level, probably account for the least utilized systematic applications of cost-revenue techniques. However, on a rela- tive basis, this latter group of studies probably will be making the largest gain in application as use of fiscal impact tools becomes more widespread, as improvements in the techniques are made, and as the local electorate demands more quantitative rationality in decision-making. Principal Methodologies Muller has identified eleven principal cost allocation method- ologies, or techniques, commonly utilized in fiscal impact analysis. Four of these and one other are discussed at great length in the Rutgers- BAA study. These techniques are the methods by which the public costs and the revenues associated with land development are frequently projected. Some of the methods rely on direct calculation of cost-revenue impacts, while others depend upon proxies (assumed relationships between demand for services and actual services provided) or upon the analysis of similar cost-revenue data from a number of communities. These principal cost allocation techniques are listed in Table l which follows.14 71 Table 1: Principal cost-allocation methodologies as identified by two prominent research studies. Mul 1 er1 Rutgers-BAA S tudy:z Also known as Community Standards .............. Service Standards Tech- nique Demographic Patterns ............. Residential Multiplier Technique Income Patterns4 Other Household Character- istics Assess Value Tech- nique Estimates by Local Officials ............. Case Study Technique Accountants Approach Time-Series Analysis Cross-Sectional Analysis ........... Cross-City Technique Fiscal Flow Econometric Methods Share A location Tech- nique Notes 1As identified by Muller in Fiscal Impacts of Land Development: A Critique of Methods and Review of Issues (Washington, D.C.: The Urban Institute, 1975). 2As identified in draft working papers prepared by Center for Urban Policy Research, Rutgers University and Barton-Aschman Associates, Inc. as part of a larger research effort entitled Cost-Revenue Methods for Land Use Impact Analysis (New Brunswick, N. J.: Center forlUrban Policy ResearCh, Rutgers University, December, 1975 and July, 1976). 3Muller does not identify this as a separate technique though he uses it himself in a number of studies and refers to it several times in 72 Table 1 (continued) Fiscal Impacts of Land Development. As it has been addressed at length in the Rutgers-BAA study, it is included in the typology. 4The two categories ("Income Patterns" and "Other Household Characteris- tics“) are really subsets of Muller's "Demographic Patterns" and will not be discussed separately in the pages that follow. See Muller, fig: cal Impacts of Land Development, pp. 8-9. 5This technique merely allocates additional expenditures for the antici- pated new population according to the present per capita cost of services in the community. Thus, if a development generates 20 percent of the total new population over a period it is assigned 20 percent of the new cost for services. However, this technique is so unreliable as to be unworthy of further discussion. As Muller puts it, "The share alloca- tion technique has some virtue when used for comparative purposes but it remains unsatisfactory as the basis for projecting the costs of growth," p. 7. Fiscal Impacts of Land Development. 73 Nine of these techniques can be considered principal cost allocation methodologies and are used in the fiscal impact analysis typology created in this chapter. One paragraph summaries of each of these methods is presented in the next few pages. A more detailed sum- mary of each methodology can be found in the Appendix. Community Standards Methods: This category of techniques applies standards for the provision of community services to variables representing projected development service demand, in order to estimate the total new demand for public services. This demand is then multiplied by the cost per unit of various services, to produce an estimate of total new service costs generated by the proposed development. This approach is widely used, has few data requirements, and can be reasonably accurate in projecting residential fiscal impacts. However, it is not sensitive to marginal cost considera- tions since it is an average cost approach. Demographic Patterns and Residential Multiplier Techniques: This category of techniques relies upon identifying the service demands of different demographic groups. Usually indicators of the demand are compiled at the household level, although less sophisticated attempts merely reflect service costs per capita. By consulting tables that indi- cate, for example, the number of school-age children and adults that live in particular housing types, and then multiplying this data by tables which reflect particular service costs per household, the analyst is easily able to estimate new public service costs to be generated by 74 residential development. However, this approach is not applicable to the projection of nonresidential development and is not sensitive to marginal cost considerations. Assessed Valuation and Tax Base Allocation Techniques: These techniques assume that local expenditures will rise proportional to the increase in local assessed valuation that comes as a result of new development, and that existing community expenditures can be allocated between residential and nonresidential land uses accord- ing to their respective proportions of the local tax base. While these are simplistic assumptions that clearly are not acceptable in every situ- ation, these techniques are widely used. This is because they provide an easy method for projecting future public service costs for nonresiden~ tial development and, generally speaking, only the case study approach is better able to do that. Consequently, these techniques are used most often in conjunction with community standards and residential multiplier techniques. Case Study Approaches: Unlike previously mentioned techniques, case study approaches are characterized more for their flexibility and lack of a prescribed and consistent methodology than for their rigidity and conceptual sim- plicity. These techniques commonly involve the use of extensive local data collection and analysis of the existing capacity situation for each local service. Much of this data is collected through intreviews with the local officials responsible for each service under study. In this 75 way, the short term marginal costs of new development on each service system are explicitly identified and calculated. Often these costs are described not just at the level of total new costs and revenues, but at a more refined level including such information as the number of new employees to be hired, feet of sewer line to be added, and cost of employee benefits. Frequently, a variety of fiscal impact techniques are used to estimate costs for particular services; consequently, the quality of these studies varies greatly, depending largely upon the ability of the analyst and the accuracy of the data obtained from local officials. Accountants Approach: The accountants approach involves the careful analysis of a community's annual budget to identify service cost increases that are directly the result of new population growth in the community during the last year. The principal assumption is that if new development has increased community service costs, then those costs will be revealed in the community's line-by-line budgets. However, this approach is of limited utility since future costs are not projected and the fiscal impacts of various land use types are not identified. It is, however, a useful technique for establishing the base year fiscal condition of a community. Time-Series Approach: The time-series approach requires the analyst to examine com- munity audits for a number of past years and then, based on a statistical examination of changes in service costs over the analysis period, future 76 service costs are projected. Future service costs then are presumed to change according to their rates of change in the past. However, signifi- cant changes in revenue sources, provision of new local services, or a variance in the rates of growth will significantly affect these projec- tions. This technique is not useful for individual project review. It is most applicable at the community scale, and reveals important facts about fiscal changes in local revenues and services. Cross-Sectional Approach: The cross-sectional approach depends upon an examination of statistical relationships of various per capita cost and revenue dif- ferences between a number of communities with similar sizes and growth rates, in order to develop expenditure multipliers, which, when multi- plied by a projected population increase, will yield the projected expenditures for a new population in a community. A major limitation with this approach is that the municipal audits of many communities are not uniform, requiring analysts to use great care in making any statis- tical comparisons. This technique is useful for providing some indica- tion of the various levels of costs and revenues associated with different community sizes and growth rates. Ultimately, these studies may provide some information about the most efficient community sizes and growth rates. Fiscal Flow Approach: This technique is often used in annexation studies to determine the net flow of revenues and expenditures between the existing community and the territory proposed for annexation. Similar to the case study 77 technique and often relying upon a variety of cost-revenue methodologies, these approaches concentrate on short-term fiscal impact projections. A major difference between this technique and many others is that the existing service costs of an area or neighborhood must be determined, whereas most cost-revenue techniques deal with projecting future costs based on estimated demand for service in an area not as yet developed. Econometric Methods: The "Cadillac" of fiscal impact methodologies, econometric techniques depend upon extensive statistical analysis of demand and supply variables involved in local service provision. These relationships are computerized and detailed characteristics of new land development can then be utilized to project new future public service costs and revenues. A major difference between this technique and other cost-revenue method- ologies is that demand variables are directly calculated and few assump- tions have to be made about whether the variables used accurately reflect demand, unlike most approaches which rely upon proxies of service demand. However, the high cost for development and maintenance of these approaches inhibits their widespread use. Current models concentrate more on projecting future public budgets than fiscal impacts of land development, but some attention is being turned in this direction. A Fiscal Impact Analysis Typology Table 2, on the page that follows, illustrates the nine principal methodologies currently utilized to project fiscal impacts for the seven principal study types identified in the two previous sections. The table 7E3 .onxu Auaum mxca .moaaxccooa ouxaou con mom: xpco n a saw: new: eoumo mx uocuoe wash u xx .paxu suspm m_;p .paxp xenon mac» xxx: cu_x van: apucoaaoc» mx uoguoe mxzh u xxx no”: xxpoeoxmauuo we oceans mxch u x. . x x moozxmz oxxhuxozoum xx x xx xuo=hm um ommmmmm< mmaoxzxumx amxxaxxnzz x xx x xx xx xx 4oa cape muxm .mcoxa Louxccou mmxo04oooxxmz —aco_uowumxc ooaam :mao ammuzmx \ucoEocoE< mcxcoN - \Louumm .mco_a zoxho« eoxm_>xun=m om: econ mcspzu bmou Pucoxmmm io>ocaex Pupxaau mum>4xh<4mxom4 muzzm>mm mzxxmwozm immomu mzoxm 4u~4oa \mpmoo mu~>mum \wzHuzwucx cw vow—ma< m< so o>xumcaaeou cw cmwxaq< m< . zo~hm omxuxmmh >o=hm uszm>mmihmou .xuo—oaxu mxmmxoeu poses? Paomxu .N u—aoh 79 is not meant to indicate that a particular methodology is best utilized for a particular study type, or vice versa; it simply indicates, in a general fashion, the most frequent application of each technique. Table 2 is read as indicated by the example below: Fiscal impact evaluation of particular PROJECTS is occasionally to frequently performed with all but FISCAL FLOW techniques employed in the calculations. A FISCAL FLOW approach, on the other hand, is often employed in AREA SPECIFIC and FISCAL FLOW studies and only occasionally in specific POLICY and LEGISLA- TIVE studies. While certainly not rigorously scientific or definitive, this table does indicate those cost allocation methodologies which most fre- quently are applied in various cost-revenue studies. The first four techniques, community standards, residential multiplier, assessed valua- tion and case study techniques, are the most frequently applied; while econometric techniques are least applied and least developed. It should be noted that complex cost-revenue studies utilize more than one method- ology in the fiscal impact analysis, usually to more specifically or more accurately project fiscal impacts. In fact, very few studies, even very simple ones, utilize only one cost allocation technique.15 Basic Characteristics of Principal Cost-Revenue Methodologies Introduction The remainder of this chapter is divided into three principal sections. The first section discusses basic allocation principles that 8O underlie the creation and use of cost-revenue methodologies. It provides valuable background information for subsequent discussions regarding especially the limitations and accuracy of various cost-revenue method- ologies. The second section identifies and describes six general charac- teristics common to all cost allocation methodologies. These character- istics are: (1) scope of application, (2) data requirements, (3) resource requirements, (4) assumptions, (5) limitations, and (6) accuracy. Com- parisons of each cost-revenue methodology to this set of general charac- teristics help to make more apparent and understandable the difference between methodologies. These general characteristics are also used as the basis for an important portion of the fiscal impact analysis framework created in the following chapter. The last section of this chapter pre- sents background information on other common issues associated with the application of cost-revenue methodologies. Two Basic Cost Allocation Principles Two basic cost allocation principles are the use of proxies in place of actual demand measures and the allocation of municipal service costs according to concepts of service use and ability to pay. Cost allocation principles are those theoretical relationships used by fiscal impact analysts to allocate or distribute either all or a portion of total projected service costs based upon an estimated demand generator or able provider. Importantly, these costs are usually allocated to various land use types based upon an estimate of service demand. This process raises such allocation problems as which service costs and what share of these costs are to be allocated to the new development; which 81 costs are assigned to various land use types; and which are assigned to present and future taxpayers? Most cost allocation techniques rely on indirect measures of service demand, or proxies in order to make these estimates. For example, a PUD with both residential and commercial com- ponents will generate a total of X amount of new traffic on the roadway system. This total new traffic (X) will come partially from the resi- dential portion of the development (Y) and partially from the commercial portion (Z). To say that all new roadway costs associated with the increased traffic generated by the PUD (X) is equal to (Y) and (Z) requires allocating these costs to the residential and commercial por- tions of the development based on a measure roadway use (in this case, traffic--this presumes it is measured or projected by traffic generation equations). However, traffic generation is merely used here as a proxy for increased roadway expenditures. It may be that the actual roadway costs are related to factors other than traffic from the PUD such as: another new shopping center down the road; heavier vehicles supplying the commercial area (thus, tearing up the roads more); increased use by non-PUD residents (the PUD residents may walk instead of drive and, thus, would not be representative of the traffic generation indiceS); Poor roadway design that provided too many lanes or was overdesigned, thus "attracting" additional costs. However, all these other factors are not included in the allocation scheme as independent considerations. It is presumed the proxy is representative of the actual service demand and subsequent increased roadway expenditures. It should also be mentioned that generally traffic is one of the better proxies as it more often 82 than not does approximate actual service demand. In general, little conclusive research into the multitude of factors affecting service demand across the whole range of municipal services has been performed-- although more research into this area is beginning to surface.16 Consequently, all cost estimating techniques use some form of allocation method to apportion service costs to new development--even the most sophisticated econometric model to date cannot accommodate all multivariate service demand factors with continued high levels of accu- racy. The important point is that the analyst must recognize what allo- cating mechanisms are being used and, in particular, which proxies and then, based on an understanding of various cost-revenue methodologies, determine whether these approaches are the proper ones for use in that situation. If there is a way to assess the fiscal impact under another set of presumed conditions, this should be done as a test of the veracity of the previous set of projections. Many cost allocation methods are applied within a set of theore- tical relationships of service demand to service payment. One of the most commonly applied is Ruth Mace's concept of "services to people," "ser— 17 Mace vices to property“ and "services of community-wide benefit.“ used these terms to categorize municipal services into two groups so that allocation of projected service costs among land use types would be thereby facilitated. As she described this useful distinction, services to property include those functions and facilities that can be specifi- cally identified with the use of land, while she equated services to people with services of community-wide benefit, and described them as those activities of a conmunity-wide or general benefit nature, essential 83 whenever people live together.18 Services to property include local government services provided principally through the medium of pr0perty, such as police and fire protection, local streets, water and sewer systems, and storm drainage facilities. Services to people include services principally benefiting residential dwellers such as schools, public health and welfare, libraries, parks and recreation services. The Urban Development Cost-Revenue Model further distinguished services of community-wide benefit from services to people by putting major streets, regional parks and general government services into this cate- gory. It is important to recognize that this distinction between service beneficiaries is a practical aid in allocating service costs between residential and non-residential land uses. Furthermore, on the revenue side it should be apparent these distinctions resemble the classic municipal taxation distinction between tax types, which are based on either a "benefits received" or "ability-to-pay basis"; again, a means for allocating between land use types.19 This is just a cursory examination of two allocation principles that underlie various fiscal impact cost-estimating techniques. However, some of the more important allocation issues that remain are discussed in the next section of this chapter under the category of "Limitations of the Methodology." Specifically, remaining undiscussed allocation issues include: average vs. marginal cost analyses; excess service capacity; scale economy influences; and long-term vs. short-term con- siderations. How each of these issues is addressed by a particular fiscal impact technique depends upon 'the cost allocation scheme of that technique and, subsequently, will determine the analysis results. It 84 would be naive to assume that an allocation mechanism does not affect the projected fiscal impact--it does. As Muller notes, Two analysts, given the same data on a proposed development, may differ on the magnitude of the surplus or deficit, and they may even reach opposite conclusions as to whether a surplus or deficit is created. . . . The methods for deter- mining which local services should be allocated to new developments, and the share to be allocated, can have a substantial imBact on estimated expenditures associated with new projects. Basic Characteristics of Cost- Revenue Methodologies Returning to the focus of this section, we recall the purpose is to systematically describe the general characteristics of principal cost-revenue methodologies. There are six basic characteristics. They are listed in Table 3 which follows. Each characteristic is described in more detail in the remaining pages of this chapter. Table 3. Basic characteristics of principal cost-revenue methodologies. 1. Scope of application. 2. Data requirements: amount, type, availability, detail and acceptable substitutes (if any). 3. Resource requirements: notably monetary, manpower, user sophistica- tion and required lead time. 4. Assumptions of the methodology. 5. Limitations of the methodology. 6. Accuracy of the results. 85 Scope of Application: Each particular cost-revenue methodology was initially designed to project the fiscal consequences of land development on specific public service delivery systems. However, not all methodologies can be used in all service systems, nor are all allocation principles universally appli- cable across all techniques. Listed below are the principle elements of cost-revenue methodologies which in some way limit the scope of their application. Failure to recognize the scope of a particular methodology can result in much wasted effort or, worse, in erroneously interpreted results. Please note that, for a given methodology, an even finer classification could be prepared (e.g., listing each and every local service that a particular technique can be applied to), but for the pur- poses of this thesis such a distinction would not serve a useful purpose, as each level of specificity becomes more situation dependent. A particular cost-revenue methodology may or may not project fiscal impacts . . . (1) On an entire jurisdiction, including the municipality, school dis- trict, and any special districts. (2) Of a few, many or all revenues. (3) Of a few, many or all expenditures. (4) Of various types of gg§t§_including capital and operating costs; where the capital and operating costs may be variously treated (partially or totally included, or not separately projected). (5) Of various land use types; including separate projections for residential, non-residential (commercial and industrial) and 86 institutional properties, or these land use types may not be separately discussed and instead are lumped together. (6) In a sequential or cumulative manner, by presenting impacts either at year X, the final year impact, or by presenting impacts yearly, in a cash flow manner. (7) Of both a primary and secondary nature; including a few, many or all reasonable direct and indirect impacts. (8) Of a project specific nature or aggregated at the community level. Data Requirements: To a very great degree, the choice between cost-revenue method- ologies often depends not only upon the scope of a particular methodology but also upon the data and resource requirements of that methodology. The amount, detail and availability of the data necessary to utilize particular methodologies varies considerably between localities. Some methods require little data that is readily available in nearly all municipalities, such as data on the current assessed valuations of pro- perty, total number of local school children, or total number of dwelling units. However, other information, such as local fire calls by land use type, school children by dwelling type, or the public service costs of specific services in particular geographical areas may not be so readily available. A technique that requires detailed data that would have to be collected by survey or special study is obviously less likely to be utilized than one with more readily available data requirements, unless the accuracy of the former technique or the information returned is 87 sufficiently better or of such great importance that it warrants the additional costs (money, manpower, time) to gather it. Resource Requirements: A major local consideration that often constrains the use of more sophisticated cost-revenue methodologies is the resource requirements of a particular approach. These resource requirements include direct monetary costs, manpower requirements, user sophistication and the time available to conduct the study. Since any cost-revenue study will involve some staff time, the simpler the technique, the lower the staff costs. These expenses are often greater when cost-revenue techniques are infrequently utilized than if regularly employed, unless a uniform methodology is computerized and maintained. Computerization of a partic- ular technique, however, does not eliminate the need for hand calculation of any alternative methodologies which may be necessary if a slightly different application is sought. Directly related to this consideration is the ability, or sophistication, of the local planning staff with regard to municipal finance, local economic considerations and computer technology. Planners' weaknesses in these areas are notorious. Simpler methodologies are often employed merely because they are within the practical capabilities of the existing staff. Thus, more sophisticated efforts may require the assistance of planning and fiscal impact consultants. This is one area where regional or metropolitan planning staffs can have a significant positive influence in their efforts to assist local communities with their planning and development problems. By preparing and maintaining 88 a computer-assisted cost-revenue model and the staff capability to maintain the model and assist communities in its use, valuable local planning time and resources can be preserved.21 Of course, all too frequently the time available to make a study of the fiscal impacts of a given project or proposed policy is insufficient to do the kind of analysis that the problem deserves. Again, consequently, simpler methodologies are utilized that may not adequately reflect the true extent of the fiscal impact, or a study may not even be undertaken. In a world of increasingly ardent attempts to interject rationality into the decision-making process, this "do-nothing" alternative with regard to projecting fiscal impacts is unjustified. Assumptions of the Methodology: Each fiscal impact methodology is premised upon a few assump- tions which, if unrecognized, may lead the analyst to conclude something which is either untrue or only partially true. In the individual sum- maries of each of the cost-revenue methodologies present in the Appendix, the principal assumptions underlying each methodology are discussed. Care must be taken to not use a particular cost-revenue methodology which is premised upon an assumption that is unacceptable to the analyst in that particular study. A simple example of this kind of mistake occurs when a particular national service standard is used to project future service costs only to discover upon further examination that once local standards are created, they indicate the national standard is totally unrelated to the actual service demands of the new residents. Yet, the national standard was acceptable for use in projecting local service 89 demand. Obviously, some rudimentary understanding of the assumptions behind particular cost-revenue methodologies is necessary, not only when it comes time to evaluate the results of the analysis, but also at the start of a study when one is deciding whether or not to use a particular technique. Most of these assumptions are related to viewing a local community's fiscal situation in a static state whereby the fiscal inter- relationships in the community are not expected to change except as impacted by the project, plan, policy, etc., under evaluation. Thus, these techniques are not dynamic, yet local fiscal conditions are. Obviously, herein lies a major limitation of all current fiscal impact projections. Significant unexpected changes in local revenues, such as the end of revenue sharing or an economic downturn, do occur, just as improvements in the quality or level of service and an increase in the number and type of local services also increases the cost of services over time. These changes are assumed not to happen under most of the principal cost-revenue techniques--largely because the extent of these changes and their subsequent impact on other parts of the municipal fis- cal condition are not readily predictable. Besides, it is very difficult to allocate the costs of an improved level of service to new residents without realistically examining whether existing residents are or are not also benefiting/paying for this improvement. The practical result of these assumptions is that if the analyst recognizes a particular assumption may be consequential, then independent assessment of its impact upon the base condition must be made, the base condition being the local fiscal structure and the fiscal 90 impact methodology which is being utilized. This kind of sensitivity analysis is probably essential to nearly all fiscal impact studies, yet it is rarely acknowledged and performed. In essence, it is a step toward contingency planning by projecting variation in results under certain circumstances. Each of the six most common assumptions applicable to cost- revenue methodologies are described in the following few pages. All of these assumptions are common among the three most widely used cost- revenue techniques: community standards, residential multiplier and assessed valuation techniques. Community Operates in Fiscal Isolation: This phrase means a particular methodology assumes that the existing fiscal interrelationships between communities, the state and the federal government, will not change in the future. For example, the proportions of local revenues from extra-local sources will remain the same and will be used in the same manner in the future as they are today. No Major Change in Service Delivery System or Level of Service Provided: This phrase expressly acknowledges the assumption that the existing level of service for each service in the community will be equally extended to new development using the same service delivery system and all its inherent characteristics that establish the current service delivery costs. 91 Services to Non—residents and Non- taxpaying Land Uses will Remain Unchanged: Since non-residents (shoppers, visitors, etc.) and non-taxpaying persons such as the elderly and non-taxpaying institutions including both government and non-governmental organizations (schools, churches, fra- ternal organizations, etc.) all use local services, usually without contributing to local public coffers proportional to contributions from tax-paying local residents, it is often important to assume that the current proportion of these non-residents and non-taxpaying land uses will remain about the same in the future as today. Standards and Multipliers are Reflective of Local Community Service Demands and Charac- teristics: This assumption is very important when standards are applied which have not been locally verified and, even if locally derived, they may not exactly apply to the proposed development type. Communities change over time and local standards that were accurate in the past may no longer be reflective of current service demand or community charac- teristics. Furthermore, standards developed elsewhere, such as national standards, may not be applicable at all. Standards ranging from current expenditures per capita, to capital facility standards, to population generation standards by housing type, to service demand by income class, may all be used in various community standards approaches. Obviously, however, the accuracy of the results will depend on whether the standards applied adequately reflect the community demand characteristics, as is assumed they do. 92 Characteristics of New Residents and Business Resemble Those of the Existing Community: Since the existing fiscal condition of a community depends upon the current revenues and service demands produced by existing resi- dents and businesses, it is often necessary to assume future residents and businesses will have the same characteristics and service demands. In some situations, this is clearly not true and other standards reflect- ing the demand characteristics of specific subgroups currently not present in the community may be applicable (such as mobile home dwellers, for example). This assumption has its greatest impact at the neighborhood level or in a small community where proposed development, which is very unlike existing development, may seriously affect the demand for and cost of municipal and school services to that neighborhood community. Projection Variables Adequately Reflect New Demand/Service Costs: Nearly all cost-revenue techniques project future demand and service costs based on just a few, and often just one, variable presumed to be related to demand for and cost of services. For example, current fire expenditures per single-family dwelling unit may be used to project the fire protection costs of new single-family units. As long as the demand unit adequately reflects actual demand, there is no problem. But most service demands are probably dependent on the interrelationship of many variables which themselves may change over time. 93 Special Assumptions: Additionally, there may be assumptions which are unique to a particular estimating technique. The summaries of each cost-revenue methodology in the Appendix will identify any special assumptions of a particular methodology. Limitations of the Methodology This category is not as discrete as previous categories since some of its components actually aggregate components of previous cate- gories. Specifically, the basic characteristics of particular cost- revenue techniques include: the scope of a methodology's application; the assumptions of the methodology; its relationship to common issues that arise in cost-revenue studies; and the accuracy of the results. With the exception of the common issues category, these characteristics are all discussed separately in this section. It is important for the analyst to recognize the potential limitations of various techniques before investing considerable effort in the development or analysis of a fiscal impact study. The six limitations most frequently present in cost-revenue methodologies are discussed below. Limited Scope: In general, a methodology has a limited scope if, in its general use relative to other techniques, it was limited in the number of service costs, the number of jurisdictions, or the type of costs and the land use types it addressed. However, higher overall accuracy of results compensated for a deficiency to some degree. This is why 94 econometric methods are not judged to be limited in scope even though they currently do not distinguish between costs by land use types. From a practical standpoint, all cost-revenue methodologies have some scope limitation that should be recognized, though some are far more limited than others. Additionally, some of the techniques are complimentary, not having the same scope limitations yet having the same assumptions; for example, the residential multiplier method and the assessed valua- tion method can be adequately used in combination to project most munici- pal and school costs and revenues of both residential and non-residential land use types. Average Vs. Marginal Costs: Average costs are simply those per unit costs of a service derived by dividing the total costs of providing the service by the number of units served. For example, per capita costs are the costs of provid- ing services to the residents of a new development in keeping with the average cost of providing the same services to the existing population. Marginal costs, on the other hand, are the absolute increases or decreases in service costs resulting from each additional increment of service. The concept is simplified best by thinking of marginal costs as the cost of the last unit, or the cost of providing a specific increment to or using a specific increment from existing service capacity. As used in cost-revenue analysis, the term usually refers to the net additional costs to a service resulting from increased service use by the new developments. This extra cost may be higher or lower than the current average cost. 95 In order to accurately calculate marginal costs, it is necessary to perform an in-depth case study analysis of the excess capacity of each service and facility provided by the affected jurisdiction and its rela- tionship to the proposed development. The result is a detailed short-term analysis of fiscal impact. However, average cost analysis is better suited for mid- and long-term analyses, as all costs become average costs over time. This concept is closely related to those of excess service capacity and scale economies discussed below. Long-term Vs. Short-term: This merely refers to the usual projection period associated with a particular methodology. Generalizing for this thesis, short-term refers to projections of five years or less while long-term is more than five years. From a practical perspective, no projection of operating costs over ten years is credible as too many variables are subject to change; however, some of the capital cost projections may be acceptable because their costs are often fixed once bond obligations are entered into. Excess Capacity: The difference between the design capacity of a facility or service system and its actual use is the excess or unutilized capacity of the system. Average cost methods presume an unlimited amount of excess capacity and constant costs/unit; this is not an unreasonable assumption over the long-term when capacity would most likely be increased as needed. Marginal cost methods identify excess capacity 96 and either charge average cost/unit charges until the excess capacity is extinguished, or charge a declining or increasing cost per unit depending on when the excess capacity appears in the system. It is declining at the beginning of the use of a facility and increasing as the capacity of the facility diminishes. Scale Economies: The service cost/unit will vary depending on the number of units used. When a facility or service system operates optimally it is taking advantage of the economies of scale present in the system at that level of operation and its cost/unit is at the lowest point. Under- utilized facilities have yet to achieve their peak scale economies, while facilities nearing their full capacity have likely exceeded them, thus incurring a higher cost/unit of operation. Input Orientation: This refers to the use of standards which rather than attempting to measure service demand, define demand in terms of a particular standard. For example, on the average, a community may currently provide X library books and personnel per 1000 residents which could then be multiplied by the estimated population of the new development to determine new library demand and costs. The new population is presumed to demand library ser- vices at an average rate relative to other households in the community. Thus, the standard is an input variable and may not reflect the actual library demands of the new population whose demographic characteristics may differ from the existing population--perhaps they are richer and more 97 educated and read library books more (or less because they buy their own) or poorer and less educated and spend their leisure hours in another manner. Special Limitations: Additionally, all methods have some limitations unique to that approach. A discussion of significant special limitations of particular methodologies is found in the methodological summaries in the Appendix. Accuracy of the Methodology: The accuracy of the results of various cost-revenue method- ologies is, unfortunately, an area where considerable additional research is necessary. Many relative statements about the accuracy of a parti- cular methodology as applied to a given situation can be readily made; however, the central question of "Using a particular methodology, how accurate is the projected fiscal impact of an analyzed project, plan or policy from the pgtggl_fiscal impact?" is not easy to answer. Princi- pally, this is because very few efforts have been made to re-do a study after some time has passed, in order to determine whether the projected result was, in fact, reasonably accurate.22 The notable exception to this is the Rutgers-BAA study currently underway where several studies utilizing.different methodologies are being re-examined to determine, in part, the accuracy of particular study results. Additionally, the problem is greatly compounded by the fact that circumstances may have changed considerably since the study was first performed. Thus, today's reality may be very different from what 98 was either assumed or projected initially. This applies not only to the fiscal situation of a municipality, which may have changed, but also, in the case of a project, which may have been built differently than the proposal that was evaluated. However, the changing nature of events should be expected, and sensitive application of cost-revenue method- ologies can help assess a variety of scenarios. Recognizing this permits the analyst to work out contingency plans that better prepare the com- munity for the possibility of unexpected, though plausible, circumstances. Thus, generally speaking, the accuracy of a fiscal impact study is dependent upon the following limitations of a particular methodology: (1) Limitations of the methodology as conceived: scope, assumptions, relationship to basic cost-revenue issues. (2) Limitations of the methodology as applied: a. Data inputs must be accurate, measured (not estimated), if poss- ible, and up to date. b. Basic assumptions must not be violated without a separate assessment of the changed condition.23 c. The influence of basic community characteristics affecting the analysis must be identified and accommodated relative to the characteristics of the project, plan, policy, etc., under study. This includes consideration of: 1. Community size 2. Community growth rate 3. Community land use composition by type, function, and signi- ficance to local quality of life 4. Community fiscal condition: total revenues, expenditures, bond status 99 Community service levels and existing demand characteristics Community excess service capacity by service Community fiscal dependencies and interrelationships . Community plans KOCDNO‘CH . Relationship of the development under study to other develop- ment currently to be proposed in the community for construc- tion during the same period of time 10. Community demographic composition: age, education, race, sex, income, etc. The link between these limiting conditions and the accuracy of a particular fiscal impact study is the individual nature of the parti- cular circumstances surrounding the application of fiscal impact method- ologies to the problem being analyzed. Thus, the accuracy of a particular technique depends greatly upon the circumstances surrounding its applica- tion. And while there is a base level of accuracy above which each methodology under ideal conditions could not be improved, this level has not been determined and really is not very important unless it is determined relative to all other cost-revenue methodologies. Likewise, if the most accurate technique could be identified and it required exces- sive data, or imposed excessive manpower or resource costs, it would have little practical utility. At the very least, it is safe to say there is room for additional research in this area. However, in the absence of the necessary comparative data on the accuracy of various techniques, there will be no attempts in this thesis to classify each cost-revenue methodology according to its accuracy beyond that presented in Table 4 in the Appendix. It should be noted, however, that some studies seek to mitigate the problems associated with 100 possible error and overall accuracy of study results by establishing or determining a confidence interval within which the projected fiscal impacts would be likely to fall.24 Until such time as more definitive information becomes available, this appears to be a reasonable compromise. Other Common Issues Associated With Cost-Revenue Methodologies In describing the general characteristics of most cost-revenue methodologies, this chapter has discussed a number of issues that fre- quently arise in cost-revenue studies. These include average vs. marginal costs, scale economies, excess capacity, level of service changes, and services to people vs. property. These issues all are pertinent to an understanding of particular cost-revenue methodologies. Additionally, however, there is a set of issues that are not directly characteristic of particular methodologies but are inevitably associated with cost- revenue studies. Consequently, the next few pages will introduce these issues in order to familiarize the analyst with them. No attempt has been made to prepare an exhaustive list or to elaborate on these issues in great depth. Hopefully, mere introduction of these issues will suf- fice to notify the analyst of their existence and relative significance vis-a-vis cost-revenue studies. The issues to be presented include: inflation, predevelopment costs and revenues, present value, and common secondary fiscal impacts. Inflation: Since most fiscal impact studies calculate results in terms of constant dollars, it often becomes necessary to consider the impact of 101 inflation, or rise in prices on the results. Generally, this is done by applying an inflation rate, or average price increase overtime, to the results. A national average rate or local rate, if known, is usually applied. However, the problem is complicated somewhat by the fact that service cost increases may vary considerably between, for example, the recreation department and the fire department. Likewise, the rate of growth in revenues may not be the same as the service cost increase. For example, while property values may rise at generally the same rate as inflation, if assessments are not kept up--they usually lag at least a year--local revenues will fall behind the service cost increases. For these reasons, some attempt to prognisticate the impact of inflation on the results may be necessary. Predevelopment Costs and Revenues: This phrase refers to those pgplig_costs and revenues associated with a given parcel and/or structure as it exists before it is developed or redeveloped. Generally, these costs include either clearing the land, providing basic infrastructure to the site and relocation costs if it is a public project, or they indicate all existing service costs to the site for police protection, fire protection, schools, waste disposal, etc. The revenues generally include any normally generated by the land as it currently exists. Obviously, if the site is vacant, only a small amount of property taxes is collected (and usually few public services are provided). Failure to consider these costs in the study will not pro- vide the user with the true net fiscal impact. An old warehouse may now return $20,000/year in tax revenues and after redevelopment may return 102 $150,000/year, but the net change is only $130,000 additional revenues. Thus, these predevelopment costs and revenues may become particularly significant in redevelopment fiscal impact studies. But, on the other hand, these costs may be inconsequential if the site is undeveloped and there are currently no service cost burdens. Present Value Some studies determine the present value of the public costs and revenues associated with various development alternatives by applying discount rates which represent, in effect, the opportunity cost of spend- ing money in one manner as opposed to another.25 One can effectively argue that present value calculations are of very little significance in all but alternative project or alternative plan cost-revenue studies for the following reasons. First, unless the projection period is quite long and the proposed development very large, the effect of applying a discount rate is not significant relative to other projection error already present in the methodology. Furthermore, most projects are of short duration and small. Second, the discount rate is largely valuable only for comparing viable alternatives of similar scale. Yet, many of the alternatives for the development of a particular site are either too desperate or too similar to produce significant differences when present values are deter- mined. Leaving land undeveloped vs. building shopping centers are two alternatives that present value has little relevance for as far as public services may be concerned. Third, two different land use alterna- tives may have essentially the same public capital costs for sewers, water, roads, and other capital intensive services; thus, present value 103 would not significantly provide new relevant information since these services may have to be provided anyway (the "do nothing” alternative may not be feasible). However, when applicable, present value calcula- tions will often reveal that alternatives with high net public costs in early years and lower public costs in later years will appear less favor- able, discounted, than an alternative with relatively lower net public costs. Present value is perhaps most useful when a large project requir- ing many capital improvements is proposed in several alternative staging schemes with each containing the same amount of development. In this way the lumpiness of public expenditures is properly related. Addition- ally, choosing the discount rate is always very difficult and often controversial, and the higher the rate, the greater the effect. Present value is of great significance to the developer of large projects or new towns which have multi-year development schedules and a considerable range of viable alternatives. However, to a community faced with rela- tively small incremental growth, present value calculations may not be of significance. Secondary Fiscal Impacts: In addition to the direct or primary fiscal impacts of develop- ment, as measured by a fiscal impact analysis, there are also indirect or secondary fiscal impacts to consider. The significance of certain secondary impacts to the study being made will vary considerably depend- ing on the circumstances surrounding each case. In certain instances, secondary impacts may far exceed the significance of primary impacts. For this reason, they should not be forgotten. But secondary fiscal 104 impacts are only a part of the total range of secondary impacts of development. To some extent secondary fiscal impacts may be viewed as secondary economic impacts because of the overall economic spillover effects in terms of jobs, spending, income, and new development. Yet, each of these, in turn, result in new tax revenues and new service costs and, thus, the fiscal impacts can, at least partially, be isolated from the overall secondary economic impacts. A common secondary fiscal impact is the effect of new development on adjacent property values. Secondary economic impacts typically include: influence with regard to attracting additional other development; increased demand for goods and services; increased demand for housing; spillovers to other jurisdictions; multi- plicative income flow effects; effects on existing business; and the creation of new employment. New development may increase or decrease the value of surround- ing land and structures and thereby increase or decrease the property tax revenues returned to a municipality. Depending on the type of develop- ment, local markets, proposed location and other factors, new development may spur additional development in that area; large activity generators such as shopping centers or sports stadiums are relevant examples. Resi- dential development, in particular, may generate a new demand for goods and services, whereas non-residential development may generate demand for new homes and certainly for new employment. New development at the edge of a community will likely have spillover effects on adjacent com- munities, such as increased traffic, or litter, usually without an attend- ant increase in revenues to the neighboring jurisdiction. New development secondary impacts may generate multiplicative income flow effects as a 105 result of new consumer and business expenditures. On the other hand, existing businesses may lose some sales to new businesses, thus reducing their share of local revenues. These secondary impacts, whether fiscal, economic or otherwise, may significantly affect the context within which the net primary fiscal impact of the proposed development is viewed. Failure to consider these effects when pertinent could seriously delude a decision-maker into a false conception about not only the primary fiscal impact of the develop- ment but of relevant secondary impacts as well. But since these secondary fiscal impacts are only a part of the total range of secondary impacts that could occur, a complete environmental impact assessment process that includes identifying secondary impacts of development may be warranted. Chapter Summary Chapter 3 has identified and summarized both the principal study types and methodologies used in fiscal impact analysis and has related these two dimensions to one another in a typology. Table 2 sum- marizing this relationship illustrates which cost-revenue methodologies are often applied in particular cost-revenue study types. The second part of the chapter identified basic cost allocation principles that underlie the application of most cost-revenue techniques. A discussion of the basic characteristics of cost-revenue methodologies was presented in order to: (1) serve as the foundation for a considerable portion of the fiscal impact analysis framework to be developed in the following chapter, (2) provide important background information on cost-revenue 106 methodologies, and (3) provide a uniform format for the summary descriptions of each principal cost-revenue methodology presented in the Appendix. This discussion was completed with a brief description of four issues commonly associated with the application of cost-revenue methodologies. 107 CHAPTER 3 Footnotes 1Ruth L. Mace, Municipal Cost-Revenue Research in the United States: A Critical Sgrvey cf’Research to Measure Municipal Costs and Revenues in Relation to Land Uses and Areas 1933-1960 (Chapel Hill: Institute of Government, University of North Carolina, 1961. 2Thomas Muller, Fiscal Impacts of Land Development: A Critiqoe g; Methods and Review of Issues iWashington,D.C.: The Urban Institute, 75). 3Center for Urban Policy Research, Rutgers University, and Barton-Aschman Associates, Inc., Cost-Revenue Methods for Land Use Impact Analysis, draft working papers (New Brunswick: ‘Center fbr Urban Pdlicy Research, December, 1975 and July, 1976). 4However, the writer is confident that the works of those cited is more than adequate for synthesis into the typology that follows, not only because of his research into the field, but also because of his work in it as described in Chapter 1. Additionally, while the‘work of those cited may not, in fact, be comprehensive in scope, they are the most com- prehensive studies of the field published to date. 5This refers to the same study cited in Footnote 3 of this chapter. 6Mace, op. cit. 7It is interesting to note Mace's discovery that one of the first applications of cost-revenue analysis in relation to land use plan- ning and policy formulation was to analyze public housing and urban development projects in the 1930's. Her words are instructive: An examination of the cost-revenue analyses, which have been prepared in recent years in relation to land use planning and policy formulation, reveals a surprising circumstance. While one might have expected these studies to be the outgrowth of developments in the fields of municipal finance and accounting, they appear to stem from early housing and slum clearance research efforts. That cost-revenue analysis has evolved in this way may be due, in part, to the strong roots of the plan- ning field of today in the housing and slum clearance movements of the first half of this century. Many of today's older plan- ners and planning educators worked first in housing and most of the more recent practitioners have been trained in this tradition. Studies of the costs of slums to city governments made their appearance about thirty years ago when, for the first time, an 108 extensive program of slum clearance and low-cost housing, under the aegis of the federal Public Works Administration, gave pro- mise of coming into being. For more than a hundred years there had been recognition in the United States that "slums are bad" for people who inhabit them and dangerous for contiguous neigh- borhoods. But not until the 1930's was there recognition that "slums are costly" to the taxpayer. Mace, op. cit., pp. 29-30. 8Barton-Aschman Associates, Inc., The Barrington, Illinois Area Phase 2: Evaluation of Growth and Governmental Alternatives (Chicago: Illinois: Birton-Aschman Associates, Inc., l970lland a supplemental report entitled A Cost-Revenue Analysis of Land Use Alternatives, also published in 1970by BartonéAschman—ASSociates, Inc.lfor Barrington. 9Dennis Gale, The Municipal Impagt Evaluation System: Computer- 2:335tEd Cost/Revenue Analysis ofTUrban Development, PAS No. 294 (Chicago: , 1973). 10Muller, op. cit. 11The six reports in this series were all published by the Urban Institute, Washington, D.C. and are listed as chronologically prepared: (1) Philip S. Schaenman and Thomas Muller, Measuring Impacts of Land Development: An Initial Approach, 1974; (2) Thomas Muller, Fiscal Impacts of Land Development: A Critiqge of Methods and Review of Issues, 19 5; (3) Dale L. Keyes, Land Development and the Natural Environment: Esti- matinglmpacts, 1976; (4) Philip S. Schaenman, Using An Impact Measurement System to Evaluate Land Development, 1976; (5) Thomas Muller, Economic Impacts of LandlDevelopment: Employment, Housingland Property Values, 1976; (6) Kathleen Christensen, Social Impacts of Land Development: An Initial Apprpach for EstimatingiImpacts on Neighborhood Usages anleer- ceptions,‘l976. 12Real Estate Research Corporation, lpe Costs of Sprawl: Detailed Cost Analysis, 3 vols. prepared for Council on Environmental Quality, Department of Housing and Urban Development and the Environmental Protec- tion Agency (Washington, D.C.: U.S.G.P.O., 1974). A good critique of this study was prepared by Alan Altshuler and can be found in the Journal 337tg39American Institute of Planners, Vol. 43, No. 2 (April, 1977), pp. 13While working on the Urban Development Cost-Revenue Model (UDCRM) with Michael Levin of Barton-Aschman Associates, Inc., the writer became aware of Barton-Aschnan's participation with the Center for Urban FNDlicy Research at Rutgers University in this study designed to identify aruj describe the current state-of-the-art of cost-revenue analysis, and sl-Hibsequently had access to various drafts of working papers while the study PPOgressed. Much of the work on that study appeared after, however, cer- tain milestones were passed in the UDCRM study, which could not, thus, draw from its findings to the extent possible in this thesis. 109 14Please note that, by and large, these methodologies relate to the estimation of future costs, not revenues, and, in fact, there are very few widely used revenue allocation methodologies. This is because the largest proportion of most local revenues comes from a very few sources, notably the local property tax. In addition to being fewer in number, revenues are generally easier to project than costs because they are based on legislated collection formulas and have only a few variables that are easily available and relatively accurate. Consequently, except for a short discussion of three common revenue allocation techniques in the Appendix, the remainder of this thesis will not address revenue allocation methodologies further. 15Table 4 in the Appendix provides, in summary fashion, relative information about various cost allocation methodologies. This information may help clarify which techniques can compatibly be used together in a fiscal impact study. 16Some good background research in this area can be found in these studies: Perloff, Harvey S. and Wingo, Lowdon, eds., Issues in Urban Economics (Washington, D. C: John Hopkins Press for Resources for the Future, l968), notably the following two articles: Werner Z. Hirsch, "The Supply of Urban Public Services" (pp. 477- 524) and Julius Margolis, "The Demand for Urban Public Services" (pp. 527- 564, George Sternlieb, et a1. ,HousingtDevelopment and Municipal Costs (New Brunswick, New Jersey: Rutgers University, 1973); John P. Crecine, ed., Financin the Metropolis (Beverly Hills, Calif: Sage Publications, l970);‘Patric W. Beaton, ed., Municipal Needs Services and Financing (New Brunswick, New Jersey: Rutgers Un1vers1ty, 1974); Elinor Ostrum, ed., The Delivery of Urban Services: Outcomes of Change (Beverly Hills, Calif: Sage Publications, 1976) 17 181bid.. p. 18. Mace, op. cit., pp. 7-8. 19This topic is discussed in somewhat more detail in the User' 5 Handbook to the Urban Development Cost- Revenue Model (Lansing, Michigan: Tr1- -County RegionallPlanning Comm1ss1on), pp. 2-l3 thru 2-17. 20 21 22Another exception are the two annexation studies Thomas Muller and Grace Dawson performed on Richmond, Virginia. The original study, The Impact of Annexation on City Finances: A Case Study in Richmond, Virginia (Washington, D.C.: The urban Institute,41973), was repeated three years later and documented in The Economic Effects of Annexation: A Second Case Study in Richmond, Virginia (Washington, D.C.: The Urban Institute, 1976), in response to a U.S. District Court case initiated to halt the annexation. Interestingly, the actual costs, as it turned out, Muller, op. cit., pp. 15-16. Gale, op. cit., p. 8. 110 closely coincide with those projected in the initial estimates. Muller's expert testimony was deemed largely responsible for upholding of the city's action by the three-judge U.S. District Court. 23For example, if the police service of the entire community is to be significantly upgraded next year, this must be specifically built into the projection or else the existing level of service will be assumed to remain the same as it is today. 24An example can be found in the User's Handbook to the Urban Development Cost-Revenue Model, op. cit., pp. 5-2 thru 5-7. 25For a fuller discussion of present value and discounting, see Robert A. Cochrane and Joseph E. Wambles article "Discounted Cash Flow Analysis and Plan Evaluation" in the September, 1971 issue of the Ameri- can Institute of Planners Journal, Vol. 37, No. 5, p. 340. CHAPTER 4 FRAMEWORK FOR INITIATING OR ANALYZING A FISCAL IMPACT STUDY Introduction Chapter Purpose It is the purpose of this chapter to attempt to apply the most important elements of cost-revenue analysis presented in the preceding three chapters to a basic analytic structure and thereby create a frame- work for initiating or analyzing a fiscal impact study. A planner unfamiliar with fiscal impact methodology charged with performing a fis- cal impact study or asked to evaluate a developer's report titled some- thing like "The Fiscal Benefits and Costs of the Proposed Good Neighbor Shopping and Residential Community" may feel he or she has an enormous task and insufficient background to successfully meet the challenge. This chapter is an attempt to make such a task managable, by putting it into terms and into a structured context understandable to the planner, so as to reduce the amount of effort on his/her part as much as possible without sacrificing a minimum level of comprehensiveness. Outline of Chapter Contents This chapter is divided into two parts. The first part explains the need for local units of government to develop comprehensive impact 111 112 assessment processes and explains how they relate to the planning process. The second part presents a three-process framework for initiating or analyzing a fiscal impact study and explains both its contents and its purposes. Performing Cost-Revenue Analysis as a Part of an Environmental Impact Assessment Process Relationship of Cost-Revenue Analysis to an Environmental Impact Assessment Process Cost-revenue analysis should be performed within the context of a more comprehensive environmental impact assessment process. This is because, while a fiscal impact study provides valuable information about the consequences of development on a community's fiscal structure, any given development proposal may have more significant natural, social or economic impacts than fiscal ones. For example, a given project may impact upon public health services, resource conservation efforts, local traffic patterns, housing choice, aesthetics, or upon balanced community growth; any of these could be more important than the fiscal impact of the proposed project or plan. Consequently, fiscal impact assessment techniques should be applied within a comprehensive, coordinated and consistently applied local impact assessment process. A partial list of non-fiscal impacts frequently examined within a comprehensive environ- mental impact assessment process1 includes impacts on the following kinds of local environments: 113 Natural Environment Physical Environment Social Environment water quality traffic patterns & congestion neighborhood disruption water supply aesthetics neighborhood character- soil erosion relationship to existing istics vegetation land use patterns displacement of resi- air quality archaelogical impacts dents wildlife public facilities nuisances Economic Environment Political Environment employment gains-losses disproportionate impacts on local clientele income groups pr0perty values objections/support from other levels of govern- ment spillovers to adjacent communities Fiscal impact analysis helps supplement the information generated by these other types of environmental impact assessments. Relationship of an Environmental Impact Assessment Process to the Planning Process Yet, even when cost-revenue analysis is performed as a standard feature of an environmental impact assessment process, it is not enough. An even broader perspective is necessary in order to establish the proper context within which impact assessment procedures are employed. This broader perspective is within the purview of the planning process. It can be conceptualized by thinking of impact assessment procedures as tools within the planning process. When this is done, it become obvious that impact assessment should not be restricted only to application on proposed private projects, but should also include proposed community facilities, programs and, above all, community plans and community poli- cies. Thus, it should be apparent that if impact assessment is to improve or even affect the development decisions that are made, an impact 114 assessment processunust become an integral part of a community's overall planning process. Professor Andrews, University of Michigan, writes: The process of planning is shot through from start to finish with judgements, intuitive predictions, and assumptions about the impacts of alternative actions. When planning problems are first defined, the achievement of certain impacts and the reduction of others are established as the goals of alternative plans that may be developed. When alternatives are formulated, it is on the basis of at least rough forecasts of their probable impacts. Finally, when tradeoffs are evaluated, judgements are made about the relative desirability of the sets of impacts pre- dicted for each of them. It makes no sense to treat impact assessment as a separate stage in this process, to be carried out only after a problem is defined and choice has been narrowed to one of several alternatives. Impact assessment must be recognized, and improved, as an ongoing activity throughout the process of planning.2 Thus, while fiscal impact assessment is a tool which focuses on a narrow area of study (a community's fiscal structure) and should be per- formed within a larger environmental impact assessment process, and while both it and the larger process provide information with significant poten- tial for improving local decision-making, as Andrews aptly noted, even the environmental impact assessment process needs to be structured as an "ongoing activity throughout the process of planning." The illustration that follows attempts to depict the relationship of impact assessment processes, local planning processes, local growth management systems and community decision-making processes, in terms of their static and continu- ous characteristics. Continuous process are represented on the following figure with curved lines and are dynamic processes. Discontinuous or ad hoc assessments are represented with straight lines indicating they are static analyses, even though they may be frequently repeated on a case-by-case basis. A growth management system has very distinct continuous and 115 \ (3 EDJVHEKDthAE34124_ as F? ibdFum31‘ r4 ea Fflexsz. é§ p4 Afiffifias- 54 AAEHJT' [5 ASSESSMENT if] k SYSTEM / Figure l. Interrelated Community Decision-Making, Planning, Growth Management, and Impact Assessment Processes. discontinuous aspects, or dynamic and static components. Although this figure is in some respects artificial, it does serve to illustrate the concept and relationship between these local community planning and deci- sion processes. Both continuous processes and ad hoc impact assessments are necessary to provide the kinds of understandable data and alternative scenarios within which continuous monitoring, planning and informed decision-making can function on a day-to-day basis. Impact assessments are, by their nature, static and ad hoc, even when uniformly applied to a class of activities. They generally concentrate on individual project impacts under a set of fixed assumptions projected over time. Nevertheless, 116 they provide invaluable reference points and indicators of both the direction and magnitude of community development and change. Recent research efforts have produced several very useful guidebooks for establishing local comprehensive impact assessment pro- cedures. Pioneers in these efforts have been researchers for the Urban Institute working under grants from HUD's Office of Policy Development and Research. Footnote 11 in Chapter 3 lists these sources for those seeking further material on establishing local impact assessment proce- dures. Additionally, this chapter presents a framework for assessing the fiscal impacts of development in a checklist format. A framework provides a systematic method of investigation with standardized elements, which will help insure a predictable coverage and relatively high level of replicability in future applications. A complimentary scheme for a whole range of impacts (not just fiscal) and an extensive list of advantages of using impact assessment checklists can be found in UsingLan Impact Measurement System to Evaluate Land Development by Philip S. Schaenman.3 Used together, these materials provide valuable information for develop- ing local interrelated planning, growth management and impact assessment processes. A Framework for Initiating or Analyzing A Fiscal Impact Study A Three-Process Framework A framework for assessing the fiscal impacts of development is merely a basic step-by-step procedure for applying cost-revenue 117 methodologies to the assessment of the fiscal consequences of development on a community. It is a guide or checklist to help insure consideration of the entire range of concerns relevant to a fiscal impact analysis. The framework presented in this chapter is designed for application by a fiscal impact analyst who must either evaluate a cost-revenue analysis prepared by someone else, or who seeks basic knowledge of fiscal impact assessment process in order to locally initiate a fiscal impact analysis. The framework is broken into three separate processes. It is designed to be utilized within a comprehensive local impact assessment system which, in turn, should be a part of a community's continuing plan- ning process and, thus, a vital element of its growth management program. The first process is actually calculating the fiscal impact of the develop- ment proposals. This process requires the skills of a technician well versed in fiscal impact methodologies. The second process involves taking the results of the impact assessment and putting them into the appropriate context for evaluation by decision-makers. This process requires the honesty and skills of a technician who also has a social conscience. The analyst must use foresight and insight into the various publics possibly affected by the proposals to insure that the context within which the assessment is conducted, presented and used is appro- priate. The choice between alternatives and options is and must be made by elected decision-makers or by administrative and advisory bodies appointed by the legislative body. The third process is a feedback process where the performance of particular cost-revenue techniques and impact assessment processes is periodically evaluated to determine their 118 continued ability to accurately produce the desired fiscal impact information. Here the fiscal analyst must also be a scientist system- atically looking for better ways to do things. Fiscal impact calculations merely produce numbers. These results have no intrinsic meaning beyond a few simple obvious observa- tions (such as net fiscal balance--revenues minus expenditures of the project over time) and have little utility until put into proper perspec- tive. This requires comparing the results with both other project- related environmental, economic and social impacts and relating them to other development taking place in the community. An analyst sensitive to community goals, existing laws, regional housing needs and past com- munity behavior will have the necessary basic foundation for properly interpreting the results of fiscal impact assessment. Since fiscal impact assessment has been identified in this thesis with more comprehensive environmental impact assessment systems, it should be of no surprise that the framework that follows resembles the principle steps in the environmental impact assessment process as modified to reflect the specific characteristics of a fiscal impact assessment. Additionally, this fiscal impact analysis framework is presented in the same spirit as was the report Measuring Impacts of Land Development by Schaenman and Muller, who said at the start of that report: The approach described here is presented as a practical aid for local officials who do not have the luxury of waiting years or decades for ultimate, ideal solutions in deciding the development issues on their agendas, but who must decide on land use proposals one at a t1me. Because the framework is essentially a checklist with explanatory text, the format for the remainder of this chapter will shift to that of 119 an outline with roman numerals designating each of the three processes and capital letters beginning with (A) designating the subdivisions there- of. A framework for initiating or analyzing a fiscal impact study follows: I. Performing A Fiscal Impact Assessment: The First Process A. Deciding whether an assessment is necessary; threshold levels of impact: Any fiscal impact assessment uses vital manpower and monetary resources which might better be put toward alternative tasks if no method is created for discriminating between develop- ment reviews. Thus, deciding whether a fiscal impact assessment is necessary and, if so, to what degree, is the first crucial step in any fiscal impact assessment process. Ideally, this decision is made first through a preliminary or initial develop- ment review as a part of an environmental impact assessment screening. Often checklists are locally developed which help structure an initial review and help identify potentially sig- nificant impacts in need of in-depth study. In addition to performing a complete fiscal impact analysis on all proposed community alternative plans, it is suggested that the below listed developments also always be evaluated: 1. Developments which are large relative to the existing com- munity; 2. Developments which are controversial; 3. Developments which are likely to set a precedent (e.g., the first major shopping center, industrial facility, high-rise 120 apartment, or deviation from local community plans or zoning maps); 4. Developments with significant visible beneficial and detri- mental effects on specific subgroups (such as a large low- income multi-family development in a single-family neighbor- hood with large lot sizes); 5. Any development which would place additional burdens on an already over-burdened service or facility (such as on a school system or sewage treatment plant). Yet, even if a proposed development has one or more of the above characteristics, its impacts should not be assessed unless the community can exercise a reasonable degree of control over the development. For example, some large university projects with significant community-wide impacts, or a large private self- contained development away from existing public services may not be subject to effective local control and may, thus, not be worthy of local analysis. In these cases, analysis by a "higher," per- haps regional level of government, may be appropriate. Initial development review may indicate that a compre- hensive environmental impact assessment is necessary, or it may indicate that a social or economic impact assessment (including impact on jobs, local income, adjacent property values) or other forms of impact assessment are more appropriate than the narrower fiscal impact assessment. Likewise, if a project has none of these characteristics it may suggest that a full-scale fiscal 121 impact study is not necessary. Perhaps only certain community services or community subgroups will be significantly impacted by the development, thereby allowing the analyst to focus the study in a particular direction and not spend time unnecessarily on detailing impacts of little concern to those affected. Many communities may want to calculate fiscal impact on all services but still focus the study on a few in order to have data and projections useful for monitoring each development impact over time. In order to effectively make these decisions about the degree of detail of the fiscal impact analysis to be performed, some communities have adopted as impact criteria the concept of 5 Thresholds can be established at the broad threshold levels. level such as the criteria discussed above for determining whether to perform fiscal impact analysis, and also at the narrower level of each community service delivery system. Threshold levels are often based upon the availability of excess capacity within a service system and should specifically be related to the type, amount and location of the excess capacity. For example, sewage lines in District "A" may have available excess capacity equivalent to meeting the needs of 1000 more single-family residences, but beyond that will require a new sewage interceptor line. If a threshold level impact of 200 single-family homes was locally established, then a project with 50 single-family homes would not require a detailed sewer system 122 fiscal impact analysis and an average cost calculation may be sufficient. However, the marginal cost considerations rise with the size of the project and as the excess capacity diminishes; thus, a 200 single-family unit threshold may be sufficient for now, but when excess capacity diminishes to the point of being able to serve only 300 single-family units the threshold level impact will need to be drastically reduced--perhaps to the point of assessing the marginal cost considerations of every development proposal until more capacity is provided. The establishment of local criteria for applying fiscal impact analysis and for focusing a study based on local threshold levels requires a good data base of local community character- istics and service delivery systems. These characteristics have. in fact, established the existing local community fiscal structure. This information assists the analyst in clearly identifying the impacts of new residents/businesses on the community. Once the data base is established, it need only be occasionally updated for subsequent impact assessments. Existing Community Characteristics: In order to perform a fiscal impact analysis and have a sound basis for interpreting the results relative to the characteristics, needs and problems of the exist- ing community, the community should identify the following informa- tion for each jurisdiction within the community (including the school district, municipality and any special districts) affected by proposed development alternatives: 123 Existing community population; Existing community growth rate; Existing demographic characteristics of the community by subarea (owners, renters, family size, income, sex, race, religion); Existing capacity situation for each community service system; Existing land use composition (and assessed valuation by land use type); Community size and influence relative to adjacent communities (service, employment and residence interdependencies); Existing community vacant land suitable as alternative sites for proposed development: Existing comunity fiscal structure (see "Scope of Study" E.2. and 3 for a sample list of revenues and expenditures) includ- ing: a) Last year's audit and this year's budgeted expenditures by service category b) Last year's revenues and this year's projected revenues by revenue category c) Existing bonded indebtedness of the community d) Reserve bonding capacity e) Bond rating f) Community fiscal record of solvency 9) identifying unexpected fiscal windfalls/disasters. 124 9. Exclusionary considerations: 6) b) C) d) e) 1’) How many multi-family, mobile home and other low-income housing units are available in the community? Is this adequate? Is there room for more? Has the community determined and assumed its "fair share" of low- and moderate-income housing? Do the community plans and the zoning map show large undeveloped areas indicated for commercial and industrial development? Is this justifiable or speculative? Does the community have a previous record for being exclusionary? Does the community have any adopted policy for encouraging appropriate and needed low-income housing? 15 there an adequate supply of land available and properly zoned for low- and moderate-income residences? Do local land use regulations seek to, or have the effect of, excluding low- and moderate-income persons? Have attempts been made to improperly justify these regulations on fiscal grounds? 10. Other local information as appropriate. Among these community characteristics, the one with the most importance to a fiscal impact analysis is the amount and type of excess capacity currently existing in each service system within the community. Each system must be assessed to determine if sufficient available capacity exists to handle the demand from 125 the new development. If insufficient capacity exists, the type, size, location and costs of new system components needed to expand service must be calculated. There are many significantly different, but defendable, approaches to the calculation and allocation of unused capacity. Irrespective of the approach taken, it is very important that the analyst be sure to investi- gate which service systems are presumed to have excess capacity and whether the excess applies only to capital intensive systems where investment increments are very lumpy, or whether labor intensive services are also affected.6 Background information on the fiscal impact Study: sponsor, pur- pose, status. Initially, it is important for the fiscal impact analyst to clearly understand some basic background information about the proposed/completed fiscal impact study. Failure to know the answer to any of the questions below is bound to compli- cate the assessment at a later stage. Information gathered from questions regarding potential study bias is for consideration dur- ing the process of analyzing the results. 1. Who sponsors or requested the study? Who performed or is to perform the fiscal impact analysis? 2. What are the qualifications of the fiscal impact analyst(s)? 3. Describe concisely the purpose of the study (e.g., was it to assess the fiscal impact of a project proposed for rezoning or subdivision approval, or was it an alternative plan evalu- ation)? What were the stated objectives of the study? What 126 were the implicit objectives of the study? What specific information was sought? Has there been any attempt to impugn unstated motives to the study sponsor(s)? Describe any special focus of the study, such as the need to perform a detailed analysis of a subcomponent of the project or of a particular service impact (such as a special focus on a small commercial portion of a largely residential project or the detailed analysis of fiscal impact on a particular service system such as schools). Identify: a) On a map, the geographical boundary of the study (are the study boundaries sufficient to cover primary and secondary fiscal impacts?) b) On a map, the boundaries of the jurisdictions and special districts affected, and separately, those analyzed. c) The total time frame for the analysis. d) The mode of analysis: Is it hand calculated, computer assisted, or derived from previously prepared impact tables for similar development in the community? Is the cost-revenue methodology available for review? What is the status of the plan or project? (e.g., idea stage, design stage, ready to build, reanalysis). Has it been analyzed previously? Based on this background information, and the statement of the purpose of the study, what type of cost-revenue study is 127 this? (See Table 2). Does it appear appropriate for meeting the study purpose? Description of the development alternatives to be considered; True fiscal impact assessment requires comparison of two or more alternative futures.7 Consequently, choosing the development alternatives is one of the most important steps in the entire process. The purpose of the study will obviously affect the alternatives chosen, but the analyst should not be short-sighted. Alternatives should be reasonable, possible and diverse. This is not to suggest that a proposed project should be automatically compared against a "no project" alternative unless there is reason- able means to insure it.8 Furthermore, a developer may be able to develop a parcel in many ways under a given zoning classifica- tion, or may have other sites available if a particular project in one location is denied. Thus, it becomes necessary to consider a number of reasonable alternatives in order to provide an ade- quate basis for comparison of results and relating the impacts of one proposal to those of another. Schaenman and Muller offer the following additional insights: Alternative land uses and alternative sites--and not only those being proposed at a particular time--should be considered in the evaluation. A community has a wide range of needs which may include low-income hous- ing, moderate-income housing, employment, shopping open space, and public facilities. Evaluation must consider the impacts of alternative ways that these needs may be met if the proposed development is not approved. Although the proposed development may have some negative impacts, they may not be as bad as some of the alternatives. Further development or deterioration of the site that may 128 take place without any approval by the local government also should be considered, and not just the conditions 9 that currently ex1st on the proposed development s1tes. The whole question of alternatives begins with the need or demand for the land uses proposed in the project or plan, and ends with those alternatives which reasonably cover the range of probable develOpments. Failure to assess a development proposal relative to an alternative prevents effective comparison and evalu- ation of results. Proposed feasible alternatives to the project/ plan under consideration could include, for example, another plan alternative, development permissible under the proposed/allowed zoning, or the same project/plan elsewhere in the community. One of the alternatives to be evaluated should be development as currently represented on the community zoning map and/or master plan. 1. Is the project/plan really necessary? What is the local need for the proposed development based upon, a market study or planning forecasts? Is this information accurate and up to date? 2. What would be the fiscal (environmental, social, economic, etc.) consequences if the development were not built? Is this alternative considered? 3. Describe the characteristics and development schedule of the proposed project/plan for each alternative: a) Site size and location (attach appropriate photos, loca- tion, maps, site and building designs); 129 b) Amount, size, and value of proposed structures by land use type (e.g., l-50,000 sq ft shopping center, 200 single-family housing units); c) Specifically indicate the number of bedrooms per dwelling unit type of residential development; d) Indicate the location and amount of open space; e) Other project characteristics of local significance. 4. Identify alternative sites owned, controlled or potentially available which would be investigated if the proposed site were locally unacceptable. What are the fiscal advantages and disadvantages of development on the alternative locations? Scope of the study: Identifying the scope of the study involves, in effect, describing the boundaries of the investigation. Once a fiscal impact study is to be performed, the level of detail of the analysis must be considered. Not every analysis need be a "Cadillac"; perhaps a "Vega" is appropriate. The following questions will help identify the scope of the fiscal impact study. When compared to the alternatives under consideration, a judgement can be made as to whether the scope was sufficient to adequately evaluate the fiscal impact of the project or plan under consideration. Whenever a development exceeds the local threshold level of a specific service, or by virtue of the development characteristics (its size relative to existing community). then merely looking at each of these service 130 costs in the study is not sufficient. Detailed marginal cost analysis of these service impacts should be initiated. They should be identified at the start of the study. 1. List each of the jurisdictions likely affected by the proposed development as well as those included in the study. Jurisdictions affected by the Jurisdictions included in development the study Municipality(s) School district(s) Special district(s) County(s) Other List each of revenues included in the study by jurisdiction. Also identify any revenues not included in the study. Examples are listed below: State school aid Local charges for services Real property taxes Local fines, fees, forfeitures Personal property taxes Federal revenue sharing State shared revenues Other local revenues Direct aid (revenue sharing) Other non-local revenues Highway and gasoline tax transfers Cigarette and liquor taxes Sales taxes List each of the public service expenditures included in the study by jurisdiction, indicating whether capital and operating costs were projected separately and which services were lumped together. Also indicate separately any expenditures which were not included. Examples are listed below: Schools--elementary, junior Health care high, high school Welfare services General government services Courts--criminal justice services Police Other social services Fire 131 Library Gas ) these may not be Parks and recreation Electric ) municipal services Streets and roads Telephone) Mass transportation Water supply Sanitary sewer Storm sewer Solid waste (refuse) disposal Identify the land use types separately considered in the study. Examples are listed below: Residential Non-Residential Institutional Single-family detached Commercial Government offices Single-family attached . Schools (townhouses) Local retail Quasi-public and non- Regional retail Duplex profit businesses Garden apartment ghfilesale Religious institutions Mid-rise apartment Other High-rise apartment Office Other Finance-insurance- real estate Research Other Industrial Light manufacturing Heavy manufacturing Other Total Project Only If the whole project is evaluated as a single unit without con- sidering the impacts of various land use types within it, so indicate. Identify the geographical sub-areas and/or specific subgroup fiscal impacts delineated in the study. For example: a) Impacts are calculated for each of the following sub-areas: county, total community, neighborhood, ward, planning dis- trict, transportation corridor, market area, zone district, etc. 132 b) Impacts are calculated for each of the following sub- groups: low- and moderate-income families, business com- munity, adjacent communities, particular racial and ethnic groups, etc.10 6. Identify the time frame for the analysis: a) Total number of years the impacts are projected for, from to b) Are the impacts projected sequentially (year by year) or are they cumulative and presented only in selected years or at project completion? Is this sufficient to encompass the impacts of the project including new capital facilities required because of the development? 7. Are all significant direct fiscal impacts on the affected juris- dictions considered? Which are omitted? Significant omis- sions would include impact on major service systems, such as schools, on adjacent communities, or on major revenue sources. 8. Are any secondary fiscal impacts considered? Which ones? Are there any probable secondary fiscal impacts of signifi- cance that should be examined? Significant secondary fiscal impacts could include impact on adjacent property values and income flow effects. Technical characteristics of the cost-revenue methodology utilized: To a very great extent, the adequacy of a fiscal impact study in providing useful information about the fiscal impact of the proposed project or plan depends upon the particular 133 cost-revenue methodologies utilized. Each cost-revenue methodology, in turn, is associated with particular data require- ments, resource requirements, assumptions and limitations that may affect the accuracy and utility of the results produced. Thus, the fiscal impact analyst must also examine the methodology used (or proposed for use) in order to properly analyze the results of the fiscal impact study. While the characteristics of each type of cost-revenue methodology are not reproduced here, the analyst is referred to Table 4 in the Appendix for a summary listing of the basic characteristics of each of the principal cost-revenue methodologies currently in use. 1. Identify the particular cost-revenue methodology(ies) utilized in the study from the list below. Indicate those public ser- vices whose fiscal impacts are projected using a particular technique. Cost-Revenue Methodologies Public Services Projected Usinnghis Method Community standards methods Demographic pattern/residential multiplier method Assessed valuation and tax base allocation techniques Case study approach Accountants approach Time-series approach Cross-sectional approach Fiscal flow approach Econometric methods Other (specify: particularly with regard to special revenue allocation formulas) 2. Where was/is the necessary data for use with this (these) methodologies (to be) obtained? Is it from recent community 134 records? Is it from aggregated community data? Is it from "old" data sources (such as 1970 census data)? Is it esti— mated? If so, how or by what methods? What proxies have been (are to be) used? Answer these questions for each insufficient data input. Are the revenue allocation formulas accurate with regard to the legal distribution formula for each revenue or are they less refined estimates? This is important because many dis- tribution formulas, such as school aid and state shared revenues, change over time. If the study has not yet been performed, is there sufficient manpower, monetary resources, lead time and staff with the required user sophistication available to perform the study? Are the assumptions of the study specifically stated? If not, can they be surmised from knowledge of the particular methodology employed? Are the stated assumptions pertinent to the methodology employed? Have they all been identified? Specifically, do the methodologies assume that: a) The community operates in fiscal isolation; b) There is no major change in local service delivery systems or in the level of service provided; c) Services to non-residents and non-taxpaying land uses will not change over time; d) Standards (or multipliers) used in the study are reflective of actual community needs/demands over time and do not reflect an upgraded level of service; e) f) g) 135 Characteristics of new residents, residential and non- residential developments are similar to those of existing development in the community; Projection variables adequately reflect new demand and unit service costs; List any additional assumptions either stated or surmised. See Chapter 3, the section entitled "Assumptions of the Method- ology" for a fuller description of these assumptions. 6. Are the limitations of the study specifically stated? If not, can they be surmised? In particular, does the study adequately address each of the common limitations cited below? a) b) C) d) e) f) 9) Scope is too limited for the scale and significance of the proposed development; Predominately average costs are used with few marginal cost considerations; Overemphasis on either short- or long-term considerations; Excess capacity in existing facilities is not adequately considered; Scale economics are not sufficiently considered; Variables used to estimate future demand/costs are related more to input considerations than to outputs; List any additional or special limitations stated or sur- mised. See Chapter 3, the section entitled "Limitations of the Method- ology" for a fuller discussion of these limitations. 136 II. Analyzing the Results of a Fiscal Impact Study: The Second Process A. Examining the results for reasonableness: The first step in the process of analyzing the results of a fiscal impact study is to examine them for reasonableness. This review should include comments from the administrators of various local service delivery systems in order to insure their experienced insights are con- sidered. These administrators should also be asked to suggest ways in which the project/plan could be altered to mitigate any projected negative impacts, and this information incorporated into the next two steps. The following questions should be reviewed in order to discover if there is any evidence of unrea- sonableness. 1. Have all the summary fiscal impact tables been properly com- puted? Do there appear to be any simple mathematical errors? 2. Do any of the projected revenue and expenditure impacts on each service category, land use type and/or geographic sub- area appear disproportionate to other projected amounts? If so, does there appear to be an error or does the output appear valid? 3. Does there appear to be any double counting of revenues or expenditures or omission of critical revenues or expenditures? 4. Do the results look consistent with the results of recent analyses of similar developments? 5. Do any possible errors appear to indicate or be the result of sponsor bias? 137 6. Is there any other evidence the results do not look reasonable within the limits of the study performed? If so, state precisely. Establishing the methodological accuracy or uncertainty surround- ing the results: Presuming that the results of a fiscal impact study appear reasonable within the limits of the methodology employed, and that no simple mistakes have been made, it is necessary to look more deeply at the particular study objective and cost-revenue methodology(ies) employed to determine whether there are any serious methodological errors affecting the study and to establish the range of accuracy surrounding the results. Additional fiscal considerations may also be pertinent such as calculation of the effects of inflation, a break-even tax rate, and application of a discount rate to calculate present value of the outputs. Answers to the following questions will help establish the accuracy of the methodology. 1. Were the methodologies employed in the study inadequate for calculating the fiscal impacts of the proposed project or plan alternatives within the stated purpose of the study and capability of the methodology employed? (Compare with Table 4 in the Appendix.) 2. Was the scope of the study, based on the investigation men- tioned in the last section, deficient with regard to any significant fiscal impacts? Were there any significant deficiencies with regard to technical characteristics of 138 the study (assumptions and limitations in particular)? If yes, does the response to any of these questions indicate that the defects are fatal to the results. What limitations do they effectively impose on the interpretation of the results? 3. What is the stated accuracy or uncertainty concerning the results? Can one be established? If not precisely, identify particular revenues and services most likely to be less accurate than others because of the particular methodology employed. 4. Are the results stated in a range indicative of a particular confidence interval, or are they stated as a fixed value? Can a reasonable confidence interval be identified and applied to the results? 5. Have the impacts of inflation on both revenues and expendi- tures been considered? Have they been considered separately by revenue or expenditure category or applied grossly to the results at the end of the calculations? If not, can reason- able inflation factors be applied to the results? 6. Has a discounting factor been applied to the results in order to calculate the present value of the various alternatives? Why? Is it significant? Identify ways to mitigate negative fiscal impacts: A thorough examination of the results should reveal various places in the proposed development schedule or plan composition that could be 139 altered in order to mitigate projected negative fiscal impacts. For example, a reduction in the number of four-bedroom residences proposed in a development will reduce the projected school-age population and likewise the impact on the local school system which, if it is already near capacity, would thus reduce the projected negative impact on schools. This process of review is called sensitivity analysis and it may identify entirely new alternatives which should be considered, but most frequently is helpful for identifying and assessing features of the proposed development which are principal causes of the projected negative fiscal impacts. In some instances, community support programs or state or federal special program funds may be available which would effectively cancel a negative fiscal impact. Obviously, sensitivity analysis should focus on those variables which were identified as being of greatest significance to the study. These include those services which the development impact may exceed local capacity thresholds and, thus, would most likely generate negative fiscal impacts. The following questions address these problems. 1. What services appear to be significantly negatively impacted by the fiscal consequences of the proposed development? Has sensitivity analysis been performed? Could specific Charac- teristics of the development be altered (and if so by how much) in order to reduce the negative fiscal consequences and still retain a viable development? 140 2. Are there any unavoidable negative fiscal impacts (impacts which cannot be effectively mitigated) if each alternative were constructed as proposed? Identify and quantify these impacts both in the short term and over the long term. 3. Are there any essentially irreversible commitments of fiscal resources associated with any of the alternatives? For example, bonding for a new capital facility is essentially an irreversible commitment of fiscal resources as is the construction of a major new capital facility such as a bridge, freeway, or electric generating plant. Identify these. Analyzing the results within the context of the local community: Once the more technical aspects of the fiscal impact assessment have been completed, it is essential to examine the results within the context of local community interests, plans, needs and other interrelated impacts of the proposed development. A contemporary development plan for that part of the community to be affected, and all attendant local policies and programs. is the most important backdrop for the analysis of the proposed development. McDonald & Smart describe the importance of this step below: Given that the analysis of a project in isolation does not provide a context sufficiently broad to assess its impact, the analyst must not be confronted with the equally frustrating situation of having to reanalyze with each Broject the complex systems involved. Nor can the pu lic or its representatives re-evaluate all policies in considering each project. The 141 appropriate process is for basic system planning and policy determination to take place in the context of plan preparation and for individual projects to be evaluated with reference to the plans. Each of the questions below help define the appropriate community context for reviewing the results. 1. How does each alternative compare with adopted community goals, policies, plans and programs for the area affected? Are consistent alternatives fiscally viable both from developers point of view and from the public's? If the development alternative that is consistent with local plans produce a negative fiscal impact, is it justified in terms of other community goals and programs? Likewise, is the developer's proposal better? Or if a plan is being evalu- ated, does its overall composition represent a fiscally sound development pattern? If not, what must be changed to make it 50? Should it be changed? Does it contribute to meeting a low-income housing need? Are the local policies inclusionary? How do the alternatives compare one to another? Does one appear better adapted to the area in question? Are the fis- cal impacts of the alternatives uniform over time? What are the long-term and short-term fiscal impacts of each alterna- tive? Certain services and variables were identified at the start of the study as being of particular significance due to the likelihood of negative fiscal impacts, because the specific 142 service or community thresholds were exceeded, or because of their significance to local clientele groups. What does the fiscal impact analysis reveal about these important specific service or community impacts? How do these impacts in particular vary among the alternatives? What is the collective fiscal impact of each alternative in relationship to all other development taking place in the community now and as is projected for the future? A multi- family low-income housing development with a projected nega- tive fiscal impact may be effectively cancelled by commercial development currently taking place in the community. This reason, and because the low-income project may meet other community goals, suggests that it should be evaluated within the context of both community goals and other development occurring in the ommunity. A fairer analysis is to assess impacts of several projects in an area simultaneously.12 Are the synergistic fiscal effects of the proposed project (or plan in particular) clearly identified and considered? Likewise, are secondary fiscal impacts and spillover fiscal impacts on adjacent jurisdictions presented? Can these be effectively quantified? Are the fiscal impacts of each alternative on specific clien- tile groups clearly delineated?13 Are the fiscal impacts of each alternative being evaluated within the context of a broader environmental, social and economic impact assessment process? 10. 143 What special significance does this project or plan have with regard to potential exclusionary consequences, based upon the fiscal impact analysis of the alternatives? Would a favorable recommendation concerning any of the alterna- tives be evidence of an exclusionary action or evidence of arbitrary fiscal zoning? If there appears to be exclusionary intent or result from a particular decision on a request, how does the decision basis compare with local anti- exclusionary policy or with state policy? Does the fiscal impact study show any evidence of being pre- pared or used for any of the following imprOper purposes: a) To exclude the proposed use solely on fiscal grounds? b) To seek only positive tax ratables? c) To wrest unconscionable exactions from a developer not in keeping with other previous decisions, so as to alter more positively the projected fiscal impacts. If the study was prepared by a representative of a development company, is there any indication: a) Of an unjustifiably limited analysis which merely addresses positive fiscal impacts and appears to ignore important negative ones? b) Of a development schedule whose density and composition are not contrary to community plans, but which, if built, will cause disproportionate fiscal and service impacts on the community, so as to greatly constrain development 144 potential on adjacent parcels or which may irreversibly commit the community to a fiscally unbalanced land use pattern in that section of the community. Documenting the study methodology and study results: It is very important for the fiscal impact analyst to document not only the study results, but also the study methodology for future referral when memories dim or when consulted by others. If a particular methodology is consistently applied within a model or uniform format, it only needs to be documented once. 1. Have the study results and study methodology been adequately documented? Can the results be reproduced using the docu- mentation prepared? Reporting the results to decision-makers: It is not sufficient for an analyst to merely do a competent technical documentation of the study results. The most important purpose of a fiscal impact study is to provide useful information to decision-makers about a prospective development or community plans before critical decisions are made. Thus, the study results must be presented to decision-makers in a form easy for them to understand and apply. Ideally, the results should clearly identify the fiscal impacts and related consequences of each alternative on the com- munity as a whole, and on its affected clientele groups and, most importantly, it should focus on the options available to the decision-makers.14 The following questions may be used as a guide for syn- thesizing the results of a fiscal impact analysis. 145 Do the results clearly identify the relevant fiscal impacts of each alternative on the existing revenue and service delivery system of the community (each jurisdiction), in both the short- and long-term, in a specific quantified form including uncertainty? Are the fiscal consequences of each alternative on its affected clientele groups and/or relevant geographic areas clearly identified? Are the viable options with regard to the proposed develop- ment or plan clearly identified? These options should include consideration of all proposed impacts of the develop- ment, not just fiscal impacts. Is proper consideration for the relative importance of the proposal contained in the summary of the options available? (i.e., is the project precedent setting or very large in scale and, therefore, worthy of extra special scrutiny?). This summary should identify important trade-offs between alternatives and identify what changes could be made to the development to improve its fiscal impact and to what extent these changes affect the outcome. Have all potentially exclusionary pro- visions been identified and pointed out to local officials? How does each alternative compare to help achieve established community plan, program and goals, or objectives? A method for recording these relationships was suggested in the Barrington Study and is reproduced on the following page.15 146 AID FOR MAKING AN INDIVIDUAL DEVELOPMENT DECISION STATEMENT OF THE ISSUE: ALTERNATIVE 2 ALTERNATIVE N GOALS AND OBJECTIVES ALTERNATIVE I GIML STATEMENT N0. I __ __ -__.__ - _ _. .J'BJE'..'I'1V.‘.‘ A _ . OBJECTIVE B _____ _ _ ._ .._.__..____ OBJECTIVE C .3 GOAL .S'TA'I'EIENT N0. 2 ()IJJEC‘TI VE A OBJECTIVE B OBJECT! W: C 00A]. STATEMENT N0. 3 OBJECT! VF A 05.?! ‘7'! V5 8 JBJEJTI VS C GOAL .‘1‘ 7'11 TEAENT N0. 4 OBJECT} DE A OBJECT! Vb‘ B OBJH‘TIVE C RATING TOTAL ENTER HERE A BRIEF NARRATIVE EVALUATING ALTERNATIVE 1 BEST RATE ALTERNATIVE RATING AID FOR MONITORING IMPACI OF PAST DEVELOPMENT DECISIONS G O A I. S T A T E M E N T DECISION MADE DATE No.1 N042 No.3 no.4 I . ._ .. __ -w .. _ -.._. _.._._ 2. ______ L _ _ - __ 3. __.__._.__- I..- 4 __ __...__ __ __._ 5 __._________ 6. _ - PRMRESS TO DATE _.___.._.___ —‘ “’— _'—‘ “""—’“’—_ ON EACH GOAL —'—_ _ — —- -'__'- “T'— —— .— ”mfl‘-——-— —.—-t —-———-—— .__._-_._. -———.—. .—__— 1‘ \ ENTER SUMMARY OF 0N GOAL NO. 2 CUMULATIVE IMPACT NARRATIVE OF ENTER BRIEF IMPACT ON GOAL N0. 2 Figure 2. Aids For Development Decisions 147 III. Feedback--Evaluating the Fiscal Impact Assessment Process Over Time: The Third Process A. Importance of periodic review and re-evaluation: It is important to recognize that a fiscal impact assessment process, just like the planning process, or a growth management system, is not in itself an end to be achieved nor is it a goal to be sought after. Quite the contrary, it is a process, a means for provid- ing information to more rationally achieve long-term community goals, and for gaining the benefits of orderly community develop- ment. Consequently, its effectiveness must always be monitored and necessary improvements made if it is to serve its role in an optimum manner. This third process in a fiscal impact assess- ment requires the analyst to: 1:“.Systematicblly.retordrthe results of each fiscal impact assessment for comparative purposes in order to determine the cumulative impact of development; 2. Periodically re-evaluate past analyses to test the accuracy of the estimates made; 3. Discover where improvements are necessary; 4. Establish and continually update a data base necessary for making future impact assessments; and 5. Monitorllgcalcfiscal structural changes over time. Monitoring the cumulative fiscal impact of development: In order to monitor the cumulative fiscal impact of development over time, it is useful to accurately record each successive development fiscal impact review on a uniform record sheet. 148 A simple format is suggested below.16 See Figure 3. A similar format can be used to continually monitor the capacity of local government facilities and of private utilities to assimilate new development.17 See Figure 4- This monitoring process can be organized by geographic sub-area or service districts of the community, or kept at the total community level. Some care must be taken to make sure all inputs were derived by the same methodology and, thus, are both cumulative and comparable. Also, some services in parti- cular areas may require more detailed monitoring due to limited capacity and/or rising cost problems. Obviously, use of a computerized fiscal impact model that is systematically applied to all development proposals in a community is a very useful aid in maintaining these kinds of records. When detailed mar- ginal cost analyses of particular services in particular areas need to be done, greater resources can be devoted to this with- out ignoring the calculation of fiscal impact on other community services. Over time, analysts should also check to determine if there is any evidence that through local land use regula- tions and in zoning decisions that exclusionary zoning or fis- cal zoning considerations result in the exclusion of mobile homes and lower-income housing from the community. Checking the accuracy of the fiscal impact methodology: Periodic re-evaluation of part fiscal impact assessments is necessary to test the accuracy of the methods used. It will often point up the places: where methodological revisions are necessary; where 149 .pcmsqopo>mo Co pumaem Fmom_u m>mpm~3530 acreopwcoz .m mesmwm m e m N F mmwucmm m e m N F um>ogqm< pumqu pomaEH mmacm>mm owpazm mpmou UAPnzm mum: mom: can; pounce; _mumwm Pmomwu m>wumpaszu umz 150 .zpvumnmo xuwpwome pausegw>ow Paco; mcwgouvcoz .¢ «game; Axywomamv gmsuo mxgozum: powgpmwu Lo mpcmpa ovguompm use mam mmwgocawg memos gown: mmvapwome ;p_mo; gmgpo ucm upmuwamo: mmwuwpwumm coAummgomm mawpvpeaae Famoamve mama: uwpom mcowpmpm mgwm use mowpom mpoocom cowpmpm mcquaa Loam: pcmpa “coaummgp mmmzmm xgozpmc mmmcwmgv Egopm use mmmzmm Amoev mmwpmg mo we?» pmmwpgmm .umoFLm>o CH pcmsqopm>mo cmp$< unmeaoem>mo mgommm vow: mwwmmmmu new» mwxm eo pcmogmm »a_Pwuaa up_n=a to maze 151 variations in estimating accuracy occur between types of services; of specific service agency constraints in provision of services; and where threshold levels may need to be revised. This should be periodically performed and sooner if an apparent methodological error appears, or when better projection method- ologies become available. D. Need for operable information gathering, storage and retrieval system: Continual monitoring of fiscal impact studies requires the establishment and maintenance of a data base and information system in order to most effectively perform future analyses and for monitoring local fiscal structural changes over time.18 Chapter Summary This chapter has two major purposes. First, because fiscal considerations are often overemphasized and sometimes even deified in local land use decisions, this chapter opened with a discussion of the proper relationship of fiscal impact studies within the local decision- making process. This discussion explained that fiscal impact considera- tions are very narrow and should be analyzed only as a part of a compre- hensive local environmental impact assessment process. It was also emphasized that impact assessment techniques were planning tools to be applied within the context of the local planning process and as needed in making growth management decisions. Clearly, the principal purpose behind impact assessment techniques, as well as the planning process, is to improve community decision-making. With this as the goal, responsible and informed application of such tools as fiscal impact assessment are 152 critical to optimizing the development and application of effective local growth management systems. It was also suggested that the success- ful fiscal impact analyst must have both the skills of a technician and a social conscience in order to properly relate the results of fiscal impact analysis to local decision-makers without ignoring the need to insure that, in the aggregate, new development will be a benefit to all community residents. 5 The second major purpose and the principal focus of the chapter is the development and illustration of a framework for initiating or analyzing a fiscal impact study. This framework is prepared for use by local planners whose knowledge of fiscal impact analysis is often limited, yet they may be expected to prepare, on a moment's notice, a competent, complete review of a consultant's study or are asked to prepare a fiscal impact study on a local project. By following the steps outlined in the framework presented in this chapter, a planner could prepare reasonable and consistent reviews of fiscal impact studies and could initiate back- ground work into preparing a local fiscal impact study. The fiscal impact assessment framework presented in this chap- ter has been conceptualized as three separate interrelated processes. The first process is actually calculating the fiscal impact of a project or plan using cost-revenue methodologies once it is determined a study should be performed. The second process involves analyzing these results for accuracy and to place them within the context of other development occurring or likely to occur within the community. The importance of putting the information in a form to meet decision-makers' needs was stressed. The third process is one of feedback, where various techniques 153 and community fiscal impacts are evaluated over time in order to make improvements in the methodology and to alter community plans when neces- sary. With this framework and its outline format, a prospective fiscal impact analyst should be able to confidently face a task of assessing or initiating a local fiscal impact study, satisfied in the knowledge that the basic criteria for doing a good job were before him/her. 154 CHAPTER 4 Footnotes 1The impact assessment process as used in this thesis is suitably defined by Runyan as follows: "Impact assessment . . . means forecasting the future effects (consequences, impacts) of a proposed policy, project or some other particular intervention. Impact assessment forecasts conseqpences of specificpproposed actions,yit is a particular form of predicting the future.‘' Dean Runyan,“Tools for Community Managed Impact Assessment," AIP Journal, Vol. 43, No. 2, April, 1977, p. 126. 2Richard N.C. Andrews, "Impact Statements and Impact Assess- ments," in Management and Control of Growth, Vol. III, ed. by Randall W. Scott (Washington, D.C.: The Urban Land’Institute, 1975), p. 155. 3Philip S. Schaenman, Using An Impact Measurement System to Evaluate Land Development (Washington, D.C.: The urban Institute, 1976), p. 5. In addition to these advantages of impact assessment systems, Schaenman also identifies five possible disadvantages to using impact measures. In all fairness, an analyst contemplating increased use of impact assessment measures should also consider these disadvantages before embarking indiscriminately down the path of "rational decision-making." 4Philip S. Schaenman and Thomas Muller, Measuring Impacts of Land Development: An Initial Approach (Washington, D.C.: The Urban Institute, 1974), p. 3. 5See,for example, McDonald & Smart, Inc., Fiscal Impact Study for the County of Sacramento (Sacramento, Calif.: Prepared for the Com- munity DevelOpment and”EhVironmental Protection Agency of the County of Sacramento, 1975), pp. 52, 100, 111, 134. 6A good example of how excess capacity can be systematically treated is found in Fiscal Impact Research Project Volume 1: Report on First Generation Model Development by James E. Frank, University of Florida. *This model calculates Slack capacity in the following capital intensive services: drainage, sewers, water, electricity, hospitals, schools, streets and highways. It assumes that capacity matches demand and that no unused capacity is available for labor intensive services, including: fire, health (other than hospital), police, solid waste, general government, libraries, recreation and welfare. Likewise, an attempt is made to categorize excess capacity of capital intensive systems depending upon the functional nature of the system, as follows: area- wide capacity; district capacity; location-specific capacity; looped network (e.g., water); and directed network (e.g., sewers). Obviously, this kind of detail requires a thorough inventory and description of each existing service system and its capacity (including total capacity, 155 current utilization and remaining excess capacity, as well as means for allocating unutilized capacity and determining its per unit cost), and should involve mapping of capacities by service category and geographic area for the easiest interpretation. As Schaenman and Muller noted in Measuripg Impacts of Land Development (p. 37): "The graphic presentation of capacity measures will not only assist officials in deciding land use cases. It will also dramatize the importance of capital improvement programming and budgeting as an integral part of the community land development process." James E. Frank, Fiscal Impact Research Project Volume 1: Report on First Generation Model Development (TallEhassee, Florida: University of Florida, 1976), p. 2.8. 7See for example McDonald & Smart, op. cit., pp. 31 and 45. 8For example, a "no project" alternative may require public purchase of the land or enactment of policy measures that would effec- tively restrict any desired development. If this is not likely to happen, that alternative should not be examined. 9Schaenman and Muller, op. cit., p. 3. 10Muller and Schaenman have identified significant clientele groups potentially affected by most development; they include: those in close physical proximity; those with business relationships; those in various political jurisdictions; those with various socio-economic and demographic characteristics; other interest groups; and the long-term public interest (including future generations). Because of the interests of each of these clientele groups the fiscal impacts of alternative developments should be specified by geographic sub-area as well as by totgg community impact where possible. Schaenman and Muller, op. cit., p. . 11 12Barton-Aschman Associates, Inc. has "suggested that groups of development projects proposed over a period of time (six months to one year) be evaluated together, particularly if they are located within one sub-area or section of the study area. The combined impact of a series of contiguous and/or coordinated projects, with possible internal cost- revenue trade-offs, should be estimated. This will give the rest of the area some indication of the overall effects of especially active develop- ment efforts in some sector or sub-area. Barton-Aschman Associates, Inc., The Barrington, Illinois Area Cost-Revenue Analysis of Land Use Alterna- tives (Chicago, Ill.: [prepared for the Barrington Area Development Council] by Barton-Aschman Associates, Inc., 1970), p. 56. McDonald & Smart, op. cit., p. 32. 13Ashfichaenman and Muller note: "The impacts of development do not fall evenly across a community. As a result of changes in land use, benefits are enjoyed and losses are suffered in various ways and to vari- ous degrees by many different groups--such as the owners of the development 156 site, nearby residents, commercial interests, and persons being displaced." Schaenman and Muller, op. cit., p. 29. 14Burchell and Listokin have identified five characteristics of a good environmental impact analysis; these characteristics also apply to a good fiscal impact analysis and provide a useful structure for pre- senting the results of a fiscal impact analysis. ". . The analysis should have the following attributes: 1. As much quantification of decision-making information as possible; 2. A clear delineation of the spatial and temporal scope of the impacts with special attention focused on the choice of boun- daries and on the definition of the area or areas of greatest impact; 3. A set of parameters which characterize the impacts and indicate their importance, both at the time of construction and during the operation of the proposed facility; 4. At least a minimal means of comparing the impacts so that impor- tant trade-offs and substitutions may be isolated; and 5. A means of identifying and measuring further projects likely to be induced by the proposed project. . . the user should report in a quantitative format that will enhance credibility by indicating both the sources and reliability of information. " I -- Robert W. Burchell and David Listokin, The Environmental Impact Handbook (New Brunswick, New Jersey: Center for urban POlicy Research, Rutgers University, 1975), pp. 38- 42. 15Barton-Aschman Associates, Inc., The Barringtop,_Illinois Area Phase 2: Evaluation of Growth and Governmental Alternatives (Chicago, Ill. [Prepared’fbr the Barrin ton Area Development Council] by Barton- Aschman Associates, Inc. , 1970, p. 79. 161bid., p. 81. 17 18See for example, Barton-Aschman Associates, Inc., Barrington Area Phase 2 Study, op. cit., pp. 69-70. Schaenman and Muller, op. cit., p. 36. CHAPTER 5 SUMMARY AND RECOMMENDATIONS FOR FUTURE RESEARCH Introduction The final chapter of this thesis will attempt to summarize the most important observations made in the preceding feue chapters. Addi- tionally, however, this chapter will suggest some recommendations for future research into the use of and technical quality of fiscal impact assessments. It is the author's hope, of course, that these suggestions will be acted upon in subsequent studies so as to improve the utility of and quality of the fiscal impact tools available to local units of govern- ment. By making these improvements, local units of government will be better equipped to deal more rationally with the challenges of develop- ment; for fiscal impact analysis can play a valuable role in local decision-making, especially with regard to the efficient provision of community services within a growth management context. Summary This thesis has been written for the prospective fiscal impact analyst. As such, it is largely descriptive and educational in content. Its purpose is to provide a prospective fiscal impact analyst with a working knowledge of cost-revenue analysis so that he or she can (1) properly evaluate a fiscal impact analysis prepared by someone else, 157 158 (2) have enough knowledge to know how to begin to develop a local fiscal impact study, and (3) understand where fiscal impact analysis fits in, relative to other assessment tools, and the planning process and, by so doing, to describe what it does and does not do, and what it should and should not be used for so that it can be fairly used to present relevant and qualified information to local community decision-makers. To achieve these purposes, it was necessary to define what fiscal impact analysis is, and to illustrate both how it is applied and what methodologies it uses. This was done by developing a typology composed of seven cost- revenue study types and nine cost-revenue methodologies. The major characteristics of each study type and methodology were presented and discussed. These included the scope, data, resource requirements, assump- tions, limitations and accuracy of each methodology. However, merely educating the prospective fiscal impact analyst about the practical and technical aspects of the field was not felt to be adequate, considering the fact that communities have long used far less sophisticated tools than fiscal impact analysis to discriminately permit or disallow new development. Thus, an effort was made to des- cribe the context within which fiscal impact analysis could and should be used. Importantly, this discussion emphasized (l) the narrow scope of fiscal impact analysis; (2) it identified the pervasive and often insidious nature of local interest in fiscal impact analysis as a possible tool for use in justifying local exclusionary practices; and (3) it emphasized the importance of linking fiscal impact analysis with other impact assessment tools in order to get a complete picture of the 159 environmental impacts of development alternatives before important decisions are made. It was pointed out by example of the Mount Laurel case that the failure of communities to follow rational and socially sound growth management procedures may result in judicial scrutiny and perhaps invalidation of local exclusionary practices. Finally, a three-process framework for analyzing or initiating a fiscal impact study was presented. With this information, a prospec- tive fiscal impact analyst should be well prepared with background information and a checklist framework to efficiently utilize time and resources in the development or assessment of a fiscal impact study. The analyst can be confident that the information in this thesis will help identify the significant problems/errors that must be dealt with in a fiscal impact study. It should perhaps be reiterated that the author justified the need for researching and writing on this subject because of four observa- tions he had made while assisting in the formulation of the Urban Develop- ment Cost-Revenue Model, a fiscal impact model prepared for the Tri-County Regional Planning Commission, Lansing, Michigan. These observations pointed to the need for a document prepared for the prospective fiscal impact analyst, and containing basic educational material on the field of cost-revenue analysis. These observations are summarized below: 1. Many communities are very interested in the fiscal impacts of develOp- ment but may not have available and knowledgeable staff to use such a tool; others seek to crudely apply fiscal impact analysis as justi- fication for local exclusionary practices or as an inflexible 160 decision rule whereby only new development that "paid its own way" would be permitted. Many critics of cost-revenue analysis feel that it is inappropriate as a planning tool because of its accuracy limitations. However, many of these criticisms fail to acknowledge that communities are interested in the fiscal consequences of development decision. Com- munities are interested because they are responsible for managing their fiscal resources wisely. Consequently, they place great value on fiscal considerations in making development-related decisions. Since there is much potential for improving upon the accuracy and current limitations of cost-revenue analysis with the proper research, criticism should be constructively focused more on reform and the need for improved methodology than on its misapplications and limita- tions as a planning tool. Critics also fail to recognize that despite the limitations and high costs of "one time" fiscal impact studies or the development of model methodologies, the possible costs of not attempting to discern the fiscal impacts of development may be much higher. To some extent, a developer who presents a study purporting to show the fiscal impacts of his proposed project or plan may be in a posi- tion of unfair advantage when the community is unable to properly evaluate and verify the accuracy of his study results and his enticing claims. These observations point to the need for education of the users of fiscal impact analysis and for research into making improvements to the existing methodologies. This thesis has attempted to address these needs. 161 Clearly, however, the field of cost-revenue analysis needs considerable improvement in its techniques and applications before it can be wholeheartedly accepted by many economists and before it most effec- tively assists in providing the kind of accurate and detailed information needed by local decision-makers. For that reason, the last section of this thesis suggests a variety of improvements and areas for additional research into the field. These recommendations have been broken into two categories. The first is recommendations for future research into techni- cal improvements to cost-revenue methodology and the second set addresses the need for a mechanism for disseminating and maintaining up-to-date cost-revenue technology in local units of government. Recommendations for Future Research Technical Improvements The success of cost-revenue analysis in significantly contributing to the fiscal information surrounding development alternatives and, subse- quently totthe quality of the decision made, will depend largely on the accuracy and resource costs associated with applying cost-revenue method- ologies. It is, therefore, very important for additional research efforts to concentrate on improvements to (or substitutes for) existing method- ologies and to initiate efforts for better data collection, storage and retrieval systems. These technical improvements would greatly enhance present cost-revenue technology. One writer has described this need as follows: 162 . . one of our primary contentions is that a substantial amount of further effort will be required in the field to develop truly meaningful studies and--of equal importance-- to communicate these conclusions properly. The real cause of the dilemma, in our opinion, relates to the lack of information available with which to perform the studies. Generally, the desired sophistication of the end product is completely beyond the existing capabilities of most municipal accounting systems. It is not uncommon for analysts in the field, with considerable experience, to sug- gest that meaningful cost-revenue studies are literally impossible. However, the intensity of the forces behind the desire for managed growth are such that continuing efforts in the field are mandatory in spite of the limitations. It is, we believe, only through the continuing pressure from the public, from developers and from municipal staff that the very necessary program budgets and unit cost-accounting systems will be instituted.2 Some specific recommendations for technical improvements follow. Research efforts should focus on improvements to the allocation methodologies, or algorithms, used by the various fiscal impact techniques. In particular, these methodologies rely to varying degrees upon proxies, often in the form of standards, generation rates and demand coefficients. Research into standards should be done: (10 to verify that national or regional standards are applicable locally; (2) to establish whether the standard represents the mean service demand or facility needed, or whether it represents a desired level of service to be achieved; and (3) to periodically review and update standards to insure continued validity. Additionally, efforts to establish local pupil and household generation rates should be undertaken and continually maintained, by housing type and bedroom mix, since many municipal and school expenditures are projected using allocation methodologies which depend on this information. 163 This is especially important if the average household size and student population continues to drop. Likewise, research into identifying and measuring the demand coefficients for all municipal and school services should be undertaken. Attention should focus on the highest cost local services initially, such as schools, police, fire and "general government" services. The lack of contemporary research into what causes, or generates, public service demand, and what factors it is related to (such as land use types, various population characteristics, the local economy, and cul- tural influences), is very poor indeed. Little scattered research with virtually no uniformity has been done with regard to many basic public services, although some interest is beginning to surface. Consequently, fiscal impact studies have resorted to a variety of proxies to represent demand for service and service provision, such as presuming new police costs per person in the community will rise proportionally to the increase in new community population. Unfortunately, the relationship is not that simple, but in the absence of sound research information, it is difficult to say precisely what that relationship is. Probably the worst information on demand generation concerns that large "general government" services category which includes most of the administrative activities and overhead costs of government, such as clerk, treasurer, assessor, planning, etc. What causes cost increases in these services? What is growth in these costs related to? How does new development create new costs for these services? Little is known, but current proxies generally overstate new costs in these services, since there is often significant excess capacity with low marginal costs 164 associated with development—induced general government cost increases. We need to learn more about these relationships in order to improve our fiscal impact allocation methodologies. Research should also be initiated into the accuraoy of various cost-revenue methodologies by verifying whether the projections made are actually correct. This will involve considerable expense in redoing studies and in monitoring costs over time, but is essential to determining whether some of the eXisting proxies and demand coefficients reasonably well predict future public service costs. It will, of course, be diffi- cult to identify whether outside influences, like unusually high inflation or a basic change in revenue sources, were responsible for any discrep- ancies, but the effort must be made. In fact, some research should be undertaken to establish whether or not the principal assumptions of most cost-revenue methodologies could be eliminated by incorporating the assumed conditions into the predictive algorithms. If successful, the limitations and accuracy of cost-revenue projections should also signifi- cantly improve. Local units of government rarely know much about the capacity both of particular facilities and syttem-wide services, thus greatly complicating a local cost-revenue analysis. Yet, the key to efficient municipal service provision is knowing at any time what the capacity levels are. This requires not only a thorough inventory of capacities for each service, but also monitoring these over time. Research into general municipal services capacity-~particularly cross-community studies--would at least provide indicators of service system capacity conditions for communities with a variety of characteristics. Such 165 information would be of some usefulness to communities without such basic information. Furthermore, it would provide a rudimentary basis for designing more efficient local service delivery systems, for once knowledge about existing inefficient systems becomes available, efforts can be undertaken to prescribe remedies and design better systems. Future local efforts to utilize fiscal impact analysis should also focus on integrating the analysis into a comprehensive environmental impact assessment process, with particular emphasis on making the fiscal impact analysis a standard part of a local economic impact analysis. Many of the secondary impacts of development alternatives which have both significant economic and fiscal implications can be best identified and evaluated within the c0ntext of an economic impact assessment. This is especially important because, to some extent, new jobs and new local income may provide a significant positive influence which may offset some negative fiscal implications of the new development on local services. Summarizing, future research efforts into cost-revenue analysis should seek to improve: local data accounting and collection; creation and use of service standards, generation rates and demand coefficients associated with various cost allocation methodologies; local system capa- city information; and the application of fiscal impact analysis in con- junction with other (notably economic) impact assessment techniques. Improvements in these areas will significantly improve the accuracy and enhance the application of fiscal impact techniques. One could also reasonably expect that with improved and widespread education of fiscal impact analysts, there would be less likelihood for improper application of fiscal impact studies within exclusionary contexts. 166 Mechanism for Statewide Application and Education The other major area for improvements to cost-revenue analysis as a planning tool deals with creating a mechanism for educating local communities on its proper application. Currently, some communities are "experimenting" with fiscal impact analysis while many others blithely go on making decisions on new development alternatives without objec- tively and systematically considering the fiscal (or other) impacts of proposed development. Yet, these same communities often also complain of their high tax rates, dwindling industrial bases and declining school age populations. In part, this is because no group has heretofore attempted to make a serious and continuing effort at educating local units of government about fiscal impact analysis. Even a unidimensional effort of selling fiscal impact analysis is worthy, because once com- munities become impact conscious, it is easier to convince them of the need for, and value of, utilizing other impact assessment procedures. Fiscal impact analysis is perhaps the ideal starting point, because it utilizes that universal medium-—dollars and cents--as the communicating vehicle. However, because the resource costs of developing cost-revenue methodologies which are reusable (i.e., model methodologies, whether manual or computer assisted, as opposed to "one time“ studies) are quite high for many communities and, since communities within a region (if not a state) have similar fiscal structures, it is suggested that an effort be made to assist local units of government in the understanding of and 167 application of fiscal impact techniques by means of a state-regional coordinating structure. Under this kind of structure, the most effective mechanism for research and model development, as well as information dissemination, could be organized. Ideally, a state agency should develop the basic fiscal impact model methodology flexible enough for application in all localities across the state. The state agency could then serve as the direct communicator with the localities or, alternatively, provide the model methodology and computer software to regional agencies throughout the state who would directly assist the local units in that region with the fiscal impact analyses of proposed local developments. The state agency could then concentrate on research into model improvements, could serve as data collector and analyst for various generation rate data and service demand data necessary to establish local demand coefficients, and generally could keep the model up to date. Regions could help local units with the technical application of the model and do research into local service system capacities as an aid in establishing local threshold indicators. In this way, the state, through its regions, could even monitor a significant portion of new development proposed each year. Addition- ally, this would help in the monitoring of progress toward meeting regional housing assistance plans and for meeting the needs for housing for low- and moderate-income persons. Incidences of exclusionary zoning and fiscal zoning should decrease, as attention would be focused on the need to reasonably meet the challenge for growth management and respons- ible local fiscal management, in a socially positive manner. 168 Furthermore, the state agency would be in the position to investigate likely alternative fiscal impacts from various hypothetical developments proposed in a variety of community types. In this way, the fiscal impacts of development on hypothetical communities with various fiscal, social and land use characteristics could be calculated. This would serve as an aid to creating reasonable service threshold measures, below which individual development fiscal impacts were not significant. Then communities with characteristics similar to the hypothetical ones, when faced with development proposals similar to those calculated, could get a reasonably good idea--very quickly--of the likely magnitude and type of fiscal impact of a particular development on their community. This information could save considerable resource costs and still allow more detailed analyses of larger projects or thoseeanticipated to have greater environmental impacts. Another research effort could then be centered on examining policy alternatives for decision-makers faced with development having negative fiscal impacts.3 A state agency could help establish whether various mitigating measures, such as development impact fees, mandatory land dedication schemes, or subdivision exactions, were both legal and of the proper magnitude, under various situations, to be permissible under the police power and laws of that state. These kinds of research efforts, when combined with education and direct technical assistance to regions and local units of government, by a state agency, would help insure the optimum application of the best available cost-revenue tech- nology to local units of government within a state. This kind of thinking 169 reflects the contemporary opinion that there is a proper role for each level of government in how services are delivered and growth is guided. The biggest share of this responsibility must rest at the local level, but the research, development and monitoring of its application may best be done by the state who, in turn, should provide moneys and other forms of direct technical assistance, upon request, to local units of government. Regions can also play a valuable role in this process. The material in this thesis suggests a number of conclusions that establish the context within which fiscal impact analysis should be viewed and used. Clearly, the demand for the kind of information produced by cost-revenue analysis is very high. Just as clearly, the results of a fiscal impact analysis are neither comprehensive nor com- pletely accurate, yet they do provide vital information on the amount and direction of the primary fiscal impacts of development. Its most frequent applications at the local level are likely to remain in its evaluations of altErnative plans and of particular development proposals. Thus, fiscal impact analysis can be very useful in planning and managing the fiscal impacts of development. Cost-revenue analysis will be espe- cially beneficial as a decision-making aid (not as decision rules). Yet, it must be used with sensitivity to the possibility of improper applications and with full knowledge of both the common criticisms of the tool and specific limitations of particular methodologies. Yet, despite legitimate criticisms of the tool and inherent limitations of each of its techniques, its usefulness and potential are of greater significance than these current problems would indicate. If improper applications of the tool are due to ignorance of legitimate 170 applications, then education is the answer. If techniques need to be improved, then applied research must be done. By ignoring or unjustly criticizing cost-revenue methodologies, neither local development-related policy decisions nor the cost—revenue methodologies will improve. Cost- benefit analysis, while more comprehensive, does not automatically fill the void. And as long as the property tax is such a significant part of our local revenue systems and is the basis for our local services, the incentive will be very strong to assess the fiscal impacts of growth. Responsible local fiscal management demands it. Furthermore, not knowing the costs of development may well create greater problems and foreclose other options for the future. Of course, until education and research have begun, these negative implications place a great burden on the fis- cal impact analyst to be sensitive, strategic, informed and proper in the application of fiscal impact methodology. In conclusion, the current usefulness and future potential for more accurate applications of fiscal impact analysis far outweigh its current limitations as a viable planning tool. Its appropriate applica- tion should therefore be encouraged. Nevertheless, current valid criti- cisms of the tool justly require recognition of its limitations and reasonable attempts to both inform users of these limitations and to engage in research to improve existing techniques. Progress in these two areas, in research and in education, will determine the future for effective utilization of fiscal impact tools in local development-related decision-making. This thesis is written to help begin to fill these gaps; future efforts must close them. 171 CHAPTER 5 Footnotes 1Robert L. Dunham, Approaches to Fiscal Impact Analysis, a paper prepared for "Growth Management Seminars," University of California (Berkeley, Calif.: Institute of Urban and Regional Development, Uni- versity of California, December, 1974), p. 1. 2Ibid., p. 2. 3James E. Frank, Volume 1: Report on First Generation Model Develppment of the Fiscal Impact Research Project (Tallahassee, Florida: Florida State UniVersity, l976), p. 1746. APPENDIX APPENDIX A SUMMARY OF PRINCIPAL COST-REVENUE STUDY TYPES AND METHODOLOGIES Introduction This appendix provides detailed supplementary information to material presented in Chapter 3. The appendix is divided into two parts. The first part further describes and provides representative references to the seven previously identified principal cost-revenue study types. The second part of the appendix individually summarizes each of the nine principal cost-revenue methodologies and illustrates how they relate to one another in Table 4, which presents the basic characteristics of each methodology. Additionally, three common revenue allocation techniques are identified and discussed. This material is designed to be used for reference purposes when applying the fiscal impact analysis framework presented in Chapter 4. The author owes a great debt in this summary of cost-revenue methodologies to material presented in Thomas Muller's Fiscal Impacts of Land Development (Washington, D.C.: The Urban Institute, 1975) and the Rutgers-BAA Study "working papers" described in footnote 13 of Chapter 3. Consequently, for additional information on the cost-revenue methodolo- gies summarized in this chapter, the reader is reférred to these two works. The Rutgers-BAA Study is to be published by the Center for 172 173 Urban Policy Research, Rutgers University, New Brunswick, New Jersey, in the fall of 1977. It is to be titled Cost-Revenue Methods for Land Use Impact Analysis. A Summary of Principal Cost-Revenue Study_Types with Examplés As a resource aid to the fiscal impact analyst, this section of the appendix will more completely describe each of the seven princi- pal cost-revenue study types that were identified in Chapter 3. Repre— sentative examples of each type of principal fiscal impact study are also identified for reference purposes. Plans When a community prepares plans for its future growth, either at the regional, municipal, neighborhood, sector or corridor level, it usually is faced with choosing between several alternative plans. A principal criterion of interest in deciding the fate of particular alter- native plans has long been the fiscal consequences of the proposed plans. Occasionally this criterion is over-emphasized as is evident in the plethora of litigation charging communities with fiscal zoning. It is, however, a legitimate concern of local government to be able to ade- quately provide both necessary and desired community services. This concern for responsible management of limited fiscal resources can be found in both the Standard State Zoning Enabling Act and the Standard City Planning Enabling Act. The Standard State Zoning Enabling Act, drafted under the auspices of the Department of Commerce in 1926, lists 174 the following authorized purposes of zoning: "to promote health and general welfare . . . to facilitate the adequate provision of transporta- tion, water, sewerage, schools, parks and other public requirements.“ Likewise, the Standand City Planning Enabling Act, prepared in 1928, also by the Department of Commerce, lists the following purposes for preparing a plan for community growth: The plan shall be made with the general purpose of guiding and accomplishing a coordinated, adjusted, and harmonious development of the municipality and its envirous which will, in accordance with present and future needs, best promote health, safety, morals, order, convenience, prosperity, and general welfare, as well as efficiency and economy in the process of development, including among other things . . . wise and efficient expenditures of public funds, and the adequate provision of public utilities and other public requirements. : " Thus, the concern for responsible fiscal management has been evident since very early in our city planning efforts. When faced with limited fiscal resources, pressure to instill some fiscal rationality into local decision-making, and a commitment to these principles by local government officials, community leaders will eagerly accept decision- making aids that promise a systematic determination of the fiscal conse- quences of development. In particular, fiscal impact analysis of alternative community plans can be a significant factor in the process of choosing between various alternatives. The relative weight that a community places on the fiscal consequences of various plans will and should vary, but they should never assume so great an importance that they are used as the rationale for excluding particular land uses or development patterns, solely on the grounds they do not contribute a 175 surplus to the community revenue coffers. Some examples of representative fiscal impact studies of alternative community plans are listed below. Alternative Development Plans: Montgomery County Planning Board. Fiscal Impact Analysis--Second Annual Growth Policy Report andlAppendix and Seguel No. 1 Environment and Transportation. Silver Springs: The Maryland National Capital Park and PlanningICommission, September, 1975. Gruen, Gruen, & Associates. The Impacts of Growth: An Analytical Frame- work and Fiscal Example. Berkeley: The California Better Housing Foundation, Inc., 1972. Neighborhood Plans: City of Tucson Planning Division. Cost-Revenue Analysis by Land Use Zone. Tucson: City of Tucson, 1974. Hypothetical Alternative Development Patterns: Real Estate Research Corp. The Costs of Sprawl. 3 vols. Washington, D.C.: U.S.G.P. ., 1975. Isard, Walter, and Coughlin, Robert. Municipal Costs and Revenues Result- ing from Community Growth. Wellesley: Chandler-Davis Pub- lishing Co., 1957. Wheaton, William, and Schussheim, Morton J. The Cost of Municipal Services in Residential Areas. Washington, D.C.: U.S. Department of Commerce, 1955. 176 Projects The most common type of cost-revenue studies are those which assess the fiscal impacts of particular residential, commercial or indus- trial projects, nOtably very laggespaojects,-;0f eourse,alarge scale projects are of significant concern because they have a visible and potentially very large fiscal impact on a community (the amount of the impact depends on the community's size, rate of growth, current level of services, existing debt, excess service capacity and the geographic location of the proposal, among other considerations). Yet, the fiscal impact of many smaller projects, which may not be analyzed with fiscal impact techniques, may have just as great a cumulative impact on a com- munity. Generally, the principal concern with project evaluations is with the short-term impact of the project, as opposed to the longer term considerations that are paramount in the analysis of alternative plans. Yet, in terms of methodology, projects are in many respects little plans, just as alternative plans may be viewed as big projects. Consequently, the focus of the study often turns to "How can we get a more favorable cost-revenue balance?" and away from the necessary capital facilities emphasis of the alternative plan proposals, where major public bonds may need to be floated for extended periods. Additionally, since the analysis of particular projects using cost-revenue techniques is a frequent activity (or potential activity) in many communities, computer assisted cost-revenue models may be Tappropriate, although many of the fiscal impact analyses that have been performed are "one-time only" studies. With the considerable investment 177 of time and manpower to perform one project analysis, however, it is often not that much more expensive to computerize a particular methodology and achieve some economies of scale with future applications. For this reason, the studies noted below are prominent examples of well-prepared cost-revenue models that can be used to evaluate projects, even though they have not been computerized in every instance. No "one-time only" fiscal impact studies are listed as they are very numerous and seldom is the methodology well documented. Besides, most of the models listed below use a project to illustrate the fiscal impact methodology. Manual Models: Connecticut Development Group, Inc. and Research Corp. of Connecticut. Cost-Revenue Impact Analysis for Residential Developments. Washington, D.C.: Department of Housing and Urban Development, July, 1974. Northern Virginia Planning District Commission. Handbook for Cost- Revenue Analysis of Land Development. Falls Church: Northern Virginia Planning District Commission, 1975. Three manual methodologies are summarized in a new book edited by: Hughes, James W., ed., Methods of Housing Analysis. New Brunswick: Center for Urban Policy Research, Rutgers University, 1977, pp. 170-233. Computer Models: Gale, Dennis. Municipal Impact Evaluation System: Computer Assisted Cost-Revenue Analysis of Urban Developmen . PAS No. 294. 178 Chicago: American Society of Planning Officials, 1973. Applied Decision Systems, Inc. The Fiscal Consequences of MSHDA-Financed Housing: A Master Manual for the Community Impact Model. 3 vols., prepared for the Michigan State Housing Development Authority. Wellesley Hills: Applied Decision Systems, Inc., June, 1973. Frank, James E. Fiscal Impact Research Project. Tallahassee: Department of Urban and Regional Planning, Florida State University, 1976. McDonald & Smart, Inc. Fiscal Impact Study for the County of Sacramento. 2 vols. San Francisco: McDonald & Smart, Inc., June, 1975. Levin, Michael, and Wyckoff, Mark A. User's Manual to the Urban Develop: ment Cost-Revenue Model. Lansing: Tri-County Regional Planning Commission, November, 1976. Financing and Budgeting Programs Ruth Mace has noted that through the period of her analysis (1960) cost-revenue methodologies had not been employed very frequently with regard to assisting in the preparation of financing or budgeting programs.2 Today, however, most cost-revenue studies of projects or land use plans pay significant attention to projecting capital facility costs and financing programs. Several studies now also employ sophisti- cated econometric methods to project at least the anticipated service budgets for a community under several conditions for many years into the future. These efforts are not concerned directly with the impact of particular projects; instead their focus is the fiscal service demands 179 and budgetary costs of the total community, as that community may exist at some future time. Three examples of studies with a focus on budget projections are listed below; all are computerized econometric models. Budget Projec ions: Scott, Claudia. Forecasting Local Government Spending. Washington, D.C.: The Urban Institute, 1972. Allaman, Peter. Environmental Models for Planning and Poljgy Making; Volume II, The Costs of Growth: Revenue and Expenditure Impli- cations of Suburban Town Development. Cambridge: Harvard University, 1975. City of New York. Econometric Model of New York, based on models of the national economy developed by Wharton Econometric Forecasting Associates, as reported in the New York Times, May 1, 1977. Area Specific Service Costs and Revenues It is the law in many states for communities who propose to annex territory to develop a plan for financing the extension of public services to the annexed territory before approval of annexation would be granted. The result has been the preparation of many cost-revenue studies that attempt to justify, at least in part, the annexation on fiscal grounds. Since an annexation study frequently deals with determining the costs of providing services to development that is already built, it is somewhat different than a similar analysis of a proposed project. The largest difference is that several costs and revenues that might otherwise have to be projected are already known, such as the existing property 180 taxes (and hence the assessed valuation) of developed property. Yet, while accuracy in estimating service costs is enhanced because the demand generators (people and businesses) are already known, it is inhibited because of the difficulty of many communities to actually measure service costs to existing areas. For example, the police protection costs for the community currently providing service may not be the same as when the territory is annexed to a neighboring territory. Of course, the option of actually surveying residents in order to determine their actual service demands is always present and, thus, more accurate estimates of service costs can be made than when projecting impacts of proposed pro- jects where even service demand must be estimated. However, survey costs are commonly so high that service demand must once again be estimated instead of measured. Also, a completed fiscal impact study of a proposed annexation may greatly resemble one prepared for a large project, an existing neighborhood or an alternative future land use plan, depending on the scale of the territory affected. Sample annexation studies follow. Annexation Studies: Marlett & Associates. Development of an Analytical Annexation Procedure for Determining the Economic Implications of Serving Fringe Development Adjacent to Major Incorporated Cities: A Case Study of Eugene, Oregon. Portland: Marlett a Associates, 1973. Muller, Thomas, and Dawson, Grace. The Impact of Annexation on City Finances: A Case Study in Richmond, Virginia. Washington, D.C.: The Urban Institute, 1973. 181 Muller, Thomas, and Dawson, Grace. The Economic Effects of Annexation: A Second Case Study in Richmond, Virginia. Washington, D.C.: The Urban Institute, 1976. Proposed Policies and Legislative Actions The category of fiscal impact studies that focus on assessing the impact of particular proposed local policies or legislative actions, while small now, is potentially a very large category. In particular, public policies that have definite land use and fiscal interrelationships are more frequently being scrutinized with fiscal impact analysis method- ologies. Most of these studies are being performed at the local level , by existing staffs under severe constraints of time, and notable examples do not regularly make their way into the hands of fiscal impact scholars. Thus, the various types of these studies do not, as yet, lend themselves to finer classification. These studies might deal with tax abatement proposals for new businesses, or with a proposed land banking scheme or an open space program for the community. Some examples of studies in this category are listed below. Proposed Policy and Background Cost-Revenue Studies: Gruen, Gruen and Associates. The Costs and Benefits of Alternative Open Space Policies. San Francisco: Gruen, Gruen and Associates, February, 1973. Livingston and Blayney, et_al, Open Space vs. Development: The Foot- Hills Environmental DesigplStudy. San Francisco: Livingston and Blayney, February, 1971. 182 Barton-Aschman Associates, Inc. Tax Impact Study for DuPage Count , Illinois. Evanston: Barton-Aschman Associates, Inc., 1975. Central Naugatuck Valley Regional Planning Agency. Revenues and Ratables: Financinngovernment in the CNVB. Waterbury: Central Nauga- tuck Valley Regional Planning Agency, Waterbury, Connecticut, 1976. Ann Arbor (Michigan) Planning Department. The Ann Arbor Growth Study. Ann Arbor: City of Ann Arbor, Michigan, February, 1973. Sternlieb, George; Réistacler, Elizabeth; and Hughes, James W. lax_ Subsidies and Housing Investment. New Brunswick: Center for Urban Policy Research, Rutgers University, 1976. Interjurisdictional Fiscal Flows and Comparative Analyses There are also two growing classes of cost-revenue studies that focus on comparative analyses of the fiscal condition of various communi- ties. These studies either: (1) concentrate on examining the fiscal flows between communities as a result of various land-related or service- related activities; (2) examine the similarities and differences of the results of cost-revenue studies performed in many communities in an attempt to determine if there are any generalities in the results, particularly with regard to differences in land use impacts of residen- tial, commercial and industrial development, which are independent of the differences between the communities themselves; or (3) by comparing the costs and revenues of selected services across many similar communi- ties (such as per capita costs and revenues), seek to identify the most 183 efficient community size for providing community services. These last studies usually rely on easily derived common denominators such as per capita costs and revenues and are related to the kinds of analyses utilized in some aspects of optimal city size studies. By and large, these studies are undertaken by state and federal government research efforts, univer- sities, or non-profit foundations with extra-local orientations. While composing very interesting reading and having the potential for signifi- cant practical utility, these studies have not as yet had a measurable impact on the manner in which local communities guide the course of their development. Some of the more important efforts in these areas are noted below. Interjurisdictional Fiscal Flows and Comparative Analyses: Sternlieb, George, etjal, HousingDevelopment and Municipal Costs. New Brunswick: Center for Urban Policy Research, Rutgers University, 1973. Stone, P. A. The Structure Size and Costs of Urban Settlements. London: Cambridge University Press, 1973. Muller, Thomas. Growing_and Declining Urban Areas: A Fiscal Comparison. Washington, D.C.: The Urban Institute, 1976. A Spmmary of Principal Cost- Revenue Methodologies The remainder of the appendix presents summaries of each of the nine principal cost-allocation methodologies identified in Chapter 3. .Additionally, three commonly used revenue allocation methodologies are 184 also summarized. Each summary is presented in a uniform format according to the basic characteristics of cost-revenue methodologies, as identified in Chapter 3. To further assist the prospective fiscal impact analyst with the relative differences between these methodologies, Table 4 con- denses this material still further. Table 4 appears as the last section of the appendix. ' Unlike the summary of principal cost-revenue study types, no representative studies of particular cost-revenue methodologies will be referenced in the following methodological summaries. This is for a few very simple reasons. First, most cost-revenue studies use a variety of techniques. Thus, while they may use a multiplier method in one part of the study, they use a standards technique and the assessed valuation technique elsewhere. The analyst who is searching for examples of how to use these techniques is thus perhaps better off referring to Muller's Fiscal Impacts of Land Development or the Rutgers-BAA Study once it is completed. Secondly, one of the reasons that examples of fiscal impact studies were presented earlier was to illustrate the fact that, to some extent, particular methodologies are reflected in particular study types. Thus, consulting these sources will provide examples of several techniques for use with particular study types. Third, few studies are comprehensive. For example, a study may be excellent in the handling of revenues and some expenditures, but may totally ignore school costs. Thus, referenc- ing a particular study as representative of a particular methodology without also summarizing each study's contents, techniques and quality could mislead the prospective analyst into thinking it had the unqualified endorsement of this writer. 185 Community Standards Methods Summary Description This category of techniques for estimating expenditures generated by new development involves the development and application of service standards for the entire range of community services. Standards are often utilized to project both capital facility needs and costs, as well as personnel and other operating costs. These standards are expressed in units relating to a presumed demand variable, such as the number of policemen per thousand persons. Generally these standards relate non-dollar items such as personnel needs, library space, or class- rooms to population. They are standards for estimating the demand for services. These standards can be established locally or, more often, they are taken from national or regional standards. Non-local standards usually reflect an average or median determined by surveying many com- munities and, thus, say nothing about whether that standard provides an acceptable level of quality of service or whether it is applicable in any given community. A local standard, or a national standard adopted locally, can be as simple as, for example, X hospital beds per 1000 persons, or Y acres of open space per person; or they can be based upon existing local service data such as the number of fire calls responded to per year by land use type. In general, the process of projecting future service costs merely involves multiplying the standard by the projected demand variable (new residents, fire calls, etc.) to get the estimated 186 expenditures. For example, a community standards approach might work in the following way: Square foot library space/person X projected number of new persons = number of square feet of new library space needed. Which, when multiplied by an average cost library space/sq ft. = new library space cost This technique can be used to project both capital and operating costs. It requires identifying the service district (neighborhood, municipality) affected if different standards are to be used throughout a community. This cost-revenue methodology and its many variations is, by far, the most widely used technique in fiscal impact analysis. The resi- dential multiplier method is really just a variation of what is herein referred to as the community standards techniques, in that service costs associated with various residential dwelling types are calculated (a refinement of person-related standards) and thus used in other projections as multipliers. However, a limitation of the residential multiplier method is that the preponderance of standards are expressed as population equivalents making them useful in the projection of residential costs, but those same standards cannot be used to project non-residential develop— ment costs. Once an entire set of standards for all services in a com- munity are developed, however, the only data necessary to calculate fiscal impacts are the projected demand variables. Frequently, these are limited solely to the number of residents projected to reside in the new development. 187 Basic Characteristics Scope: Community standards are applicable in the projection of both capital and operating expenditures in either municipal or educational settings. However, since many are expressed in per person or per dwell- ing unit terms, they are not always applicable in the projection of non- residential expenditures. Principally, direct fiscal impacts are calculated on either a cash flow or final year schedule for either individual projects or larger scale development studies. Data Requirements: Once local standards are adopted or derived from existing local data, very little uncomplicated data,,that1is readily available, is necessary to make fiscal impact projections. Data accuracy is generally not a problem since the projected number of new residents, new dwelling units, the local community audit, population and service standards are the only principal data that are needed, and these data are easily available. Resource Requirements: After service standards are adopted or derived, the resource costs are very low. Little manpower, lead time and a low level of user sophistication is adequate to use this method. Assumptions: If the service standards used are based on national and not local standards, then the analyst must determine their appropriateness or asSume that they are acceptable for use in that setting. Even if standards have been established locally for particular service district, it is important to verify whether the adopted standard represents the same or a higher level of service in that service district--otherwise, 188 the new development may be allocated service costs at a higher rate than existing development without ample justification for so doing. Some communities place considerably more value, and spend more money, on some services such as parks or schools and may legitimately wish to perpetuate this. But new development should not be charged for a higher level of service than will actually be delivered to them. Another important assumption is that service costs vary only with the variable used to identify them. In reality, police, fire and garbage costs and other community services are very likely to be dependent not only upon the population of the community, but also upon its income level, on local inflation rates and employee benefits, on the mixture of development types and on the kind of tax base the community has. Thus, projecting future costs on the basis of only one variable relegates that standard to the status of a proxy. Limitations: In addition to the possible limits of this technique to use on only residential developments, the technique is not sensitive to marginal cost considerations arising out of significant excess capacity or limited capacity situations. Since standards are used to project average costs even when excess capacity is used up, it may be necessary to do some additional marginal cost computations in cases where there is little or considerable excess capacity. Lastly, this approach is decidedly input-oriented. Thus, in particular, the technique is not sensitive to, as Muller puts it, "the income levels and other socio-economic characteristics of new residents, to revenue receipts, or to the addition of industrial and commercial 189 property. Because of demand shifts caused by these factors, service quality projections may be distorted by applying per capita standards."3 Accuracy: When using verified local or applicable national standards that accurately reflect the manner in which local services are currently delivered, this technique will adequately project fiscal impact of resi- dential developments. Special consideration should also be given to the capacity situation of existing services to insure significant marginal cost considerations have not been ignored. Demographic Patterns and Residential Multiplier Techniques Summary Description Cost-revenue techniques which focus on population variations in service demand based on analysis of demographic characteristics of residents are alternatively referred to as "methods using individual household data: demographic and income patterns" by Muller, and as the "residential multiplier method" in the Rutgers-BAA study. These are names for essentially the same techniques which are used to project both the educational and municipal costs of new residential development. Using survey data to establish the number of adults and children that live, on the average, in a variety of housing types (detached single- family homes, garden apartments, mobile homes, étc.) with various bedroom configurations, and correlating this data with existing school and munici- pal expenditures, permits the analyst to establish a table of service cost multipliers by dwelling unit type and bedroom configuration. With 190 the residential multiplier table, the public service costs of new development can be projected with a minimum of effort. While the deriva- tion of costs/dwelling unit type must be done locally, there is national and regional survey data on adult and school children populations by dwelling unit types that is applicable in a variety of communities and are often used if local generation rates are not available. An example of how this technique works is presented below: Number of dwelling units of a municipal service cost multiplier/ = particular type and bedroom mix dwelling type bedroom mix New Municipal Service Costs Number of dwelling units of a school children multiplier/dwelling particular type and bedroom mix unit type School cost multiplier/dwelling type = New school costs Of course, each local service (police, fire, garbage collection, etc.) can be projected separately or all service costs could be aggregated together. This technique resembles the community standards approach with the twist that it usually relies on locally derived costs/dwelling unit type (in essence a standard reflecting existing service costs) that can be refined to be more sensitive in some respects to demographic character- istics of residents. Thus, as long as people with demographic character- istics similar to those used to create the standards or multipliers tend to choose the same kinds of dwelling types, their service demands will be quite accurately reflected. At a simpler level, this approach has been historically applied as the per capita technique where current service costs per person are multiplied by the projected number of new persons to produce an estimate 191 of new service costs. However, by relating service demands to households, and then identifying different households by variations in the relation- ship between their demographic characteristics and service demand, a more refined estimate can be made. Putting a community's current household demands into a multiplier table further simplifies future calculations. Basic Characteristics Scope: The fiscal impacts of residential development on both school districts and municipalities can be adequately projected using this tech- nique. While capital and operating costs could be separated with this technique, they frequently are not. While the technique principally addresses only direct fiscal impacts, those secondary fiscal impacts that could be put into a multiplier context could also be projected. Cash flow or fiscal impact at development completion can both be calculated. Data Requirements: Initially a moderate amount of data is necessary, particularly if the household generation rate factors are developed locally, but after the multipliers are prepared, very little, uncompli- cated, easily accessible information is all that is required. The com- munity audit, adult and school-age popuaations, and the proposed development dwelling unit count by bedroom mix is about all that is necessary. These data are generally not plagued with significant accuracy problems. Resource Characteristics: This relatively low-cost technique requires little manpower or money to establish. Once the multipliers are prepared, 192 very little lead time for calculating fiscal impacts is needed. Low level user sophistication is another basic characteristic of this technique. Assumptions: This technique assumes that a strong relationship exists between the demographic characteristics of new residents and the type and bedroom mix of the housing units provided in a new development.4 In essence, the bedroom count is used as a proxy for household size. Unless separate multipliers are developed for parochial schools, all school children are assumed to attend public schools. The critical assump- tion behind this approach is that each new resident and school-age child entering a community causes per person and per pupil costs identical to what is being spent per capita locally to educate and service the existing population. Limitations: In addition to its limited scope with regard to projecting the impact of residential development only, this technique also suffers from typical average cost problems. No consideration of excess capacity or limited capacity marginal costs is made. In aggregating and averaging the local service costs per person and per dwelling unit while using national or regional generation rate standards, the chance exists that a particular development will be dissimilar from the multiplier reported in multiplier tables. The degree of this error may not be determined without considerable additional study. Accuracy: For projecting the municipal and school costs of residential development, this technique is adequate as long as the multipliers represent local conditions. It is a very quick method to estimate fiscal 193 impacts and get "in the ball park.“ Where there is little change in the local fiscal structure over time.the results could be very accurate. In situations with little excess service capacity, however, marginal cost analyses should be performed. Assessed Valuation and Tax Base Allocation Techniques Summarnyescription The assessed valuation technique and a refinement thereof, the tax base allocation technique, provide the only simple means for estimating the fiscal impact of non-residential development, though the technique can also be used to project the impact of residential develop- ment. These approaches project non-educational expenditures by presuming that local expenditures will rise proportional to the increase in local assessed valuation that comes as a result of the new development. In other words, this technique would assume that a two percent increase to the tax base would result in a two percent increase in local non-educational expenditures. An example of the assessed valuation technique follows: Total Expenditures of the Community For a Particular Service = $1 Expenditure X New Development = Total Assessed Value of $X Assessed value Assessed Value the Community New Expenditures $1,000,000 $50,000,000 $1,000,000 THEN For example, where current total local expenditures current total local assessed value new development assessed value 194 1 000 000 _ $1 expenditure _ 50,000,000 - $50 assessed value X $1,000,000 new assessed value - $20,000 additional expenditures This technique can be refined for use in projecting separately the impact of non-residential and residential development by the tax base allocation method. In this approach the proportion of the total tax base that residential and non-residential development currently share of the total community assessed valuation is first determined. Fre- quently, the residential expenditures are then projected using an average cost approach such as per capita or per dwelling unit costs, while the non-residential costs are projected using the assessed valuation tech- nique. An example illustrating the tax base allocation approach follows: Total Community Assessed Valuation I Total Residential Assessed Valuation = % Residential of Tax Base Total Community Assessed Valuation I Total Non-residential Assessed Valua- tion = % Non-residential of Tax Base Total Community Expenditures X % Residential Assessed Valuation = Total Residential Expenditures. Total Community Expenditures X % Non-residential Assessed Valuation - Total Non-residential Expenditures Residential Expenditures I Total Population of the Community = Per Capita Expenditures of Residential Dwellers 195 Non-residential Expenditures I Non-residential Assessed Valuation = $1 Non-residential Expenditures $ Non-residential Assessed Valuation For example, where total community assessed value = $25,000,000 with 90% of it residential and 10% non-residential; where total community expenditures = $1,000,000/year and current popula- tion = 9,000 persons; where proposed development will add 1,000 residents and a $250,000 (assessed valuation) commercial operation; then ' Residential Costs are: $1,000,000 total expenditures X 90% = $900,000 residential expenditures I 9,000 persons = $lOO/capita 1,000 new residents X $lOO/capita = $100,000 additional expenditures for residential portion; Non-Residential Costs are: $1,000,000 total expenditures X 10% = $100,000 non-residential expenditures I $2,500,000 non-residential assessed valuation [$25,000,000 total assessed valuation X 10%] = $l Non-residential Expenditures $255Non-residential’Assessed'Value X $250,000 new non-residential assessed valuation = $10,000 additional expenditures for non-residential portion. Total Costs are: $100,000 new residential expenditures + $10,000 new non-residential expenditures = $110,000 additional expenditures from the project. 196 Basic Characteristics Scope: These techniques are useful in projecting non-educational service costs. They can be applied to particular services or to combinations (as in the example above); however, operating and capital costs can only be separated if the base expenditure data are also separated. Impacts can be projected on a yearly basis if the projected assessed valuation of the proposed development for each year is known, or the projection can be made at the project completion year. Only primary fiscal impacts can be calculated. Data Requirements: Very little, easily obtained, uncomplicated data are necessary to use this technique. The quality of the data depends most on local assessment practices. Often it is necessary to apply equaliza- tion factors. The local audit report, assessed valuation report and projected project value and new population are all the basic data that are necessary to use this technique. Resource Requirements: These techniques are inexpensive to develop, requiring little money, manpower, lead time and a low level of user sophistication. Basic Assumptions: The critical assumption behind these techniques is that increased expenditures generated by new development are directly proportional to increases in the local tax base, as measured by the assessed valuation. This assumption may be critical to producing reason- able results in certain situations. The Rutgers-BAA study discusses this problem as follows: 197 This (assumption) tends to break down in the situation where a new development is being added to an area with an old tax base, as there is a tendency for the existing assessed value not to keep up with inflationary trends due to the deprecia- tion factor. Thus, the new development will have a signifi- cantly higher assessed value than existing development, and thus using the technique will generate significantly higher costs, even with comparable development. For example, a 10,000 square foot industrial building built in 1960 may be assessed at only $10 per square foot or $100,000, whereas a new building of comparable size may be assessed at $15 per square foot or $150,000. Again, the difference is due to the fact that,LOVEE time, tax bases do not keep up with inflation in building construction costs due to the depreciation factor. Thus, while construc- tion costs may rise 10 percent annually, a building with a 40-year life would depreciate 2.5 percent annually, a net in- crease of only 7.5 percent. Furthermore, in many jurisdictions reassessment of existing property does not occur annually, and there would be a lag factor before the tax base is adjusted and increased property tax increases are realized. The proposed $150,000 building would (be projected to) generate 50 percent greater service costs than the existing $100,000 building, even though they may be identical buildings (in fact, the newer building, because of better construction standards and more advanced security precautions, may generate fewer potential fire and police expenditures). Thus, the technique should got be used in a community with an old, deteriorating tax base. (First two comments in parentheses were added.) Another basic assumption is that expenditures can be allocated between residential and non-residential land uses based on their relative pro- portions of the total tax base. Limitations: In addition to its limited scope of applicability (it is not usually applied to the projection of educational expenditures) and its basic assumptions, there are two other important limitations. These are (1) its reliance on average costs with no marginal cost considera- tions and, thus, the inability to include capacity considerations, and (2) the lack of any substantial information verifying whether assessed 198 valuation is or is not an accurate proxy for service demand, especially for non-residential development. In some instances, older communities, it clearly is not; in other applications, it is not so clear. Accuracy: While the accuracy of the basic assumption is debatable, no other method, except the case study, does as sufficient a job in project- ing non-residential development costs. The fact it is a low-cost, low- data technique thus makes it particularly attractive for use, particularly when used as a complement to either the community standards or residential multiplier techniques. Case Study Approaches Summary Description The case study approach departs substantially from the estimat- ing procedures previously discussed, in that the approach depends upon the analyst's ability to thoroughly research each service system in a community and to extract from its administrator a well conceived assess- ment of the marginal costs of new development. Thus, the approach is not only more detailed and potentially more useful, but is also more time consuming, costly, and more prone to undeterminable error. The case study approach involves thoroughly examining both the capital facilities and delivery systems of each public service in order to discover the type and amount of excess capacity, if any, that is residual in the system. The marginal costs of this unutilized, or needed, capacity are then deter- mined and allocated to the proposed development. The results of this analysis are detailed short-term costs that specify the amount and cost 199 of new personnel, their benefits, new equipment, facilities and other costs associated with each service category studied. Several issues arise with the case study approach that are not present with average cost approaches and which can cause estimation problems. Central among these is deciding at what cost level and whether to allocate the last remaining capacity in a service system to a proposed development. This is important because the new development, when con- sidered in isolation of other developments, may be proposed at a time when the marginal cost for that service is high. If this high marginal cost is allocated to the new development, a later development may be built after completion of a new facility, and thus enjoy a lower marginal cost since excess capacity may again be high. This situation requires the analyst to uniformly decide in advance how to allocate the costs of facility use when capacity is either limited or plentiful. There are many variations of the process of performing a case study fiscal impact analysis, but they all include: (1) calculating the needs or service demands of the proposed development; (2) analyzing each service system and determining its existing capacity situation and the manner in which the service is provided; (3) interviewing the administra- tors of each local service system for his/her assessment of the fiscal impact of the proposed development on that service; (4) comparing the development demand for service with the existing capacity; (5) determining the cost of the capacity to be utilized by the development; and (6) checking the results for'accuracy, completeness and reasonableness. Of course, individual attention can also be given to each revenue source, 200 and the total fiscal impacts on all affected jurisdictions can even be assessed. This is the only approach that will adequately evaluate the fiscal impact of institutional land developments which return very few revenues, since there are no property taxes, and yet may generate signifi- cant costs. Many of the other fiscal impact methodologies may be employed in the process of completing a case study analysis. Basic Characteristics Scope: The case study approach is applicable in any jurisdiction or special district; it can be used on all revenue sources and expenditures, including both capital and operating costs; it can be used to evaluate any land use type in a year-by-year or total project impact setting; and it can evaluate all primary fiscal impacts or be extended to include many secondary impacts of development as well. In short, it has the broadest potential scope of any cost-revenue methodology. Data Requirements: Considerable data are required for a case study of all local services, much of it substantially more complex than the data requirements of most average cost techniques. However, most of the neces- sary data is still available in moderately-sized comnunities without special studies, though at times it may not be as accurate as the simpler, more common data requirements of other methods, since more of it may need to be estimated. More importantly, the analyst has a tremendous burden when using this approach to utilize good interviewing techniques, since much of the data come from department heads. This approach often runs into excessive bias from the local officials who may perceive admitting 201 to any excess capacity as a threat to future funding, especially in services with high operating costs and a large number of personnel. Resource Requirements: The monetary costs of a case study are moderate to high, depending on detail of the study, and require considerable man hours, much lead time and a moderate to high level of user sophistication to properly utilize. The study is usually not easily repeatable--it is a "one-shot effort." Assumptions: None of the basic assumptions common to the average cost techniques previously discussed constrain the analyst using the case study method unless he/she so chooses to also use an approach that falls under those assumptions. Instead, the big assumption in this approach is that the analyst and the local administrators are both sufficiently knowledgeable and honest to realistically assess the new service demands and fiscal consequences of new development. The more atypical the pro- posed development is from the existing community pattern, either in type, size, service demands or quality, the greater the likelihood for error in the marginal cost analysis. Another major assumption is that the capital costs for servicing new development can actually be isolated and estimated apart from the total system with any accuracy. Limitations: The principal limitations in addition to identifying mar- ginal costs and undeterminable error, especially from an administrator who tries to "pad" his budget using a proposed development as the vehicle are: (1) the inability to easily project long-run costs, and (2) the tendency to apply the technique so sporadically that, in effect, various 202 large scale developments may be examined in detail while smaller developments are ignored. Yet, the aggregate impact on services of many smaller developments may be even greater over time. This is especially unfair if it comes at the expense of the next larger development whose timing is such that because it is being evaluated later it may pay dearly for the remaining limited excess capacity. Accuracy: The accuracy of the case study technique depends dispropor- tionately on the analyst, the local administratOrs, local data, and any of the assumptions associated with various cost-revenue techniques that may be employed in the projections. Consequently, the results could be either very poor or very good. The lack of systematic procedures, the high cost and the dependency on local administrators' judgements make the technique worthy of "second thoughts" before use, and careful monitor- ing procedures should be employed if it is utilized. Accountants Approach Spmmarnyescription The accountants approach involves the analysis of annual budgets for year-to-year expenditure changes by function that are directly the result of population growth. This approach requires careful analysis of the current budget, comparing itlto aetualscosts of the previous year, deliberately evaluating what increases in the budget were attributable to rising price indexes, what increases were a product of budget addi- tions unrelated to new housing development, and allocating the residual of the increases to new residential growth. The fundamental tenet of 203 this approach is that since all municipal service costs are reflected in the budget, then if new development requires more personnel or equipment, these costs will be indicated in the budget. Basic Characteristics Scope: This approach can be used in either a municipality or a school system to evaluate both revenues and expenditures, and can evaluate operating and capital costs separately as long as the budget is as detailed. While studies using this approach have been performed, which claim to identify residential costs of new development separately from non-residential development, this could only be done by making several assumptions regarding allocation of particular costs which were not 6 Only the fiscal impact of development in a previous or specified. current year can be determined by this approach in contrast to all other cost-revenue approaches which project future year fiscal impacts. No secondary fiscal impacts can be identified with this approach. Data Requirements: Principally, the only data required for this approach are the audit report from the preceding year, this year's budget and the preceding years aggregate development data, including the number of new dwelling units, and new population. While this may not appear to be many categories of data, it can involve a lot of complex work with line- by-line audit figures. However, the data are easy to obtain and are generally quite accurate. Resource Requirements: Considerable manpower, cost and lead time by a skilled analyst is necessary in order to adequately use this approach. 204 Assumptions: The crucial assumption underlying this approach is that the cost of new development can: (1) be separated out of a budget from other cost increases, and (2) that the resulting difference is the result of new development service demands and not an increase in service demands from existing development in the community. It is nevertheless a marginal cost analysis that is subject to error from budget padding attempts of various departments which may or may not have prepared their budgets with new development service costs in mind. Limitations: The technique cannot adequately be used to estimate fiscal impacts of various land use types; it cannot project future costs; it is highly dependent on the analyst's ability to decisively interpret all budget items with relation to service provision throughout the community; and it may not be able to separate out existing service demand-related costs from new development demand-related costs. Accuracy: What this technique does do adequately is identify what new development (total of all types) cost the community last year, identify- ing specifically what those costs were. This information is very help- ful in establishing a base condition or as a check on other methods that attempt to recreate a base condition. This technique is also useful for identifying unusual expenditures in a particular service for a particular year, something other techniques often overlook. In general, this technique is the least useful and one of the least used of common cost-revenue techniques, although it may have utility in 205 comparing various neighborhood service costs if the existing service costs can be separated by geographic area. Time-Series Approach Summarijescription The time-series approach examines service expenditures per unit at various points of time in the past, then future costs are pro- jected under the assumption that the future condition, relative to the variables under study, is dependent on the relationship between these variables in the past. Most frequently, this time-series approach relates service costs per capita over time, to population growth or real personal income growth during the same period. Often expenditures for twenty or more years in the past and into the future are examined. How- ever, the approach is not sensitive to individual development impacts, only community development costs over time. Basic Characteristics Scope: This technique is most often applied in large municipalities, metropolitan areas, or even larger communities such as states, and looks at both revenue and expenditure changes over time. Capital and operating costs can be separated, but impacts by land use types cannot. Yearly impacts or some other regular interval are normally used and projections are often made for twenty or more years into the future. No secondary fiscal impacts are separately considered and individual project impacts cannot be assessed. 206 Data Requirements: Depending on the number of years in the study, a moderate amount of data could be gathered but it is all relatively uncom- plicated and readily available. The data are generally of good quality but often are limited only to expenditures or revenues by service cate- gory and the community population in those years. Resource Requirements: Low to moderate costs, little manpower, but significant lead time may be necessary to use this technique. The user must also be familiar with statistical analysis techniques and forms of statistical error to use this approach. Assumptions: A major assumption of this technique is that change in service costs over time are dependent on local population changes. How- ever, other changes in community characteristics or in revenue sources may also be very important, but these considerations are not even reflected in this univariate analysis. Irrespective of the number of years of past data analyzed,it is probably unreasonable to assume that expenditures in the future will vary in the same manner that they did in the past, but because this technique is often used in large communi- ties, the short-term projections may be quite good. Limitations: The time-series approach does not separate impacts by land use type or by individual project, and its long-term average cost approach is also insensitive to short-term marginal considerations. Muller also notes "A statistical limitation of time-series data is they are not 'independent,' since the dollar allocation for a particular service is closely related to the outlay level in the previous year."7 The most 207 important limitation is the emphasis on per capita costs as the variable used to measure change in service cost, irrespective of other changes in community characteristics, revenue sources and land use changes over time. Accuracy: At the community level, the accuracy of the time-series approach is adequate for establishing trends in community service demand and cost indicators--as long as the kind and rate of development occurs in the future relative to the same local service capacity considerations and regional economic conditions as they did in the past. Thus, especially for the first few years of the projection, at the community level, the results should be fairly representative. The technique can be helpful in understanding fiscal changes over time, particularly when used in conjunction with other fiscal impact techniques. Cross-Sectional Approach Summary Description This method seeks to establish statistical cost-revenue rela- tionships between communities which have similar characteristics and is usually measured by per capita variables. Muller describes the technique in the following way: Cross-sectional analysis consists of comparing revenue and expenditure data for observations taken during the same time interval. In most studies, the basic observation elements are community wide data. For example, expenditures for services in the same year are compared for communities, grouped by population size, to determine, by the use of regression analy- sis, if statistically significant relationships exist between their per capita outlays and their rate of growth. Expendi- tures by community size, holding rate of growth constant, are also compared. In order to effectively use cross-sectional analysis in a fiscal impact study, it is necessary to have a 208 sufficiently large sample so that data on communities can be stratified by groups of communities with similar total popula- tions and rates of growth. In addition9 differences in income and land use should also be considered. The Rutgers-BAA study describes one particular kind of cross- sectional approach entitled the cross-city multiplier method, which is limited to one causal factor, rate of population change, and two mediating or conditioning factors: size of population and the direction of popula- 9 By comparing service costs for many communities with tion change. various growth rates, expenditure multipliers are developed, which when multiplied by a given population increase will yield the projected expenditures for that new population in that community. This approach is not sensitive to analyzing individual develop- ment impacts nor impacts of various land use types. It does, however, provide a substantive means for comparing service costs and revenues between communities and, thus, provides some insights into various ser- vice cost-revenue similarities and differences between communities with the same and differing characteristics. Basic Characteristics Scope: The cross-sectional approaches are applicable in municipalities or school districts and can be applied to both expenditures and revenues, although emphasis is usually on the former. Capital and operating costs are not generally separated, nor are various land use types assessed separately. Fiscal impacts are generally expressed as total fiscal impacts in the final year of the analysis and many primary impacts are evaluated, though most services are aggregated into broad categories, 209 such as public safety, which is composed of fire and police services. Individual projects are not generally examined unless they are very large. Data Requirements: A moderate amount of relatively uncomplicated data, largely found in local audits that is easily available from many communi- ties, is necessary in order to utilize this technique. Generally, the audit data is accurate, but a very major problem exists with the local classification of service costs; one community may list some service costs in one category while the audit of another community may put these into a different category, making comparison difficult. For example, while two audits may have a category called "public safety," they may in fact incorporate different component costs, one including both police and fire services and the other only police costs. Resource Requirements: Moderate to high monetary and manpower costs may be necessary if many communities are analyzed and to establish the multi- plier tables. Lead time may be long and a moderate to high level of user sophistication is also essential. However, once the multiplier tables are established, the resource requirements are low. Assumptions: There are many basic assumptions behind this technique that have not been previously encountered in other methodologies. First, it has to be assumed that municipal budgets can be aggregated into a desig- nated classification scheme and still accurately reflect comparable community costs for that service. Second, the community population classification scheme and growth rate schedule must be assumed to be refined enough to reflect actual differences and similarities between 210 communities. Third, it must be assumed that the annual rate of population change, holding city size constant (or vice versa), is the only factor causing a significant pressure for change in the local budget--other possible factors must be considered separately. Similar to the average cost projection techniques, this method assumes that a city will con- tinue to provide services at its current level of service and that, if a community is unique relative to others under study, it will retain its uniqueness throughout the analysis. Limitations: The major limitations on its scope include no separation of capital from operating costs, and neither individual developments or separate land use types can be assessed. Additionally, this technique uses an average cost approach with a multiplier modifier which may not apply if other variables not considered in the classification do, in fact, have a bearing on how local expenditures are made. Accuracy: At the community level of comparing costs and revenues, this technique is sufficiently accurate to produce some indicators about ser- vice costs by community size and growth rate. Some studies have indicated that medium-sized communities (about 100,000 persons) are the most effi- cient producers of a wide range of municipal services. If future studies continue to show this, there may be some policy moves to encourage smaller communities to grow and to discourage growth in larger communi- ties. At the project level, this analysis methodology is a little too gross to provide dependable results with sufficient detail for making informed decisions. The critical element of accuracy is in taking the 211 audit data from many communities and properly comparing them since different accounting practices may list costs differently between com- munities. Fiscal Flow Approach Summary Description One of the more common community level fiscal impact techniques is the fiscal flow approach, which is often used in annexation studies. In a developed community, this type of analysis may help provide answers to questions such as: "Which neighborhoods of the city subsidize other neighborhoods because they return more in revenues than they use in services?" Muller, himself the author of a noted fiscal flow study, describes this approach by saying: Fiscal flow analysis is a means of comparing aggregate public sector costs and revenues among spatial areas or population groups. A positive fiscal flow denotes an excess of revenues over expenditures, with the excess flowing, in the case of spatial analysis, to a different subcommunity area or juris- diction, and in the case of households from one income group to another. Fiscal flow data by intrajurisdictional area, land use, and income provide a framework for examining the impact of both individual development and aggregate develop- ment. However, this technique requires a more substantial cross-sectional data base of revenues and expenditures than many communities have. Basic Characteristics Scope: Fiscal flow analyses can be used to evaluate both the revenue and expenditure flows between areas within a municipality or between larger areas, including both capital and operating cost analyses and allocations 212 by land use types. The results are generally stated as the primary fiscal impact at a given time or for a particular time interval. Data Requirements: This approach uses somewhat more data than most tech- niques, as it requires determining existing costs and revenues from developed sub-areas of a community which, if directly measured data are not available, must be estimated using allocation techniques or survey research. Consequently, data accuracy may suffer, though the data them- selves are no more complex than simpler techniques require. Resource Requirements: Depending on the detail involved and the size and number of sub-areas studied, the monetary and manpower costs are likely to be moderately high requiring a fair amount of lead time and a well-skilled analyst. Assumptions: Since a fiscal flow study is not performed to project future flows, as much as it is to establish either the existing situation or the situation after a single change (such as after annexation), most of the common assumptions about static fiscal analyses, while valid, are unimpor- tant because the analysis itself is generally short term. The critical assumption is that existing service costs and revenues can be adequately estimated for each sub-area for, if not true, then the resulting estimate of fiscal flow will be inaccurate. Without extensive indicators of actual service use, particularly in older diverse neighborhoods, the ability to make these estimates is severely hampered. Limitations: This technique is limited more from its data requirements and the need to estimate existing service demand in developed areas than 213 by other factors. While principally average cost estimates are developed, marginal cost considerations and obvious capacity problems must also be incorporated into the analysis. For example, if a sewer system could not tolerate the new users due to an annexation, some corrective action would need to be taken and the marginal costs thereof included in the analysis. Also, it is generally presumed that without further analysis, a positive fiscal flow from community A to community B at time X will continue into the future for some period of time--but the amounts of the fiscal balance are not generally calculated for this period. Accuracy: Since this approach is similar to the case study approach in its thoroughness, but usually avoids as great a dependency on local officials to evaluate impacts, it can be a very accurate mechanism in the hands of the skilled analyst. Inclusion of short-term marginal con- siderations where relevant significantly adds to the accuracy and utility of this approach. Econometric Methods Summary Description While definitely the most complicated, expensive and time con- suming of fiscal impact techniques, econometric techniques are the wave of the future. "Econometric analysis utilizes a mathenatical formulation of economic theory and statistical procedures to measure theoretical relationships and to verify (or reject) given hypotheses. Econometric analysis applies techniques such as factor analysis and more advanced 11 statistical methods." Rather than relying on individual proxies of 214 service demand, many variables that may affect demand are identified, just as the supply of services is examined to determine changes in costs over time. This information is often assessed at subcommunity levels as well. Few of these studies have as yet been performed and the results have shown many inconsistencies between supply and demand for services and local costs and revenues, even within an individual community. The beauty of these techniques is, of course, once a community is properly modelled, future expenditures can be easily projected with a determinable error as long as proposed new development is similar to some existing local development. This is the only fiscal impact technique that approaches being a dynamic model, though it too is really just a sophis- ticated static model at present. Basic Characteristics Scope: For all practical purposes, this approach could be comprehensive in its application, though it has been applied only to municipalities and not school districts so far. The degree of separation of costs by land use type and by operating and capital costs is not dependent on the technique, only the budget, available data, and desires of the analyst. Yearly fiscal impacts are usually projected, often in the form of specific line item budget needs. Data Requirements: Considerable data, much of them detailed and not readily available, are necessary to utilize this approach. Intensive data collection efforts are necessary to use these techniques. As with the fiscal flow approach, the data accuracy may be questionable when 215 establishing sub-area service demands, especially if estimates instead of direct measures must be used. Resource Requirements: High monetary and manpower costs, considerable lead time, much patience on the part of local officials and very sophis- ticated analysts are necessary to effectively prepare an econometric model. Assumptions: The most significant assumptions behind this technique are that: (1) data are accurate, particularly at the sub-area level; (2) there has been proper identification of the variables which are, in fact, the cause of service demand, and do not just appear to be; (3) future developments will closely enough resemble existing developments in the community to be adequately evaluated by the model; (4) that future service levels, budget systems and revenue sources will not vary signifi- cantly so as to alter the very basis for predicted demand relationships. Limitations: Only communities of a certain minimum size, with significant development or fiscal pressures, say perhaps 100,000 persons, could afford this process now. It would require constant updating and evaluations, but could reveal much new information on how service costs and demand in a community really are created. The considerable detail involved in going through the audit and service system components is likely to reveal as many inadequacies in current service systems as it is understanding of how the community fiscally functions and whether it does so optimally. Accuracy: Given that data inputs are valid and that the correct enumerat- ing variables are identified and incorporated into predictive algorithms 216 by qualified persons, the outputs, at least in the short term, should be very accurate, as accurate as any contemporary technique can be. Revenue Projection Techniques The "other half" of fiscal impact studies are, of course, the projections of revenue anticipated from the proposed development. Since 40 to 60 percent of local municipal revenues and an even greater per- centage of school revenues are usually derived from local property taxes, it should not be surprising that revenue projections are generally simp- ler and more accurate than cost projections. The fewer the number of significant local revenues the easier these projections become. Accuracy is also enhanced by the fact that many revenues are collected according to straight-forward formulas and very few variables are involved. Those that are required are relatively easy to obtain or to estimate with reasonable certainty. Unlike the cost estimating methodologies, very few revenues need to be projected using allocation principles. The actual number and types of revenues collected in a locality varies con- siderably from state to state. There has been a trend in recent years to consolidate the number and types of revenues both at local and state levels. Some sources, such as state, shared revenues, are becoming more important and they make up larger portions of local revenue sources. Often these state-collected revenues are returned to a locality based on a specific formula reflecting need, tax effort and accountability. Irrespective of what may have been paid into these state coffers by local residents and businesses, what is returned depends on the formulas being 217 used; thus, only the variables in the distribution formulas related to new development are pertinent to projecting new local revenues from these sources. Generally this also serves to make the process simpler. Three of the most common revenue projecting techniques are discussed in the following pages. They will not be presented in the same uniform format as the cost projections because: (1) they are pertinent to all fiscal impact studies irrespective of the cost estimating method- ology employed; (2) significant primary revenues are relatively easily projected for any jurisdiction, each land use type, in whatever time frame is desired for either individual projects or aggregated at the community level; (3) there are relatively few data requirements and the data accuracy is good; (4) there are few and relatively low resource costs; (5) there are relatively few assumptions; (6) likewise, relatively few limitations; and (7) the overall accuracy is usually good--better than on the cost side. As a result, these revenue projecting techniques will be presented in summary descriptive form with some discussion of important related issues. The revenue projecting techniques presented are: (1) real property tax revenues, (2) per capita revenues, and (3) formula revenues. Real Property Tax Revenues The process of calculating real property tax revenues once the market value of the structure and land, the assessment rate, the equaliza- tion factor and tax rate are known, is a very simple task. This informa- tion is all available from the local assessor when existing development is being studied but requires sales price data per unit if a proposed 218 project is being evaluated. However, since an error in an estimate of projected market value will greatly influence the accuracy of the revenue projections, it is recommended the analyst either calculates several alternative values or applies a confidence level to the results. Other problems may be encountered with assessment rates that differ significantly from the state mandated one, though the state equalization factor is intended to compensate for this. As far as short-term fiscal impacts are concerned, the time lag, often twelve months between occupancy ofta new structure and receipt of property tax revenues, causes problems on the fiscal balance sheet because the munici- pality and school system absorb costs upon occupancy and use of a struc- ture since children must be educated and municipal services provided. Inflation is a more serious problem on the revenue side of the ledger than on the cost side because service costs often rise faster than local revenues. Tax delinquencies and tax exempt property are also problems in some communities. Personal property taxes are usually levied in the same manner as real property taxes, but do not cover the same kinds of property from state to state. Most northern states levy personal property only on businesses (inventory, machinery, shelves, etc.), while southern states often include personal property tax on cars, boats and other per- sonal property of residential dwellers. Failure to include personal property taxes in the study may severely understate revenues. Also, some communities do not attempt to keep property assessments up to date and their reassessment may lag several years behind; yet it is usually supposed 219 to be done yearly. Again, equalization factors are supposed to help mitigate these differences, but at the scale of an entire community, they may not be sufficient. Real property tax revenues are collected according to the fol- lowing generalized formula: . . Equalized Assessment _ Assessed Equa112at10n _ Assessed X Market . - x - Ratio Value Fa¢t°r .- Value (EAV) Value X Tax Rate = Real Property Tax Revenues per Year. For example, where an assessment ratio equals 50 percent, the equalization factor is 1, and taxesare $43.00 per $1,000 EAV, then a $50,000 dwelling would pay $1,075 in property taxgs per year. $50,000 = = $43.00 Dwelling X 0.50 $25,000 X 1.00 $25,000 X 1,000 EAV $1,075 Tax Revenue per Year. Per Capita Tax Revenues Some taxes are distributed to local units on a per capita basis from total revenues collected by the state. They often include state income taxes, motor vehicle fuel taxes, other revenue sharing dollars, even state aid to schools (in which case, per capita becomes per pupil). Locally generated revenues from user charges, licenses and fees can be put into a per capita context for projection purposes as well, and rea- sonably so if these revenues originate solely from residential dwellers. All that is involved in a per capita calculation is the following process: Specific tax revenues I current population = per capita revenue X pro- jected population = new local revenue ‘ 220 For example: $200,000 local user charges I 20,000 community population = $10/capita X 500 new projected residents in a proposed development = $5,000 new tax revenues State school aid revenues that are returned on a per pupil basis may be calculated as follows: Current state aid revenue I current pupils = state aid/pupil X projected pupils = total new state aid to be received locally For example: $300,000 I 1,000 = $300/pupil X 30 pupils = $9,000 revenues. As long as the population estimates are reasonable, as long as that particular revenue source is provided only by persons or residential dwellers, and as long as there is no other established formula for the distribution of these revenues, this technique is accurate and obviously easy to use. Too often, however, all local revenues are put into a per capita context and compared with revenues from other communities. Con- siderable distortion can occur in doing this because a largely residen- tial community with X revenues per capita is likely to have far fewer revenues/capita than a community with the same population but a large business or industrial base. Thus, only revenues related to persons and residential land uses should be used to compare revenues between communi- ties on a land use basis. It should be also noted that population-related revenues are only allocated based on an official census of the local population. If none has ben made since the decennial census, then it will be used; 221 otherwise, a special census will have to be made. These are quite expensive undertakings, but a proposed development which provides addi- tional residents to the community each year may not, in fact, generate additional revenues unless a special census is done to count those new residents. Estimated Formula Revenues Two very different kinds of revenues could be referred to as formula revenues. The first would be revenues which are collected by a locality or returned to a locality based on a specified state or local formula enacted as law. These revenues do not need to be discussed here because these formulas are easy to identify and are easy to apply even though they vary considerably from state to state. The other kind of estimated formula revenues require the analyst to make a preliminary calculation of supply variables as a prerequisite to determining the amount of local revenues that will be received from the established revenue formula. This process greatly resembles some of the allocation steps and assumptions associated with service cost projections. Repre- sentative examples of these kinds of estimated revenues are state sales taxes returned locally and locally-generated sales taxes from new resi- dents. For example, a proposed neighborhood shopping center may return to the community the following sales tax revenues: Square footage X annual sales volume/sq. ft. = total annual sales X sales tax X percent received locally = local sales tax revenues 222 150,000 sq. ft. X $60/sq. ft. = $9,000,000 X 4% = $360,000 X 10% = $36,000 local sales tax revenues Data on annual sales volume/sq. ft. will probably have to come from some national or regional study and is, in effect, a standard which may or may not reflect the existing local markets. An example of sales taxes generated by new residential develop- ment is often done in the following manner: Housing price X household income factor = household income X consumer durable expenditures factor = consumer durable expenditures $40,000 X 0.50 = $20,000 X 0.45 = $9,000 consumer durable expenditures Consumer durable expenditures X local household expenditures factor = local household expenditures X sales tax = total sales tax X percent returned locally = local sales tax revenue $9,000 X 0.30 = $2,700 X 4% = $108 X 10% = $10.80 local sales tax revenue/ unit Of course, it is necessary to have regional factors or local factors to make these estimates and, if these factors are not determined locally, regional factors should first be verified as being reasonably accurate before using. It should be noted that an important part of a comprehensive fiscal impact analysis would involve calculating whether and to what extent other revenues currently received by the community might no longer be received because of the proposed development. In particular, a new shopping center might generate many new sales tax revenues to the community, but if other sales dropped at existing esta- blishments the net impact may be much less. These formula revenue 223 techniques do not calculate this potential loss, and it has to be considered separately. While there 'hs a multitude of ways to estimate the values of variables necessary to determine local sales tax revenues, these two approaches have been illustrated as examples of "formula" approaches to estimating revenues. Summary Table of the Basic Characteristics of Principal Cost-Revenue Methodologies Perhaps the easiest way to illustrate the relative differences between each of the principal cost-revenue methodologies summarized in this appendix is to chart, in summary fashion, the basic characteristics of each cost-revenue methodology. Table 4, following, attempts to do this. The six basic characteristics of cost-revenue methodologies are each numbered in the left-hand column and correspond to the written summary descriptions of each methodology presented in this appendix. The first characteristic, "Scope of Application," has many more elements than the remaining five characteristics and horizontal lines are used to separate these elements, whereas remaining horizontal lines in the table separate the numbered basic characteristics and not sub-elements thereof from one another. The measurement scales used in this table are rudimentary and somewhat subjective in that a particular rating of, for example, "low," "moderate" or "high" is based upon a particular methodology's relation- ship to the other principal methodologies. It does not refer to some broader set or perfect technique. Table 4 follows: Table 4. Relationship between the basic characteristics of principal cost-revenue methodologies.‘ 224 Methodologies Community Standards Methods ResidentiIl 'Nuitipi ier Demographic Pattern I Tax Base Allocation Techniques Assessed Valuation Case Study Approaches Accountants Approach Tine-Series Approach Cross-Sectional Approach Fiscal Flow Approach Econometric Methods ‘I Scope of Application: Jurisdiction: Municipality School District Special District Other \\\ \\ \\\\ \\ \\ Revenues: Some Many All \\ \\ \\ \\ Expenditures: Some Many All \\ \\ \\ \‘x \\ \\ \\ \\ Types of Costs: Capital I Operating not Separated Capital - Many All Operating - Many All \\\\ \\\\ \\\\ \\\\ \\\\ Various Land Use Types: Residential Mon-residential Institutional Not Generally Separated ”L‘s “to \\\ Sequential or Cumulative: Final Year Impact Yearly Impact \\ \\ \\ \\ Primary Fiscal Impacts: Sole Many All \\ \\ \\ Individual Development Impacts (Project Level) Aggregate Development Impacts (Comunity Level) Data Regui rments: Alount of Data - little. moderate. much . Type of Data - (relatively simple, can lex Data Availabi ity - difficult, moderately available. readily available Data Accuracy I Detail - poor, good li-no simple readily good li-no sieple nod good7 11 simple readily good varies no-diff varies li—eo complex readily goodn li-no simple]3 readily good simple nae-good 5 simple and varies couples diff varies Table 4. Relationship between the basic characteristics of principal cost-revenue methodologies.. 224 Methodologies Conmnity Standards Methods ResidentiII .Multiplier Demographic Pattern I Tax Base Allocation Techniques Assessed Valuatiai Case Stgdy Approaches Accountants Approach Time-Series Approach Cross-Sectional Approach Fiscal Flow Approach Econometric Methods Scops of Application: Jurisdiction: Municipality School District Special District Other \\\ \\ \\\\ \\ \\ Revenues: Some Many All \\ \\ \\ \\ \\ Expenditures: Some Many All \\ \\ \\ \\ \\ KK \\ \\ Types of Costs: Capital I Operating not Separated Capital - Many All Operating - Many All \\\\ \\\\ \\\\ \\\\ \\\\ Various Land Use Types: Residential Mon-residential Institutional Mot Generally Separated X’K ‘3,» \\\ Sequential or Cumulative: Final Year Impact Yearly Impact \\ \\ \\ \\ Primary Fiscal Impacts: Some Many All \\ \\ \\ Individual Development Impacts (Project Level) Aggregate Development Impacts (Community Level) Data Rpguirements: Amount of Data - little, moderate. much . Type of Data - (relatively simple. complex Data Availabi ity - difficult. moderately available. readily available Data Accuracy I Detail - poor, good li-mo simple readily good li-mo simple good simple readily good M-II varies mo-diff varies li—mo complex readily goodn li-mo 51-91.” readily good simple mo-goodls simple varies complex diff varies Table 4. (Continued) 225 Methodologies Community Standards Methods Demographic Pattern ResidentiIl.Multiplier I Tax Base Allocation Assessed Valuatim Techniques Case Study Approaches Accountants Approach Time-Series Approach Approach Cross-Sectional Fiscal Flow Approach Econometric Methods 3. w: Monetary Costs moderate. high Manpower - little. moderate. much User Sophistication - low, moderate. high Required Lead Time - little. moderate. much low-mo li-mo II-D low-mo li-mo low-mo li-mo mo-high mo-mu mo-high mo-m mo-high li-mo low-mo U-Mgh li-mo high high 4. Assggptions: I. b. C. G CQ . Characteristics of resi- Community operates in fiscal isolation No major change in service delivery system or in the level of service provided Service to non-residents I non—tax paying land uses won't change over time Standards-multipliers are reflective of com- munity demands/needs over time dents and new businesses are similar to those existing of development; Projection variables adequately reflect new demand/service c ts Special assumptions variesIo variesu varies‘6 varies], 5. limitations: C. d. .0 6“ Limited scope Average costs vs. mar- ginal costs (pro. dominately) Long tenm vs. short term Excess capacity Scale economies Input orientation 3 Special limitations avg long ignored ignpred avg ignored ignosad I avg long ignored ignored varies '4'! short incorp incorp IOFD V0?! short incorp incorp avg long ignored ignored varies avg-marg very short part varies varies varies ll?! short incorp incorp Abbreviationg: avg - average diff - difficult incorp - incorporated li - little marg - marginal mo - moderate mod - moderately mu - much part - partial See following page for Mates. 10 226 Notes for Table 4 A check (/) in a cell of this matrix indicates that use of a particular methodology is more apt to be associated with that characteristic than with another. That does not mean a technique could not be used, for example to project school district costs when only municipality was indicated. It does mean that technique is not commonly used in that manner--suggesting another technique may be more appropriate. Only revenues associated with a particular technique are indicated here; most revenues are projected using a separate set of methodologies not indicated on this table. The assessed valuation technique is used to project residential costs on occasion, but there are better techniques available. It is most useful with regard to non-residential development. Community standards techniques are often used on both residential and non-residential development types, but the standards applied to non- residential developments are not usually as reflective of service demand as those applied to residential development. The accountants approach does not generally separate development costs by land use type but usually infers they are all attributed to resi- dential development. The accountants approach also evaluates the fiscal impact of development in the last year and the coming year and, thus, is not oriented to pro- jecting future year costs in the same way as other techniques. Other jurisdictions include regional or state fiscal comparisons over time. Data accuracy is good if the standard is locally derived or a national standard is verified before use. Monetary costs will be quite high if the required local data are not readily available and must be acquired by survey or other research. This rating assumes the required data are easily available. Special assumptions and special limitations are significant assump- tions and limitations unique to a particular methodology. See explana- tion in text for each methodology. The assumptions inherent in a case study depend very much on the details of the analysis; thus, some of these stated assumptions may apply. 11 12 13 14 15 16 17 227 The data accuracy of the accountants approach is good in the sense that it relies on municipal audit data which are fairly accurate, but bad in that audits too often reveal only aggregated costs which are difficult to specifically identify pertinent costs from. The special assumptions of the accountants approach are related to the fact that it is analysis of recent and current, not really future development impact, as indicated by last year's audit and this year's budget, so within that limited time frame the listed assumptions are really the base condition--not assumptions. Time-series data are simple and accurate in that they all come from one source--past audit reports, but complicated in that audit report- ing formats and contents are likely to have changed over time, making comparisons difficult. Time-series approaches do have some assumptions but, in general, the orientation is in part to identify the relevance of the common assump- tions listed here. Crossesectional'data~are relatively accurate, butfthe techhique requires aggregating much of the service data (instead of police and fire expenditures considered separately, they are added together and called public safety) so that it can be compared more easily to data from other communities. Assumptions of fiscal flow techniques, like those of case studies, vary with the particular situation. The two techniques have many similarities. ’ Assumptions of the econometric techniques depend on the extent and detail of the econometric model. But as far as general assumptions go, there are usually fewer than with other techniques, although there are also more specific assumptions with each set of algorithms. 228 APPENDIX Footnotes 1U.S. Department of Commerce, Standard State Zoning Enabling Act (Washington, D.C.: USGPO, 1926 rev.), p. 6 in original. [Reprinted in 4.R. Anderson, American Law of Zoning, Sec. 26.01 51968 and 3.A. Rathkopf, Law of Zoning andiPlannihg,’3rd Ed. at 100 1967 .] and Standard City Planning Enabling Act (Washington, D.C.: USGPO, 1928 , p. 17. 2Ruth L. Mace, Munioipal Cost-Revenue Research in the United States: Ainitical Survey of Research to Measure Municipal Costs and Revenuegrin Relation to LandUseg and Aneas 193341960 (Chapel Hill: Insti- tute of Government, University of North Carolina, 1961), p. 172. 3Thomas Muller, Fiscal Impacts of Land Development: A Critique of Methods and Review of Issues (Washington, D.C.{_iThe Urban Institute, 1975), p. 7. 4See for example, Sternleib, George, et a1., Housin Develop: ment I Municipal Costs (New Brunswick, New Jersey: Rutgers Un versity, 1973), Chapter 1. 5Center for Urban Policy Research, Rutgers University, and Barton-Aschman Associates, Inc., Cost-Revenue Methods for Land Use Impact Analysis, working paper entitled, "Cost-Revenue Procedural Method Des- cription: Assessed Valuation Method“ (New Brunswick: Center for Urban Policy Research, Rutgers University, December, 1975), p. 2. 6"This, then, makes the budget a valid tool for identifying what revenues and expenditures can be reasonably attributed to all munici- pal accounts, even to isolating new residential-related accounts from all the other classes of accounts." Ashley Economic Services, Inc., Cost/ Revenue Analysis of New Housing Development in the City of San Diegp (Newport Beach, calif.: SEED, Inc., 1972), p. 3. 7Muller, op. cit., p. 10. 81bid., p. 9. 9Rutgers-BAA Study, op. cit., working paper entitled "Cost- Revenue Procedural Method Description: Cross-City Method," December, 1975. loMuller, op. cit., p. 11. 1'Ibid., p. 10. LIST OF REFERENCES LIST OF REFERENCES Allaman, Peter. Environmental Models for Planning and Policy Making, Volume II’, The Costs of'Growth: iRevenue ahd"ExpenditureiImpli- cations of Suburban Town Development. ‘Cambridge: Harvard Univers1ty, 1975. Altshuler, Alan. Review of The Costs of Sprawl, by Real Estate Research Corp. ., Journal of the American Institute of Planners, 43 April 1977, pp 207-209. American Society of Planning Officials, Research Report No.2: Problems of Zoning and Land Use Regulations. Washington, D. C: ASPO, for National CommiSSTOn on Urban Problems, 1968. Andrews, Richard N.C. 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Edited By David Listokin. New Brunswick: Center for Urban Policy Research, Rutgers University, l974, pp. lOS-l30. lllllllllllllllllllllllllllllllllllllllllllllllllllll 3008008447