An Introduction To Fiscal Impact Analysis Economics Essay

I. What is Fiscal Impact Analysis? Fiscal impact analysis is “a projection of the direct, current and public costs an revenues associated with residential or non-residential growth to the local jurisdictions(s) in which the growth is taking place” (Burchell, 1978).

FIA analyzes the impact on government revenues and costs, it does not include any impact on private sector costs and revenues. (Mucha October 2007)

II Description of Fiscal Impact Analysis

Using the above definition, the terms direct, current and public are critical to understanding the concept of fiscal impact analysis. A fiscal impact analysis looks at direct or immediate cost and revenues of the project being researched. For example, if a town were to build a new shopping mall, a fiscal analysis would look at how much revenue the building would bring in from property taxes, fire and building inspections as well as how much the project would cost in services such as police, fire, ambulance etc. All of these revenues and costs would be factored into the analysis. A fiscal impact analysis would not look at how such a project might affect property values on nearby

residences or business at local restaurants, they would be considered indirect effects of the new mall.

A fiscal impact analysis allows a way to estimate the financial impact of development as if the project was in use today that is considered a “current” effect.

The final key in understanding fiscal impact analysis is that it only deals with public costs and revenues. “Logic would dictate that any development will also have a fiscal impact on the private sector.” (Burchell 1978). So it is important to realize that a fiscal impact analysis quantifies the effect on the government’s revenues and expenditures but not on private interests.

A. How is Fiscal Impact Analysis Performed?

The following types of analysis are based on six methods that are outlined in the “Fiscal Impact Handbook” by Robert W. Burchell. They are the Per Capita Multiplier, Case Study, Service Standard, Comparable City, Proportional Valuation and Employment Anticipation.

Per Capita Multiplier Method

This method is primarily used for residential method. It uses an average cost per person and school costs per pupil. Those averages are multiplied by a estimation of how many new people and students the new development will add to the town. Most of the time, these average numbers used are from the United States Census data.

Case Study Method

This method can be used for residential and non-residential analysis. In this method, local officials and experts such as school administrators, governing bodies, and

those involved in the budgeting process are interviewed to see how these different government entities will be affected by development. “The expert estimates are then

combined, to account for the impacts in different areas to create an overall estimate of the fiscal impact of a development.” (Burchell. 1978)

Services Standard Method

In this method, United States Census of Governments data is used to calculate the average manpower per 1000 people and capital to operating expense ratios for 8 municipal functions. The fiscal expenses are then calculated based on local salaries, statutory obligations, per employee expense, manpower requirements for services and changes in population.

Comparable City Method

This method compares another municipality that has the growth rate and population that the municipality conducting the analysis is looking to achieve. The theory is that comparable cities will similar growth rates and spending on municipal and school expenses.

Proportional Evaluation Method

This method is used for non-residential developments. It bases a municipality’s costs on the proportion of property that it uses. This method can overstate the costs of large developments or understate those of small developments because municipal expenditures are not always in line with the size of a development.

Employment Anticipation Method

This last method in Burchell’s handbook is used for non-residential developments. This method uses an estimate of the amount of employees that a development would add to the municipality. It estimates what the cost would be for each new employee in various municipal sectors and then multiplies that by the expected increase in employees to estimate the total cost for the municipality.

In Preparing a Fiscal Impact analysis, Bise writes that which methodology used depends what type of analysis is being performed. “For smaller development projects, the average-cost method is preferable because, in many cases, the size of the development is not large enough to trigger the threshold level where surplus capacity is depleted.” (Bise 2010) The average-cost approach is a simple and common procedure, In this method, the costs are allocated to new development according to the average cost per unit that serves existing development, The cost per unit is multiplied by the number of estimated new units. In this method, the average costs of services are assumed to remain stable. The flow of data used for this approach can be seen in the chart* below:

*OKU Regional Council of Governments pg 6

Interview with Government Official

I did not directly interview a government official because I have been involved in several re-development projects in the municipality I work for. When a developer approaches a municipality with a project, many meetings and negotiations take place so that both parties are satisfied with the type of development that will be implemented. This can be a long and tedious process. The developers must meet with the governing body to see if the municipality would have an interest in the type of development they want to do. Once there seems to be a mutual interest, then the process begins. The planning and zoning boards get involved, township engineers, and various state agencies such as the Department of Environmental Protections and the Department of Transportation may also be involved if the site is contaminated or has an impact on a state highway. The developer also has to convince the public that their development is good for the town. Public meetings are held for the residents to see just what is planned and how it may affect them.

Exhibit A is a resolution extending the designation of the redeveloper. As I stated previously, this process can be a long one. This project started in November 2002, an extension was granted in December 2004. The developer was given a conditional designation in March 2009 and was given another 180 days to show progress on certain conditions which includes providing or pay for a fiscal impact analysis. (Item #5)

Exhibit B is a copy of the fiscal impact analysis that was given to the municipality by the redeveloper.

Exhibit C contains an excerpt from the final report on “Eliminating Barriers to Transit-Orientated Development, March 2010. In this report, structured interviews were used as well as public surveys to gather information that was incorporated into the fiscal impact analysis (See Exhibit D and E)

Examples of Fiscal Impact Analysis

Exhibit A – Resolution requiring a fiscal impact analysis be completed

Exhibit B – Fiscal Impact Analysis for Aberdeen Township – Transit Village

Exhibit C – Excerpt from March 2010 Final Report “Eliminating Barriers to Transit-Oriented Development (Rutgers, NJDOT, NJDOT and US Dept. of Transportation)

Strengths and Weaknesses of Fiscal Impact Analysis

One of the advantages of using a fiscal impact analysis is that it “enables one to examine marginal impacts of development as opposed to the total and average impacts.” (Burchell, 1978) The main strength of a fiscal impact analysis is that it allows local officials to see a detailed forecast of what can be expected from a particular development. Fiscal Impact Analysis “encourages anticipation of change, helps define achievable levels of service, projects capital facility needs, clarifies development policy impacts, calculates capital costs and operating expense, calculates revenues, and encourages “what if” questions.”(Bise September 2010).

One weakness is that in order to get such refined estimates, more data is required. This can be a roadblock to those that may be unfamiliar with economic models. New software modules are being developed that use complex variable and

many users may get lost in the technical aspects. Users must have an understanding of the process as well as be familiar with the limitations of the analysis. One particular limitation is that “most simple forms of fiscal impact analysis fail to incorporate variation in the costs of providing services over space.” (Burchell, 1978)

According to Edwards and Huddleston (2010) in their study showed that standard off the shelf fiscal impact analysis can produce “relatively large errors and even incorrectly predict whether to expect a fiscal surplus or deficit.” They suggest that

planners need to acknowledge the limitations and conduct their analysis in ways that reflect the uncertainty involved.

Some projects may be politically sensitive. Local officials should consider public perception of services so that they can determine how best to explain the data and to involve its residents in the discussions.

What does a Fiscal Impact Analysis Generally Find?

Fiscal Impact Analysis usually will determine whether or not a development will have a positive or negative on municipalities and school districts. Based on studies by Burchell (1992) there appears to be types of development that generally have a positive impact on municipalities and school districts including “research parks, general office parks, industrial development, high rise garden apartments, age-restricted housing and 1-2 bedroom condominiums.” (Harrison and French 2005). These types of developments usually generate enough tax revenue to pay for new services and infrastructure and also have a positive impact on school districts.

Some developments may have a negative impact on the municipality but a positive impact on the school district. These include retail properties, 1-2 bedroom townhouses and expensive 3-4 bedroom homes. “In fact, some studies indicate that certain types of housing developments can cost municipalities more in infrastructure and services than they generate in new property tax revenues over the short term.” (Harrison and French 2005)

Some research findings indicate that some development may have a negative impact on both the municipality and school districts. These types include 3-4 bedroom townhouse, inexpensive 3-4 bedroom homes, 3 plus bedroom garden apartments and mobile homes. “These types of development often do not bring in enough tax revenues

to cover the added infrastructure and service costs and they may also negatively impact the school budget.” (Burchell, 1992)

Can a Fiscal Impact Analysis Answer all of your Municipality’s Questions?

Probably not, but it can give those making decisions answers to some specific questions with regard to the impacts of development on their budget. However, a fiscal impact analysis is dependent on assumptions made by the analyst. Also, no two developments are the same. Fiscal Impact Analysis is one of many useful tools.

In conclusion, it is evident that fiscal impact analysis is a very useful tool for government. It I think that one of the most important aspects of performing a fiscal impact analysis is that not only can officials see how a development is going to impact their town, but they can also create different scenarios and determine which is the best for their municipality, which one will net the most revenues and have the least effect on the level of services.

Literature Review

Strategies for Successful Fiscal Impact Analysis Planning Advisory Service Report, Issue 561, Chapter 3 – Strategies for Successful Fiscal Impact, Chapter 6-Preparing a Fiscal Impact Analysis, Chapter 8 – Benefits of Fiscal Impact Analysis September 2010, Bise, L. Carson II

Abstract: This report encompasses several chapters; Chapter 3 gives an example based on assumptions prepared as part of a fiscal impact analysis for Champaign, Illinois. It goes through the steps used in the analysis including assigning one department to be responsible for overseeing the analysis. It identified the tasks to

be completed which include using alternative scenarios, defining the level of services, preparing explanations of the facts involved, calculating the results and analyzing the

findings by comparing the results for each alternative.

In Chapter 6, the report explains the different methodologies that can be used in fiscal impact analysis. It details the steps needed to prepare the analysis and also compares the merits of the average-cost approach to the case-study marginal approach. This information can assist local officials to estimate the impact the project might has on tax rates, bonding options or if they will have a surplus of deficit.

Chapter 8 looks at the strengths and weaknesses of performing a fiscal impact analysis. The benefits can be used for budgeting or for land use, capital or financial planning. A major benefit is that it describes what may or may not happen due to changes in a specific jurisdiction. A fiscal impact analysis measures the impact of growth or decline on a municipality’s services. This chapter illustrates that even though fiscal impact analysis is only as good as the information used (Garbage in, garbage out) it is still the best available tool for evaluation a development’s impact on local government’s services and facilities.

An Introduction to Fiscal Impact Analysis, Thane Harrison and Charlie French, University of New Hampshire Department of Resource Economics

Abstract: This article is a short and to the point introduction to Fiscal Impact Analysis. It covers the basic principles of what a fiscal impact analysis is, how it is performed, what the pluses and minuses are of using a FIA, what information is generated, how the information is used to determine if the development will be good for the community. It also outline the 6 methods from Burchell handbook.

The Fiscal Impact Handbook, R.W. Burchell, The Center for Urban Policy Research: New Brunswick, NJ 1978

Abstract: This article outlines the steps necessary in completing a FIA. According to Burchell, there are basically 6 methods which he outlines in this handbook. These methods are Per Capita Multiplier, Case Study, Service Standard, Comparable City, Proportional Valuation and Employment Anticipations. In most cases, revenues can be calculated by multiplying the current tax rate by what the anticipated change in the tax base would be.

Prospects and Perils of Fiscal Impact Analysis, Mary Edwards and Jack Huddleston, Journal of American Planning Association, Vol. 76 No 1 25-41,

Winter 2010

Abstract: This study’s purpose was to understand how planners use FIA today, how a FIA informs current debates in planning and the level of sensitivity that projections and underlying assumptions have on the FIA. The study surveys planners across the country on how they use FIA. The results showed that planners consider FIA to be an important tool. It also showed that the standard off the shelf FIA can have

large errors and can indicate a wrong prediction with regard to whether or not there will be a surplus or deficit.

Fiscal Impact Analysis: How to use it and what to look for? Michael Mucha, Government Finance Review 23, October 2007

Abstract: FIA is a powerful tool for predicting long term financial consequences. Besides showing what impact new development has on a municipality, FIA can also be used to determine the financial consequences of the loss of a business to a town. Examples of different methods and how they are used are also discussed in an easy to read list. This article looked at some instances that other literature did not address such as what if the project does not happen as planned and how to use a FIA to see how losing business would affect the town. It agrees with the other articles on how important the FIA is as a tool for local officials.