THE LOCAL FISCAL IMPACT OF RESIDENTIAL AND NONRESIDENTIAL DEVELOPMENT: RESPONSE TO THE NAHB MODEL Reported by: ROBERT W. BURCHELL, Ph.D. MICHAEL LAHR, Ph.D. DAVID LISTOKIN, Ph.D. Prepared for: NATIONAL IMPACT FEE ROUND TABLE (NIFR) NATIONAL CONFERENCE ARLINGTON, VIRGINIA 5 OCTOBER 2006

FISCAL IMPACT OF RESIDENTIAL AND NONRESIDENTIAL DEVELOPMENT ORDER OF PRESENTATION An Introduction to Local Fiscal Impacts How the Calculation is Done, and Results The NAHB Model Results of the I-O and Fiscal Models Conclusions

INTRODUCTION TO FISCAL IMPACTS (I) Fiscal impact analysis (FIA) is an analysis of local development on its host public service providers Fiscal impact analysis is the revenues triggered by new development minus the cost extended this same development The result is net fiscal impact expressed as an annual revenue/cost surplus or deficit It is strictly an operating cost comparison relating to a development in its immediate host jurisdiction (municipality and school district)

HOW THE CALCULATION IS DONE, AND RESULTS (I) Calculating Costs When fiscal impacts are calculated locally, detailed information is obtained from local municipal and school district budgets as well as from the Abstract of Ratables Fiscal impacts use a development pro forma including number, value, type, and size of units and 000’s of square feet of nonresidential space To this are applied demographic multipliers and cost per person or student to determine the new service population and its costs (in each district)

HOW THE CALCULATION IS DONE, AND RESULTS (II) Calculating Revenues Property tax revenues are calculated using a local generalized tax rate for municipality and school district. This is applied to assessed valuation using an equalization ratio. Other tax and non-tax revenues are calculated according to formulas on how they flow to each of the districts. Intergovernmental transfers are calculated according to formulas and often take away from the positive impacts of expensive residential or nonresidential development.

HOW THE CALCULATION IS DONE, AND RESULTS (III) Net Fiscal Impact Costs are subtracted from revenues, and net fiscal impact is determined Net fiscal impact is the annual surplus/deficit of revenues over costs It is expressed as an annual revenue or cost related to development and must be portrayed as a saving or additional outlay as a percentage of the annual expenditures of a district With many caveats, its results generally have been portrayed as follows:

The Typical Fiscal Hierarchy* POSITIVE1.Research Office Park 2.Office Development 3.Industrial Development 4.Retail Development 5-6.Vacation Home – Age Restricted BREAK-EVEN7.Open Space 8.Town House (2 BR) 9.Single-Family (3 BR) 10.Garden Apt. (1 BR) 11.Town House (3 BR) 12.Single-Family (4 BR) 13.Garden Apt. (2 BR) 14.Mobile Home (2 BR) NEGATIVE15.Affordable Housing (3 BR) *Numerous caveats and disclaimers. Must be done locally.

HOW THE CALCULATION IS DONE, AND RESULTS (IV) THE CHANGING NATURE OF FISCAL IMPACT ANALYSIS RESULTS Household size and school-age children have continued to decrease since For standard housing types, decreases are 20% to 40%. Structure value for new properties has increased by 15 to 30 percent annually from 2001 to New property values multiplied by an existing general property tax rate yields high revenues. Price also affects multipliers: within types/bedroom configuration, increasing price yields decreasing persons and children. Secondary effects of residential development (support for retail) diminish primary negative effects but only by about 10%. Impact fees (separately calculated) are reducing operating cost debt service. PILOTS and mixed-use developments balance unequal distributions.

The New Fiscal Hierarchy* POSITIVE1. Industrial Development (3) 2. Research Office Park (1) 3-4.Vacation Home/Age-Restricted(5-6) 5. Retail Development (4) 6. Office Development (2) 7. Town House (2 BR) (8) 8. Town House (3 BR) (11) 9. Open Space (7) BREAK 10. Garden Apt. (1 BR) (10) EVEN 11. Single-Family (4 BR) (12) 12. Single-Family (3 BR) (9) 13. Garden Apt. (2 BR) (13) 14. Mobile Homes (2 BR) (14) NEGATIVE 15. Affordable Housing (3 BR) (15) *Numerous caveats and disclaimers. Must be done locally.

THE NAHB MODEL (OVERALL) (I) The NAHB model is a generalized impact model combining I-O analysis and Fiscal Impact Analysis The I-O portion is calculated for a region to generate jobs, income, gross state product (GSP), and taxes. The portion of local taxes is used as a first-year revenue with recurring revenues of the fiscal analysis The FIA portion contains costs and revenues derived from national averages

THE NAHB MODEL (SPECIFICALLY) (II) The I-O Model The NAHB uses an I-O model for a metro area. While a model of a local area would be more appropriate, I fiscal analysis, one should not be used. Assumptions of interjurisdictional trade and labor commuting do not apply below a labor market area. Construction costs are calculated in the first year at the jurisdictional level to balance revenues. Revenues are assumed to flow to the same single jurisdiction as costs; in reality, revenues from the metro area model are distributed over multiple jurisdictions. As such, revenues are overstated at the jurisdictional (local) level; costs are understated.

THE NAHB MODEL (SPECIFICALLY) (III) The Fiscal Impact Model Costs of $3,784 for a single-family unit ($1,418 education and $2,366 for non-education) appear low. This cost in northeastern states amounts to $10,624 ($8,500 for education [.85 SAC x $10,000] and $2,124 for non-education [3.54 HHS x $600]) Revenues of $6,480 for a single-family unit valued at $285,000 also appear low. $2,700 comes from the property tax, or $0.94 equalized. This could easily be $1.10, which would yield $3,135 in property taxes.

THE NAHB MODEL (SPECIFICALLY) (IV) The Fiscal Impact Model (continued) Non-property tax revenues appear high. These are $3,780 and mix Enterprise funds and General Fund obligations. Enterprise funds are generally not used in fiscal impact analyses. Using $3,135 for property tax and $3,780 for nontax revenues yields $6,915 in total revenues. The fiscal impact would be $6,915 minus $10,624 = (-) $3,710 The fiscal impact shown is $6,480 minus $3,784 = (+) $2,695

CONCLUSIONS: Fiscal impacts of land development have been around for decades Procedures have emerged over time which have been vetted and tested These analyses are specific to a jurisdiction and deal with operating costs and revenues generated at the local level Mixing I-O analysis and fiscal analysis blurs operating impacts Numerous changes affecting emerging residential development profitability render this procedure unnecessary and unwarranted