Analyzing Economic Development Opportunities N. Tatum Blvd., Suite 225 Phoenix, Arizona (602)

Transcription

1 Analyzing Economic Development Opportunities N. Tatum Blvd., Suite 225 Phoenix, Arizona (602)

2 How are Local Governments Evaluating Projects? New Jobs Created Increase in Tax Base Capital Investment in Construction Investment in Land Cost/benefit Analysis Number of relocating/expanding companies Company revenue/sales 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: ICMA Economic Development Survey, 2014.

3 Types of Economic Development Projects New or Expanding business Retention of existing location or retention/expansion combo Annexation General Plan Amendment

4 Types of Assessments Economic Impact Multiplier effects on jobs, labor income and output for a specific study area Revenue Impact Major revenues like sales, property and income tax Can include company and employee revenues May cover multiple jurisdictions Fiscal Impact Cost/benefit Analysis Revenues and expenditures-often O&M only Generally for a single jurisdiction May include many revenue and expenditure types May incorporate opportunity cost, not just direct cost Benefits may include a wide range of impacts such as environmental and consumer benefits Not limited by geography

5 Economic Impacts Direct Indirect Induced Total Jobs, payroll and output of subject business Business growth resulting from changes in supplier purchases Increases in household spending as consequence of more workers at subject business and its suppliers Overall increase in jobs, payroll and output for all local industries based on additional demand from subject business

6 Multipliers Typically generated by third party input-output model such as IMPLAN, REMI or RIMS Multipliers are detailed by geography, industry and impact measure (jobs, income, output) No universal multipliers, but they typically range between 1 and 3 The greater the interaction between industries in an area, the more local indirect and induced spending will occur

7 Fiscal Impacts Third Party Models FedFIT WebLOCI Both require significant set up Custom Models Align to city/county budget O&M plus capital Can use local revenue structure and rates May include multiple jurisdictions Cost Methods Marginal cost vs average cost Per unit rates versus service standards or proportional valuation

8 Comparison of 3rd Party Models Type of Model Geography IMPLAN RIMS II REMI FedFIT WebLOCI Custom Model Economic impacts ZIP codes, county, region, state Economic multipliers only County, state Dynamic economic/p olicy impacts County, region, state Format Web-based Spreadsheet Desktop application Strengths Industry detail, geography options Affordable and accessible Weakness Static No modeling capability Robust forecasting and policy analysis Expensive and complex Fiscal calculator Fiscal impact Economic and fiscal impact County, city County, city County, city, state Excel Web-based Excel or Access Easy to use and accessible Default values may not produce valid results Detailed cost estimates Large amount of setup/ data input required Specific to your location, custom outputs, ready to use Development time, cost

9 Cost Benefit Analysis May include quantitative and quantitative elements Need to find a way to measure everything consistently in dollars, points or some other units Discount to current time period if values are in dollars and assess who bears costs and benefits May be difficult to compare disparate measures of cost and benefits

10 Types of Inputs Required Economic Impact Revenue Impact Fiscal Impact Cost Benefit Industry Type Capital investment Jobs, payroll Jobs, taxes, increase in land value, etc. Jobs Annual Payroll Taxable sales, leases or utilities Capital investment and taxable sales Infrastructure additions Public service cost, infrastructure, congestion, pollution, etc.

11 How Does Timing Factor In? Economic impacts Do not incorporate inflation Proportional to number of jobs and payroll in a given year May only show single or multiple years Revenue and fiscal impacts May include both recurring and non-recurring revenues or costs Recurring impacts have cumulative effects Expenditures for services start immediately, revenues may lag Cost benefit analysis Incorporates timing and discount rates Costs and benefits may not occur simultaneously

12 Timing of Incentives Abatements will be naturally timed to align with revenues Other incentives may align with conditions that are not directly related to revenue generation such as number of jobs created Always measure revenues over entire term of agreement, even if they are the same every year Payback period is a policy decision, but 5 to 7 years is standard typical for larger incentives, use NPV

13 When to Consider Multi- Jurisdictional Impacts Should align to jurisdictions incurring costs or providing incentives Exceptions include certain statutory incentives that allow consideration of revenues to all jurisdictions, even those not bearing costs Be wary of studies that show impacts to other jurisdictions that are not providing incentives

14 Direct and Indirect Impacts Definitions Direct, Indirect, Induced Important to consider if a project will generate additional indirect activity at other local businesses or seed future development in a particular location New employees may generate economic and revenue impacts Important to consider net new, not just re-directing existing impacts

15 Tips for Evaluating Impact Analyses Economic impacts What is the study area-are multipliers specific to that area? What is the source of the multipliers (IMPLAN, REMI, RIMS)? Are the impacts increasing over time, and if so why (inflation vs real productivity growth)? Revenue and fiscal impacts Is it clear what revenues are generated by the company versus employees? For employees, is there an adjustment for share of employees living in the community? For retail, is there an adjustment for net new sales? Does the study show revenues net of incentives? What jurisdictions are included?

16 Uncertainty Can be addressed in development agreements with conditions that must be met for incentives to be paid Can apply a percentage to benefits to adjust for the likelihood they will occur, but may be hard to estimate It is also important to look at the worst case scenario

17 Claw Backs Include deadlines for the company to achieve certain milestones Contingencies that provide remedies for companies meeting some milestones and not others Consequences range from receiving only partial incentives to payback of incentives already received

18 Opportunity Costs Typically addressed through a cost benefit analysis rather than an economic or fiscal impact Future opportunities are often completely unknown Rare that the opportunity cost involves an immediate trade off between projects

19 Dealing with Sunk Costs Sunk costs typically involve investment in infrastructure, but could also include land or facilities Plans may change by the time an economic development opportunity occurs Sunk cost should not eliminate otherwise desirable projects that may not benefit from the investment Investments with the intent of future sale to private party may still require consideration

20 Communicating Results Are assumptions clearly described? What is included and what is not? How are the results specific to the relevant jurisdictions? Are new impacts clearly distinguished from existing or no build conditions? Are employee impacts included? Is the time period for the impacts appropriate? Are one-time versus on-going impacts clearly delineated?

21 Summary Economic development projects create tangible benefits for communities in terms of jobs and tax revenues Looking at costs and net impacts is not required by statute, but is important for the local governments that will provide services Economic developers should consider at least a basic analysis of impacts as part of the standard due diligence for projects