The Impact of Overly Restrictive Annexation Policy on Economic Activity in Texas and Its Metropolitan Regions

Transcription

1 The Impact of Overly Restrictive Annexation Policy on Economic Activity in Texas and Its Metropolitan Regions Prepared for The Texas Municipal League 1821 Rutherford, Suite 400 Austin, TX by The Perryman Group 510 N. Valley Mills Drive, Ste. 300 Waco, TX (office) (fax) www. April 2003

2 The Impact of Overly Restrictive Annexation Policy on Economic Activity in Texas and Its Metropolitan Regions Table of Contents Executive Summary i I. Introduction 1 II. Overview of Annexation Issues 3 Linkages Between Suburbs and the Central City The Economics of Annexation Annexation Patterns in Texas III. Methodology 7 Model Logic and Structure Model Simulation and Multi-Regional Structure The Final Forecast IV. The Effects of Annexation Restrictions: Summary of Key Results 16 V. Synopsis 21 Appendix

3 The Impact of Overly Restrictive Annexation Policy on Economic Activity in Texas and Its Metropolitan Regions Executive Summary The capacity to annex emerging areas of development into a central city is often critical to the ongoing sustainability of a metropolitan area. Suburban expansion imposes greater burdens on the infrastructure and facilities of urban centers, as more residents and firms demand access to roadways, telecommunication systems, concentrated governmental and business services, cultural and entertainment venues, and a dynamic regional pool of workers. In the absence of a mechanism to recoup the resulting incremental expenses, a negative externality is created which ultimately limits prospects and capacity for growth of the entire area. The Perryman Group (TPG) has recently engaged in a comprehensive analysis to evaluate the economic consequences of proposed annexation restrictions on business activity in Texas. The results reveal that, as of 2030, the state will suffer losses of -$305.7 billion in annual Gross Area Product; -$168.8 billion in annual Personal Income; -$96.1 billion in annual Retail Sales; -1,234,760 in Employment; and -2,314,047 in Population. i

4 The Impact of Significant Restrictions on Annexation Capacity on Business Activity in Texas -- Losses as of 2030 ($305.7) Gross Product (1,234,760) Permanent Jobs (2,314,047) Population ($168.8) Personal Income ($96.1) Retail Sales ($350) ($300) ($250) ($200) ($150) ($100) ($50) $0 Billions of 2003 Dollars Source: Texas Econometric Model, The Perryman Group All dollar values are given in constant (2003) dollars. These losses represent a reduction of 11.9% of the baseline projection for total output, 10.7% for income, and 7.6% in permanent jobs. The losses span all regions of the state. The greatest percentage losses generated in output occur in Laredo (33.1%), Longview-Marshall (32.6%), Odessa-Midland (32.2%), Texarkana (31.8%), and Sherman-Denison (31.8%), while the most substantial absolute losses are in San Antonio ($52.9 billion), Austin-San Marcos ($52.0 billion), and Houston-Galveston-Brazoria ($42.1 billion). The largest relative job losses occur in Laredo (19.3%), Bryan-College Station (19.2%), San Antonio (18.1%), Corpus Christi (17.2%), and Lubbock (17.0%). Once again, the greatest aggregate reductions in absolute terms occur in San Antonio (240,910), Austin-San Marcos (162,197), and Houston-Galveston-Brazoria (130,121). ii

5 The Relative Impact of Significant Restrictions on Annexation on Business Activity in Texas and Its Metropolitan Regions -- Losses as a Percentage of Gross Area Product as of % % % % % % % % % % % % % % % % % % % % % % % % -8.30% Abilene Amarillo Austin-San Marcos Beaumont-Port Arthur Brownsville-Harlingen-San Benito Bryan-College Station Corpus Christi -5.08% Dallas El Paso Fort Worth-Arlington -5.86% Houston Killeen-Temple Laredo Longview-Marshall Lubbock McAllen-Edinburg-Mission Odessa-Midland San Angelo San Antonio Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls Urban Total Texas Total -35% -30% -25% -20% -15% -10% -5% 0% Source: Texas Econometric Model, The Perryman Group Percent The Relative Impact of Significant Restrictions on Annexation on Business Activity in Texas and Its Metropolitan Regions -- Losses as a Percentage of Employment as of % % % % % % % % % % % % % % % % % % % % -9.86% -9.71% -8.24% -7.56% Abilene Amarillo Austin-San Marcos Beaumont-Port Arthur Brownsville-Harlingen-San Benito Bryan-College Station Corpus Christi -2.84% Dallas El Paso -4.52% Fort Worth-Arlington -3.29% Houston Killeen-Temple Laredo Longview-Marshall Lubbock McAllen-Edinburg-Mission Odessa-Midland San Angelo San Antonio Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls Urban Total Texas Total -25% -20% -15% -10% -5% 0% Source: Texas Econometric Model, The Perryman Group Percent iii

6 The inability to generate sufficient resources to meet central city requirements within the context of a growing overall community fundamentally changes the character of the Texas economy and severely constrains its ability to achieve its full potential in the years to come. iv

7 The Impact of Overly Restrictive Annexation Policy on Economic Activity in Texas and Its Metropolitan Regions I. Introduction Texas has enjoyed remarkable economic expansion over an extended time horizon. During the past three decades, the state has experienced increases of 201% in output and 136% in jobs. Following well-established national trends, much of this activity has been centered in the urbanized segments of the vast Lone Star terrain. The proportion of population included in the metropolitan statistical areas (MSAs) of the state has risen from less than 80% to 85%, while the overall state output concentration has expanded from 85% to 92%. In fact, almost 96% of the total increase in gross state product over the past 30 years has been in urban areas, as well as 93% of all employment. This rising dominance of urban activity has been largely fueled by the pace of migration to suburban regions. In fact, the amount of land that has been brought into development nationally has advanced at a rate 2.76 times as great as that of the population in the past 15 years. In Texas, most of the fastest-growing counties (such as Collin, Denton, Fort Bend, Montgomery, and Williamson) are adjacent to large central cities. In virtually every urban region, the majority of new residential and commercial expansion is occurring beyond the boundaries of traditional activity. While this phenomenon clearly reflects evolving land use patterns and has been highly beneficial to the aggregate performance of the state economy, it has proved challenging for the central cities in MSAs across Texas. As growth occurs in surrounding areas, there is greater demand for the infrastructure, services, and amenities found in the major cities, yet the sources of revenue to support these needs do not rise accordingly. Over time, this situation, if allowed 1

8 to persist, will foster a deteriorating hub to an MSA which threatens its ongoing prosperity. To avoid this undesirable evolution in urban dynamics, it is essential that a mechanism to ensure adequate resources be established and maintained. Some states seek to accomplish this task through elaborate regional revenue sharing processes, which are often complicated, controversial, and difficult to administer. A more direct and efficient approach long used in Texas is to permit cities to annex areas of new development into their municipal boundaries. Annexation expands the tax base, thus providing funds to support an increasing regional population. The policy relating to this process within the state has evolved over time in response to changing circumstances. The primary provisions now in place emanate from Senate Bill 89 (SB89), which was enacted during the Texas Legislative Session in Provisions of this measure were implemented in stages, with the entire statute only becoming fully operational in January This legislation calls for an annexation plan, an opportunity for residents of areas slated for annexation to publicly comment, detailed proposals by the annexing city regarding the availability of city services, and other elements to assure fair and equitable procedures. SB89 is designed to give cities time to plan and areas to be annexed time to respond and voice concerns. Nonetheless, it preserves the ability to add the territory and tax base needed to provide for increasing public requirements. Although the major aspects of SB89 are only now taking effect, there is a movement of late to substantially inhibit the capacity of central cites to expand. In particular, current proposals such as House Bill 568 (HB568) would require prior approval within an area before it could be added to an incorporated area. This mandate would have the practical effect of drastically reducing and, in fact, largely eliminating the ability to obtain incremental revenues through expanded territory. In the present study, The Perryman Group (TPG) provides a comprehensive examination of the economic consequences of severely limiting the annexation process. Initially, a discussion of the pertinent issues is provided. 2

9 This analysis is followed by a description of the methodology and models employed in the investigation. The principle findings are then summarized, and a concluding perspective is offered. Detailed results for numerous measures of business activity are provided in the Appendix. II. Overview of Annexation Issues Linkages Between Suburbs and the Central City A key factor in any discussion related to annexation is a clear understanding of the relationship between suburbs and the central city. There are widely disparate views on the topic. Some suburban residents maintain that (1) they gain no benefit from proximity to the central city; (2) their local political, social, and economic structures are independent; and (3) they should not be responsible for funding activities in adjacent areas. Other observers maintain that the traditional urban center is vital to the economic wellbeing and quality of life of the surrounding area. Advances in telecommunications and other technologies have clearly improved the flexibility of corporations to move away from downtown areas. Offices, retail establishments, hospitals, and other facilities are now more able to locate in the suburbs, raising their level of independence from the urban environments. As jobs shift outward, suburban residents may feel increasingly disconnected from the central city. Nonetheless, important linkages remain. From an economic development perspective, the central city is typically crucial to the ongoing success of the surrounding area. If the city is flourishing, prospects for its suburbs are enhanced. When a central city is faltering, however, the competitive position of its suburbs in efforts to attract corporate locations or expansions is jeopardized. Cities serve the needs of businesses and consumers on a regional basis. 3

10 Another crucial linkage is the flow of workers between the central city and the suburbs. It is often true that suburban housing is too expensive for employees at the low end of the skill and wage spectrum. Many people necessary for the suburban economy to function may be unable to afford to live there, but instead commute from the city. At the same time, the central city may provide far more opportunities than are available in the suburbs. The ability of people to live in one setting and work in the other is important to the vitality of both areas, a fact consistently verified by traffic flows. In addition, this movement of workers increases infrastructure requirements. Finally, central cities often provide services and amenities beyond what is feasible for smaller areas. Major hospitals, universities, cultural arts, sports facilities, and other amenities important to quality of life are often located in or near traditional urban centers. Crucial aspects of infrastructure, such as interstate highways, transit hubs, and telecommunications systems, may be part of the central city as well. Governmental offices, legal services, and financial institutions which serve large interests also tend to be concentrated in the central business district. For all of these reasons (and others), it is in the best interest of suburban and central city residents to interact in a synergistic manner. The flexibility to annex additional land in order to maintain a share of economic growth and the resulting tax base is an important aspect of the long-term viability of central cities, particularly given the relatively low level of State assistance to cities for regionally beneficial infrastructure expenditures. The Economics of Annexation As population centers grow, they naturally expand outward, absorbing formerly vacant land. The issue of the appropriateness of urban expansion into larger geographic areas has been the topic of intense study and debate for many years, 4

11 yet is has become a fact of life in the majority of communities. These new developments often represent the most vital elements of the regional economy. Cities which are unable to annex segments of this newly developed land in order to capture a share of the expansion in the tax base can face growing poverty and other problems. As noted, if the central cities begin to display difficulties such as deteriorating infrastructure, rising crime, decreasing relative income levels, and other consequences of inadequate resources, the suburbs stand to suffer. Increased suburban activity generally leads to greater demand for city services such as police, fire, and parks and recreation. In addition, suburban residents typically utilize city streets and other infrastructure as they access the services and amenities of the central cities. Similarly, the interdependent labor markets and supplier networks create added strain on local services. Without the capacity to annex these growing areas and increase its tax base, a city will face potentially insurmountable fiscal challenges. If annexation is severely restrained or virtually prohibited in an area, there may be undesirable economic development consequences for the affected city and region. When companies and developers can avoid city taxes by locating in essentially a no annex zone, they may expand or relocate in a suboptimal manner, distorting natural land-use patterns. The capacity to annex removes this undesirable, artificial skewing of the location of new activity. Another benefit of annexation is that it can enhance the quality of life for suburban residents. Annexed areas may see better water and sewer options, improved planning, greater police and fire protection, superior access, and other positive outcomes. From a regional perspective, city control of key land-use decisions, environmental conditions, and other parameters can represent a far more favorable long-term scenario than alternatives. From the perspective of economic theory, the rationale for annexation is straightforward and unambiguous; it is based on the well-established concept of externalities. An externality may be viewed as some aspect of a transaction that is not properly reflected in the marketplace. It can be positive (such as the 5

12 social benefits of education that exceed private returns) or negative (such as pollution generated by some types of production or the health consequences of tobacco use). When the price of any product does not reflect its true costs, it will be overconsumed or underconsumed depending on the nature of the externality. In the present context, suburban development adds to the stress on central city infrastructure and services. Without mechanism to allow the resulting costs to be recouped, they become an externality which inefficiently directs development and ultimately undermines the performance of the entire region. The annexation process serves the purpose of permitting resources to flow to central cities, then properly adjusting for the full range of outlays involved in expansion. Stated alternatively, annexation is an effective approach to properly price new development in the marketplace. Annexation Patterns in Texas Over the past 30 years, most Texas cities have substantially expanded their land area, thus generating the resources necessary to support surrounding development. In 1970, the recaptured area of the central cities within the state totaled about 2,200 square miles; by 2000, this area had risen to almost 3,800 square miles. This 72.1% increase corresponds to central city population growth of 63.1% and suburban expansion of 154.5%. Thus, there has been a notable increase in the population segment likely to place demands on infrastructure and facilities, while a sizable portion of the growth in the central cities is the result of annexation. (Because certain counties have been added to the MSAs over time, their total land area has risen by 44.3%.) The rate of annexation diminished moderately during the past three decades. 6

13 Patterns in Annexation and Metropolitan Growth in Texas Increase in Land Area in Central Cities 72.1% Population Growth in Central Cities 63.1% Population Growth in Suburban Areas 154.5% Source: The Perryman Group 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Percent By contrast, many older US cities have become essentially stagnant in terms of land area growth. In those instances where there is a strong regional planning effort and flexibility with regard to annexation, the vitality of the central city has been preserved. However, other central cities have seen notable decay and the need for large inflows of resources from state and federal sources. Compared to other large US cities, Texas cities have acquired the financial wherewithal to partially support the expanding infrastructure needs imposed by growing regional populations by annexing surrounding land area. The methodology for analyzing the importance of this issue for future growth and development is presently described. III. Methodology In order to examine the consequences of significant restrictions on the ability of municipalities to annex newly developed areas, The Perryman Group has 7

14 engaged in an extensive empirical analysis. As an initial stage of the project, detailed data were compiled regarding economic and demographic expansion in all of the metropolitan statistical areas in Texas as well as their central cities. These areas comprise about 85% of the population and 92% of the economic output of the state. Information was assembled on relevant variables over the period from 1970 to 2000, as well as annexation patterns within the central cities. In a few instances, two cities which exhibit the characteristics of a central city (such as Odessa and Midland) are included together in the analysis. The next phase of the investigation involves a comprehensive multiple regression analysis using cross sectional data from each of the urban areas over the relevant time period. Multiple regression is a well-established technique for identifying systematic relationships using variables. This empirical investigation reveals that (1) annexation is an important factor in supporting urban growth, and (2) the ability of a central city to expand is a positive, statistically significant contributor to surrounding suburban prosperity. All of the equations implemented in this segment of the investigation were extensively tested for statistical significance, random residual patterns, stability in a forecasting environment, overall empirical properties, and other pertinent measures to assure their appropriateness for use in the quantification of the impacts of annexation. These findings are consistent with both the prior discussion of land-use patterns on a national scale and with the presence of externalities associated with suburban development. The final phase of the analysis involves integrating these equations with the MSA submodels of the Texas Econometric Model, which was developed and is maintained by The Perryman Group. Baseline simulations are established for each area through These results implicitly assume that no new impediments to growth will emerge. The model is then re-evaluated with a substantial restraint on annexation imposed. Findings are given for several indicators of business activity (population, employment, personal income, gross product, etc.) for each of the individual areas. A more complete description of the modeling process is given below. 8

15 Model Logic and Structure The economic modeling system used in the present analysis is formulated in an internally consistent manner and is designed to permit the integration of relevant global, national, state, and local factors into the projection process. It is the result of more than 20 years of continuing research in econometrics, economic theory, statistical methods, and key policy issues and behavioral patterns, as well as intensive, ongoing study of all aspects of the global, US, Texas, and regional economies. The system has been continually expanded and updated over the past two decades and is widely used by thousands of corporations, utilities, governmental entities, and financial institutions. The Texas Econometric Model revolves around a core system which projects output, income, and employment by industry in a simultaneous manner. For purposes of illustration, it is useful to initially consider the employment functions. Essentially, employment within the system is a derived demand relationship obtained from a neo-classical production function. In other words, the need for workers in any given sector reflects the demand for the product or service they generate. The expressions are augmented to include dynamic temporal adjustments to changes in relative future input costs, output and (implicitly) productivity, and technological progress over time. Thus, the typical equation includes output, the relative real cost of labor and capital, dynamic lag structures, and a technological adjustment parameter. The functional form is generally logarithmic, thus preserving the theoretical consistency with the neo-classical formulation. The income segment of the model is divided into wage and non-wage components. The wage equations, like their employment counterparts, are individually estimated at the two-digit Standard Industrial Classification (SIC) level of aggregation. Hence, income by place of work is measured for approximately 70 distinct production categories. The wage equations measure real compensation, with the form of the variable structure differing between basic and non-basic. 9

16 The basic industries, comprised primarily of the various components of Mining, Agriculture, and Manufacturing, are export-oriented, i.e., they bring external dollars into the area and form the core of the economy. The production of these sectors typically flows into national and international markets; therefore, the labor markets are influenced by conditions in areas beyond the borders of the particular region. Thus, real (inflation-adjusted) wages in the basic industry are expressed as a function of the corresponding national rates, as well as measures of local labor market conditions (such as the reciprocal of the unemployment rate), dynamic adjustment parameters, and ongoing trends. The non-basic sectors are somewhat different in nature, as the strength of their labor markets is linked to the health of the local export sectors. Consequently, wages in these industries are related to those in the basic segment of the economy. The relationship also includes the local labor market measures contained in the basic wage equations. Note that compensation rates in the export or basic sectors provide a key element of the interaction of the regional economies with national and international market phenomena, while the non-basic or local industries are strongly impacted by area production levels. Given the wage and employment equations, multiplicative identities in each industry provide expressions for total compensation; these totals may then be combined to determine aggregate wage and salary income. Simple linkage equations are then estimated for the calculation of personal income by place of work. The non-labor aspects of personal income are modeled at the regional level using straightforward empirical expressions relating to national performance, dynamic responses, and evolving temporal patterns. In some instances (such as dividends, rents, and others), national variables (for example, interest rates) directly enter the forecasting system. These factors have numerous other implicit linkages into the system resulting from their simultaneous interaction with other phenomena in national and international markets which are explicitly included in various expressions. 10

17 The output or gross area product expressions are also developed at the two-digit SIC level. Regional output for basic industries is linked to national performance in the relevant industries, local and national production in key related sectors, relative area and national labor costs in the industry, dynamic adjustment parameters, and ongoing changes in industrial interrelationships (driven by technological changes in production processes). Output in the non-basic sectors is modeled as a function of basic production levels, output in related local support industries (if applicable), dynamic temporal adjustments, and ongoing patterns. The inter-industry linkages are obtained from the input-output (impact assessment) system which is part of the overall integrated modeling structure maintained by The Perryman Group. Note that the dominant component of the econometric system involves the simultaneous estimation and projection of output, income, and employment at a disaggregated industrial level. Several other components of the model are critical to the multi-regional forecasting process. The demographic module includes (1) a linkage equation between wage and salary (establishment) employment and household employment, (2) a labor force participation rate function, and (3) a complete agecohort-survival population system with endogenous migration. Given household employment, labor force participation (which is a function of economic conditions and evolving patterns of worker preferences), and the working age population (from the age-cohort-survival model), the unemployment rate and level become identities. The population system uses Census information, fertility rates, and life expectancy tables to determine the natural changes in population by age group. Migration, the most difficult segment of population dynamics to track, is estimated in relation to relative regional and extra-regional economic conditions over time. Because evolving economic conditions determine migration in the system, population changes are allowed to interact simultaneously with overall economic conditions. 11

18 Retail sales is related to income, interest rates, dynamic adjustments, and patterns in consumer behavior on a store group basis. Inflation at the state level relates to national patterns, indicators of relative economic conditions, and ongoing trends. A final significant segment of the forecasting system relates to real estate absorption and activity. The short-term demand for various types of property is determined by underlying economic and demographic factors, with short-term adjustments to reflect the current status of the pertinent building cycle. In some instances, this portion of the forecast requires integration with the Multi-Regional Industry-Occupation System which is maintained by The Perryman Group. The Texas Econometric Model contains numerous additional specifications, and individual expressions are modified to reflect alternative lag structures, empirical properties of the estimates, simulation requirements, and similar phenomena. Moreover, the system is continually updated to reflect new data and evolving empirical relationships. Nonetheless, the above synopsis offers a basic description of the overall structure and underlying logic of the system. Model Simulation and Multi-Regional Structure The initial phase of the simulation process is the execution of a standard nonlinear algorithm for the state system and that of each of the individual subareas (regions, MSAs, and counties). The external assumptions are derived from scenarios developed through national and international models and extensive analysis by The Perryman Group. In this instance, the national models, which reflect similar underlying logic but are not as complete, were used to drive some of the projections. These results were compared with those of other major models for overall reasonableness. Once the initial simulations are completed, they are merged into a single system with additive constraints and interregional flows. Using information on minimum 12

19 regional requirements, import needs, export potential, and locations, it becomes possible to balance the various forecasts into a mathematically consistent set of results. This process is, in effect, a disciplining exercise with regard to the individual regional (including metropolitan and rural) systems. By compelling equilibrium across all regions and sectors, the algorithm ensures that the patterns in state activity are reasonable in light of smaller area dynamics and, conversely, that the regional outlooks are within plausible performance levels for the state as a whole. The iterative simulation process has the additional property of imposing a global convergence criterion across the entire multi-regional system, with balance being achieved simultaneously on both a sectoral and a geographic basis. This approach is particularly critical in non-linear dynamic systems, as independent simulations of individual systems often yield unstable, non-convergent outcomes. It should be noted that the underlying data for the modeling and simulation process are frequently updated and revised by the various public and private entities compiling them. Whenever those modifications to the database occur, they bring corresponding changes to the structural parameter estimates of the various systems and the solutions to the simulation and forecasting system. The multi-regional version of the Texas Econometric Model is automatically reestimated and simulated with each such data release, thus providing a constantly evolving and current assessment of state and local business activity. The Final Forecast The process described above is followed to produce the preliminary forecast. Through the comprehensive multi-regional modeling and simulation process, a systematic analysis is generated which accounts for both historical patterns in economic performance and inter-relationships and best available information on the future course of pertinent external factors. While the best available techniques and data are employed in this effort, they are not capable of directly 13

20 capturing street sense, i.e., the contemporaneous and often non-quantifiable information that can materially affect economic outcomes. In order to provide a comprehensive approach to the prediction of business conditions, it is necessary to compile and assimilate extensive material regarding current patterns both across the state of Texas and elsewhere. This critical aspect of the forecasting methodology includes activities such as (1) daily review of hundreds of financial and business publications and electronic information sites; (2) review of all major newspapers in the state on a daily basis; (3) dozens of hours of direct telephone interviews with key business and political leaders in all parts of the state; (4) face-to-face discussions with representatives of major industry groups; and (5) frequent site visits to the various regions of the state. The insights arising from this fact finding are analyzed and evaluated for their effects on the likely course of future activity. Another vital information resource stems from the firm s ongoing interaction with key participants in the international, domestic, and state economic scenes. Such activities include visiting with corporate groups on a regular basis and being consistently involved in the policy process at all levels. The firm is also an active participant in many major corporate relocations, economic development initiatives, and regulatory proceedings. Once organized, this information is carefully assessed and, when appropriate, independently verified. The impact on specific communities and sectors that is distinct from what is captured by the econometric system is then factored into the forecast analysis. For example, the opening or closing of a large facility, particularly in a relatively small area, can cause a sudden change in business performance that will not be accounted for by either a modeling system based on historical relationships or expected (primarily national and international) factors. The final step in the forecasting process is the integration of this material into the results in a logical and mathematically consistent manner. In some instances, this task is accomplished through constant adjustment factors which augment relevant equations. In other cases, anticipated changes in industrial structure or 14

21 regulatory parameters are initially simulated within the context of the Texas Multi- Regional Impact Assessment System to estimate their ultimate effects by sector. Those findings are then factored into the simulation as constant adjustments on a distributed temporal basis. Once this scenario is formulated, the extended system is again balanced across regions and sectors through an iterative simulation algorithm analogous to that described above. In the present instance, the comprehensive modeling and simulation process is initially employed to establish baseline conditions in each area for This end point was selected in order to permit sufficient time for the effects of the potential restrictions on annexation to impact development patterns, linkages, and the overall character of the economy. While the baseline projections will certainly not be perfect due to many intervening factors, the relative differential between projected outcomes with and without restricted annexation levels should constitute valid comparisons (i.e., any absolute variations of ultimate actual outcomes from those forecasted by the model should affect the baseline and restricted cases in an approximately proportionate manner). Following the baseline simulations, the entire process is repeated with central city growth being substantially curtailed from the patterns previously observed. For illustrative purposes, the constrained case assumes that annexation will occur at 50% of the rates that would be anticipated under current guidelines. This hypothetical environment is likely to understate actual impacts, as requiring approval by area constituents prior to annexation would likely have the practical effect of prohibiting virtually all territorial expansions of central cities. The results of this extensive investigation are presently summarized. 15

22 IV. The Effects of Annexation Restrictions: Summary of Key Results The basic review and analysis of the historical database compiled for this study reveals and confirms a definitive pattern of activity evolving outside the major cities. These central cities contained more than 60% of the population of their respective MSAs in 1970 but less than 50% by Moreover, with the exception of a few areas that are constrained by adjacent cities and have other large cities within their MSA, all of the primary cities contain at least 35% of the area residents. Given the diversity across the various regions of Texas in terms of economic drivers and composition, this finding suggests a lower bound below which the growth potential of an area would be significantly impaired. Similarly, historical simulations of the model described above reveal further evidence of the importance of central city growth to overall prosperity. Specifically, this segment of the analysis demonstrates that, if annexation had been eliminated, the urban centers would now only constitute 37% of current population in the relevant metropolitan regions. This level is near a minimum threshold and suggests that expansion in Texas would have been severely constrained over the past 30 years if annexation had been notably restricted. The likely impacts of a 50% curtailment in anticipated annexation patterns would result in annual losses by 2030 of -$ billion in annual Gross State Product; -$168.8 billion in annual Personal Income; and -$96.1 billion in annual Retail Sales. All of these values are expressed in constant (2003) dollars to adjust for the effects of inflation. 16

23 The Impact of Significant Restrictions on Annexation Capacity on Business Activity in Texas -- Losses as of 2030 ($305.7) Gross Product (1,234,760) Permanent Jobs (2,314,047) Population ($168.8) Personal Income ($96.1) Retail Sales ($350) ($300) ($250) ($200) ($150) ($100) ($50) $0 Billions of 2003 Dollars Source: Texas Econometric Model, The Perryman Group These totals represent 11.9% of the projected level of state output in 2030 and 17.1% of the baseline growth during the 2000 to 2030 period. The corresponding impacts on income are 10.7% and 17.6%, while those for retail sales are 12.2% and 20.1%. In addition to these declines in yearly business activity, the constraints on urban development would be expected to precipitate losses of -1,234,760 Permanent Jobs; and -2,314,047 Residents. This loss of jobs is 7.6% of the baseline employment level and reduces growth by 19.5% during the time period from 2000 through The loss in population is approximately 27.8% of that expected from migration (as opposed to natural increases) over the relevant time horizon. 17

24 The regional distribution of these impacts is also interesting to note. In percentage terms, the most significant losses in output occur in Laredo (33.1%), Longview-Marshall (32.6%), Odessa-Midland (32.3%), Texarkana (31.8%), and Sherman-Denison (31.8%). In absolute terms, the greatest adverse effects are observed in San Antonio ($52.9 billion), Austin-San Marcos ($52.0 billion), and Houston-Galveston-Brazoria ($42.1 billion). The Relative Impact of Significant Restrictions on Annexation on Business Activity in Texas and Its Metropolitan Regions -- Losses as a Percentage of Gross Area Product as of % % % % % % % % % % % % % % % % % % % % % % % % -8.30% Abilene Amarillo Austin-San Marcos Beaumont-Port Arthur Brownsville-Harlingen-San Benito Bryan-College Station Corpus Christi -5.08% Dallas El Paso Fort Worth-Arlington -5.86% Houston Killeen-Temple Laredo Longview-Marshall Lubbock McAllen-Edinburg-Mission Odessa-Midland San Angelo San Antonio Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls Urban Total Texas Total -35% -30% -25% -20% -15% -10% -5% 0% Source: Texas Econometric Model, The Perryman Group Percent 18

25 The Relative Impact of Significant Restrictions on Annexation on Business Activity in Texas and Its Metropolitan Regions -- Absolute Losses in Gross Area Product as of 2030 ($51.953) ($ ) State of Texas ($52.855) ($42.110) ($36.682) ($17.191) ($2.663) Abilene ($3.384) Amarillo Austin-San Marcos ($9.416) Beaumont-Port Arthur ($4.769) Brownsville-Harlingen-San Benito ($5.372) Bryan-College Station ($9.829) Corpus Christi Dallas ($12.028) El Paso Fort Worth-Arlington Houston ($4.382) Killeen-Temple ($3.855) Laredo ($5.919) Longview-Marshall ($7.287) Lubbock ($5.907) McAllen-Edinburg-Mission ($7.941) Odessa-Midland ($2.252) San Angelo San Antonio ($2.944) Sherman-Denison ($2.068) Texarkana ($5.548) Tyler ($2.177) Victoria ($3.511) Waco ($3.636) Wichita Falls ($60) ($50) ($40) ($30) ($20) ($10) $0 Billions of 2003 Dollars Source: Texas Econometric Model, The Perryman Group In terms of the proportion of total employment, the highest percentages are exhibited by Laredo (19.3%), Bryan-College Station (19.2%), San Antonio (18.1%), Corpus Christi (17.2%), and Lubbock (17.0%). The most extensive job declines are exhibited by San Antonio (240,910), Austin-San Marcos (162,197), and Houston-Galveston-Brazoria (130,121). As a general proposition, the Dallas area exhibits the lowest relative effects, primarily because of the somewhat land-locked nature of the central city. As the urbanized territory of the surrounding area expands, however, restrictions on other significant municipalities bring about similar limitations. 19

26 The Relative Impact of Significant Restrictions on Annexation on Business Activity in Texas and Its Metropolitan Regions -- Losses as a Percentage of Employment as of % % % % % % % % % % % % % % % % % % % % -9.86% -9.71% -8.24% -7.56% Abilene Amarillo Austin-San Marcos Beaumont-Port Arthur Brownsville-Harlingen-San Benito Bryan-College Station Corpus Christi -2.84% Dallas El Paso -4.52% Fort Worth-Arlington -3.29% Houston Killeen-Temple Laredo Longview-Marshall Lubbock McAllen-Edinburg-Mission Odessa-Midland San Angelo San Antonio Sherman-Denison Texarkana Tyler Victoria Waco Wichita Falls Urban Total Texas Total -25% -20% -15% -10% -5% 0% Source: Texas Econometric Model, The Perryman Group Percent The Relative Impact of Significant Restrictions on Annexation on Business Activity in Texas and Its Metropolitan Regions -- Absolute Losses in Employment as of 2030 (1,234,760) State of Texas (240,910) (162,197) (130,121) (100,061) (12,770) Abilene (16,161) Amarillo Austin-San Marcos (41,909) Beaumont-Port Arthur (33,262) Brownsville-Harlingen-San Benito (48,385) Bryan-College Station (49,160) Corpus Christi Dallas (55,405) El Paso (61,357) Fort Worth-Arlington Houston (26,019) Killeen-Temple (25,167) Laredo (25,517) Longview-Marshall (35,863) Lubbock (40,879) McAllen-Edinburg-Mission (28,409) Odessa-Midland (12,207) San Angelo San Antonio (10,880) Sherman-Denison (10,641) Texarkana (23,672) Tyler (9,929) Victoria (15,672) Waco (18,208) Wichita Falls (300,000) (250,000) (200,000) (150,000) (100,000) (50,000) 0 Source: Texas Econometric Model, The Perryman Group Persons 20

27 Although these conclusions represent extensive levels of economic dislocation associated with limits on annexation, they only represent a portion of the total effect on aggregate performance. Smaller trade centers in rural counties (particularly those relatively close to metropolitan areas) and secondary cities within large urban regions will face parallel (though generally less pronounced) difficulties in supporting outlying growth. Moreover, the adverse outcomes will persist and intensify over time. It is, thus, readily apparent that the long-range prosperity of Texas is critically tied to maintaining a mechanism to sustain central city vitality in the face of suburban development. V. Synopsis The results of this study demonstrate the profound consequences of measures designed to restrict annexation. In fact, the entire character of the Texas economy will be changed in a way which notably limits its capacity to support future growth and prosperity. The inability to expand in an unfettered manner creates a situation of market failure in that the emerging growth areas are not required to pay the full social costs of their expansion. In effect, they become free riders on the transportation, communications, financial, legal, cultural, educational, residential, and other activities provided by the central city. The result is perpetual deterioration on the sustainability of the core of the area, which in turn accelerates flight to outlying areas. This spiral, if left unchecked, ultimately erodes the viability of the urban centers, diminishes the quality of key support networks, and imposes future costs and constraints on the entire region. At the same time, the image of the area is tarnished, thus reducing prospects for business locations, expansions, and retentions. This situation can only be overcome by providing a mechanism by which the central city can expand its tax base in line with regional needs. The most efficient mechanism to achieve this result is simply to allow responsible and appropriate annexation of emerging development. Severe restrictions on this 21

28 capacity will have notable detrimental consequences for business activity; TPG analysis indicates negative effects of $305.7 billion in yearly gross product, $168.8 billion in annual personal income, and 1,234,760 permanent jobs. More importantly, Texas will be denied the opportunity to achieve its full potential and destiny in the evolving global economy of the 21 st Century. Respectfully submitted, The Perryman Group M. Ray Perryman, PhD, President 22

29 Appendix The Impact of Significant Restrictions on Annexation Capacity on Business Activity

30 The Impact of Restrictive Annexation Policies on Population in Texas and Its Major Urban Centers as of Forecast with % Reduction Projected Baseline Baseline in Projected Annexation Area Value Forecast Annexation Losses Abilene 126, , ,446 (14,574) Amarillo 218, , ,084 (25,403) Austin-San Marcos 1,263,559 2,449,802 2,066,594 (383,208) Beaumont-Port Arthur 384, , ,971 (36,005) Brownsville-Harlingen- San Benito 336, , ,666 (85,604) Bryan-College Station 152, , ,382 (97,426) Corpus Christi 380, , ,471 (69,834) Dallas 3,541,099 6,197,845 6,015,047 (182,798) El Paso 682, , ,057 (98,769) Fort Worth-Arlington 1,713,122 2,927,638 2,791,675 (135,963) Houston 4,693,524 7,877,341 7,618,547 (258,794) Killeen-Temple 314, , ,694 (48,767) Laredo 194, , ,787 (77,043) Longview-Marshall 208, , ,145 (32,479) Lubbock 242, , ,460 (36,445) McAllen-Edinburg- Mission 573,920 1,088, ,282 (161,367) Odessa-Midland 236, , ,269 (22,678) San Angelo 103, , ,741 (9,271) San Antonio 1,599,378 2,569,392 2,143,853 (425,538) Sherman-Denison 110, , ,153 (28,111) Texarkana 89, , ,589 (9,706) Tyler 175, , ,424 (33,636) Victoria 84, ,940 95,185 (8,755) Waco 214, , ,109 (19,276) Wichita Falls 140, , ,458 (12,595) Urban Total 17,782,056 29,597,135 27,283,088 (2,314,047) Texas Total 20,946,503 33,432,975 31,118,928 Source: The Perryman Group

31 The Impact of Restrictive Annexation Policies on Employment in Texas and Its Major Urban Centers as of Forecast with % Reduction Projected Baseline Baseline in Projected Annexation Area Value Forecast Annexation Losses Abilene 62,836 95,088 82,319 (12,770) Amarillo 103, , ,689 (16,161) Austin-San Marcos 707,305 1,205,459 1,043,262 (162,197) Beaumont-Port Arthur 169, , ,314 (41,909) Brownsville-Harlingen- San Benito 118, , ,125 (33,262) Bryan-College Station 78, , ,534 (48,385) Corpus Christi 176, , ,433 (49,160) Dallas 2,089,944 3,525,140 3,425,079 (100,061) El Paso 280, , ,064 (55,405) Fort Worth-Arlington 816,310 1,357,640 1,296,284 (61,357) Houston 2,363,339 3,953,812 3,823,692 (130,121) Killeen-Temple 150, , ,436 (26,019) Laredo 75, , ,283 (25,167) Longview-Marshall 99, , ,467 (25,517) Lubbock 123, , ,713 (35,863) McAllen-Edinburg- Mission 173, , ,979 (40,879) Odessa-Midland 108, , ,747 (28,409) San Angelo 50,576 81,337 69,130 (12,207) San Antonio 790,334 1,334,141 1,093,231 (240,910) Sherman-Denison 47,368 70,512 59,631 (10,880) Texarkana 40,896 63,993 53,352 (10,641) Tyler 89, , ,907 (23,672) Victoria 39,781 61,434 51,504 (9,929) Waco 103, , ,645 (15,672) Wichita Falls 70, ,716 92,508 (18,208) Urban Total 8,930,936 14,980,088 13,745,327 (1,234,760) Texas Total 9,999,775 16,322,847 15,088,086 Source: The Perryman Group

32 The Impact of Restrictive Annexation Policies on Real Gross Product in Texas and Its Major Urban Centers as of 2030 (In Constant 2003 Dollars) 2030 Forecast with % Reduction Projected Baseline Baseline in Projected Annexation Area Value Forecast Annexation Losses Abilene $3,503,881,593 $10,171,149,545 $7,507,880,066 ($2,663,269,479) Amarillo $5,962,211,060 $18,503,839,322 $15,119,470,179 ($3,384,369,143) Austin-San Marcos $60,571,846,094 $216,286,252,121 $164,333,505,674 ($51,952,746,447) Beaumont-Port Arthur $10,203,949,498 $30,310,295,930 $20,894,789,184 ($9,415,506,746) Brownsville-Harlingen- San Benito $5,176,568,055 $16,576,941,052 $11,808,398,127 ($4,768,542,925) Bryan-College Station $3,635,341,643 $21,407,546,861 $16,035,340,378 ($5,372,206,482) Corpus Christi $10,393,182,771 $31,685,633,238 $21,856,545,305 ($9,829,087,933) Dallas $206,371,069,225 $721,979,870,678 $685,298,002,352 ($36,681,868,326) El Paso $15,936,977,483 $49,997,564,850 $37,969,918,965 ($12,027,645,885) Fort Worth-Arlington $58,507,231,254 $207,059,552,866 $189,869,048,349 ($17,190,504,517) Houston $216,585,658,983 $719,199,709,918 $677,089,655,354 ($42,110,054,565) Killeen-Temple $7,849,158,841 $21,668,596,671 $17,286,404,781 ($4,382,191,890) Laredo $3,397,277,513 $11,660,304,057 $7,805,325,674 ($3,854,978,382) Longview-Marshall $5,529,772,854 $18,164,163,869 $12,245,006,274 ($5,919,157,594) Lubbock $6,951,754,466 $24,178,641,240 $16,892,076,162 ($7,286,565,077) McAllen-Edinburg- Mission $7,732,285,698 $26,187,622,602 $20,280,443,061 ($5,907,179,541) Odessa-Midland $7,458,467,748 $24,624,147,197 $16,682,861,722 ($7,941,285,476) San Angelo $2,680,632,474 $8,197,707,088 $5,945,441,857 ($2,252,265,230) San Antonio $50,763,795,454 $167,148,164,046 $114,292,771,726 ($52,855,392,319) Sherman-Denison $3,040,245,339 $9,247,565,564 $6,303,856,258 ($2,943,709,306) Texarkana $2,078,511,409 $6,494,929,395 $4,426,542,492 ($2,068,386,902) Tyler $5,746,459,054 $19,513,826,293 $13,966,278,577 ($5,547,547,716) Victoria $2,198,390,494 $6,862,027,857 $4,684,688,433 ($2,177,339,424) Waco $6,003,095,594 $18,700,861,083 $15,190,351,508 ($3,510,509,576) Wichita Falls $3,866,041,273 $11,665,811,750 $8,030,082,495 ($3,635,729,255) Urban Total $712,143,805,870 $2,417,492,725,093 $2,111,814,684,955 ($305,678,040,138) Texas Total $772,661,193,683 $2,562,477,317,300 $2,256,799,277,162 Source: The Perryman Group