HomeMy WebLinkAbout10/01/2002, BUS 2 - FISCAL IMPACT ANALYSIS OF NEW DEVELOPMENT council Mmfi,°�
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C I TY O F SAN LU I S O B I S P O
FROM: Bill Statler, Director of Finance �v
SUBJECT: FISCAL IMPACT ANALYSIS OF NEW DEVELOPMENT
CAO RECOMMENDATION
Approve an approach to "project-by-project" fiscal impact analysis based on its consistency with
the General Plan.
DISCUSSION
Overview
The Council recently requested that we include a "project-by-project" fiscal impact analysis in
agenda reports related to the review of development applications. This report outlines our
recommended approach in responding to this request, which focuses on the project's consistency
with the General Plan rather than preparing detailed, case-by-case empirical analyses.
Background
Because of the nature of State-local fiscal relationships in California, fiscal impact analyses of
land use decisions are rarely meaningful on a project-by-project basis: once the model has been
developed, the results are predictable. For example, a number of fiscal impact analyses prepared
for the City over the past several years (including for the General Plan, Airport Area, San Luis
Marketplace and Court Street projects) all reached the same basic conclusion:
1. Housing of all types will be consistent "fiscal losers." The underlying revenue structure in
California cities simply won't generate — even under the most favorable of circumstances —
the revenues necessary from housing units to service their residents. For this reason, it is
critical to ensure that there are adequate non-residential uses to offset this. No city should
grow itself poor, which is what will happen in California cities if there are not adequate non-
residential uses to offset the net costs of serving their residents.
2. Office, business park and industrial uses are largely break-even: service costs are relatively
low, but so are related revenues. At one time in California's history, property tax revenues
may have made these types of uses "fiscal-winners." However, in the realities of the "triple-
whammy" post-Proposition 13, post-property tax exchange agreement with the County and
post-ERAF environment, this simply isn't the case any more.
On the other hand, some of these uses may have significant sales tax revenues associated
with them due to "business-to-business" sales (which represent about 20% of total City sales
tax revenue). However, because of the wide range of uses allowed in these zones, this is
difficult to project, even on a case-by-case basis.
Fiscal Impact Analysis of New Development Page 2
3. Hotels are almost always "fiscal winners" due to relatively low service costs and directly-
related transient occupancy tax (TOT) revenues.
4. Retail uses may be "fiscal winners," but only if they respond to a demonstrated unmet need
(typically measured by where sales per capita in the City or region for a specific type of use
are below State averages). Otherwise, new retail is largely just redistributing the demand
(and related sales tax revenue) that already exists; and in this case, at best it will be fiscally
neutral.
Accordingly, analyzing the fiscal impact of new development is much more meaningful at the
General Plan level. Once the underlying fiscal model has been developed that sets "per unit"
costs and revenues for various types of land uses, the overall balance of these uses determines
the net fiscal impact.
Much like computing grade point averages, the overall "fiscal GPA" is not decided by just the
grades received in each class,but from the number of units undertaken for each. In this example,
this means a "D" in our "housing class" can be offset by some "A's and B's" in other land use
"classes." However, whether the overall GPA can reach a passing grade depends largely on the
weighting (units) of these other classes, not just on their grades alone. (An "A" in a 0.5 unit
physical education class will not offset a"D"in a 4.0 unit history class.)
In short, since this "weighting" is determined by the General Plan, fiscal impact analysis is much
more meaningful at this level. The City did this type of analysis as part of the 1994 General Plan
update, and overall our land use plan was "fiscally balanced."
In this context, we should avoid focusing on the specific fiscal impacts of individual projects —
since we know before even opening up the spreadsheet who will be winners and who will be
losers. Instead, we should focus on whether they are consistent with the General Plan. If they
are, then their fiscal impact—relative to the General Plan as a whole—is neutral.
On the other hand, if they are not consistent, then further analysis may be warranted to assess
how the balance reflected in the General Plan will be affected by the change — either positively
or negatively.
Why not just go for "fiscal winners"only? Because our City does not exist solely to be fiscally
healthy. If we did, we would not have any residents at all, and the only development would be
car dealerships, large discount stores and mail-order computer sales desks. This would be a
fiscally healthy city, but who would want to live here? And this is our fundamental purpose: to
help create a place where people want to live, work and play. (Or as the General Plan says:
"provide a setting for comfortable living, including work and recreation.")
To achieve this goal does require adequate fiscal resources — but this is a means, not an end in
itself. In summary on this point, while we cannot ignore fiscal realities, land use decisions
should never be driven by fiscal considerations alone, but by our vision for the future as
expressed in the General Plan. And given this, we should not allocate our limited resources to
analyses that are unlikely to be significant decision-making factors.
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Fiscal Impact Analysis of New Development Page 3
Proposed Approach
As discussed above, we recommend that "project-by-project" fiscal impact analysis focus on
General Plan consistency. Accordingly, we will typically take one of two approaches in
preparing the Fiscal Impact section of Council agenda reports, depending upon whether the
project is consistent with the General Plan:
Consistent with the.General Plan. In this case, the fiscal impact analysis will generally read as
follows.
When the General Plan was prepared, it was accompanied by an overall fiscal impact
analysis, which found that overall the General Plan was fiscally balanced. In this case, since
the project is consistent with the General Plan, it has a neutral fiscal impact.
Not Consistent with the General Plan. In this case, some level of analysis may be warranted,
however, it will typically be handled in a qualitative rather than empirical fashion. For example,
the Council recently directed the staff to initiate a land use change on the property located at
Broad and Orcutt from manufacturing/service-commercial to housing. Given the important
policy objectives underlying this direction, it is unlikely that there would be any decision-making
value in preparing a more detailed empirical analysis of this change in the General Plan.
Accordingly,the fiscal analysis for this change will likely read as follows:
The underlying revenue structure in California cities will not generate–even under the most
favorable of circumstances the revenues necessary from housing units to service their
residents. For this reason, a reasonable amount of non-residential uses is needed to offset
this. When the General Plan was prepared, it was accompanied by an overall fiscal impact
analysis, which found that overall the General Plan was fiscally balanced, even though new
residential development was proposed. In this case, since the project is adding housing to
the City and reducing non-residential uses, the proposed General Plan change will have an
adverse fiscal impact.
In the event that a more empirical analysis than this is desired, it will cost $15,000 to $30,000 for
consultant services for each case-by-case review (depending on the complexity and type of the
proposed change), along with a commensurate level of staff time to coordinate the work and
provide the consultant with needed information. However, unless there are compelling
circumstances (such as those discussed below), we believe this type of effort will rarely be
justified.
Special Circumstances. hi special circumstances, a more empirical analysis may be warranted
on a project-specific basis—even when the proposed project is consistent with the General Plan.
For example, we recently recommended contracting with Alan Kotin to prepare an economic
study of the San Luis Marketplace project, which will include a fiscal impact analysis in its
workscope. In this case, there are two compelling reasons to do this type of detailed empirical
analysis:
1. Revenue sharing for infrastructure improvements. The applicant is requesting that the
City assist in financing the project's share of an expensive public infrastructure project (the
2�
Fiscal Impact Analysis of New Development Page 4
Prado Road Interchange). As set forth in a previous non-binding Memorandum of
Understanding (MOU) negotiated with the applicant, there are a number of good policy and
business reasons for doing so. However, it has been the City's clear position that any such
participation must be "performance-based," and in no case exceed more than 50% of the net
fiscal results of the project (gross revenues less any"transferred"revenues and service costs).
In this case, a detailed analysis of costs and revenues is necessary before considering entering
into such an MOU.
It is important to note that the City rarely considers entering into this type of revenue sharing
arrangement (in fact, we have only considered doing it once — for the "first" San Luis
Marketplace project; and even that non-binding MOU is now moot, since the project did not
receive discretionary approvals). However, whenever these types of "public-private"
partnerships emerge—even when the land use is consistent with the General Plan—a more
detailed fiscal analysis will probably be required. But in this case, it will be driven by our
"business"role in the project, not by our regulatory one in the land use arena.
2. General Plan requirement. And in this specific case, the General Plan calls for an
economic analysis of the impact of the San Luis Marketplace project on the Downtown. As
such, even if City participation in funding infrastructure costs were not an element in the
proposed project, some level of economic analysis (but not necessarily a detailed analysis of
service costs and revenues)would be required for consistency with the General Plan.
CONCURRENCES
The Department of Community Development concurs with this recommendation.
SUMMARY
Fiscal impact analysis of new development is typically more meaningful at the General Plan
level. As such, since the fiscal impact analysis performed when the General Plan was prepared
found it "fiscally balanced," we recommend focusing project-by-project reviews on consistency
with the General Plan. In those cases where it is consistent with the General Plan, the analysis
will simply state this and conclude that it is fiscally neutral. In those cases where a change is
proposed in the General Plan, we will provide an assessment of the fiscal impact, but it is likely
to be a qualitative rather than an empirical one. There will be special circumstances when a
more detailed analysis will be warranted; however, these are likely to be rare and center around
unique public-private partnerships or specific General Plan requirements.
G:Land Use Fiscal Impact Analysis/Council Agenda Report