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HomeMy WebLinkAbout10/15/2002, BUS 5 - FISCAL IMPACT ANALYSIS OF NEW DEVELOPMENT continued from 10/1/02 council °° °tlDa .10%15/021 A acEn0a REpoRt 5 CITYOFSAN LUIS OBIS PO 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. S� 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. S-2 - 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. In 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 S 3 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