One of the issues that came out of the Finance and Budget’s Commission meeting on September 14 that looked at the fiscal impact of the Wildhorse Ranch project was to review how the city evaluates new developments. The result last night was a two hour discussion that left more questions than answers about how the city evaluates development projects.
I begin with a little background and details on the model itself. The model was first developed in 2004 to analyze the potential General Fund impact of the Covell Village development project but was intended to be flexible and dynamic enough to be used for all major development projects. It consists of three parts–assumptions, revenue calculations and expenditure calculations.
The revenue section includes the various revenue sources to the City: Property Tax, Property Transfer Tax, Sales and Use Tax, Municipal Services Tax, Parks Maintenance Tax, Public Safety Tax, and Other Revenues. Property and Sales and Use Tax account for more than 60% of revenue.
Expenditures are the costs of the project. The primary driver of expenditures are personnel expenditures, according to information provided at the meeting they account for 71% of the costs of a project, more on this shortly.
The model is of course limited. It attempts to create a reasonable representation of the General Fund impacts of new development but there is no way for it to completely predict the future and therefore it is important to recognize that the results are merely a tool that should be used in evaluating the expectation of future income and expenditure flows. The model does not take into account the true marginal costs associated with new development but rather works on a per capita cost basis. Supplemental and one-time fees are not included in the fiscal model. They are paid with each new development and are meant to mitigate additional infrastructure needs resulting from the project. Thus the fiscal model is only a portion of the whole financial picture.
There were several issues that were raised that need to be addressed here and in future discussions. As was explained by Paul Navazio, who is director of Finance and Assistant City Manager, there are really three types of fiscal impacts. There are projects that are always positive in terms of fiscal impacts, we could think of these as economic development projects. I use Target as a recent example, theoretically at least the cost to the city will always be far greater than the tax revenues the project produces.
There are also projects that will always have a negative impact, for example a zero tax affordable project will always have a negative fiscal impact.
Finally, there are a broader range of projects whose fiscal impact depends on the assumptions of the model. Under some conditions they may be positive. Under some conditions they may be negative. These are the range of projects that are thought of as fiscally neutral. What the city seems to do for these projects is take a reasonable expectation of the fiscal impact and then impose additional supplemental fees to hedge their bet.
There is considerable question as to the usefulness of fiscal neutrality understanding the fragility of the model to its assumptions. This is indeed part of what happened during the discussion of Wildhorse Ranch–different assumptions led to a different conclusion about the fiscal impact of the model. The city eventually placed the fiscally neutral label on it after imposing a certain amount of one-time supplemental fees. But the fiscal analysis for that particular project remained a source of dispute.
This recognition of the limitations of the fiscal neutrality concept leads us to a number of questions about what should be done with that conclusion, whether the model’s impact should be a range of numbers rather than a single outcome, and of course questions about the assumptions themselves.
One of the points that Mr. Navazio made is whether we are not better off looking at the fiscal picture as a whole rather than on a project by project basis. After all, just because an affordable housing zero tax project is a net loss to the city, does not necessarily mean it is not a project that the city should pursue.
To me this gets towards a bigger point, which are the assumptions of the model. With Wildhorse Ranch for instance, the sensitivity analysis showed how much of an impact the 5% projected personnel cost annual growth had on the economic assumptions of the model. Remember 71% of the costs are personnel costs. If the city were able to hold personnel cost increases merely to the cost of inflation, that would mean huge surpluses not only for a specific project but across the city.
This gets back to a previous point that regardless of how a particular project pans out, if we continue to grow our personnel costs at 5% annually, as a city we will be in trouble fiscally regardless of whether we approve any additional development projects. Along the same lines, if assumptions about revenue sources such as property or sales tax do not pan out, and that is 60% of our taxation, then we will be in trouble as a city as well.
What those two facts suggest is that while the evaluation of a single project may help us adjust along the margins, most of the factors involved in the project’s costs and revenues are actually largely citywide in scope.
By no means am I arguing that we should not strive for fiscal neutrality whenever possible, but it does appear we need to examine our assumptions at the macrolevel in addition to the microlevel if we want a true sense for where we are headed.
The question as to what role the Finance and Budget Commission should play in all of this remains murky. Just as an observation with the current Wildhorse Ranch project, changes to that project were being made up until the time of council action and in some cases even after the project was placed on the ballot on July 28. Under those kinds of conditions, having the Finance and Budget Commission weigh in, is like having them evaluating a moving and changing target. But perhaps having the process be standardized will impose a degree of stability in the numbers and having the commission help set up clearer policy guidelines will help as well.
The issue was by no means resolved last night and I think there needs to be considerable discussion on the philosophical underpinnings both by the community and the council. Unfortunately, while individual projects are sexy and exciting, fiscal analysis is not. And yet, at least with regards to the fiscal impacts, much of the tumult could have been avoided had the city’s fiscal policies been clearer and more easy to understand.
—David M. Greenwald reporting
So if the model is limited now what is its value for projecting out 15 years from now? Its probability of being correct in fiteen years is, I’m guessing now, approaching zero. The only question is does it do it from above or below. So this endless debate about the fiscal analysis can be put to rest through the use of Occam’s Razon, the idea that the simplist argument is the best, and the answer is those opposed think from above and those in favor think from below. The one truth is that if we stick to the model only homes for the rich will ever be built again.
Thanks for bringing up that point, and that was discussed as well. One of the reasons they limit the analysis to 15 years is that there is simply too many variables that they have to account for outside of that time period.
“The one truth is that if we stick to the model only homes for the rich will ever be built again.”
That’s actually a better than perhaps you intended. The project manager for WHR, John Tallman, said if they wanted it to all pencil out all they would have had to do was sell $800,000. They could have also achieved the density that the neighbors would have liked. That is an issue that needs to be addressed as well, outside of the framework of the highly contentious WHR debate.
Having said that Occam’s Razor is extremely flawed and limited in terms of analyzing things as complex as fiscal impact.
David
Could you give us a sense of Comission members’ and CC liaison discussion?
It sounded like it was all staff.
Were their recommendations?
DPD says: “The question as to what role the Finance and Budget Commission should play in all of this remains murky. Just as an observation with the current Wildhorse Ranch project, changes to that project were being made up until the time of council action….”
David.. It is not “murky” at all! I am afraid that your efforts continue to be transparent to “spin” this piece to deflate the problems of the Yes on P Bill Ritter campaign which should have anticipated and insisted that the city follow the manner in which the CV Measure J process was handled. As to the your quote above, the OBVIOUS solution is NOT to bring the project to a measure J vote UNTIL the fiscal issues are READY to be brought to the B & F Commission for their analysis and RECOMMENDATION.
….. this could easily have been done by asking( and the Council DID appear to allow Parlin to make this decision) to move the Measure J vote to a later date and thus allow these issues to be presented to the F & B Commission when READY. Parlin insisted on the Council voting at 1:30 AM to make his project a special-election, SINGLE ISSUE ballot in November.
one consideration i think should be included in fiscal analysis of commercial projects is a decommissioning factor-we have seen a fairly large number of big box stores close in the region-their value from a city point of view has been severely reduced and as long term vacant space has real costs to the city–the city should consider including a decommisioning fee that would be put into escrow that would be used if a facility closes and is out of use for a significant period
DPD says: “The project manager for WHR, John Tallman, said if they wanted it to all pencil out all they would have had to do was sell $800,000…”
So… it sounds like you agree that the WHR proposal is fundamentally an ILL-CONCEIVED project.
Many local government projects require some estimate of what will happen out to 50 years or even longer. The best example is AB32 which looks at global warming. Republicans are arguing we don’t know what will happen in 50 years so lets just ignore the problem. Some comments here sound quite similar.
Of course no one knows the future, but this project was deliberately engineered to only cover 15 years. If the City wants a margin of error, how about giving that to the citizens of Davis and not the developer?
“…Republicans are arguing we don’t know what will happen in 50 years so lets just ignore the problem. Some comments here sound quite similar…”
What do you expect from a Republican developer who is trying to hide behind local Democratic consultants?
I will repeat a process question I had on an earlier day’s post. Of a project is approved, does the developer have a certain amt of time to begin building or can they carry the approval for a certain or indefinite time period? When we finished the room over our garage, we had to make progress every 6 months or lose the permit.
To me that is one of the problems here: the number of projects aproved but not begun. To the point that YOP folks have argued against the “2000 units” stance with ‘this project won’t be built, etc.
I think there should be a time period once approved that some progress/building needs to happen or a new application. Am I wrong in any assumptions?
Sorry if typos, I cannot scroll up on iPhone 🙁
One huge factor is personnel costs (71%). The automatic 5% per year increase is a fundamental problem. At some point, those costs automatically make a project revenue negative. Public sector analysis and projections based on developer supplied information has a huge potential for problems. From this uninformed citizen’s viewpoint, the automatic salary increases (and related pension and benefits issues) has the potential to bankrupt any city. Well maybe if a city approves every possible development (and of course raises taxes), perhaps the disaster is put off for the interim years new construction generates (maybe) some income (based on developer supplied base information). There’s also the clear drive to approve more expensive homes. Developers walk away w/ profits and the taxpayers pay for it (w/ ever larger contributions). What a business model for responsible long range planning.
[quote]the city should consider including a decommisioning fee that would be put into escrow that would be used if a facility closes and is out of use for a significant period[/quote]I don’t think that’s a bad idea, Stan. However, if I understand what you are saying, I would implement it differently. I suggest — once the economy picks up and the City works its way past our near-term crisis — we reserve one-third of the amount collected in the City’s 1% sales tax. That money is paid for by our retailers, particularly by the auto dealers, Davis Ace and soon Target. We already keep track of how much each retailer brings in. When a salex-tax generating business closes its doors, the City could then spend the amount which was put into the reserve fund by the shuttered retailer down to zero, even if a new company opens in that location. The effect would be to smooth out the revenue cycle from sales tax revenues.
On the other hand, the idea of charging every sales-tax generating business an upfront fee or an additional fee for “decommissioning” purposes would simply serve to harm the profitability of retailing in Davis; and if that discouraged stores to open here, it would ultimately deflate the City’s revenues.
[url]http://www.davisvoice.com/measure-p/[/url]
I think this discussion is unnecessarily obscurantist, which is typical of those pushing money-losing residential development.
Housing does cost more to service than it brings in revenue over the long term. That is a fact. Some projects are worse than others. The Wildhorse Ranch project is worse than others because it brings one-third less property tax revenue than average, while paying a lower per unit fee than average.
It matters very much that residential development does not pay for itself, because the absolute size of the deficit matters. A small University town on I-80 can make a dent in its structural deficit with external sources of revenue that are not dependent on its population. For example, a few hotels on I-80 that serve I-80 travelers, combined with a few high-tech companies with local-designated point of sales, can make a real dent in the deficit of a small town with a structural deficit, but not a large town with a structural deficit.
We shouldn’t be limiting our models to 15 years, because we know with a certainty that massive unfunded liabilities are coming due in the next 25 years. We shouldn’t be burying our heads in the sand.
Also, limiting the model to 15 years allows for tricks to be employed, such as when the Wildhorse Ranch project contributes a small onetime fee that lasts only 15 years to claim the project pencils out.
I think we should have both medium term, 15 year models, and longer time 25 and 35 years models. Fifteen years flies by very fast.
That said, I think it makes sense to build housing that serves real needs, such as housing that can be dedicated to those who work or study in town, or great, energy efficient model high-density transit-oriented residential projects near downtown.
But we should be upfront and fully cognizant that new development does not pay for itself, and the public should be offered a far larger share of the windfall profits when cheap ag land is converted to housing, because it is the public that has conferred value on the land, both by conferring the zoning change, and by the investments that have allowed housing on our dirt-cheap ag to sell for much more than housing build on ag land around communities that have not made such large investments in their schools and quality of life.
[i]I think it makes sense to build housing that serves real needs[/i]
Rest assured that Davis has enough housing for the people who currently live here. By that standard, there is no real need, and there never will be.
Greg,
That’s unnecessarily glib. There are many people who work or study here, or who are offered jobs to work here, who do not already live here.
There are plenty of valid criticisms of my positions. Why create a position to criticize that I don’t hold?
“The question as to what role the Finance and Budget Commission should play in all of this remains murky. Just as an observation with the current Wildhorse Ranch project, changes to that project were being made up until the time of council action and in some cases even after the project was placed on the ballot on July 28.”
What that says to me is the F & B Commission should have been allowed to weigh in at a much earlier time in the process. This is what needs to happen in terms of all commission input. Commissions are essentially being cut out of the process altogether, by not being given info on development projects in a timely manner. How can commissions act in an advisory capacity if not given the necessary info to weigh in on the matter and make recommendations. All commissions are being used for in regard to housing development at the moment is as a rubber stamp – not a good use of our commissions.
[i]There are many people who work or study here, or who are offered jobs to work here, who do not already live here.[/i]
I know that. Some of them have been disgusted all along.
But so what? They aren’t eligible to vote under Measure J’s terms. Would you like to change Measure J to enfranchise them for development measures?
This “new housing does not pay for itself” meme is only accurate at the low end of the market. At some point, the income and expense curves cross and housing is profitable for the city. This is true even in Davis where residential development is loaded down with an unusually high burden of costs for infrastructure, services, affordable housing, open space, parks, ag mitigation, etc.
Where you get into trouble is trying to accurately model these curves in order to predict exactly where the break-even point might be. I agree with Sue on the point that the models need to have a much longer time horizon, and additional effort needs to go into creating more robust models where costs do not “fall thru the cracks” to be borne by the taxpayer in the out years.
While all these ideas about workforce housing and affordability make for nice rhetoric, they are economically unsustainable in Davis. THAT is the fundamental fact that we need to come to grips with. By layering on the green standards, I’m guessing that the additional cost per unit for WHR housing will now be over $100,000 per unit … most of which will be passed on the the buyer.
The silence is deafening. They’ve even managed to muzzle Mike Harrington.
Are they sitting on a lead and trying to run out the clock?
Have they concluded they’re losing the on-line debate?
Is this just a strategic pause as they regroup for the final onslaught?
Did Ritter close up shop because Parlin stiffed him for last month’s $15,000?
Any other theories?
“Other website with Measure P info”
…. is authored by STEVE SOUZA. Councilman Souza, the guy who bellowed from the dais, ” WE!!! are the deciders!!!. His attempt(with his co-subcommittee member Ruth Asmundson, to neuter the political influence of the Senior Citizen Commission is well-known to seniors and those who follow Council happenings. Souza is at his core an anti-populist, his flowery rhetoric, hawaiian shirts and curly locks not withstanding.
Sue said “That said, I think it makes sense to build housing that serves real needs, such as housing that can be dedicated to those who work or study in town, or great, energy efficient model high-density transit-oriented residential projects near downtown.”
There you go again trying to control who lives here. Of course this is viewed through the prism of your own experience and since you have no use for the public schools in Davis you lack an appreciation for those who might choose to live here to provide a good education for their children. I think of my UC Davis alumnist friends who live in Spring Lake because they couldn’t afford the house they need for their growing family. They both own small businesses in Davis but couldn’t afford a home here so they did the next best thing. They moved to the leap frog development of Spring Lake and put their kids in St James and still came out ahead. The loss to Davis schools two ada. The many additional miles driven adds to greenhouse gases and traffic and parking. So if you could take your one trick hat off for long enough to see what no growth policies have done to this community you would be as sad as I am that you have successfully jammed up the development works as much as you have over the years causing much hardship on good people, that any other community would welcome, in order to keep Davis “livable” for the chosen few who meet your elitist view of the world that only students and faculty are worthy.
Yep, it looks like we have won! Scared off those YOPpies! Deafening silence from the other side. Must mean that we win big on Nov 3!
[quote]There you go again trying to control who lives here. Of course this is viewed through the prism of your own experience and since you have no use for the public schools in Davis you lack an appreciation for those who might choose to live here to provide a good education for their children.[/quote]I can’t allow this kind of slander to go unanswered. Every citizen benefits from great public schools. The future of the country depends on it. I support our public school system with all my heart.
Who are you to question that? At least sign your name if you are going to slander people.
[i]I support our public school system with all my heart.[/i]
I do too. DJUSD is a truly wonderful school district with an amazing array of options for students at various levels. It’s not a perfect district, but the perfect is said to be the enemy of the good. As the parents of two children in DJUSD, we’ve been really happy with it.
Unfortunately, it has lately had declining enrollment. While it is true that every citizen benefits from great public schools, fewer citizens have recently benefited from our great public schools.
“Could you give us a sense of Comission members’ and CC liaison discussion?
It sounded like it was all staff.
Were their recommendations? “
The commissioners were interesting in examining further a model that could work. Certainly the notion of the commissioner’s role came up along with trying to better get a handle on the concept of fiscal neutrality. What I liked about that discussion is that it focused on the future rather than a specific project. This was about fixing some of the problems with model, but they are going to be difficult to fix and the city has very serious fiscal problems.
David:
Be Careful what you wish for.
The City could “fix” its fiscal model by making it more optimistic but less realistic–look at what Sacramento and Washington do. As many of us have blogged, some of the assumptions in the model are also already quite rosy. I don’t want to get into that debate now, but just realize at some point down the road if you endorse an unrealistically rosy fiscal model it will come back to bite you (CV?)
That is perhaps true, but I think the city’s overall fiscal model is too optimistic and that has put us into the position we are now fiscally on a citywide basis. If we do not fix our employee compensation system, we have some trouble. The other interesting thing I did not have space to mention was that Navazio named about 10 unfunded liabilities that the city needs to account for in the longer term.
“That is perhaps true, but I think the city’s overall fiscal model is too optimistic and that has put us into the position we are now fiscally on a citywide basis. “
Many of us have been saying this for a while–if the City’s fiscal model is too optimistic as you say that implies that WHR may lose money–or did you mean something else?
As far as employee compensation, its really the benefit issue that concerns me and some of those issues are in the hands of folks at the State and national level.
David, where is the City of Davis on total compensation compared to other cities? And has the city ever looked at unmet needs in the past? Also, do other cities do this or is it new to look at unmet needs?
Phil:
Right now, every model that we have assumes the continuation of existing taxes and also a fairly stable tax revenue over time. I think at this time and certainly in the near future that is very optimistic.
Moreover, your point about benefit issues gets into the longer term problem. We have $42 million in unfunded liabilities for retiree health alone. Now we may have additional in unfunded pension liabilities. And from what Paul said, there are a whole host of unfunded obligations.
Our standards assumption of 5% personnel cost increase will likely bankrupt us in 15 years if it continues at that rate and I think that severely underestimates the true cost when you factor in unfunded liabilities. Just look at what happens with retiree health benefits. We are transitioning to a different model that will save us money in the long term, but it still increases five fold between now and 2020. That means we will be paying over $10 million just in retiree health, that’s like 10% of our current general fund budget.
To curious minds:
I don’t have the answers to those questions. In part the real question is how much we play in employee costs compared to our own budget, because that’s where the money comes from. Unmet needs are a bit nebulous, what we really have is a crumbling infrastructure without resources to pay for it. But some of the unmet needs are things we don’t need.
I watched the CC meeting last night, as the CC voted unanimously to spend $5.5 million on a solar power project for the wastewater treatment plant, and about $9 million on a bicycle path between Davis and Woodland, of which $400,000 will be borne by the city of Davis (the rest of the money is from state and federal funds). This is very typical – keep stoking fires while Rome burns.
Now supposedly the solar project is supposed to pay for itself eventually, but that was just a guess. Want to bet it doesn’t pencil out in reality? And where the hell are we going to get $400K for a bicycle path between Davis and Woodland, when we can’t even pay for road repairs in this town?
I fully expect to be told both projects are “necessary”. We’ll see what citizens think in a few years from now, when the city is in even more desparate straits than it is now!
Sue,If you feel I have slandered you please let me try to refrase as that was not my intent. What I was trying to say is that your policies have made it difficult for young families to buy in Davis or caused their budgets to be strecthed to the breaking point in order to buy in Davis making good people seek shelter in other communities. My criticism was of your desire to socially engineer Davis in your own vision of what it should be, but in doing so you leave out many good people that we should welcome into the community. I did not intend to suggest that you are against education in general. I even used an example of my friends who bought in Spring Lake but own businesses in Davis and have their kids in St James as an example of what I was talking about.
Of course being for education is like being for the fish. Everyone supports the fish yet their numbers keep going down. I remember Jim Brulte showing up at a teacher rally at the capitol about ten years ago showing his support for education. Of course his voting record as Senate Minority Leader would call into question the depth of his committment.
I hope this sets the record straight and I am glad that you didn’t dispute my charge of elitism in your accusation of slander.
wrong handle
Or, perhaps the elitists are the folks who work in Woodland but insist on living in Davis because they refuse to send their children to the Woodland public schools.
Yes the great debate between doing what is best for the community by supporting the public schools or doing what is in the best interest of the child by placing him or her in the best possible setting. I’ll tell you that I no not one person who ever chose the schools and community interest over the interest of their child.
Another thing, my friends own businesses in Davis and an equally compelling argument is that they want the children to be nearby when they are at work. Placing a high priority on your child’s education should be commended not mocked. As I said these are people most communities would want; well educated, productive business owners who are family oriented and care about the education of their children. Only in a place like Davis with its selfish values would they be encouraged to move to the next town over. Just like the Palms Playhouse, if you don’t value your community assets, you can lose them.