Gaps in Nishi Financial Analysis on Cost Side

Bicycle Connectivity on West Olive
Bicycle Connectivity on West Olive

Yesterday the Vanguard published an analysis of the Nishi fiscal picture. In response, we received an anonymous note that raises a number of questions. In the interest of having a full and transparent conversation, we will publish this as food for thought.

City needs a defensible financial projection to show Nishi pencils out positive for city revenue vs cost wise…over the long run, or mechanisms are in place to assure this.

Here are the gaps I’ve seen that need to be remedied…I hope FBC staff and consultants can dig in.  Council does not have bandwidth, and too many are suffering from “confirmation bias”, and the business community, who is always concerned about cost/benefit, has already endorsed the project before the answer is in.   

  1. Account for lack of Prop 13 setup in value in projection of Property Tax Revenue Most likely scenario most of these building will be tax assessed at cost: construction cost of the buildings (x infrastructure) and cost of land…i.e. AG value developer purchased it at.
  2. Reconfirm Market value for Assessment.  The “Resale Market Value” of the building numbers used are high relative to what professional appraisers have seen in the market. These values are so key, having a 3rd party confirm is important. But of course, these numbers are only good when the property sells….otherwise first issue (Prop 13) holds.
  3. Year by year cash flow for project is important to confirm its benefit to the city for project’s FULL life cycle, not just year 1.   Under Prop 13 assessed value rises at 2% under Prop 13 “freeze”, yet city’s cost rise faster, especially personnel costs, at a  much higher rate. So you are taking today’s  property tax value/rate and today’s cost and projection out five years. When you project the costs out 20 years, will the project really pencil as benefit to the city?
  4. Consider Government “grants” as part of the break even. Developer is excited about getting Government grants to finance infrastructure needed by the project once it is okayed. This is tax payer subsidy. Have payback of these funds been worked into the breakeven analysis?  While this is “free money” that does not come from City budget, won’t these funds lower the chance of city getting ‘free money’ for other projects from SACOG, the state, etc.
  5. Measure project revenue against a true “sustainable” city cost as well as the “target” operating costs of the city.  Consultant used as “breakeven” payback to the city last year’s budget/cost….even though we residents have been told, in context of tax increases and salary increases, that spending rate is not “sustainable” and more taxes are needed.  Also, if we ever hope to been in a lucky-condition like Palo Alto, we should be projecting new project revenue to yield that an “Ideal” aspirational revenue per acre.   Otherwise we are just in a treadmill.
  6. Any Incremental Cost Analysis needs to include Time and opportunity costs to the Political process Nishi is taking a lot of council and community time…and will take more.  There are other improvement council could have focused on.  And it city staff and council time in the future will be needed to manage of infrastructure upgrades are in part driven by project.  YOU also want to include recovery of sunk-cost by council/staff to date. 

    I also would include some value for community involvement in process….volunteer time spending reading NISHI stuff is taken away from other community endeavors.  If you want to monetarized this on time costs against future revenue for at NPV, you could cost out all this one-time investment at, say $20/hr for citizen, and $200/hr for council and actual cost for staff, and see if project is Paying back 20%/year to for the Pre Measure J/R time, and say 5% ROI on later investment.  I suggest 20% or even 40%, as it the magnitude of return rate of speculative financial investment expect in startup.

  7. Need to do a risk analysis of County/City property Tax split. How much is viability of project affected if revenue split is different than what is projected? Does city need to insist on a 40/60 split with county to make this project viable…and city is taking the risk, and county is not assuming much incremental costs or overhead with built out.  This analysis is critical in city’s negotiation with county on tax split?  

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4 Comments

  1. Jim Frame

    I also would include some value for community involvement in process

    This is the price of living in a dynamic community, and it doesn’t seem reasonable to charge it to the project.  It’s a cost that’s borne by the citizens regardless of whether or not the project is approved.

    Does city need to insist on a 40/60 split with county to make this project viable

    I thought the county share was limited to the make-whole amount, i.e. the revenue it loses upon annexation.  How much negotiating leverage does the county have, and on what basis?

  2. David Greenwald

    This was posted by request from Jeff Miller:

    Anonymous

    While tend not to jump into the discussions on the VG, mostly because I see the F&BC’s role as objective analysis not policy. That said I would offer the following:

    1.        Account for lack of Prop 13 setup in value in projection of Property Tax Revenue Most likely scenario most of these building will be tax assessed at cost: construction cost of the buildings (x infrastructure) and cost of land…i.e. AG value developer purchased it at.

    Not most, just those held by the developer and only until such time as they are sold. I believe the land is stepped up in value although that is small amount in the overall tax basis. One straightforward way to address this issue is to create an Assessment District, with the annual assessment set at a level that captures any “lost” property tax revenue. 

    2.       Reconfirm Market value for Assessment.  The “Resale Market Value” of the building numbers used are high relative to what professional appraisers have seen in the market. These values are so key, having a 3rd party confirm is important. But of course, these numbers are only good when the property sells….otherwise first issue (Prop 13) holds.

    This is just statement, please provide data and the names of the appraisers. Here too creation of an Assessment District is a straightforward method for permanently eliminating this problem, if it in fact exists.

    3.        

    4.       Year by year cash flow for project is important to confirm its benefit to the city for project’s FULL life cycle, not just year 1.   Under Prop 13 assessed value rises at 2% under Prop 13 “freeze”, yet city’s cost rise faster, especially personnel costs, at a  much higher rate. So you are taking today’s  property tax value/rate and today’s cost and projection out five years. When you project the costs out 20 years, will the project really pencil as benefit to the city?

    The problem you describe is a City-wide problem.  It applies to the house that the author lives in just as much as it applies to the 46 acres in this project. There is a much broader problem here. It involves if/when city staff finally accepts that if they do not change their business model for providing services then the past increases in compensation, unfunded pension, OPEB and infrastructure cost are unsustainable. The small 46 acre/$100k potential deficit is peanuts compared issues surrounding the other 5000 acres of the City. ($100k is less than 2 tenths of one percent of a $50 million GF Budget) That said, the project needs to at least have the potential to be a net financial positive to the city.

    5.       Consider Government “grants” as part of the break even. Developer is excited about getting Government grants to finance infrastructure needed by the project once it is okayed. This is tax payer subsidy. Have payback of these funds been worked into the breakeven analysis?  While this is “free money” that does not come from City budget, won’t these funds lower the chance of city getting ‘free money’ for other projects from SACOG, the state, etc.

    This is a question not an answer. Can the author pleas cite evidence that it will. That evidence will help us transform  an alarmist statement into a factual statement.

    6.       Measure project revenue against a true “sustainable” city cost as well as the “target” operating costs of the city.  Consultant used as “breakeven” payback to the city last year’s budget/cost….even though we residents have been told, in context of tax increases and salary increases, that spending rate is not “sustainable” and more taxes are needed.  Also, if we ever hope to been in a lucky-condition like Palo Alto, we should be projecting new project revenue to yield that an “Ideal” aspirational revenue per acre.   Otherwise we are just in a treadmill.

    This point is also not specific to the project, but rather applicable to the whole City of Davis. The city needs more revenue from either some sort of growth or new additional, or should I say “aspirational,” taxes or some combination of both. You can wait for your “aspirational” perfect project/acre but the only thing I am sure of is that in this town you will never arrive at a consensus about your “aspiriationally” perfect project.

    7.      Any Incremental Cost Analysis needs to include Time and opportunity costs to the Political process Nishi is taking a lot of council and community time…and will take more.  There are other improvement council could have focused on.  And it city staff and council time in the future will be needed to manage of infrastructure upgrades are in part driven by project.  YOU also want to include recovery of sunk-cost by council/staff to date

    Management of city business is their respective jobs. I agree with you in concept that the cost is real, but should that cost  be a direct cost or an allocated overhead cost?. As a member of the FBC, and now as the FBC Chair, I have been asking for years on just exactly how overhead is aggregated and allocated for the services and projects that the city provides. Still don’t know but I am working on it. I also don’t believe we have any real cost analysis with usable metrics on the services the city provides.  There will be a discussion on how some of the onetime fees that the project would generate, construction fees, etc, could be put into some special reserve fund to begin funding replacement cost 20 plus years from now.

    I also would include some value for community involvement in process….volunteer time spending reading NISHI stuff is taken away from other community endeavors.  If you want to monetarized this on time costs against future revenue for at NPV, you could cost out all this one-time investment at, say $20/hr for citizen, and $200/hr for council and actual cost for staff, and see if project is Paying back 20%/year to for the Pre Measure J/R time, and say 5% ROI on later investment.  I suggest 20% or even 40%, as it the magnitude of return rate of speculative financial investment expect in startup.

    I am quite sure the CC would like to be collecting your $200/hr. With respect community/citizen involvement, that is our job as a citizen. (even $20/hr is a great deal more than any of us on the F&BC are paid.)

    8.       Need to do a risk analysis of County/City property Tax split. How much is viability of project affected if revenue split is different than what is projected? Does city need to insist on a 40/60 split with county to make this project viable…and city is taking the risk, and county is not assuming much incremental costs or overhead with built out.  This analysis is critical in city’s negotiation with county on tax split?

    This issue has been anticipated by EPS in their analysis report.  EPS Scenarios 4 and 5 show the fiscal results with optimistic and pessimistic tax split percentages.  Having three different scenarios seems more than sufficient to me.  CC has a subcommittee negotiating the city/county split as we speak. Unfortunately I would be willing to make a sizeable wager that neither side has any real cost data that can or will be used in the negotiations. What the CC council can do is make the county take the bet of fairness, i.e. a 50/50 split by incorporating it into the ballot measure. If we make one of the caveats in the measure that it only goes forward if the county agrees with whatever the fair split is. They can get half of something or all of nothing.  

    The F&BC is not a political entity nor are we unduly influenced by staff or the CC. We have been working hard on this very issue of transparency and accountability of both the city staff and the CC for the last two years.

     I know all of us on the F&BC sincerely appreciate citizen involvement and input.  But what is also greatly appreciated is real data. Statements like “ to yield that an “Ideal” aspirational revenue per acre” does not help us as much as data that backs up what your/an ideal amount of aspirational revenue per acre is and why. And, questions like “ won’t these funds lower the chance of city getting ‘free money’ for other projects from SACOG, the state, etc. ”  either assumes that staff has not taken them into account or better yet  you provide data that proves where this has occurred.

    The F&BC is working on a 20 year budget document that addresses our unsustainable fiscal future which includes our unfunded pension, OPEB and infrastructure liabilities. We also need to layer the Nishi or any project into the document as you correctly point out. We have to use all resources available  to provide the most accurate data possible.

    If the project’s  potential loss is breakeven or a $100k/ year fiscal deficit in a worst case scenario and the potential win for the city could be more than $1million/ year then that should be presented to the voters along with all of the other issues surrounding the project. Then let them vote.

    I personally have no dog in this hunt and this is not my full time job. I appreciate any help I can get. Please feel free to contact me to drill down into any of these points.

    Jeff Miller

    Member and Chairman of the Finance & Budget Commission.

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