A few weeks ago the Finance and Budget Commission had some concerns about the fiscal analysis of Nishi. To their credit, the developers went back to the drawing board with the city and looked into ways to shore up the finances. So now, instead of a $106,000 deficit, the project has about a $1.4 million surplus.
The problem that we face is that putting a single number on a fiscal analysis is not an accurate way of doing it. The Vanguard asked for and received a spreadsheet analysis as to how these numbers were derived, and the FBC seems to have simply picked the one it liked best and voted to support it.
The problem with that approach is that everything from property taxes to various fees are projection – at buildout, with various assumptions. But the projections, if we were dealing in the real world, would be a range with standard errors and confidence intervals.
The FBC vote decided that the correct number was $1.4 million (which is actually $1.389 million rounded up). How do they get there? The city assumes about $1.07 million general fund revenues, plus another $168,000 in non-general fund revenues, and the key is the $760,000 in development agreement revenues.
The city’s projections for the general fund revenues range from between $891,000 and $1.07 million. The key difference between the two are on two line items – property taxes which would vary between $118,000 and $227,000 and sales taxes which range from $88,000 to $165,000. Everything else seems locked into place.
The non-general fund revenues are locked in, as well.
Meanwhile, the development agreement revenues include: $181,000 for Parks and Open Space. There is the $356,000 for Community Services District revenues (remember in the staff report, however, it’s not clear that that is a constant). There is the $93,000 in the make-whole provisions.
The one thing in question is the Measure O sales tax revenue. If it is not extended, obviously that revenue is zero. But odds are that we will at least extend the 2004 portion of that, generating $121,000. Then there is a scenario where both are extended for the full $242,000. The $1.4 million scenario assumes only one is renewed – I think it is more likely that both are, because I don’t see how the city is going to be able to function without the full sales tax renewal.
The big point of dispute on the commission was actually on the expenditure side, and it had to do with increased fire and police expenditures. The city budgeted in a $312,000 increase in fire and $530,000 in police.
Ray Salomon pushed for the substitute motion to reduce the expected revenue to $700,000 from $1.4 million. Dan Carson, however, I think is right in this case. He proposed reducing the marginal cost of fire and police protection from $842,000 down to $108,000. The city budget is suggesting that the 47 additional acres of Nishi are going to require, in effect, two additional firefighters and 3.5 FTE of additional police officers.
I have seen some of the critics of Nishi jump onboard this number and argue it is more realistic, as that is what police and fire are asking for, but I have to say this is nonsense. On the fire side, Nishi is right down the street literally from the UC Davis Fire Department and, with boundary drop, they can easily and quickly respond to a call. Nishi is not going to require us to hire any additional firefighters.
On the police side, it clearly will add to the city police’s service area, and it might trigger additional calls for service. On the other hand, we are already operating the police, down five officers – five officers whose costs are already figured into the city budget.
The bottom line, I just don’t see how this small development triggers the need for two firefighters and 3.5 police officers. So I think the $108,000 is far more realistic.
By their numbers then, I would support a $1.5 million revenue projection. But that only goes so far.
But I see a potential pitfall here. Talking to a number of experts here in town, there seems to be a very real concern that the housing aspect of Nishi could be built, but without an identified anchor-tenant, the commercial space, especially the R&D, is more problematic.
We have a phasing requirement for housing triggered both by the second crossing to UC Davis as well as the upgrades to Richards Boulevard. But there is no provision that requires the developer to build the R&D – ever. Some people I talked to – all of them supporters of the project – believe that there is real possibility that the commercial is never built.
One person I talked to said there is clear interest in the site for R&D and companies to come in. After all, it is close to the university and the university is pumping out tech transfer companies. But they acknowledge that commercial demand is far less predictable than housing.
So the obvious question – at least for me – is what happens to the revenue that is projected if the R&D component, projected at 325,000 square feet, is not built?
I couldn’t get a good answer to that. The FBC projections that I see do not seem to take much of the R&D budget into account as it is. As I noted above, there is only a slight difference in property tax and sales and use taxes in the FBC scenario versus the worst case scenario. We’re talking maybe $200,000 a year. (The worst case scenario, according to one member of the commission, takes into account Bob Milbrodt’s assessment issue and substantial sales tax reductions).
There seems to be no real analysis here as to what happens if the R&D simply doesn’t get built.
I asked Katherine Hess. She responded, “Hypothetically, there would be less property tax and less sales tax from the businesses and the employees. We would also have lower service costs, of course.”
She added, “In reality, though, the combination of freeway visibility, proximity to campus and downtown, permit-ready parcels, the synergies of a mixed use innovation district, and property owners with no incentive to sit on the land should mean a strong demand for the office/R&D to get built.”
But the problem is that I have the city telling me that the no commercial buildout scenario is unlikely, but also have people in the field and others telling me that it is a real possibility because commercial is not predictable.
If we are looking at the FBC numbers, the no commercial possibility doesn’t seem to play a huge impact in its projected revenue.
One reason for that might be that they really aren’t projecting the commercial revenue along with the enhanced property tax value into their model. After all, if Nishi is really going to generate “between $315 to $385 million in annual economic activity, $89 to $107 million in annual wages, and 1,500 to 1,800 permanent jobs,” as the developers are touting, then the city is going to get a lot more than a few hundred thousand in sales and property tax revenues from it.
I could be completely wrong here – but it seems like the fiscal analysis is probably on the conservative side. The reality is that we could stand to gain far more than projected if the project pans out. But we have no way of really knowing if it will, and so the prudent model simply looks at the direct effects. Without the commercial component, with all of the other guarantees, it seems like we should still end up with about $1 million in revenue at buildout even without commercial, with the possibility of a lot more if the commercial succeeds.
Is that enough to satisfy critics? Probably not. But it could be enough to get council to approve it on Tuesday and enough for the voters as a whole to support it in June. Stay tuned.
—David M. Greenwald reporting