One of the biggest criticisms of housing projects is the perception that they are fiscal losers for a city. What is fairly certain at this point is that the city staffers and the Finance and Budget Commission are working and refining fiscal models in order to make them more accurate.
This week the Finance and Budget Commission looked at a work up on the Nishi fiscal model. That is of course a bit tricky, given that we don’t have a firm project proposal as of yet and whatever findings we have are preliminary at best.
The city staff and ultimately the commission agreed that the project was modestly fiscally positive over a 15-year period. Over the last few months, one of the big questions that the Vanguard continues to raise is whether a 15-year time horizon is appropriate. A long time city employee who has held a variety of different positions in different cities told me recently that anything beyond a 10-year estimate is, at best, speculative.
To my point, however, I would argue that at some point you are no longer looking at fiscal impacts from development. Instead, you are looking at city fiscal conditions. How and when to draw that line is a question that has not been fully resolved.
My reasoning here is quite simple – how does a project go from positive in year five to negative in year 15 (if it does)? The answer here is not due to the development itself. Whatever additional
costs there may be have already been borne by the city in year five. No, what makes it go from positive to negative is the fact that our cost of labor is increasing at a citywide level faster than our stream of revenue.
In short, that leads me to the conclusion that our housing projects themselves are not net negative investments for the city. Rather, our city’s fiscal model itself needs to be refined. We either need to do a better job of containing costs or a better job of finding revenue.
Either way, this is a citywide issue, not a site-specific one.
During the time the Vanguard has existed, we see the city takes fiscal analyses far more seriously these days than it did back in 2008. While the city has not perfected the models for development fiscal impacts, they have taken care to make sure that direct impacts are mitigated through impact fees and that the numbers more or less pencil out.
In addition, the Finance and Budget Commission has worked hard to analyze the impact of projects on the city budget and worked to refine and improve on existing models.
The commission voted 5-2 to support the staff finding that the project is net fiscally positive. The commission in their motion declared, “We also generally concur with the estimate that annual ongoing revenues and costs for the city from the project would be modestly net positive over time.”
However, one commenter on the Vanguard, who apparently attended the meeting, has repeatedly posted a link to a commissioner’s alternative analysis and proclaimed that the truth is likely in the middle between the net fiscally positive findings by the commission and city staff, and the huge $11 million hole found by Commissioner Ray Salomon.
I reached out to Dan Carson, Chair of the Commission, to better understand Mr. Salomon’s analysis and I quickly have concluded that the commission is correct to have backed the city staff model – imperfect as it may be.
Here are some of the key differences.
First, he assumed lower amounts of taxable sales for students than in the city model. While that might make sense, the city model was already adjusted to assume a much lower sales tax per capita for students than the general population.
Second, Mr. Salomon assumed that assessed values of property, upon which the property taxes are levied, would grow more slowly for the first five years of the project than the city model. The city model assumed two percent growth in assessed value throughout the period, which is the maximum permitted under Prop. 13.
But those are fairly small compared to the expenditure estimate differences which, according to Mr. Carson, were significantly higher than those in the city model.
In year five, Ray Salomon assumes that the costs for the city to provide services to Nishi will be around $1.6 million. That’s nearly twice the amount the city model estimates.
“It is clear from an examination of the spreadsheets that he does not correct for a double-counting of some administrative costs that was corrected in the city staff model,” Dan Carson explained to the Vanguard in an email.
He continues: “As a result of this and other technical differences in the estimates, for example, Ray assumed the cost per DUE (dwelling unit equivalent) is $898 for police services and $472 for fire services. The city staff estimate is $475 for police services and $211 for fire services.”
In fact, the commission came to the conclusion that the city staff estimates for city service costs are not only reasonable, “but actually could be overstated.”
Here is a key example. Mr. Salomon assumes that costs for police would amount to $557,000 after buildout in five years. That means that at roughly $150,000 in total compensation per officer, the city would end up hiring 3.7 officers to account for a single apartment complex.
That doesn’t seem likely to occur, especially since the city police have been asking, as it is, for additional officers over the last few years and the city lacks the budget for those.
Mr. Carson writes, “We concluded that a lower cost assumption of $300,000 was reasonable to use, while expressing concern that even this number is likely overstated. The EIR for the original Nishi project states that the costs of providing police coverage to a much larger project would be nominal.”
These are just basic examples. Likewise, particularly with boundary drop, the city is not going to need to add firefighters based on this development. The city at some point might add a fourth fire station, which would of course require a number of new firefighters, but that remains a long way off as the city cannot afford to add the millions to the city budget for additional fire service and would not be doing so in response to such a modest development in a location already close to both the central fire station and the UC Davis fire station.
The problems with Mr. Salomon’s analysis illustrate a larger issue. Even with the city projections, a good deal of these added costs are only theoretical costs. Unless the city actually adds staff as the result of the development, the city is not really adding costs. Moreover, even if you account for the theoretical incremental increase in cost of service as the result of new residents, the project is still fiscally positive at build out.
Where projects move toward the negative is not in year five when they are assumed to be built out, but year 15, when the increased costs of labor have outstripped the projected increases to revenue.
There is a solution for that and it has nothing to do with development.
What the city needs is to have accurate impact fees to cover actual costs and then, at the city level, they need a cost containment plan to keep costs for all city services from escalating out of control.
—David M. Greenwald reporting