By David M. Greenwald
Davis, CA – It is a highly contentious issue, however, when EPS (Economic & Planning Systems, Inc.) issued its projection that DiSC 2022 would generate just under $4 million per year in annual fiscal revenue, some complained that EPS did not at least present an alternative of 100 percent of the variable costs.
The city of Davis’ development impact model was designed by the Goodwin Consulting Group, which includes a component to determine the average coast.
The Finance and Budget Commission had asked to determine whether the variable cost, created by multiplying average expenses by 75 percent was “appropriate.”
In a memo that will be discussed at the December 13, 2021, Finance and Budget Commission meeting, however, Bob Leland, the Special Fiscal Consultant for the city, argues, “Our analysis shows that the 75% variable cost figure is reasonable as a percent of overall costs, although it varies by department.”
As Leland explains, “Any given expense account, however large or small, may be fixed or variable in nature, but the key is identifying major categories of expense that are fixed that can be easily deducted from the total expense by department, leaving the net amount as variable expense.”
The Goodwin model never specifies the basis for the 75 percent factor it uses to identify variable costs.
Leland writes about “costs. It was discussed as being a reasonable number and an ‘industry standard.’”
Leland looks at the following categories of costs that are fixed in nature: Personnel Costs, Pension, Retiree Medical, Debt Service, Grant Match, Contingency, Capital Outlay and Payments to County.
“The costs for these items were then deducted from the FY 2022 budget amounts for the General Fund, using the City’s long-range forecast model,” Leland explains. “This resulted in variable costs equaling 75.1% of total costs, with the amounts by department as used in the Goodwin model ranging from a low of 51.3% to a high of 89.2%.”
However, he also notes there are problems with assigning expenses to proposed development (a problem that we have also identified).
He said, “The problem with computing expenses by an average cost approach is that, in reality, local agencies do not budget this way. On a marginal basis incremental cost increases are small, and it is not practical to scale up precisely with individual growth additions.”
Further, “When a budget is increased, it is done incrementally. The question is whether the workload in a given area justifies the need for an added position, or a larger contract with an outside provider of services and supplies.”
He writes that “for smaller developments, there will not be any incremental costs identified, hence the reliance on average costs.”
He continues, “Ultimately, expenditures are both driven and limited by revenue growth. If there is revenue, an agency will spend it, and conversely, an agency cannot spend what it does not have. Even in times of population growth, if the economic cycle is producing lower revenues, then the agency will spend less, and service levels will suffer.”
Leland argues later, “Despite these underlying pressures on expense, an agency can only spend what it has available.” Thus, he adds, “Since revenue generation is ultimately the key criterion in determining what a city can spend, it makes sense to compare the baseline revenue generation of the revenue sources most affected by development (current adopted budget), to the proposed development itself.”
This was the model used by BAE (BAE Urban Economics) for evaluating the Fiscal Impact Analysis for the Davis Downtown Plan.
“The fiscal model incorporates cost saving based on assumed efficiencies in downtown service provision,” BAE reports on Page 6 of its analysis. “Nevertheless, the fiscal model does project substantial increases in costs for the Community Development, Community Services, Police, and Fire Departments, and General Government functions.”
These costs are based on “the increase in downtown DUEs (Dwelling Unit Equivalent) which assume 75% of the existing average cost for DUE are variable and will increase as the Downtown Plan adds DUEs…”