Agenda - 12-06-2010 - 7e - Laserfiche WebLink

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Analyzing the Benefits and Costsof Economic Development Projects 7 2 2 that come about as a result of growth and development. An economic impact analysis primarily emphasizes the economic benefits of a development project, but public officials must understand what a project will cost the local government as well. A development project that expands economic activity in an area increases the demand for public services. For example, when a new business facility locates in a community, it will cre- ate an influx of new workers who will use public infrastructure (roads, water and sewer), enroll children in public schools, and utilize other public services such as fire and police departments, parks, libraries, and so forth. An economic impact analysis using one of the models previously discussed will not directly capture the extent of these costs, which local governments must incur to support growth. However, the data from an economic impact study can be used to estimate the costs of the additional public services that a new development project will require. From a local government fiscal perspective, a new business hiring more employees or a new housing development creates a ripple effect that can have significant budgetary implications. Thus public officials and decision makers should understand what the net fiscal effect of a par- ticular economic development project will be. Fiscal Impact Analysis The most comprehensive way to determine how a development project ti~ill affect a local gov- ernment is to conduct a fiscal impact study. A fiscal impact analysis estimates the costs of Iocal government services needed to support a development project. The analysis considers the costs of development in relation to the public sector benefits such as new revenues from taxes, fees, and user charges. By addressing both the costs and benefits to local government, a fiscal impact analysis makes it possible to determine a project's net fiscal effect on a jurisdiction. With this information public officials can determine whether the public benefits (revenues) of a particular development project will exceed the costs incurred by local government, thereby creating a posi- tive return on the public investment in that project. Estimating the costs of development The local government costs that arise from an economic development project are those directly related to the project plus any additional expenditures required to support the growth that ensues. Direct project costs might include (1) public infrastructure expenditures specific to the project, such as improvements in water and sewer systems and roads and (2) any cash incen- tive grants or other financial assistance used as an inducement for a prospective business. The direct, project-specific costs can be readily identified. The other costs associated with the expected growth that will occur in the jurisdiction and region due to the development project can be estimated in a fiscal impact study. Many such costs will correspond to various local bud- get expenditure categories that might include education, public works, public safety, parks and recreation, public health, social services, and so forth. The two approaches to estimating the costs of any expanded local government services and infrastructure needed to support new development are average cost and marginal cost. The average cost approach is used most often because it is more straightforward and relies on data that are easier to obtain. Estimates based on average costs assume that what public services cost today is a good indicator of what they will cost in the future. The average cost approach calcu- lates the current average cost per unit (person, household, or acre of land) of providing a local government service. This average cost per service unit is then applied to the additional units that © 2010 school of Government. The University of North Carolina at Chapel Hill