Analysis: Leland recommends using the 75% variable cost assumption for development impact models

By David M. Greenwald
Editor-in-chief

Davis, CA – This is a very controversial issue, however, when EPS (Economic & Planning Systems, Inc.) released its projection that DiSC 2022 would generate just under $ 4 million per year in tax revenue. Annuals, some complained that EPS did not at least present an alternative of 100 percent variable costs.

The City of Davis Development Impact Model was designed by the Goodwin Consulting Group, which includes an element to determine the average rating.

The Finance and Budget Committee had asked to determine whether the variable cost, created by multiplying the average expenditure by 75 percent, was “appropriate”.

In a memo to be discussed at the Finance and Budget Committee meeting on December 13, 2021, Bob Leland, the city’s special tax consultant, said: “Our analysis shows that the figure of 75% of costs variables is reasonable as a percent of total costs, although this varies by department.

As Leland explains, “Any expense account, whether large or small, can be fixed or variable in nature, but the key is to identify the main categories of fixed expenses that can be easily deducted from the total expenses by department. , leaving the net amount as a variable expense.

The Goodwin model never specifies the basis of the 75 percent factor that it uses to identify variable costs.

Leland writes of “costs. It has been discussed as a reasonable number and an “industry standard”.

Leland examines the following cost categories that are fixed in nature: personnel costs, pensions, retiree medical care, debt service, grant matching, contingencies, capital expenditures, and county payments.

“The costs for these items were then deducted from the FY2022 budget amounts for the general fund, using the city’s long-range forecasting model,” Leland explains. “This resulted in variable costs equivalent to 75.1% of total costs, with the amounts per department as used in the Goodwin model ranging from a low of 51.3% to a high of 89.2%.”

However, he also notes that there are issues with the allocation of spending to the proposed development (an issue we have also identified).

He said: “The problem with calculating expenses using an average cost approach is that in reality local agencies don’t budget that way. On a marginal basis, the incremental cost increases are small and it is impractical to increase them precisely with individual growth additions.

In addition, “when a budget is increased, it is done gradually. The question is whether the workload in a given area justifies the need for an additional post, or a larger contract with an outside provider of services and supplies.

He writes that “for smaller developments there will be no identified incremental costs, hence resorting to average costs.”

He continues, “At the end of the day, spending is both driven and limited by income growth. If there is income, an agency will spend it, and conversely, an agency cannot spend what it does not have. Even in times of population growth, if the business cycle produces lower incomes, the agency will spend less and service levels will suffer. “

Leland would later argue, “Despite these underlying spending pressures, an agency can only spend what it has. So, he adds, “since revenue generation is ultimately the key criteria in determining what a city can spend, it makes sense to compare core revenue generation to the highest revenue sources. affected by development (currently adopted budget) with the proposed development itself. . “

This is the model used by BAE (BAE Urban Economics) to assess the fiscal impact analysis of the Davis Downtown Plan.

“The tax model incorporates cost savings based on the presumed efficiency of downtown service delivery,” BAE reports on page 6 of its analysis. “Nonetheless, the tax model provides for substantial increases in costs for 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 assumes that 75% of the existing average cost for DUEs is variable and will increase as the downtown plan adds DUEs…”


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