Fiscal Impact Review of New Development

Important Questions for a Fiscal Impact Review of New Development

Many communities are facing new development and redevelopment. A common question is what financial impact the development will have on budgets of cities and school districts. Cities and school districts are especially interested in assessing whether a proposed development will provide sufficient revenue to cover its future operating and capital cost both in the short and long-term.

Many municipal officials assume that most new development will pay for itself, Unfortunately, that is not always the case. For a variety of reasons, it is not always easy to predict which developments will cover their cost and which will not. Tax rate limitations and conservative assessing practices have combined to limit the financial upside of new development and re-development.

It is a recommended financial practice for communities to review financial impact of new developments. Many communities are asking developers to provide this information as they submit their plans. However, these analyses may not explore the full costs of development. Having full information can provide important insight and even leverage when negotiating development and annexation agreements.

Cities and School Districts should consider the following questions and responses when evaluating new development and re-development.

1. Why is it important to review the fiscal impacts for a proposed development? Fiscal impact reviews are an essential component to financial planning for communities. Knowing, and preparing for, the capital and operating needs of new developments are keys to successfully managing growth. Without such information and financial plans, communities experiencing growth may find themselves supporting budgets from building permit and impact fees. When the growth subsides, these communities are likely to face financial stress.

2. Who should prepare a fiscal impact review? It is best that local government staff or a financial advisory firm working for the local government should perform the review. Many communities rely on information provided by the developer's consultant. This may present problems for the community if those interested in the impacts of the development question that information. It is hard for the community to verify that conclusions are correct if they have not been involved in the development of the fiscal impact data. In many cases, the client requesting the fiscal impact review is the developer and not the local government. It is sometimes difficult to assure objectivity of the fiscal impact review when it is in the best interest of the developer to show a positive fiscal impact for their project.

3. Who pays for the study if the local government staff or financial advisor performs the work? The study will need to be paid for by the local government. Local governments can treat this like any other internal review, such as engineering, where the local government assumes the costs or contracts for the review and becomes the client, yet requires the developer to assume the costs.

4. Don't new developments pay for themselves? No, not always. Tax rates and fees vary greatly because various types of development generate widely different local revenue. As a result, it is difficult to generalize about their financial viability. Typically, specific analysis is needed.

5. If new development pays for new streets and utilities is there any need for additional impact fees? Yes, new development will typically add to the need to eventually expand or build and equip new city halls, police stations, public works facilities, fire stations, parks, libraries and schools. New equipment for police, fire, and public works will need to be financed. Finally, because of the lag between new development and receipt of property taxes and state revenues based on population census data, transition financing is also needed.

6. Is budget or audit information the best source to develop projections for future operating costs? Yes, that is the best place to start. But most local governments have been faced with cutbacks to the point that budgets do not always reflect the true cost of operations. It is critical to identify the real cost to maintain existing services and facilities and adjust projected costs accordingly.

7. What options are available if the development will not support itself financially? There are quite a few options, depending on circumstances. Some options include changing phasing, development type, revising the base plan, conducting special census, and increasing up-front impact fees.

8. When is the best time to prepare a fiscal impact study? The best time is once an initial concept has been presented, but prior to initiating the formal approval process. This allows for adjustments to the plan based on the results of the study. It is much more difficult to make changes once a development concept has been submitted for formal review and approval.

9. Is there really any difference between studies performed by the developer’s consultant and one prepared by a city or their consultant? Yes, some development consultants do not have the municipal background needed to properly evaluate impacts and cost of services. Rarely, does a developer or their consultant have actual municipal operating knowledge. In addition, it is important to recognize that service levels vary from community to community.

10. What type of organization provides Fiscal Impact Review services? These studies are prepared by a variety of sources including cities themselves, planning firms, financial advisory firms and even some universities. Some communities require disclosure of current and recent clients to avoid the appearance of conflict of interest. It is always a good idea to check references as part of the selection process.

James Prosser is a financial advisor and leads Ehlers’ Illinois Office. He has city management experience in f Richfield, MN and in Hazel Crest, Glen Ellyn, IL. Jim has also managed numerous redevelopment and fiscal impact project s for communities.

Beth Ruyle is a financial advisor and is the municipal group leader for the Ehlers’ Illinois Office. She is the former director of the South Suburban Mayors and Managers Association. She has extensive economic development and municipal finance experience.