Economic Impact Analysis

Analyze – Negotiate – Close!

Definition

Economic Impact Analysis…

Is the projection of the direct, current, public costs and revenues associated with growth to the local jurisdiction(s) in which this growth is taking place.

Why?

To avoid being the 5th member of the “Star Trek landing party”

Economic Impact Analysis uses your

technical skills to guide the local

leadership into sound decision making

Methodology• Marginal Costing

• Comparable Community

• Average Costing

If you come in contact with a company who can’t explain in one sentence what their company actually does…..be very afraid

Marginal Costing• Good: Relies on demand /supply relationships

of local service providers• Bad: Can lag or lead Average Costing practices

Example:

Community Population: 7,700

Police /Resident Ratio: 1:400 (19.25 Policeman) Currently 20 policemen on force

New company raises population by 220 (19.8 Policeman)

No real cost to community safety?

Comparable Community• Good: Provides Real Life Examples for

Comparison• Bad: Extremely Time Consuming and /or

ExpensiveExample:Community Population: 7,700 /19.25 PolicemanNew company raises population by 220 (19.8 Policeman)Community B: 8,500 people /22 PolicemanCommunity C: 5,500 people /16 PolicemanCommunity D: 10,000 people /25 Policeman

Average Costing• Good: Creates the best average allocation of

costs in the short term• Bad: Works well in general rather than specific

situations.

Example:

Community Population: 7,700

Police Budget: $2,800,000 or $286/person Currently 20 policemen on force

New company raises population by 220

Assigned cost: $286*220 people = $62,857

Key Point• In the extremely long run, the Marginal

Cost, Average Cost and Comparable Communities Methods will yield similar estimates of economic impact analysis. Yet, Average Costing produces defensible results with the minimum amount of demand on your time.

Adelphia Communications?

The owner and

his two sons took

$1,000,000,000,000

Key Constraints to Remember

• Percentage of new employees building homes: 20% (National Studies)

• Value of homes as a factor of income: 2.3• Percent of new employees assumed to be

residents: 32.3%• After-tax income available for non-essentials

33%• Propensity for local resident consumption: 85%• Propensity for non-resident consumption: 10%

Projecting Revenue• What You’ll Need

– Assessing Practices– Tax Rates– Investment by Category

• Land• Real• Personal

Assessing Practices• Real, Personal, Land• Purchase Value =

Market Value• Conversion Factors

(100%, 50%, 33%) of market value

• Personal Property Depreciates over time depending upon usable life to a residual value.

Example: Company A purchases a new piece of equipment.

Purchase Value: 14,579,600

Assessment Rate: 100%

Net Value: $14,579,600

Taxing Practices• Levied by multiple

jurisdictions (city, county, schools, state, etc.) but at a consistent rate

• Rate is either $/100 of assessed value or $/1000 of assessed value (mills).

• Often quoted as a percentage

Tax Rate: .014706/100

Tax Burden: $214,407

Sample Revenue Project• $3,920,400 in land• $16,500,000 in Property• $14,579,600 in Machinery & EquipmentTotal = $35,000,000

• 120 Jobs @ average pay of $49,000

• Property Tax Rate is $15/1000 (1.4% or 0.15)

• Income Tax Rate is 5%

Dennis Kozlowski ?

(Tyco Corporation)

$16,000 to purchase

an umbrella stand, and a $6,000 shower curtain

Projecting Costs• What You’ll Need

– Your Most Recent Non-Grant, Non-User Fee, Budget for the Unit of Government

– Population Figures from the same year

– Incentive Package

Sample Costs• 24,331 residents

• $12,606,905 General Fund Budget

• $518 /resident

Sample Costs• 120 jobs

• 32.3% will be residents

• 39 new residents

• 3.30 people /household

• 129 new residents

Additional Costs are:

129*518 = $66,822/year

Secondary BenefitsDistribution

of New Jobs

Average Expendable

Income

Propensity to

Consume Locally

Industry /Community Specific Multiplier

Economic Benefit

Residents 120*32.3 49,000*33% 85% 1.96% $1,044,164

Non-Residents

120* 49,000*33% 10% 1.96% $697,250

Total Secondary Benefits $1,741,414

In college, my economics class was

taught at 8:00am which really didn’t work for me

Secondaries• Bankability

– Only directs can be banked for improvements

• Challengeability– Different assumptions yield different results

• Credibility– I’d rather be known as conservative than

exaggerating

Tips on Multipliers• Industry vs. Community Specific

• Best Sources:– REMI (Community)

• www.REMI.com

– Bureau of Economic Analysis (Industry)• http://www.bea.doc.gov/bea/dn2/i-o.htm

Key Decision ParametersIndicator Formula

Cost /Benefit Direct Revenues /Direct Costs

Incentives /Job Incentives /Number of Jobs

ROI Private Investment /Public Investment

Incentives /Wages

Ratio

Total Incentives /Total Wages

Break Even Point Total Incentives /Net Annual Revenue

End of Presentation