Olympian Drive resolution approved by Council

Yes, it passed. Yes, there were Chamber of Commerce types at the meeting who are itching to tie bows on their shovels.Yes, there were farmers present who will likely lose some of their land. Here’s what you didn’t see on the 10 o’clock news…

Despite the vote and the way the resolutions were worded, not all council members are for every part of the project. Charlie Smyth and David Gehrig both have concerns that the portion of the project that extends Olympian from Lincoln to Route 45 will not be cost effective. Additionally, they want to have a rerouted version of North Lincoln Avenue (sans 90-degree turns) added to the project.

Both also said that their yes votes were based on the condition that the project study phase include a third party cost-efficiency study.

Smyth said that this is crucial because the city projections (pdf) did not include tax incentives for businesses that will be locating in the area and appeared to assume growth occurring earlier — five to ten years out — rather than later. Smyth presented his own admittedly rough calculations at the meeting. He subjected the city’s results to growth rates ranging from 2 to 4 percent, a discount rate to account for the time value of money, and a five-year property tax abatement for businesses locating in the district. When all three of these are included in the equation, positive revenue to the city results only if 80 to 100 percent of build-out occurs.

Smyth conceded that his analysis did not consider employment effects or costs and benefits to other entities. He said a more sophisticated analysis is needed that includes benefits to other taxing districts, but that the city needs to watch its bottom line. “The city cannot afford to subsidize other taxing districts and cannot ignore these two additional dimensions as tax caps do not apply to the city. These other taxing districts will not make up any deficit that we may find ourselves in that would in turn result in increased taxes or reduced services.”

He proposed that the design study include an independent analysis early on with a report to Council at a fixed date so that Council can re-evaluate the project before proceeding with further design work, land acquisition, or actual construction.

“I realize that the state is picking up the tab on this project but I want the option of pulling the plug on all work should these analyses prove the road is unsustainable or to adjust the portions built so that they result in neutral to positive economic benefit to the city,” said Smyth

According to Smyth, Council has directed city staff to bring back ideas and items for discussion as soon as they are ready (probably in about 5 weeks) concerning how to get Lincoln Avenue into the design review process as well as get a full blown cost-benefit risk analysis.

Upon arriving at the meeting, citizens were informed by Urbana Fire Department personnel that standing room in the council chambers was limited due to fire codes. Huh? It was only after a former planner commented on the fact that he had never known Urbana to have fire personnel on hand at a council meeting that the head counting abated and that those in the hallway struggling to hear over the roar of vacuums were allowed to stand in the rear of the chamber.

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Here’s the text of Charlie Smyth’s review of the economic analysis of the project, which he presented at the meeting:

Review of Staff Economic Analysis of Olympian Drive Completion

In the Economic development analysis document prepared by staff last week, the assumptions underlying the pace of growth are unknown leaving me to ask “this analysis is compared to what?” We really need at least 3 development rates for each of the growth area scenarios that reflect historic trends and current economic climate. What we’ve been presented are simply 3 sizes of development, full build out, moderate build out, and limited build out, based on willing seller all with the same underlying model and assumptions. These three scenarios found that over 30 years the city’s total benefits (net of all costs) were $22m, $11m, and $10m respectively.

How do we know that the assumptions used aren’t too optimistic? Assumptions need to be realistic and take into account the discounted rate of an investment today versus 20 or 30 years out (e.g., $1m returned in taxes in 20 years does not pay back $1m paid now in costs). What we have right now appears to show a front loading of growth with most growth occurring 5 to 10 years out (take a look at the increases in property taxes each year shown in the figure below) which is probably not realistic and doesn’t reflect what’s been happening in adjacent areas. Another question to ask is what square footage is being built and how fast (light versus heavy industrial)? We also know that it’s the rare big development that doesn’t get incentives so these need to be factored in as well – how much of the return needs to be pushed out 5 years for Enterprise zones or how much of a discount do we need to allow for developments that are given other tax break incentives?

So, some back of the envelope calculations … a 3 by 3 grid showing the build out scenarios with 3 linear growth rates for this area using only city revenues (property tax, utility tax, and sales tax). The starting point for these adjustments is from the values used in the city staff report. An important caveat here is that this revised analysis mirrors the city report in looking at revenues and costs from the city’s perspective, and does not consider employment effects or costs and benefits to other entities. A more sophisticated analysis is needed along the lines given below that take into account the benefits to other taxing districts and such but the bottom line is what the city has to pay up front and gets in return for our investment. The city cannot afford to subsidize other taxing districts and cannot ignore these two additional dimensions as tax caps do not apply to the city. These other taxing districts will not make up any deficit that we may find ourselves in that would in turn result in increased taxes or reduced services.

While the city analysis is useful and illustrative, there are three major issues not included in the cost benefit analysis that temper or, when combined, reverse its conclusion. Taking into to account each issue, stepwise, generates 3 sets of tables. The final table shows that rather than yielding large positive balances from the city’s perspective under all scenarios, the city would only yield a small positive balance (up to $3.6 million in present dollars) in the two most optimistic growth and land availability scenarios, and in all seven other scenarios the city would see a net loss of revenue after 30 years. This analysis does not take into account any costs associated with rebuilding Lincoln Avenue.

1. Alternative scenarios in a cost benefit analysis are intended to illuminate the cost/benefit implications of risks or uncertainties. The scenarios labeled “full, moderate, and limited build-out” only look at the risk of private landowners choosing not to sell land for development. Each scenario still assumes every available acre will be developed by 2040, at a growth rate not discussed or subjected to risk analysis. In fact, future revenues from Olympian Drive are subject to two kinds of risk – supply risk, which modeled in the city analysis, and demand risk, which is the rate and extent to which development occurs on available land.

This table shows the 30 year net revenues to the city for the three supply alternatives in the staff analysis (940 acres, 590 acres, and 510 acres) with three demand/growth scenarios – 100% build out, 80%, and 60% (representing a 30 year linear annual growth rate of 4%, 3% and 2%, respectively).

2. Second, a cost benefit analysis is designed to compare costs and benefits over time, in this case, up front and ongoing costs against future benefits in the form of tax revenues.  Yet to compare dollar values across time, you must adjust for the time value of money.  A thousand dollar outlay today is not offset by a thousand dollar receipt thirty years from now.  You have to discount future costs and revenues.  Plugging in a modest discount rate of 3%/year results in the following net benefits of the project under the same scenarios above:

3. Third, development incentives (including TIF districts, enterprise zones, and project-specific development agreements) are commonly used to attract new development, yet the analysis assumes each developer will pay 100% of local taxes. If you assume a five year property tax abatement for the Olympian Drive project area (with the discounted future values @ 3%/year from above), the 30 year net benefits to the city are:

We need a full blown risk analysis (a real cost benefit scenario as illustrated above) and the only way to do this is to add a rate of economic development to our growth areas and get full costs associated with all investments (time value of money and all city costs). The analysis done above doesn’t include the costs of N. Lincoln Ave Corridor yet the city analysis has included it as a total build out under all three scenarios. This is not realistic and if included, the above table would show even greater negative return. A more realistic growth pattern might be to take the last 20 years of growth and development in this immediate area (along N. Lincoln) and project it out in a linear fashion. A similar approach could be used for N. Cunningham. As part of the analysis, we need to see a breakdown of land sections with the potential incentives figured in, the benefits to different taxing bodies (metro district, school district, etc), city costs, investor costs, and expected contributions from government agencies.

Further, the analysis needs to reflect the likely construction approach with:

1. Phase A only risk analysis
2. Phase A with Lincoln Ave Corridor
3. Then add Phase B (in combination with 1 and 2)

Finally, the scope of work that is part of the design study needs to include these analyses performed by an independent agency early on with a report to council at some fixed date so that we may re-evaluate this project before proceeding with further design work, land acquisition or actual construction. I realize that the state is picking up the tab on this project but I want the option of pulling the plug on all work should these analyses prove the road is unsustainable or to adjust the portions built so that they result in neutral to positive economic benefit to the city.

References:

Cost Benefit Analysis: Concepts and Practice (2nd Ed), Boardman et al. (New Jersey: Prentice Hall, 2001)

See especially Ch. 6 (Discounting Future Benefits and Costs); Ch. 7 (Dealing with Uncertainty)

Handbook of Public Finance, Fred Thompson and Mark Green, eds. (New York: Marcel Dekker, 1998), pp. 221-268 (cost benefit analysis); pp. 269-318 (discounting)