City Council Agenda and Packet 2024 05 14 - SP

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8 Fiscal Impact Analysis: How Today's Decisions Affect Tomorrow's Budget economic growth decide how to invest limited funds so as to maximize the return. For example, different economic development strategies can be evaluated for their impacts on land use. Land use in turn affects services, costs, and revenues. A fiscal impact analysis helps identify the economic development strategy that makes the most fiscal sense. Finance Issues A fiscal impact analysis focuses on change, generally over a two- to ten-year period. Although the accuracy of the projections diminishes over time, the analysis can help to raise budget and finance policy issues and suggest alternative approaches for addressing them. A fiscal impact analysis differs from traditional local government revenue and budget forecasting: local gov- ernment budgets are primarily revenue driven. That is, the budgeted operating and capital expenditures are fiscally constrained by the amount of revenue forecast. In other words, a local government backs into the bud- geted appropriation as it tailors spending to income. In contrast, a fiscal impact analysis projects the demand for services and facilities (usually based on current levels of service) without regard for expected revenue. If projected revenue does not cover projected expenditures, obviously a deficit will be incurred. Further, a fiscal impact analysis links changes to costs and revenue to specific land uses. For example, if community decision makers implement a shift in land -use policy that results in the need for pub- lic safety capital facilities and associated operating expenses sooner rather than later, a simple cost pro- jection based on a 5 percent annual increase could potentially understate future public safety costs. Fol- lowing are five ways in which fiscal impact analysis can be applied to finance issues. Capital improvement programming Individual depart- ments seldom incorporate market forces or land -use plans into their capital improvement program (CIP) requests. Fiscal analysis enables a local government to forecast the need for additional capital facilities as well as the most appropriate locations for investments in public facilities, based on projected increases in popula- tion or employment in various areas of the community. A fiscal impact analysis also clarifies the timing of infra- structure improvements. By incorporating future demo- graphic and economic projections, the fiscal analysis will indicate the demand for capital facilities in the near term as well as the longer term. Revenue forecasting For purposes of this discussion, a revenue forecast defines the projected change in rev- enues (assuming existing rates) that is caused by land - use or demographic changes in the community. The revenue forecast is one of the results of a fiscal evalu- ation. Specific revenues such as building permit fees, connection fees, and other user fees are considered, as are intergovernmental transfers and general revenue sources such as sales taxes and ad valorem taxes. Projected revenues are compared under different development scenarios. For example, the projected number of new detached houses and apartments mul- tiplied by their estimated market value and then by their assessment rate will result in a projection of the additional property tax revenues from each develop- ment scenario. Nonresidential square footage will also generate additional ad valorem taxes, so a similar analysis can be done for that type of projected devel- opment. One-time fees, particularly utility connection fees, can also be important, and the revenues from them will vary by alternative and by year. Fiscal planning Budget planning usually focuses on only the next budget year, but fiscal planning focuses on change and uses a two- to ten-year time frame. Fiscal planning provides local officials a long-term perspec- tive in which to consider plans and policies that affect costs and revenues associated with each department and activity of the local government. If the fiscal analysis shows deficits in the early years of the projection period, local officials may decide to postpone infrastructure maintenance, development, or expansion or to modify some revenue assumptions or land -use policies. In con- trast, if the fiscal analysis shows a deficit in the later years of the analysis, local officials may increase their annual investment in reserves to escrow funds that will be needed in the future, plan to expand revenue sources, or begin thinking about how changes in land -use poli- cies could mitigate the anticipated fiscal problems. Budget projections Because fiscal impact analysis can project the demand for departments' services, it is helpful in preparing and evaluating departmental bud- get requests. An increase in the intensity of land use, for example, will generate a higher level of demand for police services. The fiscal analysis offers a budget projection for the police department on the basis of these changes and specified service levels over the forecast period. Local officials can look at this infor- mation for alternative levels of service and project the effects of those alternatives on the budget. Level -of -service changes One of the main variables considered during fiscal impact analysis is the level of service. The question to be asked is: What is the cost of providing different levels of service? The evalua- tion of existing levels of service provides a baseline for reviewing community level -of -service goals in light of fiscal constraints. After the current level of ser- vice is determined for each activity, the costs of new development can be easily evaluated. If the recreation department's level of service is determined to be one neighborhood park per ten thousand persons, then projected population growth can be tied to estimated 15