Today we will talk about a tool that cities and towns can use to make more efficient and equitable infrastructure, equipment and economic development investments. That tool is fiscal impact analysis. Most city operating expenses are for personnel: salaries, health care costs and pensions. At the same time, cities and towns spend billions on equipment, infrastructure and one-time special projects like economic development initiatives. According to the Bureau of Economic Analysis, state and local governments spend over $350 billion annually on infrastructure, buildings, equipment and technology systems. Some recent estimates identify another $70 billion in various economic development initiatives. (sources) How can local governments make sure they are getting what they intend and are generating an adequate return on investment?
What is Fiscal Impact Analysis?
Fiscal impact analysis is a process to measure how local-government revenues and service costs will change because of a public or private capital investment or a change in government policy. It subtracts costs associated with the project from the new revenues generated because of the project. Examples can include new commercial or residential developments or infrastructure construction.
How it helps you make better decisions.
Local leaders with a lot of experience in their community often have a good intuitive feel for the consequences of these types of projects. Still, adding fiscal impact analysis to your decision-making process has many benefits. You will have more precise cost and revenue estimates for budget forecasting. You will also be able to compare alternative strategies when deciding how to spend a limited investment budget. More importantly, a transparent fiscal impact process can help recruit constituent support for a chosen strategy and convince elected officials that management is making good use of public resources.
What you need to do to make the most of the tool.
Practically, any community can make use of fiscal impact analysis. Professional experience in economic and budget analysis is necessary to build a custom model for a community, but less experience is needed to run an existing model. The model will use your historic budget and community economic data. This data will need to be collected and organized to go into the model. Beyond the technical requirements, how the model is used is even more important for success. Communities that build an organizational culture that understands and supports the tool is vital. While the analysis is relatively straightforward, if conducted behind the scenes it can breed confusion or distrust among stakeholders. Consistent use and communication of the findings will help stakeholders weigh the technical analysis along with other factors that are important to them. Fiscal impact analysis is just one factor in local development decision making. Equity, in terms of who pays and who benefits, are also important, as are other community values like historic or environmental stewardship.
We are experts at this tool and believe it is an important step to better local government decision making. Take a look at our Local Leader’s Guide to Fiscal Impact Analysis for more information and a handy checklist of questions any consumer of these types of studies should ask to make sure you are getting reliable results. Let us know if you would like to learn more about how fiscal impact analysis can help your community make better decisions.
Next week, as local governments across the country are working up their budgets, we will focus on the largest operating expense for cities and towns – policing. What can policy analysis bring to the discussion, and help communities deliver public safety in fair, transparent and efficient ways?