The study will be of two versions of the project, the original plan and the revised plan. The Blackhawk Ranch was actually developed according to a third plan, but this will not be covered in the analysis.
The analysis will be limited to the impact upon the school district, the water district, the waste water district, and the fire protection district.
The study will include the impacts on the property, the local share of the sales tax, the property transfer tax, the hookup fees for the water and waste water districts and a category of miscellaneous taxes.
Fundamental assumptions:
It often happens that we have a figure in Year X and we want to express it in terms of dollars of Year Y. If we have a price index for the two years this adjustment can easily be done. Let Pt be the price index for Year T with respect to some Base Year B.
Price indices are usually expressed in percent and to convert a regular number we need divide the price index by 100. The just involves moving the decimal point two places to the left.
To convert an expenditure of EX in Year X to an expenditure in the Base Year we divide by the price index; i.e., EB = EX/(PX/100) = EX(100/PX).
To convert an expenditure in the Base Year to Year Y we need to multiply by the price index of Year Y (divided by 100); i.e., EY = EB(PY/100).
Thus the relationship between EY and EX is EY = EX(PY/PX).
SJC AG 89:2
In terms of engineering the project is feasible. A series of dams on the headwaters of the Yukon, Copper, Kootenay, Fraser, Peace, and Columbia Rivers can divert their flows into reservoirs. Included among these is the 500 mile long Rocky Mountain Trench, a natural formation which has 16 times the capacity of Lake Mead on the Colorado River. From the Rocky Mountain Trench the water would flow into Montana and central Idaho. The dams would generate electrical power but not all of it would be marketable. Some of the power would be required to pump the water over some mountains in Idaho to a canal where it would flow south along the border area of Utah and Nevada. Here the water flow would be divided into two branches. One would go southwest to Nevada, California, and northwestern Mexico. The other would go east to Arizona, New Mexico, and Colorado. This is the main element of the project. A subsidiary part would take water from the Peace River by canal to the Great Lakes and thereby linkthe praire provinces of Canada with the St. Lawrence Seaway. Other subsidiary elements could link the system to the Pacific Ocean at Vancouver, British Columbia and link Lake Manitoba to the Hudson Bay.
As envisioned by the R. M. Parsons Co. the system would deliver 120 million acre-feet of water annually; 78 million to the U.S., 22 million to Canada, and 20 million to Mexico. According to Parsons this would enable Mexico to triple her irrigated acreage, irrigate an additional 40 million acres in the U.S. and 7 million in Canada. NAWAPA would generate 70 million kilowatts of power; 38 million for the U.S., 30 million for Canada and 2 million for Mexico. Parsons estimates that all this would cost $100 billion in 1964 dollars. In 1989 dollars that would be about $339 billion. The question is whether the project is economically justified.
Parsons estimates that about 85 percent of the water would be sold to agriculture at $4 ($1964) per acre-foot and the other 15 percent to municipal and industrial users at $15 per acre-foot. At 1964 prices that would result in annual benefits of $0.68 billion or, assuming water prices increased at the same rate as general inflation, in 1989 prices $2.3 billion. The annual gross revenue from electrical power was estimated to be $2.45 in 1964 value dollars. Energy prices since 1964 have increased faster than general inflation. Using the Consumer Price Index for gas and electricity the ratio is 4.57 as compared to 3.39 for goods in general. The revenues in 1989 prices would be $11.2 billion per year.
The project is so immense that its construction might be spread over a thirty year period. Here is a reasonable estimate of the costs of the project by five year intervals.
Five Year Operating Construction
Period Costs Costs
Years (billions $1989) (billion $1989)
1 1-5 0.0 5.1
2 6-10 0.0 200.1
3 11-15 4.2 33.2
4 16-20 8.5 33.2
5 21-25 8.5 33.2
6 26-30 8.5 33.2
7 31-35 8.5 0.0
8 and after 8.5 0.0
Compute the NPV of the costs at interest rates of 4 and 5 percent.
The benefits would follow approximately this schedule:
Five Year Water Power Other
Period Revenue Revenue Revenue
(billions $1989) (billion $1989)
1 0.0 0.0 0.0
2 4.5 22.0 0.0
3 11.5 56.0 8.5
4 and after 11.5 56.0 16.9
Compute the NPV of the benefits over a fifty year period. Then take
the difference of the NPV of benefits and costs to get the NPV of the
net benefits of the project. Estimate the IRR of NAWAPA.
The present value of the costs at a discount rate of 4 percent per year is about $234.5 billion, and at 5 percent about $210.6 billion.
The present value at 4 percent over a fifty year period is $241 billion, so the net present value of NAWAPA at a 4 percent discount rate is (241.4-234.5)=$6.9 billion. At 5 percent the present value of the revenues is $198.2 billion, so the net present value at 5 percent is (198.2-210.6)=-$12.4.
The internal rate of return can be approximated by interpolation. When the discount rate increased by 1 percent (from 4 percent to 5 percent) the net present value fell by (6.9+12.4)=19.3. In order to bring the NPV down from 6.9 to 0 it is necessary to increase the discount rate by (6.9/19.3)x1 percent; i.e. by 0.36 of 1 percent. Therefore the IRR for NAWAPA is approximately 4.36 percent.
Present Values of Costs and Revenues of NAWAPA at 4 percent
Operating Costs
11-15 (4.2/5)*(11.1184-8.1109)= 2.5263
16-50 (8.5/5)*(21.4822-11.1184)= 17.6185
total = 20.1448
Construction Costs
1-5 (5.1/5)*4.4518 = 4.5408
6-10 (200.1/5)*(8.1109-4.4518)=142.8740
11-30 (33.2/5)*(17.292-8.1109) = 60.9625
total =208.3773
total PV of costs =228.5221
Water & Power Revenue
6-10 (26.5/5)*(8.1109-4.4518) = 19.3932
11-50 (67.5/5)*(21.4822-8.1109) =180.5126
total =199.9058
Other Revenue
11-15 (8.5/5)*(11.1184-8.1109) = 5.1128
16-50 (16.9/5)*(21.4822-11.1184) = 35.0296
total = 40.1424
total PV of revenue =240.0482
net present value = 11.5261
Notes for Econ 205
Topics: Fiscal Impact Analysis is the estimation of the additional revenue and costs generated for local government as a result of a project.
Spread Sheet
Mini- Fiscal Impact Analysis Problem
Blackhawk Ranch Project
Reading Assignment: Economic Practices Manual Chapter 1. Econ 205:
Frieden's book examines the case histories of six large housing developments for middle income housing in the San Francisco Bay Area. In each case he found that the developers were forced to rescind plans for building thousands of housing units for middle income families and replace them with projects for building hundreds of units for high income families. The title of his book reflects his disgruntlement over seeing people from high income families use environmental arguments to increase the supply of housing for high income families at the expense of the supply of housing for middle income families. He sees the environmentalism as a ploy to protect the interests of one population group at the expense of others. Frieden's chapter on the Blackhawk Ranch is entitled, "Abusing Technical Studies." A major project such as the development of the Blackhawk Ranch requires the submission of an Environmental Impact Study as mandated by the State of California. Economic and fiscal impacts are considered important aspects of the environmental impact. These studies are usually prepared by professional consultants but the local government requires the developer to finance the studies. Frieden states,
Opponents began to organize early; thus the technical studies were prepared in the atmosphere of a gathering storm. The consultants, however, submitted balanced technical reports indicating that the environmental and fiscal consequences of the Blackhawk Ranch development would pose few serious problems for the county. The planning department, which had final responsibility for the studies, promptly rewrote them in ways that would provoke much greater opposition.The planning department of Contra Costa County presented the rewritten version of the fiscal impact analysis to the County Board of Supervisors. At this public meeting the head of the consulting firm that prepared the study, Claude Gruen, announced that the results being presented by the planning department were not the conclusions of his firm's study. The rather strange ambiance of the meeting is perhaps revealed in the fact just before Dr. Gruen started to speak a young lady ran naked across the stage. Unflapped Dr. Gruen said, "Usually I cannot arrange such a spectacular introduction." The type of analysis that he found objectionable in the planning department study was the allocation of a pro rata share of fixed costs for the county to the Blackhawk Ranch. Generally the planning department staff who called themselves "planning economists" made mistakes that no economist would make. The technical environmental impacts were also the subject of controversy. Frieden notes, "Two separate consulting studies failed to find any rare or endangered plant species on the site." The planning department then asserted that although no rare or endangered species were discovered the development of the Blackhawk Ranch "would essentially preclude the discovery of any rare or endangered species." Searching for environmentalist handles to hold back the project the county planning department's report "worried" about a variety of plant and animal species including the Californian tiger salamander, the Alemeda striped racer (a snake), and the black-chinned sparrow. Most are neither rare nor endangered and none have a habitat in the part of the project, a working ranch, that was to be developed. These species live in the chaparral that is on the higher slopes and would not be affected by the project. The planning department even worried about the coyote which they felt was unjustly maligned. But for these worries to elicit public support they have to involve creatures which are in some sense sacred. The consultants' reports emphasized that the development would have only minor impact on wildlife in the area since that areas in which the wildlife lived were not the parts of Blackhawk Ranch that would be developed. The consultants report argued that the golf courses called for in the developer's plans would, in fact, improve the habitat for deer and songbirds. Frieden says, Deer and songbirds, however, had no place in the gloomier visions foreseen by the county planning staff. They rewrote the text to argue that a residential development would 'create habitats for noxious animals or even animals dangerous to man.'[...] The apocalyptic vision of the county planning staff even included a vague threat to the well-being of our national bird, the bald eagle. Here, the reasoning was particularly tortured. The bald eagle has forty known nesting areas in California, none of them in Contra Costa County. The eagles have feeding areas away from their nests, but apparently there are no feeding areas for them on the property either. But the more northern populations of bald eagles do migrate to several lakes in California in the winter season and 'it is a possibility that they fly over the project area.' The crucial concern for many was not the environmental impacts but the fiscal impacts. Frieden gives the following summary of the fiscal impact studies. Econ 205A
The State of California mandates specific amounts of school space per student for elementary (Kindergarten through fifth grade, K-5), junior high (sixth through eighth grade, 6-8) and high school (ninth through twelfth grade, 9-12). The number of square feet per student are, respectively, 55, 75, and 85. The Gruen, Gruen plus Associates (GG+A) Study takes the construction cost to be $35 per square foot but the data in the EPM suggests a somewhat higher figure. We are lumping elementary and junior high schools together so such schools would be some average of the two types. The size the schools would be is also uncertain. The GG+A Study takes the size of an elementary school to have a capacity of about 500 students, a junior high about 1000, and a high school about 1400.
For our study we are requiring the schools to be built as soon as there are any pupils in order to ensure that there is no deterioration of the quality of education due to overcrowding.
The schools also require land, about 10 acres per elementary school, 20 acres per junior high, and 40 acres per high school at a cost of $15,000 per acre.
The operating costs were about $1300 per year and the State of California gave the School District about $500 per student per year. Thus the annual operating costs were about $800 per student in excess of what the State Government provided.
Separate operating cost figures for elementary, junior high, and high schools are not available but high schools are about 20 percent higher than elementary schools.
YEAR POPULATION
SAN JOSE CALIFORNIA
1970 1,072,600 20,039,000
1980 1,299,700 23,780,100
1990 1,477,000 29,839,250
LINEAR GROWTH POPPROJ = POPLAST + B (PROJ.YEAR-LAST.YEAR)
B =(POPLAST - POPFIRST)/(LAST.YEAR-FIRST.YEAR)
SAN JOSE B = (1,477,00-1,072,600)/(1990-1970)=(404400)/(20)
= 20,220 PER YEAR
PROJECTION FOR 2000 AD = 1,477,000 + (20,220)(10) = 1,679,200
CALIFORNIA B =(29,839,250-20,039,000)/20 = 490,012.5 PER YEAR
PROJECTION FOR 2000 AD = 29,839,250 + 4,900,125 = 34,739,375
EXPONENTIAL GROWTH
POPPROJ = POPLAST (1+GROWTH.RATE)(PROJ.YEAR-LAST.YEAR)
(1+GROWTH.RATE) = (POPLAST/POPFIRST)1/(LAST.YEAR-FIRST.YEAR)
SAN JOSE (1+GROWTH.RATE) = (1,477,000/1,072,600)1/20
= (1.377).05 = 1.016125
POP2000 = (1,477,000)(1.016125)10
= (1,477,000)(1.17468) = 1,733,213
CALIFORNIA (1+GROWTH.RATE) = (1.4890).05 = 1.0201
POP2000 = (29,839,250)(1.0201)10
= (29,839,250)(1.2203) = 36,411,940
MODIFIED EXPONENTIAL POP = C + ABTIME
FOR THREE EQUALLY SPACED POINTS
B = (POPLAST - POPMIDDLE)/(POPMIDDLE - POPFIRST)
A = (POPLAST - POPMIDDLE)/(B-1)
C = PM - A =
(POPLASTPOPFIRST - (POPMIDDLE)2)/(POPLAST + POPFIRSTT2POPMIDDLE)
SAN JOSE B = (1,477,000 - 1,299,700)/(1,299,700 - 1,072,600)
= 0.7807
A = -808,530
C = 2,108,200
The level of purchases for residents in A in B is proportional to the product of the population of A times the population of B divided by the distance from the center of the residential area of A to the center of the commercial area of B. Reilly's Law is usually modified to use some measure of attractiveness of B, such as the area of the stores or their total sales, instead of the population of B. Instead of the population of A the total spending by residents of A is used.
Example: Three cities A, B, and C
Distances Sales
A B C
A 0.5 2.0 3.0 100
B 2.0 0.3 5.0 200
C 3.0 5.0 0.6 400
Proportion of Spending by residents of A in the stores of
A, B, and C:
SalesX/(DistAX)2 Share of Spending
Stores
A 100/(0.5)2 = 400.00 400.00/494.44 = 0.809
B 200/(2.0)2= 50.00 50.00/494.44 = 0.101
C 400/(3.0)2 = 44.44 44.44/494.44 = 0.090
Sum = 494.44 Sum = 1.000
Proportion of Spending by residents of B in the
stores of A, B, and C:
SalesX/(DistBX2 Share of Spending
Stores
A 100/(2.0)2 =
B 200/(0.3)2 =
C 400/(5.0)2 =
Sum = Sum = 1.000
Proportion of Spending by residents of C in the
stores of A, B, and C:
SalesX/(DistCX)2 Share of Spending
Stores
A 100/(3.0)2 =
B 200/(5.0)2 =
C 400/(0.6)2 =
Sum = Sum = 1.000