Is profit the Point?

Those who were hoping that development of Alameda Point would solve the City’s financial problems suffered another disappointment Tuesday night when staff presented a “draft fiscal impact analysis” to City Council.

Back in September, staff told Council that the “backbone” infrastructure necessary to support development at the Point would cost a whopping $566,580,000.  (Since then, the figure has been revised to a mere $560,280,000).  But this represented only the cost of building the infrastructure.  What, Mayor Marie Gilmore and Councilwoman Lena Tam wanted to know, would be the annual cost of maintaining it once the Point was fully built out?

They got the answer Tuesday: $10,574,000, which includes $3,303,000 for fire protection, $3,053,000 for road maintenance, $1,960,000 for police protection, and $1,900,000 for park maintenance.

The draft fiscal analysis also estimated the annual revenue generated by a fully built out development.  The total for the general fund derived from property taxes, transfer taxes, utility users taxes, sales taxes, business license taxes, and franchise fees is $11,031,000.  Add revenues for other City funds and the total rises to $13,363,000.  This means that the overall net economic benefit to the City  – i.e., the “excess” revenue left in all funds after paying public safety and maintenance costs — would be $2,789,000.

This amount is equivalent to only 3.8% of the total general fund revenue for the last fiscal year.  It isn’t enough to cover the $3,359,599 deficit projected to occur in fiscal year 2015-16, much less the higher annual deficits projected for later years.  Nor would it make much of a dent in the City’s $86.4 million unfunded liability for retiree health benefits (aka “OPEB”) or its $106.5 million unfunded liability for pensions.  And, of course, the benefit won’t be realized until the Point is fully built out, which will take many years.

But a net benefit is better than a net loss – right?

Sure.  Unfortunately, the draft fiscal analysis points out that the expected benefit may quickly turn into a loss if the City chooses to set up an “infrastructure financing district” (“IFD”) to pay for building the infrastructure.

Under the bills passed by the Legislature (but not approved by the Governor), a city would set up an IFD and issue bonds to finance infrastructure construction.  A portion of the property taxes paid by property owners in the district would be diverted from the general fund and used to pay principal and interest on the IFD bonds.  Every property tax dollar diverted to an IFD thus would be a dollar that didn’t go into the general fund.

The analysis estimated that, if 80 per cent of the annual property tax revenue from the Point went to debt service for an IFD, the general fund would take a $4 million hit.  Goodbye $2.8 million annual benefit. Say hello to a $1.2 million annual loss.  (Alameda Point Chief Operating Officer Jennifer Ott told Council that the City would attempt to “mitigate” – which, in this context, means “make up for”– this loss through assessments on property owners at the Point).

And that’s not all.  The fire department apparently takes the position that providing fire protection for 3,240 new residents and 8,909 new employees at the Point will require construction of a brand-new fire station fully staffed by an engine company (four captains, four apparatus operators, four firefighters, plus a fire prevention captain and a halftime senior fire code compliance officer).  The draft Master Infrastructure Plan includes $4.5 million to build the new fire station (which may be low, since the latest number for building a new fire station no. 3 at Buena Vista and Grand is $6 million).  According to the fire department, the annual operating costs for the new fire station – primarily salaries and benefits – will be $3,320,621.

As the draft fiscal analysis points out, “although the exact timing and location of the station has not yet been determined,” it “will likely be required at some point before the full build out . . . (and therefore the full level of revenues reflected in this analysis).”  As a result, the analysis concludes, “there may be a temporary period during the development . . . that the City experiences a net fiscal deficit.”

(At Tuesday’s meeting, Councilman Tony Daysog suggested that perhaps fire protection costs could be reduced – maybe we should say “mitigated” — if the new fire station served not only the Point but also the portion of the west end now served by fire station no. 2.  The suggestion appeared to catch former IAFF Local 689 president and current fire chief Mike D’Orazi off guard, for he initially responded that it was a “possibility” before quickly recovering and warning that consolidating two fire stations into one might reduce response times to an unacceptable level).

Mayor Gilmore, who had raised the question in the first place, was delighted with the conclusions in the draft fiscal analysis.  The predicted net economic benefit, she said, “is certainly cause for cheer.”  To the Mayor, the leftover cash appeared to be a welcome windfall rather than an intended consequence.  “We’ll have that money,” she said, without mentioning any diversion of property tax revenues to pay off IFD bonds, “but we shouldn’t be too quick to spend it on new programs or new ventures.”

City Manager John Russo sat silently through the presentation and discussion.  Mr. Russo’s prior public statements have suggested that he regards development at the Point as a way to ameliorate, if not entirely solve, the City’s financial problems, particularly the “leakage” of sales tax revenue caused by Alamedans spending their retail dollars off the Island.  Indeed, Mr. Russo identified attracting businesses that generate sales tax revenue as the top priority in his “disposition and development” strategy for the Point.  One wonders whether he joined the Mayor in cheering that a fully built out development at the Point would produce an annual net economic benefit of only $2.8 million.

Given Mr. Russo’s previously stated position, it probably was not a coincidence that, after presenting the fiscal results based on the assumption that development at the Point followed the 1996 Community Reuse Plan, the draft fiscal analysis also contained a paragraph examining the “possibility” that a “major retail sales tax generator” could be lured to the Point.  Adding a major retailer, the report concluded, would result in a net increase of $2.4 million annually, bringing the annual net economic benefit to $5.2 million.

Now imagine, as we suspect Mr. Russo did, what the result would be if more than just one “major retail sales tax generator” came to the Point.  In such a case, the development might actually start generating enough revenue after expenses to begin paying down the City’s unfunded liabilities for such things as pensions, retiree health benefits, and deferred maintenance.

To evaluate the fiscal impact of having more retail, the economic consultants who prepared the draft fiscal analysis had to tweak the assumptions derived from the Reuse Plan about the mix of uses  — residential, office, manufacturing/warehouse, retail and service – that would be built at the Point.  But why stop with more retail?  The consultants might well have been asked to evaluate the fiscal impact of other development scenarios that differ from the Reuse Plan.  Their analysis appears to contain all of the necessary formulas; it’s just a matter of changing the inputs.

The one scenario that leaps to mind, of course, is building more housing units than the 1,425 called for in the Reuse Plan.  It has long been an article of faith that, once built, housing will cost the city more in services than it generates in revenue.  The draft fiscal analysis presented the perfect opportunity to test this hypothesis:

  • If we’re reading the analysis correctly, of the $13.4 million in revenue from a fully built out development, only about $1.5 million is attributable to property and transfer taxes resulting from new housing.  What additional revenue, if any, would be generated if the mix of uses changed so that, rather than 1,425 units, 3,000 or even 4,500 housing units were built (with a corresponding decrease in commercial square footage)?
  • The analysis does not break down public safety or maintenance costs into residential and commercial.  But it would appear that, except for public works, the ongoing costs  do not depend on the type of development.  (We’ll assume, until Chief D’Orazi opines otherwise, that the fire department could adjust to more housing units and less commercial space without adding a second new fire station or full engine company at the Point).  What would be the additional costs, if any, of maintaining roads (including, of course, bike lanes) for a more housing-intensive development?

The Merry-Go-Round doesn’t know the answers to these questions.  But surely the economic consultants can give us a clue.  And let’s suppose that, contrary to the conventional wisdom, the net fiscal impact of more housing would be to produce more cash for the City on an ongoing basis than the Reuse Plan scenario would.  If that were the result, housing advocates would gain an argument for Sun Cal.v2 that might appeal even to those who focus on the bottom line.  In any event, wouldn’t it be nice to have this information as we are making decisions about the mix of uses to permit at the Point?

For some reason, our current City Council, except for Councilman Daysog, doesn’t seem terribly interested in the fiscal impact of alternative development scenarios.  Instead, the other Council members who attended Tuesday’s meeting — Councilman Stewart Chen, D.C. was absent – displayed their usual fascination with minutiae.  (What is the sunset date for Alameda County Measure B anyway?)  Ms. Ott expressed staff’s willingness to run numbers on any scenario Council would like to see.  But the only specific suggestion she got was to play around with the transfer tax rate.  Maybe our Council members are keeping all their substantive ideas to themselves.

Sources:

Draft Fiscal Impact Analysis: 2013-12-17 Ex. 1 to staff report – Draft Fiscal Impact Analysis of Alameda Point

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Alameda Point, Budget, City Council, Development, Firefighters, Housing and tagged , , , , , , , , , . Bookmark the permalink.

2 Responses to Is profit the Point?

  1. frank says:

    The reality is that for most people in the East End and Bay Farm it is and always will be easier to go off Island for shopping.

  2. 2wheelsmith says:

    I and other advocates for housing agree with you that an honest and comprehensive evaluation of the long-term cost of housing would help inform the debate at Alameda Point. I’ve always wondered if housing costs city’s in the long run, why are smaller and newer communities on the urban fringe so anxious to approve housing developments – for example Dublin? In my experience, it is primarily long established prosperous communities, such as Alameda, Pleasanton, and Piedmont, that argue that housing costs them in the long run. These well-off communities are in a better position to pay for services than newer communities like Dublin.

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