The hidden costs of development

If you believe Willdan Financial Services – and why wouldn’t you? – 3,227 persons will be living, and another 5,016 working, every day at Alameda Point when the site is fully built out.  In addition, again according to Willdan (in a separate report), 8,260 new residents, and 3,330 new workers, will find a home or a job in Alameda outside the Point – presumably in one of the new developments built along the northern waterfront – by 2040.

That’s a lot of people to whom the City of Alameda will need to provide services, police and fire protection in particular, in addition to those whom it serves today.  The Merry-Go-Round has always wondered whether the City will be able to afford the extra cost.  Indeed, we first raised the issue back in 2014 when the Del Monte warehouse project was being rushed through Council to beat the imminent departure of Mayor Marie Gilmore and Council members Lena Tam and Stewart Chen from the dais.

Unfortunately, no one seems to know the answer for any project other than Alameda Point – not Council, not the Planning Board, not City staff.  During the development review process, neither the developer nor City staff is required to provide any information about the costs of the additional municipal services a project will make necessary or the additional tax revenue it will generate.  So projects get approved – and to date all of them have been approved by the Planning Board and/or Council – without any analysis of their effect on the municipal fisc.

Moreover, the public discussion about development proposals typically has focused on transportation:  How much worse will the project make traffic congestion at the tubes and bridges?  But, as we suggested a few weeks ago, a precise answer to this question may not really be all that useful.  We propose today that, when another new proposal is on the table, City officials – and the public – shift their attention from traffic to economic impacts.

We know that there are some in town who regard development, particularly residential development, as a moral imperative.  After all, where other than Alameda will the people now trapped in states that voted for Donald Trump flee for refuge?  But a more pragmatic approach makes more sense – at least to us.

We take our counsel from former City Manager John Russo, who frequently acknowledged that the costs of providing municipal services to a new development eventually will exceed the tax revenues it generates.  If Mr. Russo is right – and we learned not to argue with him – this is information the decision-makers ought to have before they approve a project, not somewhere down the line.  That way, if a proposed project is expected to impose costs that tax revenues won’t cover, Council will be forced to decide whether the development offers benefits that justify going forward despite the negative economic impact.

The City has undertaken the sort of analysis we’re suggesting only once – because it had to.  In 2003, Council passed what has become known as the “fiscal neutrality” ordinance, which established the “policy” that “the revenues created by a development project [at Alameda Point], coupled with assessment district or community facilities district financing where appropriate, will provide sufficient funding to the City of Alameda to pay its cost of providing municipal services for that development.”  To comply with the ordinance, staff engaged Willdan to do a “fiscal impact analysis” for Alameda Point generally and Site A specifically.

According to the final version of Willdan’s report, once the Point is fully built out, the City will have to spend $10.71 million a year to provide municipal services to the new development, broken down as follows:

Notably, the $3.558 million in estimated fire department expenses does not include the cost of building the new fire station the department told Willdan it must have.  (The Master Infrastructure Plan pegs the price tag at $6 million.)  Moreover, the computation of salaries and benefits for the new 12-person engine crew – four captains, four apparatus operators, and four firefighters – was based on the union contract then in effect.  Since then, Council has handed the firefighters another raise and CalPERS has jacked up the City’s pension contribution rate.  Likewise, the estimated fire prevention costs assumed that these duties would be performed by a half-time non-sworn fire inspector.  Having just convinced a Council majority to “rebuild” the fire prevention bureau with sworn personnel, the department may want to do the same at the Point.  For all of these reasons, the cost estimate for the fire department undoubtedly is grossly understated.

(In case you were curious, the police department did not identify a need for any new facilities at the Point, and it told Willdan that one street cop per every 1,000 “resident equivalents” – at a cost of $245,000 per officer – would be enough to patrol the area.  The $2.216 million estimate includes the cost of an additional eight police officers.)

According to Willdan, a fully built-out Alameda Point will generate $9.839 million annually in tax revenue (of which $8.010 million goes into the General Fund), broken down as follows:

This is almost, but not quite, enough to meet the “fiscal neutrality” requirement, and the Willdan report states that the projected deficit of $871,000 will need to be made up from what Willdan calls “fiscal mitigation.”  In fact, the cost estimate in the report probably is too low and the deficit therefore probably is larger.  But if Willdan’s numbers are taken at face value, revenues from development at the Point by themselves can be expected to cover most of the costs of providing additional municipal services, without imposing any financial burden on the City.

(Just recently, the City formed a new Community Facilities District for Alameda Point to pay certain ongoing expenses – including the transportation demand management program – at an estimated total annual cost of $1,457,647.  Whether this CFD represents the “fiscal mitigation” to which Willdan refers is unclear.  But if so, it is consistent with the “fiscal neutrality” ordinance, which recognizes that a CFD may be used to meet the stated “neutrality” requirement.)

Unfortunately, there is no evidence to support the same conclusion for any of the other development projects approved or planned for the northern waterfront, individually or collectively.  Indeed, the City has not done any “fiscal impact analysis” for any of those projects.  As Community Development Director Debbie Potter explained to us, the “fiscal neutrality” policy applies only to “former military property” – like the Point – and none of the projects along the northern waterfront fits this description.

Still, some limited information is available.  The City has formed two CFDs to pay for the ongoing costs of providing municipal services for two projects:  Alameda Landing and Marina Shores.  For the former, the supporting documentation included a cost estimate prepared by the public works department.  This estimate showed an annual cost of $505,000, broken down as follows:

As footnote 2 warns, the schedule contains a significant wild card:  public safety.  Rather than an estimate of actual costs, this line item appears to be based on the amount left over after paying the public-works department expenses.  We suspect that Fire Chief Doug Long and Police Chief Paul Rolleri wouldn’t agree that it will cost only $97,949 per year for their departments to protect all of the new residents and workers at Alameda Landing.

The CFD assesses a special parcel tax on residential and commercial property owners, but it is unclear whether the revenue from the special tax, either by itself or together with other tax revenue, will cover all of the annual costs of providing municipal services for Alameda Landing.  According to a report presented by City Finance Director Elena Adair last December, the City had collected $610,875.65 in special taxes for the Alameda Landing CFD through the end of fiscal year 2015-16, but it had spent only $42,454.43.  The rest of the money is sitting in a special account.

(We should note that the City formed a second CFD for Alameda Landing to issue bonds for financing infrastructure construction for the development.  The special tax assessed for this CFD is used to pay debt service on the bonds, not for ongoing expenses.  In addition, Council recently approved “annexing” the waterfront portion of Alameda Landing, where the last phase of development will go, to the original CFDs and expanding the services they pay for to include maintaining the waterfront park.)

The picture for Marina Shores is more opaque.  All we know is that, according to Ms. Adair’s report, the City had collected $169,407.27 in special taxes for the Marina Shores CFD through FY 2015-16 and spent only $5,510.24.   The supporting documentation did not contain any estimate of the annual cost of providing municipal services to the development, so we don’t know whether this tax revenue, either by itself or together with other tax revenues, will cover all of those costs.

For Alameda Landing and Marina Shores there is at least some information publicly available about ongoing costs.  The same can’t be said about any of other development projects that already have been approved by the Planning Board and/or Council:  Boatworks (182 housing units), the Del Monte warehouse (380 housing units and 30,000 square feet of commercial/retail space), 2100 Clement (52 housing units), and 1435 Webster (nine housing units and 4,700 square feet of ground-floor retail space).

Nor can it be said for any of the new development projects now in the planning stage:  the last phase of Alameda Landing (445 housing units, 15,000 square feet of ground-floor retail space, 10,000 square feet of office space, 40,000 square feet of “waterfront warehouse uses,” and a hotel);  Encinal Terminals (589 housing units and 50,000 square feet of “commercial/office and restaurant uses”); Alameda Marina (670 housing units and 150,000 square feet of maritime and other commercial businesses); and, most recently, Shipways (292 housing units).

Regrettably, there is no public information about how much these projects, or any of them, will cost the City annually for municipal services once they are built.  Nor is there any public information about whether the additional tax revenue generated by the developments will cover the cost of providing those services.  And no plans have been announced to establish CFDs like those set up for Alameda Landing and Marina Shores to ameliorate the financial burden on the City.

(If you’re thinking that the Development Impact Fee could be used for this purpose, think again.  That fee can be spent only on capital improvements attributable to new development, not on ongoing maintenance expenses.  And it is collected at one time – when the developer applies for a building permit – not on an annual basis.)

This is information we think our elected officials should obtain and review before they approve another development project.

We’d start by asking the relevant department heads to estimate the annual costs their departments will incur to provide services to the projects that already have been approved.

We especially would want to hear from the fire department.  During the last round of budget hearings, Chief Long told Council that the current staffing level represented the bare minimum necessary to ensure public safety for Alamedans.  We’d like to know whether he thinks that he can expand fire protection to Alameda Landing, Marina Shores, Boatworks, Del Monte, 2100 Clement, and 1435 Webster without adding more firefighters – not to mention more equipment, and maybe even another new fire station.  And if not, we’d ask the Chief to estimate what the additional costs would be – using the wage rates in the current MOU and the current forecast for pension and OPEB expense.  The amount is likely to be significant:  the recent staff report on the fire prevention bureau stated that the cost of adding just two new firefighters or apparatus operators, plus a captain, would range between $763,916 and $799,206 in FY 2017-18 and between $810,196 and $847,860 in FY 2019-20.

(Lest it appear we’re letting the cops off the hook, we’d want the same information from Chief Rolleri.)

At the same time, we’d ask Ms. Potter and Ms. Adair to take a look at the revenue side.  Using the Willdan study for Alameda Point as a guide, they should estimate the additional property tax, transfer tax, sales tax, utility users tax, and any other revenue that will be generated by the already-approved projects.

The data would then land on the desk of City Manager Jill Keimach.  Maybe she’d be able to tell Council that the estimated tax revenues from the already-approved projects will be sufficient to pay the ongoing costs of providing municipal services to them.  But if not, she should be prepared to recommend a way to cover the shortfall.

In any event, this analysis will establish the base line.  For future development proposals, Council should mandate that a fiscal-impact analysis be undertaken (and paid for, of course, by the developer) on a project-by-project basis:  By how much (if at all) will the project increase the demands imposed on the General Fund (and other City resources)?  Council should consider the answer in deciding whether to approve the project.

If so, we can start to imagine the message Council might deliver to Tim Lewis, the developer of the Del Monte warehouse whose proposal for the Encinal Terminals is pending:

“We agree that, regardless of what the architectural preservationists think, a 14-story high rise would add character to Alameda’s historic neighborhoods,” the elected officials could say.  “We also agree that, regardless of what the regional planners say, Alameda needs another 510 apartments for households earning ‘above-moderate’ income.  But, as loyal as we are to our friends in the public-safety unions, we want to be sure you won’t be sticking the City every year with a multi-million-dollar tab for more firefighters and cops.  So if the fiscal-impact analysis comes out negative, you’d better get your lawyers working on the papers for a CFD.”

And if ol’ Tim balks?  Well, we’ll leave the response to Vice Mayor Malia Vella and Councilwoman Marilyn Ezzy Ashcraft, who were elected with financial backing from Alamedans United, the PAC to which the developer gave $5,000.  “Sorry, Tim,” they could tell him.  “Five grand just doesn’t buy you what it used to.”

Sources:

Willdan Fiscal Impact Analysis of Alameda Point and Site A: 2015-06-16 Ex. 10 to staff report – Alameda Point Fiscal Impact Analysis

Willdan Development Impact Fee Update and Nexus Study: 2014-07-01 Ex. 1 to staff report – Willdan Financial’s DIF Update and Nexus Study

Alameda Landing CFD No. 13-2 Report: 2014-01-07 Ex. 2 to staff report – CFD Report for CFD 13-2

FY 2015-16 CFD annual report: 2016-12-06 Ex. 1 to staff report – FY 2015-16 Community Facilities Districts Annual Reports

Fire prevention bureau: 2017-04-18 staff report re adding new positions

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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9 Responses to The hidden costs of development

  1. Paul S Foreman says:

    As usual, you are right on target. I have been harping on this subject for the past three years in conversations or Q & A sessions with City Council, the City Manager, Andrew Thomas and Debbie Potter. Every new residential development of any substantial size needs to have a fiscal neutrality study. If that is done, every one of them will show an annual deficit that will require a public safety CFD (with the possible exception of Alameda Marina, depending on how much commercial use it maintains. Commercial use yields a surplus of revenue)
    The story I get from the above three City Staff people are that CFD’s are subject to opposition by developer litigation as to the proper deficit figure and that developers are being asked to do other things in lieu of a CFD. Both of these excuses are totally lame. CFD’s are a matter of negotiation with developers. They agree on them in the development agreement. When I look at the development agreements for the approved projects on the Estuary they contain nothing remotely fiscally comparable to this issue, nor do I find any developer contributions that differ in any substantial way from those made by the developers of those projects that do include a public safety CFD..
    The response I get from City Council is silence. Our part time volunteer Council relies on the City Manager and Planning Staff; and they are clearly dropping the ball.
    What makes matters worse is that once a Development Agreement is signed without the inclusion of a public safety CFD, it is lost forever. The imposition of a CFD requires an election, wherein only the owners of the development property vote. It is done before any units are sold, so that only the developers vote and their vote has already been assured in the development agreement. The CFD costs the developer nothing other than the extent to which it impacts the marketability of the units. Thus, the CFD is baked into to every subsequent sale of individual units. The chance of a majority of residents of any new development approving such an assessment is nil. The opportunity to create a CFD at DelMonte and Boatworks, has already been lost.

  2. Mark Greenside says:

    Seems to me there are 3 questions to answer:
    1. Using realistic cost and income numbers, will these new developments pay their own way?
    2. For how long? In the beginning, especially before residents and businesses move in, they certainly will. Probably for a while they will continue to do so. But for how long? That needs to be projected out and the city needs to know/plan for when a positive flow becomes negative.
    3. As I understand it, these new developments are independent tax units. If that is so, what happens if/when the residents in these units decide not to raise their own taxes. After all, as a result of these tax, they are already paying thousands of dollars in taxes more than the rest of us. What happens/if when they refuse to pay more? Do the rest of us pay the difference? Do we watch a community become unsafe, fire and police wise? What is the plan for this contingency?

    • Paul S Foreman says:

      Mark, CFD burdened developments are not independent taxing districts. They are subject to the same real estate tax rates as any other property. The CFD is a seperate public safety assessment that runs with the land. The ones that I have seen also provide for an automatic percentage increase every year. Therefore there will be annual increases. However your point is correct that if the public safety deficit increases beyond the locked in annual increase, there is no effective way to increase the CFD rate.

  3. Mark Greenside says:

    Thanks, Paul. Is the only way to increase the rate by a vote of the taxpayers in the CFD? If that’s the case, that’s my main point. If that’s not the case, how does the rate get increased?

    • Paul S Foreman says:

      I have not researched that detail. I assumed that if a CFD must be adopted by a vote of all of the owners in the Community Facilities District, that it could only be increased by such a vote. However, i don’t know if such a subsequent vote is authorized by the law, and if it is is, what chance would it ever have of passing?

      The required assessment for a CFD is determined a formula that is bassed the land uses that are planned for the development.. For instance, the original Willdan study was based on a larger percentage of the Point being dedicated to commercial use and thus showed no public safety funding deficit requiring a CFD. However, the land use plan changed and the report was amended to reflect a lower commercial and higher residential use.

      A webpage at http://www.fieldman.com/pdfs/chart_2_advscfdsnapshot.pdf states at Item #9 that CFD’s are written so that, if the land use changes after an election, the new percentages are plugged into the formula and the assessment can be raised or lowered by the product of that formula. If this is true, we could see a change in per unit assessmnts without an election. However this is a change based upon land use, not increased costs of public safety. It seems to me that these increased costs are not addressed by a CFD, but by budget cutbacks in other city services or City-wide voter approved special assessments.

      This is deeper than i wanted to dive and probably above my pay grade. Maybe Mr. Sullwold can help us out here.

  4. Paul S Foreman says:

    I do find it revealing that when Mr. Sullwold writes about taffic congestion related to new residential development, he gets lots of comments from concerned citizens, but when he writes about this CFD issue and opines that we pay more attention to the impact of development on the financial health of the City, there are only two people commenting.

    I agree with Mr. Sullwold that the financial issue needs much more attention, but the lack of comments reinforces my view that mobilizing opposition to the current rate of residential development must be keyed primarily to the traffic issue.

  5. Steve Gerstle says:

    More traffic will mean the need for more traffic enforcement. Alameda’s traffic division is very small and does not normally work on weekends. Will additional development bring with it additional police or will we see our police force spread even thinner?

  6. carol says:

    Here is the best primer on California taxes, especially Mello-Roos parcel taxes [CFDs]http://www.caltaxfoundation.org/reports/parceltax-summary.pdf
    California taxes are so much higher than everywhere else and so arbitrary, most people don’t even try to understand them. Traffic affects everyone, whether they own property or not. Everyone understands traffic.

  7. carol says:

    Here is the best primer on California taxes, especially Mello-Roos parcel taxes [CFDs] http://www.caltaxfoundation.org/reports/parceltax-summary.pdf
    California taxes are so much higher than everywhere else and so arbitrary, most people don’t even try to understand them. Traffic affects everyone, whether they own property or not. Everyone understands traffic.

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