SECTION I - INTRODUCTION

Impact fees are the monetary charges imposed by local governments on developers. These fees allow the government to recoup additional costs to accommodate the new development. Expanding communities and growing cities bring with them both new revenue generating capability and additional expenditure burden to a local government. It is often easier to acknowledge the increased revenue potential from further real estate, personal property, and sales taxes than it is to identify the added expenditures necessary to provide the new development with water and waste water treatment, educational facilities, and public safety. There are, of course, many other expenditure demands on a local government as well as several additional revenue generating factors. In order to accurately levy an impact fee, all facets of both sides of the balance sheet must be evaluated carefully.

The purpose of this report is to present the results of the fiscal impact analysis for the proposed development of the Hunt Field area and annexation into the City of Charles Town, West Virginia (hereafter the City). The objective is to estimate the fiscal flows for the City and Jefferson County Board of Education. This includes operating revenues and expenditures that would be generated by the proposed development. The results present the fiscal flows associated with each proposed land use: single family homes, town homes, multi-family homes, retail commercial space, and office commercial space. The summation of the impacts from each of the land uses represents the total fiscal impacts to the City and the Board of Education. From the total fiscal impacts, it can be determined whether there is a positive or negative net fiscal impact on the City and the Board of Education. This information can then be used to determine whether to levy an impact fee, and if necessary how much should be levied.

The City has proposed the annexation of the Hunt Field area into the City. This land currently sits approximately one mile south of the City. This report presents an analysis of the fiscal impacts of the Hunt Field Development on the City and the Jefferson County Board of Education. The analysis relies on the evaluation of the financial records of both the City and Board of Education as well as an economic model of social accounting. The methods are described in greater detail in the methodology section (Section II). The end result of the analysis is the recommendation that the City would need to assess the developers $700 per residential unit built in order to meet the growing fiscal demand for operational expenditures on the local government. The impact fee is isolated to the residential development because there are negative net impacts on the local government’s support of residential needs that are not entirely offset by net positive impacts from non-residential development. In fact, as shown in the appendix tables, the non-residential development creates a positive net fiscal impact while the residential development creates a negative fiscal impact. It seems natural to assess the impact fee on the development that creates the additional burden on the local government.

The City is a small, growing community located in the far eastern panhandle of West Virginia. It is not more than ten miles from the Maryland and Virginia borders, and approximately 65 miles from Washington, DC. There are approximately 3,000 residents of the City according to the 2000 U.S. Census. With the annexation of Hunt Field, and the proposed development of this land, it is estimated that the City would add 8,275 new residents and 1,877 new students over the 20 year build out period.[1] The developers have proposed a schedule of development to take place over a 20 year period.

The Hunt Field Development plans[2] cover an area of approximately 1,040 acres of previously undeveloped land. The development would be made up of 3,200 residential housing units, 200,000 square feet of retail and commercial office space, 130 acres designated for recreational and natural uses, 10 acres designated for civic uses, and 75 acres to be donated to the Board of Education for the location of three new schools. The residential development would consist of 1,947 single family homes, 803 town houses, and 450 apartment units. The 200,000 square feet is planned to be evenly split (100,000 square feet each) between retail and commercial office space. This development and annexation would significantly increase the population and employment within the City.

The remainder of this report is organized as follows. Section II describes in detail the methodology used to analyze the fiscal impacts. Section III includes an analysis of the City budget and the effects of the development on the City budget. Section IV presents a similar analysis of the Board of Education budget. Section V shows phasing schedule of development and estimates of annual fiscal flows based on the phasing schedule. Finally, Section VI provides a summary and recommendations.

SECTION II - METHODOLOGY

This section is designed to provide a clear outline of the steps taken to arrive at the fiscal impacts of the proposed Hunt Field Development. The purpose is to allow the reader to follow the subsequent sections and provide the necessary economic background to fully understand the fiscal impact study. This study uses financial data from the City and the Board of Education along with socioeconomic and demographic data and regional industry characteristics provided by the Minnesota Implan Group, Inc. The methodology consists of the collecting and analyzing the data. After the initial checking of the data a deeper modeling effort is conducted using the IMPLAN software and average cost methods in order to arrive at the fiscal impacts.

Average costs simply use the existing costs per person to estimate the future costs dependent upon the increase in population or students. The alternative to this method would be to use marginal costs. Marginal costs would be more appropriate in a situation where the average costs are expected to increase or decrease dramatically as population increases. An example of this type of situation would be when new water treatment capacity would be needed to serve the increase in population. If that were the case, the marginal costs of serving increasing population would rise quickly when the number of water users reached the capacity of the treatment plant. When that would happen, the plant would have to be expanded, generating higher costs to serve the growing demand. In the case of Charles Town, the City facilities have enough capacity to meet the growing demand, and the costs of additional service should remain approximately constant, therefore making an average cost method more appropriate.

The method of using average costs is used because the demand for most local services is reflected in the capacity of the existing infrastructure. In other words, the existing City facilities could be expanded proportionally to serve the expected increase in population that would result from the development of the Hunt Field property. One exception to this is the school facilities, but the developers have proposed land on the site for new schools that would serve the growing demand for space requirements facing the Board of Education. The capital costs associated with building new schools, and all other potential capital costs have not been included in this analysis upon the instruction of the City. Water treatment and wastewater facilities are currently operating with enough excess capacity that capital contributions to the system would not be necessary to serve the increased demand generated from the proposed development. There would be general increases in the costs of servicing additional users in the way of supplies and staffing considerations. Staffing considerations are more likely to directly affect public safety and Board of Education expenditures than other City services.

The purpose of the initial phase of data analysis is to determine the existing conditions in the City. This includes assessing the financial flows, as well as understanding the capacity of the infrastructure. The existing property values are used to estimate the percentage revenues from residential and non-residential sources. The existing expenditure requirements are also calculated from the existing property values and population characteristics. Estimating the per capita revenue generation and expenditure requirements are based on the average costs under the existing City conditions.

The average costs methodology implicitly assumes that the average expenditures per capita and per pupil are the best estimates of future expenditures. Additionally, existing service levels are assumed to remain constant into the future. A third assumption is that the existing distribution of expenditures (allocation factors) remains constant into the future. And the fourth assumption is that the government multiplier effect plays a role in local government finances. The multiplier depends on the tax rates and the local supply and demand for consumer goods. When a larger share of consumer and intermediate goods are produced and purchased locally, the result is a larger multiplier effect. This fifth assumption makes analysis with IMPLAN a deeper study into the fiscal flows of the City and therefore a deeper impact assessment.

The modeling effort incorporates the existing fiscal conditions and the socioeconomic data for Jefferson County in order to estimate the impacts of the proposed development. The model used is provided by the Minnesota Implan Group. The model is a regional economic impact model that allows the user to specify an economic event, or series of events and with additional background information computes economic and fiscal impacts of the event. While that sounds rather simple, it is important to recognize that the IMPLAN model is not just a black box into which data can be entered and the solution is presented. The model is a tool that can assist in the overall analysis of the data, and that is designed to provide estimates based upon the existing local economy. The output from IMPLAN must then be interpreted by the analyst. For example, the software produces outputs directly for several tax categories that are common among most local governments.[3] Other revenue categories are included in the output for total local revenues, and can be separated out according to the existing revenue generating shares. The existing revenue generating shares are based on population, existing assessed property value, and housing type. Allocating the total revenues to the appropriate mix of local revenues completes the interpretation of output from the IMPLAN software. Minnesota Implan Group also maintains and provides local data sets delineated by county.

The methodology employed by the IMPLAN model is a combination of economic input-output modeling and a social accounting framework. The input-output modeling describes the flow of money through an economy. When a dollar is spent to purchase a product in a local economy, that dollar has a direct effect as well as secondary effects, which are typically separated into indirect effects and induced effects. The direct effect of the dollar spent is that it represents one dollar of income to the recipient. The secondary effects of that dollar are generated from how that dollar is subsequently used. A portion of that dollar may be used again within the local economy; a portion may be spent outside the local economy; and a portion may be used to pay taxes. Standard input-output models describe the portion of the dollar that stays within the local economy. The IMPLAN model uses social accounting to also describe the portion of the dollar that is transferred to the federal, state, and local governments. Social accounting is the term used for incorporating the government institutions into the modeling framework. Without the social accounting, the model would simply explain the flow of money from households to businesses, and between businesses. The social accounting adds government purchases and government tax sources into the model. This allows the analyst to generate estimates of fiscal impacts of a proposed project. This impact analysis is ultimately interested in the portion of taxes that are transferred to the local government.

The IMPLAN model uses what are known as multipliers to calculate the impacts of an economic stimulus. In the IMPLAN model, the multipliers are developed from an analysis of the linkages and leakages in the economy. Linkages can be best defined as the interaction of two parties in the local economy. The greater the level of local interaction, the higher percentage of income remains in the local economy and the higher the resulting multiplier. Conversely, the development of multipliers must also account for the leakages in the local economy. Leakages can be best defined as the portion of local income that is spent on imported purchases and non-local taxes. For example, a portion of income is allocated to Federal and State taxes or for businesses to purchase supplies that are not locally manufactured. In Charles Town, the level of imported purchases is great, and the result is lower multipliers than one would find in a larger city or in a city with an industrial sector. Ultimately, the linkages and leakages depend on the availability of goods and services provided locally, and the industry multipliers reflect this information.

The multipliers are calculated for each industry in the local economy. This would include various retail businesses, financial and consulting services, construction, food services, and all other industries located within the City. The multipliers for these industries help to determine the additional indirect business taxes that would be generated from the proposed new development.

The IMPLAN model provides two key elements to this study. The first is the local multiplier. The multipliers are calculated through a general equilibrium model known as input-output analysis. A general equilibrium model takes into account both supply and demand conditions when formulating the results, rather than simply approaching an economic question from solely the producer’s view. The IMPLAN software not only provides the framework for the model, but the company also maintains a database of necessary demographic and socioeconomic data used to calculate the specific relationships between local producers and consumers for specific local areas. The data sets are delineated by county. The impacts calculated for this report have been performed using the Jefferson County, WV data set. The model allows for the data set to be altered by the user in order to most accurately reflect the user’s interpretation of the existing economic conditions. The data set was altered to only include the types of businesses within the City, while maintaining the consumer demand functions of Jefferson County. This carries the assumption that the demand conditions in Charles Town are the same as those in Jefferson County. This is a reasonable assumption based on the similar demographic and socioeconomic characteristics of the City and County. See appendix for demographic and socioeconomic data.

The second element that IMPLAN provides is the capability to estimate the number of jobs that would be created from the proposed non-residential development. The employment data used is from the County Business Patterns, a program run by the U.S. Department of Census, and the ES 202, a wage and employment data set maintained by the Bureau of Economic Analysis. This data set describes the industrial structure of the local economy, with one caveat pointed out by Minnesota Implan Group that there is generally a three year time lag between the current year and the most recent County Business Patterns data. In this case, that should not raise significant concerns because the financial data being used is year 2000, and industry structure adjusts slowly. The County Business Patterns data is used with the estimated value and type of the non-residential land use to estimate the number of jobs the land use will employ. The calculation is based on the output per worker ratio across the various industries that make up the local economy. The calculation for jobs created by the non-residential land use of Hunt Field is 506 jobs. This is the aggregate of 308 jobs created by the development of 100,000 square feet of retail space, and 198 jobs created by the development of 100,000 square feet of commercial office space.

The major sources of data used in determining the existing fiscal flows were the Municipality of Charles Town Financial Statements (with Supplemental Information) for the year ending June 30, 2000 and the Jefferson County, WV Board of Education Financial Statements and Supplementary Information for the year ending June 30, 2000. Other key data items include the Rates of Levy for real estate and personal property tax, and the Official Budget Document for the City. Additionally, the real estate values for the proposed development, and the induced population and enrollment are assumptions taken from the developer’s report. This data can be found in the appendix. This report intends to calculate the fiscal impacts based upon the explained methodology, but using equivalent data to the developer’s report. In doing so, the developer’s phasing schedule also remains the same.

SECTION III - ANALYSIS OF CITY BUDGET

This section provides an accounting of the calculated impacts to the City budget, and how they were derived. This includes the expenditure estimates, which are based on existing levels of per capita expenditures, and the revenue estimates, which are based on property tax calculations and the results of the social accounting multiplier analysis from IMPLAN. The results from the IMPLAN software are then used to estimate the revenue impacts that are shown in the appendix tables and summarized in Table III-1. It is important to note that the real estate valuations and the population increases are based on the figures reported by the developer, and this report does not attempt to adjust the forecasted demand for residential housing. This assumption has been made to make use of one set of base data for the analysis.

Table III-1

City of Charles Town Impact Summary

Induced Revenues
Taxes (including interest & penalties)	$ 1,849,019
Real & Personal Property Tax	$ 1,086,641
Business and occupation tax	$ 62,798
Alcoholic beverages tax	$ 93,131
Utility services tax	$ 478,262
Hotel occupancy tax	$ 123,302
Other taxes	$ 4,885
Video lottery revenue	$ 103,254
Licenses, permits and fees	$ 66,801
Franchise fees	$ 80,838
Intergovernmental:
Federal	$ 232,864
State	$ 4,529
Charges for services	$ 139,805
Fines, forfeits, court costs and charges	$ 7,136
Other Revenues	$ 28,809
Total Revenues	$ 2,513,056

Induced Expenditures
General government	$ 674,519
Public Safety	$ 1,400,888
Street and transportation	$ 512,569
Health and Sanitation	$ 1,019
Culture and recreation	$ 112,242
Total Expenditures	$ 2,701,238

Net Impacts	$ (188,183)

The figures in Table III-1 represent impacts in 2000 dollars for full build-out and occupancy of the proposed development. The property taxes were calculated using the expected real estate and personal property values forecasted by the developer. Supporting tables for the calculations can be found in the appendix. Taxes were calculated on the single family homes and the town homes according to the class II property tax rates for residential property owned and occupied by the owner. Multi-family homes and all non-residential development property taxes were calculated at the class IV rates for non-residential and non-owner occupied real estate within City limits. While the IMPLAN software has the capability to estimate property taxes, the decision was made to calculate them individually in this manner because forecasts of the expected property value were given by the developer. This allows the property tax estimates in this analysis to be as accurate as possible using all available information.

The remaining City revenues were calculated using output from the IMPLAN software, with some specific categories calculated directly, such as business taxes, franchise fees, and licenses, and the remaining categories calculated from the overall local tax generated. These categories were allocated a share of the tax generated based on expected population, property values, and the share of existing revenues generated. The City revenues (tax impacts) are generated in IMPLAN based on the characteristics of the economic event. In this analysis the economic event is characterized by the expected property value of the development and the expected population from the residential development, or the expected jobs from the non-residential development. The program can estimate the value of taxes that will be generated by the property being occupied, in the way of property taxes, license fees, non-tax revenues (such as fines), and other taxes. IMPLAN also generates taxes that are paid to higher government levels, such as state and federal. From this it can generate the intergovernmental revenues that a local government can expect to generate.

The induced expenditures reflect the necessary increases in local spending in order to maintain accepted public service levels. There are noticeably large increases in annual expenditures for public safety, general government, and transportation. This is consistent with the current expenditure allocations, and is justified by the large expected population increase. As the City’s population grows, one should certainly expect that the Police Department would need to grow accordingly. The City currently spends little to support the volunteer Fire Department, but it is likely that the City would need to contribute to this service in the future. The City government would need to expand to meet the needs of a growing population base, and the City would need to increase funding of public infrastructure such as City Hall, paved roadways, and parking facilities. All of these areas contribute to the induced expenditures that the City would face with the annexation and development of Hunt Field.

SECTION IV - ANALYSIS OF BOARD OF EDUCATION BUDGET

This section provides a step by step accounting of the calculated impacts to the Board of Education budget, and how they were derived. The expenditure impacts are based solely on the average costs per pupil from the fiscal year 2000 Board of Education financial statements. The revenue impacts are based on the property taxes from the proposed development, the increase in intergovernmental funding based upon increased enrollment, and based on local population increase for other sources of revenue. It is important to note that the assumptions used for property valuation and increased enrollments are strictly based upon the figures supplied by the developer. This report does not attempt to value real estate or challenge the assumptions of the demographic make-up of the proposed new development. Table IV-1 provides summary information for the Board of Education impacts.

Table IV-1

Board of Education Impact Summary

Induced Revenues
Taxes	$ 4,255,402
Other local revenues	$ 297,392
State sources	$ 6,544,000
Federal sources	$ 704,333
Total Revenues	$ 11,801,127

Induced Expenditures	$ 12,591,120

Net Impact	$ (789,993)

The figures in Table IV-1 represent impacts in 2000 dollars for full build-out and occupancy of the proposed development. The expenditures were calculated using general operating expenditures and debt service expenditures for the Board of Education. Expenditures on capital improvements were not included in the per pupil expenditures that were used to calculate the induced expenditures. According to the U.S. Census 2000, public school enrollment for Jefferson County was 7,404 is the year 2000. This figure was used to calculate a per pupil expenditure of $6,708 annually. The induced expenditures assume that the same value will be spent for each additional student to enter the school system. The estimated number of new students, based on the developer’s student generation factor, is 1,877. Therefore, the induced expenditure requirement for the Board of Education is simply the new students multiplied by the per pupil expenditures. This figure is shown in the summary table above.[4]

There were a few additional steps taken to calculate the induced revenues for the Board of Education. The intergovernmental (Federal and State aid) are both calculated on a per pupil basis, similar to the expenditure impacts. The existing per pupil intergovernmental aid was calculated using the year 2000 revenues divided by the enrollment of 7,404. The resulting dollar value of aid per pupil is multiplied by the expected enrollment increase to give an estimate of intergovernmental revenues. This calculation assumes that the State and Federal governments would continue to provide the same level of aid to local education as they currently offer.

Other local revenues are assumed to be based on the population, and are therefore calculated on a per capita basis. The per capita local revenue generation is calculated by dividing the fiscal year 2000 other local revenues by the population in Jefferson County. The local revenue generated from the proposed development was then calculated by multiplying the per capita figure by the expected increase in population. The resulting figure is the calculated other local revenue.

Finally, the tax revenues to the Board of Education were calculated using the fiscal year 2000 tax rates and the expected property values estimated by the developer. The Board of Education tax rates include the school current expense rate, the school excess levy rate, and the school per improvement rate. The details of the calculations are in the supporting tables in the appendix.

SECTION V - FISCAL IMPACT PHASING SCHEDULE

The fiscal impact phasing schedule is required because the developer’s plans are expected to take place over a 20 year period. The development would be phased in, and as a result the impacts would not actually occur all at one time as suggested with the impacts calculated under the assumption of full build out and occupancy. In fact, the City and Board of Education budgets would face greater negative impacts at the earlier stages of development because it is planned for only residential development for the first six years. The first stage of non-residential development occurs in the seventh year of the planned build schedule. This schedule is presented below in Table V-1, and is a direct replication from the developer.

Table V-1

Development Schedule

Year	Units SF	Units TH	Units MF	Sq ft Retail	Sq ft Office	Total units Resid	Total Sq ft Non-Resid
1	60	30				90	0
2	60	30				90	0
3	60	30				90	0
4	60	33	150			243	0
5	70	40				110	0
6	70	40				110	0
7	80	40	150	50,000	50,000	270	100,000
8	100	40				140	0
9	100	40				140	0
10	100	40				140	0
11	100	40	150	50,000	50,000	290	100,000
12	100	50				150	0
13	110	50				160	0
14	110	50				160	0
15	110	50				160	0
16	150	50				200	0
17	150	50				200	0
18	150	50				200	0
19	107	50				157	0
20	100					100	0
Total	1,947	803	450	100,000	100,000	3,200	200,000

From this development schedule, we can assign the timing of the fiscal impacts. The first year of development, the fiscal impacts would be generated from 60 single family homes and 30 town houses. The fiscal impact per single family home and the fiscal impact per town house are both multiplied by 60 and 30, respectively, and added together to yield the fiscal impact in the first year. The same methodology is followed for each of the twenty years to determine the net impact up to that point in the development. The results of this are shown in Table V-2.