A Conservative Economic Analysis

One of the important factors that weighed in Mayor Cieslewicz's decision to support the new Central Library is the impact analysis performed by Andrew Statz, his Fiscal Efficiency Auditor. He described this analysis in a powerpoint presentation to the Common Council on August 27, 2009.

Everyone acknowledges that significant new tax revenues will flow to the City from redevelopment of the existing library site. Indeed, our team estimated that these new revenues could exceed $100 million over a 50-year horizon, including just the City portion of property taxes and room taxes. However, before putting this project in his 2010 capital budget request, Mayor Cieslewicz wanted to take a look at this from a very cautious and conservative perspective.

Statz did this in his comparison of the costs and benefits of the proposed project with those of the remodeling alternative. His conclusion was that in a worst case scenario the net cost to taxpayers over a 15-year horizon would be no greater for the new library than the remodel. Under expected conditions, the new library will actually be $8 millions less.

What makes his assumptions conservative?

1. A 15-year analysis period was used. This timeframe covers repayment of all City debt and results in four years where the tax revenues exceed the debt service costs. However, tax base created by the Phase II development will generate revenues to the City for decades thereafter.

2. Debt service costs were estimated assuming a 5% interest rate. Current ten year rates for municipal bonds are 3.3% - and federal "recovery zone" subsidies could reduce this rate even further.

3. Property tax rates and assessments are projected to decline every year during the analysis period. In contrast, Fiore-Irgens projections reflected a 2.5% average increase in property taxes.

4. The "status quo" value of Block 66 is escalated by 4% annually to determine the increased property taxes. On the other hand, the value of the fully-improved Block 66 is assumed to increase by only 2%.

We are cautious investors ourselves, and generally approve this approach. After all, if a project still makes sense when the assumptions are stacked against it, you know you have a good one!