Day #097: The math behind building shiny things

Why the problems under the hood are more upsetting than any one economic development project.

Inspired by Michael Bierut’s 100 Day Project, 100 Days to a Better RVA strives to introduce and investigate unique ideas to improving the city of Richmond. View the entire project here and the intro here.

  • Idea: A non-partisan, state-level organization for pre-project and post-project economic analysis.
  • Difficulty: 3 — There are already many economic development groups and organizations throughout the state. There is a fine line between just adding another organization and making something meaningful.

Economic development1 through incentives like grants and loans is important to realizing a better Richmond, but the current paradigm of municipal development has much room for improvement. A non-partisan, state-level organization for evaluating economic development and an adjustment in the language of elected officials about economic development would benefit every city in Virginia.

Successful economic development can boost tax revenue, enhance job development, promote business retention, and increase the productive use of resources like property, capital, and labor. Investments today can increase the longterm growth potential of economies in ways not possible in the future. Future output isn’t only based on future inputs, but the history of past inputs.

It’s tough to quantify every goal of economic development. That being said, there are plenty of factors that can be measured that are not being measured, are poorly measured, or are abused in the conversations surrounding economic development. It is important to better measure the measurable because there’s a fine line between successful economic development that accomplishes these goals and what Alex Steffan calls “stealing the future, selling it in the present, and calling it GDP.”

The problems

There are flaws in the ways pre-project and post-project economic impact reports are made and how they are used by local-level elected officials. Despite multiple disclaimers and specific language about the limitations of economic estimates, these plans are usually paraded around as empirical evidence of what will happen instead of estimates of what may happen.

Furthermore, discussions about these plans ignore the asymmetry of information and cannibalization.

The asymmetry of information results in wasted money: a business may be willing to locate in Richmond with no incentives, but the City offers a deal out of fear of losing the opportunity to some other city.

Waste, water, and taxes

In a very consolatory move last week, the city decided to give other breweries a break on their utility surcharges for wastewater.

Meanwhile, the city finds itself between a rock and a hard place dealing with the $50,000 of meals tax and Hardywood because of poor communication.

This in the wake of wiping out a $1.75 million tax bill that stems from a miscommunication with Richmond CenterStage.

Adding to the comedy, Lagunitas founder Tony Magee has been outspoken this week about how public money has no role in giving advantages to private businesses like Richmond did for Stone Brewing.

When the City incentivizes businesses, it often ignores cannibalization. The incentives offered to Stone Brewing are an example of this. There’s a finite amount of beer demand in Richmond, the addition of a subsidized competitor will hurt other local breweries.

Most importantly, effective post-project analysis in Richmond is subpar or totally lacking. Post-project analysis helps cities find ways to improve, citizens measure the quality of their representatives, and econometricians improve their tools. The only thing worse than making a mistake, is making a mistake and not learning from it. Even the most successful project can be improved through further understanding.

Washington’s training facility is a good case study of this issue.

First, the city trumpeted the year-over-year boost of $230,000 worth of tax revenue during July and August. In addition to using a 61-day time period to estimate the impact of a 17-day event, Richmond’s Finance Department ignored other factors like inflation and continued improvement in the economy.

Despite receiving private analysis2 on the front end, Washington’s training facility received analysis on the back end (PDF) done by the combination of Richmond Regional Tourism and the VCU Center for Sports Leadership.

The methodology of this study estimating the impact of the 2013 camp to be $10.5 million is questionable. It is based on optional-participation, web-based surveys sent out by email from Washington two months after the event. Analysis is only as good as its inputs, and there was plenty of potential for response bias and poor recollection.

There is only one mention of a confidence interval in the report. It doesn’t specify why the 95% confidence level was chosen and what a “±3.9 confidence interval means” (±3.9 is also a margin of error, not a confidence interval). If it is ±$3.9 million, that means the confidence interval is $6.6 million to $14.4 million! The mayor certainly didn’t make this distinction and very few news sources questioned the number.

The executive summary also has an asymmetry of language. It suddenly drops the word estimate and proclaims, “In all, the 2013 Washington Redskins Training Camp had a total economic impact of $10.5 million on the Richmond MSA.” Additionally, as WTOP points out, 15.2% of out-of-towner’s money was spent on products that would go back to Ashburn, Virginia.

The study does briefly offer a disclaimer as to its limitations, but the failure to share standard errors or offer a plus-minus on that $10.5 million figure was irresponsible and led to confidence by the mayor and the media based on precision instead of accuracy.

Lost in the fanfare of that $10.5 million is the failure of the project to meet goals that don’t require statistical inference. Economic Development Authority revenue from “Other Sponsorship and Rental” which was projected to bring in $1.1 million per year, which was reprojected to bring in $192,450 in FY2014, only brought in $79,195 in FY2014. More than a year after construction, the second floor of the facility which is supposed to be a “sports medicine rehabilitation and men’s health center” remains empty. $100,000 intended for schools almost wasn’t collected from the site sponsor Bon Secours because no one sent an invoice. This is all from one project.

This story is worth noting because it shows the failure of pre-analysis, the misuse of that analysis, and poor post-analysis. The city deserves better than a report with questionable methodology from biased sources. Richmond would be better off if this type of analysis was done by a non-partisan, state-level agency blood thirsty for the truth but aware of its own limitations.

An improvement

Analysis on the federal level by organizations like the Congressional Budget Office and state level by organizations like the Joint Legislative Audit and Review Commission are unquestionably less biased and more responsible. What’s needed is a state-level, non-partisan organization for analysis that is funded by municipalities with the money they are currently sending to private companies and public institutions not equipped for this type of analysis. JLARC could simply be expanded.

This organization would be responsible for pre-project and post-project analysis as well as centralizing data and surveys, securely analyzing tax data, measuring impacts on a regional level, and disseminating information to voters and news organizations.

Increased transparency and accountability by a higher-level, less-biased source should improve the language of proponents and opponents of projects.

— ∮∮∮ —

It is important to acknowledge that while significant disagreements exist over economic development projects like the Shockoe Bottom baseball stadium, everyone wants a better Richmond. However, the vitriol surrounding this issue suggests otherwise and is counterproductive (See: Day #090).

Economic development is important for Richmond. The best way to build a better Richmond is to limit emotional arguments, improve and properly use empiricism, and to seek to understand. People are upset about most of these projects, but in reality they should be more upset with what’s happening under the hood of the growth machine.

Love this idea? Think it’s terrible? Have one that’s ten times better? Head over to the 100 Days to a Better RVA Facebook page and join in the conversation.

Photo by: Mobilus In Mobili

  1. This can include investments in human capital and infrastructure, but in this article will be limited to incentives like loans, tax abatements, grants, and in-kind benefits given to private businesses. 
  2. Private analysis has the potential to be flawed as well. These firms have an institutional incentive to affirm the ideas of elected officials in order to attract future contracts. This is not to suggest impropriety, but that when it comes to spending millions of dollars a higher standard is worth discussing. 
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Aaron Williams

Aaron Williams loves music, basketball (follow @rvaramnews!), family, learning, and barbecue sauce.

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