Economic impact analysis: science, politics or both?

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“Every economic activity has an impact,” UCCS economics professor Fred Crowley once noted. The difficulty, continued Crowley, is in calculating the precise impact of a given economic activity.

A recent get-together of politicians, senior military officers and aerospace executives at the Space Foundation focused on the local economic impacts of military installations and defense contractors. Of the $28 billion regional economy, the military is said to account for $9 billion. Individual components of the space-related military sector include the 21st Space Wing, ($1.46 billion economic impact) and the 50th Space Wing ($1.2 billion) and ITT/Exelis ($100 million).

Few communications from the Regional Business Alliance fail to mention the economic impact of various sectors of the economy. Here’s an example from this week: “Nearly half of our regional economy consists of the economic drivers of our aerospace and defense industry ($9 billion), tourism ($1.3 billion), and national and international nonprofits (approximately $3 billion)…”

Locally, consultants such as Summit Economics and Dave Bamberger & Associates prepare analyses for clients in the public and private sectors. Nationally, hundreds of firms undertake such projects.

It’s difficult to exaggerate the political importance of such studies. Economic impact analyses are used to gain support for taxpayer-funded economic development initiatives, including professional sports stadiums, airports, and recreational amenities. Elected officials reluctant to commit tens or even hundreds of millions to private/public partnerships often cite EIAs as influencing their decisions.

Next week, Colorado Springs is expected to apply to the state for funds available under the Regional Tourism Act.

The act seeks projects “anticipated to result in a substantial increase in out-of-state tourism.”

Projects such as the Olympic Hall of Fame or a new Air Force Academy visitor center might qualify, but providing “reliable economic data” to justify the state’s investment is absolutely crucial.

Local elected and appointed officials refused to comment on whether the city has engaged an outside firm to create a study for an RTA application. Any studies will be intensely scrutinized.

“We have a really respected financial analysis team,” said Jeff Kraft of the Colorado Office of Economic Development and International Trade. “They’ll determine whether the revenue (generated by the project) is truly incremental to Colorado.”

That would seem to preclude booster-driven, politically tailored EIAs often presented to justify investing taxpayer dollars in projects unrelated to traditional governmental responsibilities.

The role of politics

Studies of existing economic impacts may be less subject to bias than those that estimate future impacts, but no common methodology governs study preparation. Imagine a basketball game where the scorers could arbitrarily change the rules, making a three-point shot worth four points, giving credit for a missed shot or lowering the height of the basket.

“Figuring out visitor numbers to Colorado Springs is pretty easy,” Crowley said. “Look at hotel occupancy rates, other statistics, and even go to the Wal-Mart on Eighth Street and count license plates.”

Consultants can use any of a half-dozen commercially available software packages to create studies, use simple input-output analyses, or prepare a rough and ready memo based on earlier work. One example was a 2009 study created by a local firm to estimate the probable economic impact to the region of retaining the headquarters of the U.S. Olympic Committee.

The four-page memorandum, supposedly based on city-supplied “base data,” claimed that the local sports industry, which then directly employed 910 people, generated outsized economic impacts. The numbers: economic output of $314.3 million, 3,480 total jobs, employee earnings of $146.7 million, city and county sales tax revenue of $3.6 million, and property tax revenue of $4.6 million.

When CSBJ requested the “base data” for that study, the city couldn’t produce it — because there wasn’t any. The memo had been requested by then-Mayor Lionel Rivera, an ardent USOC proponent. Despite no backup data, its political impact was substantial. Council members cited it after their votes for the retention package, giving Rivera a hard-fought victory.

Different consultants can come up with widely varying estimates. When the Dallas Cowboys began planning a new football stadium in Arlington, Texas, two groups commissioned economic impact analyses. The analysis for the Cowboys, cited by officials pushing a tax increase to help fund the project, figured the economic impact between $12.5 billion and $27.7 billion over 30 years. An analysis ordered by stadium opponents projected a loss of $290 million over the same period of time.

EIAs — accurate, unbiased?

Crowley said it would be difficult to accurately estimate “truly incremental” revenue for a facility such as the Olympic Hall of Fame. The RTA’s rigid guidelines preclude simply claiming that most visitors will be out-of-towners. You have to show the museum will be a new draw and destination, not another attraction competing with others already existing.

“There are lots of complex statutory requirements that applicants have to meet,” said Kraft, “and we analyze applications very carefully. We look at historical sales tax trends, so if the region has been growing at 2 percent annually, we discount that. Also, we don’t want to fund projects that steal dollars from other parts of Colorado — we won’t pay you to capture visitors from Fort Collins or Pueblo.”

The list of requirements extends for many pages, requiring extraordinarily detailed, comprehensive, factual analyses.

That may explain why only two possible applicants attended informational conferences in Denver during March and April: Colorado Springs and Cañon City.

Cañon City’s project, a lodge and summit ranch at Royal Gorge, was described as a “mountain resort.” Having begun the process on April 23, the city abruptly terminated it on May 8, noting “this funding may not be as beneficial as first thought.”

Thus, Colorado Springs might be the only applicant. It’s a good position, but much will depend upon the quality and accuracy of the economic impact analysis.

A four-page memo won’t cut it this time.