Lessons from my life as a former economic impact Modeler

November 29, 2023 

When I was in graduate school at the University of Pittsburgh, I worked at a university center which did policy work for a variety of government agencies. I helped do the economic impact modelling using the Regional Economic Model Inc (REMI) model. 

REMI was a very sophisticated model which used real world data customized to local areas to replicate the structure of the local economy. Our job was to input the spending associated with a new project PLUS the costs (negative input) to get educated guestimates of a range of possible impacts - including which sectors would most be impacted.  

We would create projections for a range of scenarios - not just one "best case" possibility. Then we would provide the range of possible impacts to the clients, with the key assumptions and caveats that the estimates were not FACTS or guarantees. 

There are serious limitations with the estimates of the REMI model - the most important of which is that it is static- the structure of the economy does not change in response to the new project.  

Yet the REMI model (or IMPLAN) is far superior to the naive approach used by for-hire consulting firms which simply apply some basic spending multipliers to tourist activities or construction activity.  These do not account for the idiosyncrasies of the local economies nor do they consider COSTS or displacement spending impacts.  The simple multiplier estimates ALWAYS generate a positive impact b/c they don't subtract out the costs.

I could have had a career doing impact modelling - REMI recruited me on numerous occasions to join their firm.  I chose not to follow this path.

The main reason I did not stick with impact modelling was due to how clients used the results to mislead the public and to fit a desired narrative.  

 Bottom line: there are better models (REMI, IMPLAN) and there are naive approaches (basic spending multipliers). All leave a lot to the modelers regarding input assumptions and tend to be used to estimate a single project's impact rather than ask which sort of project would give biggest bang for the buck. 

Evaluating how projects actually played looking a real world data shows just how off base typical impact model estimates tend to be. It is startling that so much public policy is based on what private consulting firms say will happen, when such estimates tend to be so  far off base (inflated) compared to what is actually observed to happen.  Consulting firms are in the "what do you want the answer to be boss" world. They have to get paying gigs. 

Hiring a company to create unreliable and unrealistic estimates is dereliction of public duty.  Hiring a company to look at one aspect of a project (do the TIF numbers cover debt) without looking at overall budget impacts, is also failure of due diligence. 

With Arena 1.0, council DID take the time to assess the content of the various studies provided by OU Foundation and friends.  The 3rd party consultant gave an honest assessment that the city did not have info needed to understand impacts. (I was vindicated here).

Folks, the statutory review committee failed to get analysis of financial impacts on the city, which is supposed to be part of the process. Last time it made a recommendation without the key analysis needed to guide the city. Fortunately, city council DID put in the effort to assess the reports it was presented. 

I understand the finances of the proposed arena project are not hashed out (hard to make the finances work for an arena because these are not money makers in a market like Norman's). 

Yet, somehow, Team Norman KNOWS how much private spending will occur in the UNP north district.  Of course, this is because housing, retail, commercial office, hotels, do not NEED an infusion of public spending (we see the proposed Sooner Village just south of the OU sports complex, for instance).  

OU knows what it wants - a new publicly financed arena to anchor a new bar/restaurant strip in the UNP North.  This will create a windfall for them.  Will it help the City of Norman's budget?  Not likely.

Tax Increment Finance robs voters of choice, constrains future councils, puts budget at risk

Submitted to OU Daily for possible publication 
Tax Increment Finance robs voters of choice, constrains future councils, puts budget at risk

The proposed arena-entertainment district plan calls for the creation of one or more Tax Increment Finance (TIF) districts. Norman City Council took the first step to create to create statutory review committee to evaluate and make a recommendation about the proposed plan. This step takes us down the path of TIF without, first, evaluating if Norman residents want this project, and if so, is TIF the best way to fund it?

TIF allows local governments to engage in long term borrowing contracts which can last up to 25 years. The popularity of TIF stems from the ability to secure a tax revenue stream for authorized projects in a designated area. The TIF captures some or all of the incremental growth in taxes collected in the designated increment district. The incremental growth is calculated as the actual collections minus the baseline collections. Lenders consider if the revenues diverted to the TIF district are sufficient to cover project and borrowing costs. This is the sort of analysis that TIF consultants perform.

TIF locks in a revenue stream which eliminates uncertainty about future council budgetary priorities. If there is a crises or opportunity to invest in a promising venture, TIF funds cannot be touched much like water fees go into the water fund and can’t be used for public safety or other general purposes.

By sequestering funds, TIF agreements constrain future councils. The share of tax revenues collected in the TIF increment district which are diverted to the TIF fund instead of going into the general funds is predetermined. Future councils cannot unilaterally change the amount of taxes that are siphoned to the TIF fund even if they face budget shortfalls or emergencies.

TIF agreements are hard to unravel, even if development plans don’t pan out as promised. When city council tried to end the UNP TIF tax siphon back in 2018, the developer threatened lawsuits. In the end, city council gave up $8 million the developer was contractually required to pay for failure to build the promised lifestyle center. Not an inch was built, not a penny of the penalty was returned to tax payers.

TIF agreements are desired by private developers because a simple city council majority can approve a TIF without the need to get voter approval. In contrast, general sales tax rates and sales taxes for special purposes such as the Norman Forward quality of life program, must be approved at the ballot box. Representatives from OU Athletics Department told faculty groups that they don’t want a public vote. They do, however, want taxpayers to hand over more than $200 million for an arena to host OU athletic competitions.

TIF schemes can be (and often are) used for development that would happen anyway. Take for example the University North Park TIF which was used to finance infrastructure for a retail shopping district. Clearly, raw land along the fast growing I-35 corridor would have attracted retail without public expenditure. The Target store planned to relocate from Main Street to the UNP regardless of the approval of the UNP TIF. Further, we see development along I-35 and Classen Blvd in Southeast Norman with no TIF.

TIF master plans are speculative and include conceptual drawings. It is easy to overpromise public benefits and hire consultants to generate wildly inflated projects of returns on investment, but much harder to deliver on such promises. Again, Norman has first-hand experience with OU developers who promised a walkable lifestyle center with high end stores (Neiman Marcus was mentioned at the time). The promises were unrealistic. Norman spent $7 million dollars on Legacy Park to complement the illusive lifestyle center which never was built.

Standard TIF feasibility studies are limited and misunderstood. TIF consultants do not consider returns from other potential uses of tax dollars. For instance, they are not asked to provide advice about what sort of project would deliver the biggest bang for the buck. Instead, they are asked to estimate activity IN the TIF area and commonly ignore displacement effects on non-TIF areas.

To the extent that competition-related spending shifts to the Arena TIF district and away from existing Norman businesses, the general fund tax would suffer. Further if the Arena TIF district attracts most of the new restaurants and entertainment venues, then growth in the TIF would displace growth in the rest of Norman.

The displacement effect is exacerbated by the plan to keep Lloyd Noble in operation along with the proposed new arena. Norman is not a large enough town to support two large capacity arenas. Competition for live entertainment and convention events is fierce.

Displacement effects are well recognized in the data-driven, academic research on the economic impacts of sports facilities. This is why cities which use tax dollars to fund professional sports facilities are not shown to exhibit economic benefits. There is little reason to think that a college sports-anchored arena would fare better.

The bottom line is that we need to be clear about how TIF mechanisms work. TIF does not create NEW tax revenues, avoids voter approval at the ballot box, and constrains future council budgeting decisions for up to 25 years. These are important shortcomings of any TIF project.

The proposed Arena TIF is a huge ask – over $200 million in public spending using tax dollars. Regardless of how appealing you find the concept of another arena-entertainment district, the financial implications of TIF cannot be ignored. If projections of net new taxable sales revenues do not pan out, as is generally the case, then tax payers will be left to deal with resulting budget shortfalls.

Cynthia Rogers
OU Professor of Economics

TIF siphons tax $s before going into General Fund

 November 17, 2023

Today's episode of "Can We Believe the Arena-Entertainment District Hype"

No so long ago, in our own Norman community, City Council was forced to negotiate a very bad deal to end the UNP TIF siphon from the general fund.  25 year deals are highly risky and ill-advised.  

A little reminder about the risk of TIF which diverts sales taxes. Unless the TIF is used to create NET NEW activity (as opposed to moving where activity occurs) and the increase in taxable sales covers the expenditure (including financing costs) then TIF will take a bit out of the general fund budget. 

Don't be fooled by the narrative that TIF does not come out of the general fund.  Fact is, the $ is diverted before it gets to the general fund thus reducing general fund revenues.

Transparency vs. small meetings with Council Members

 November 16, 2023

Today's episode of "Can You Believe the Arena-Entertainment District Hype?"

Question: If the arena plan is so  wonderful for Norman, why is OU withholding financial details and meeting with council members out of the public eye?  

BTW meeting with council members in small groups is a tactic to avoid meeting the requirements of the Open Meetings Act.

Meeting with council members in small groups is NOT a demonstration of transparency.

Myth Busting: Is a new arena needed for a successful athletics program? NOPE

 November 15, 2023

Today's episode of "Can you believe the arena/entertainment district hype"

This is a crowd source opportunity.  Last night an OU representative  boldly claimed that OU "needs a new arena" to have a successful basketball program. (or something close to this...it was late) 

There are two ways to fact check this: (1) what is the correlation between new arenas and winning percentages and (2) do the most successful programs have the best and newest arenas? 

According to wikipedia the most winning NCAA men's basketball program is Kentucky. 

Kentucky plays in Rupp arena, built in 1971  Guess what - they are upgrading Rupp arena not building a new one b/c upgrading is more cost effective. 

Second place is University of Kansas.  KU plays in Allen Field house which was built in 1955 and is planning UPGRADES (not a new facility) to improve fan experience.

Clearly a new arena is not a requirement for a winning team....

Comments from Neighbors 4 Norman Facebook:

[Me] #3 the Tar Heels play in the Dean Smith Center completed in 1986. Are they replacing it with a brand new building? NOPE

" In November 2015, Cunningham told the media that the school had been looking at renovating the Smith Center to add premium level seating and reducing the overall capacity by potentially 4,000 seats or building a replacement structure.[33] This project would also be privately financed through donations and athletic department revenue, but not with state taxes.[33]"

Megan Benson: Gonzaga's 6000 capacity arena dates to 2004, relatively new, but was paid for by a private donor! GO ZAGS!

Keith Brewster: Duke is also one of the most successful basketball programs over the past 30 years. Cameron Indoor Stadium first opened in 1940. If the new arena seats ~8000 it will actually be smaller than Cameron Indoor (9314)

Robert A Terry: Cameron Indoor Stadium for the Duke BB team is an antiquated arena by any standard and yet is considered on of the gems of college basketball. Cameron is one of the few major arenas that uses backboards suspended from the ceiling instead of anchored on the floor. - that is how old it is.

They finally installed AC in 2004 because of the odor problem - but it is still there.

I think the Blue Devils have done reasonably well ,,, Sorry UK and KU fans.

Susan Elizabeth Hahn: Indiana University - Simon Skjodt Assembly Hall built 1971. Renovated 2018. seats 17, 222 and is consistently sold out

Does moving OU sports displace existing activity or create new taxable sales?

 November 11, 2023

Today's episode of "Can you believe the arena-entertainment district hype? "

"Why are arena promoters ignoring well-known displacement effects?"

We need to understand Tax Increment Financing. Key details:

(1) TIF does not create a new revenue source to protect general fund

(2) The public does not get to vote like we did on Norman Forward quality of life projects,

(3) Tax collections are targeted to the TIF district and not available for city-wide needs

(4) The key to doing economic and fiscal impact analysis is evaluating how much net new activity (taxable sales) is likely to result vs. how much activity in the TIF displaces existing revenues

Here's a cartoon to illustrate displacement

Scott Dixon how do you know that a new arena won't mostly displace spending in Norman? (data-driven evidence please).

Don't be Scammed - TIF projects spend Tax Revenues

 November 10, 2023

Today's episode of "Can you Believe the Arena-entertainment district hype?" and "Why are city residents funding NEDC to mislead the public?"

To perform a proper return on investment of a public expenditure requires looking at public budget impacts.

It is true that TIF projects do not get allocations from the general fund because...

TIF prevents money from flowing INTO the general fund in the first place. In public finance we call this a tax expenditure b/c it reduces tax revenues available in the general fund.

TIF does impact the General Fund in a big way (recall the UNP TIF siphoned more than 10% of sales taxes from the general fund at its peak).

Nothing new or unique about a smaller arena and bars/restaurants

 November 9, 2023

Today's episode of "Can you believe the Arena-Entertainment district hype?"

The proposal is to build a less than 8,000 seat arena with premium box seating with a private club.  This would enhance the game viewing experience - and lead to higher ticket prices.

It is inconsistent to argue that we need to prepare for the SEC fans which are claimed to travel farther and longer by building a SMALLER facility than what we currently have.  

OU's 8,000 seat arena in the UNP would be the smallest in the SEC by some 1,500 seats (vs. Auburn).  

It isn't clear that a brand new, smaller arena would be more cost effective than renovating Lloyd Noble, where parking infrastructure and road access is already in place.  

Rupp Arena is going to be renovated b/c this is more cost effective than building a new facility. Why are things different here in Norman?

Team Rupp is fundraising to pay for the upgrades -  selling arena club memberships to the fan base and boosters.  Why isn't TEAM Norman doing this sort of fund raising?

Rupp Arena is getting $60m in the form of STATE tax credits to finance its upgrades.  

From the City's bottom line perspective,  building and operating a multi-use area is RISKY and UNPROVEN investment.  Tax payers pay up front for vague promises of return on investment in terms of net increase in tax revenues. 

Neighbors, don't be fooled by estimates of gross activity related to an arena-entertainment district (Feasibility studies). Any prudent business owner knows you have to account for direct costs as well as opportunities to use funds for other purposes. 

Strong Towns points out that the city has to run things like a business. If arenas made business sense, then private companies would build and operate them.  It is a big red flag that the CITY is being asked to build and operate a mixed use area, not private investors.  

In contrast, UT has agreed to be an anchor tenant of a new multi-use arena that will be build, owned, and operated by a private investment group.  The Austin economy can support such a venue. 

There is a reason the OU is pushing for TIF vs. a sales tax (Norman Forward, MAPS approach).  TIF can be approved by 5 council persons.  Norman Forward was approved at the ballot box as a quality of life program.  

It is a red flag that OU wants to avoid a public vote on a venue that is being marketed as a "quality of life" deal.  

There will be nothing unique or new about the UNP arena-entertainment district.