Below are terms used in fiscal impact analysis. This is not an exhaustive list but it does cover the terms used in the LOCI™ software system and documentation.
Average Costs – These costs are calculated by simply taking the existing total costs and dividing them by the number of people or businesses using and/or paying for the item. It is a good measure of what the existing burdens on costs are, but is not necessarily a good measure of costs if a change is made. For example, total primary education costs divided by the number of students yields existing average primary education costs per student; adding students may cost more, or less, per student than this average.
Benefits – In general, these can be either an increase in some positive aspect of economic life, such as higher wages or increased employment opportunities, or they can represent a decrease in some negative aspect of economic life, such as decreased traffic congestion. In the analytical framework presented here, benefits are narrowly defined as the increase to local government revenues.
Commuter – In this tool, a commuter is an employee of a facility located within the planning area or governmental jurisdiction who is not a resident of that area or jurisdiction. In commuters travel from outside the local jurisdiction to jobs in the local jurisdiction.
Costs – The costs considered in this report are limited to increases in the resources required by the local government, such as additional resources to provide educational services for more students or additional police to protect an increased number of residents. Not considered are public costs such as increased traffic congestion or private costs such as increased insurance premiums.
Direct Costs – This term is defined here as those resources required by the local government to provide services to the facility under study and its employees. For employees, these costs are associated with services the local government provides to the new households formed by the new employees that settle in the jurisdiction over time.
Direct Benefits – These are narrowly defined in this manual to consist only of the revenues accruing to the local government from the facility under study and its employees. These are mostly property taxes and sales and use taxes, as well as fees such as a business license fee.
Direct Impacts – A direct impact can be either a direct cost or a direct benefit. These impacts comprise a Direct Impacts analysis in LOCI and is the most used analysis option in LOCI. The other way to run an analysis is as a Total Impacts analysis which includes multiplier impacts.
Discount Rate – The discount rate represents the opportunity cost of capital, that is, it is the interest lost by receiving funds in the future rather than in the present. The size of the discount rate depends on the opportunities available now that must be foregone and the riskiness of the proposed project. A true opportunity cost of capital for a community would be bracketed by the interest that must be paid on current debt and the interest that could be earned in the appropriate investment funds market. It is common to adjust this bracket to reflect the difference in risk between the project and other available investment opportunities.
Economic Activity – The flow of goods and services within an economy, and between a local economy and others and the flow (in the opposite direction) of payments for the goods and services, all constitutes economic activity. It is often measured by the sum of all revenues generated in a community. As such, it includes an indeterminable amount of double counting. Other measures of economic activity, such as income or employment, do not contain double counting and are therefore better measures of impact.
Economic Growth – There are two important dimensions to economic growth. First, it can be an increase to the quantity of economic activity, such as, level of employment or increases in income. Second, it can represent increases to the quality of economic activity measured by such things as income per capita or value-added per man-hour.
Economic Impact – This is the positive and negative changes resulting from a development project. The positive changes are measured here by the increase in local tax revenues and the negative changes are measured by the additional service burdens. Other important types of positive changes would include more employment choices for new and existing residents, improved opportunities for further development, higher values for neighboring properties, and higher personal incomes. Other negative changes would encompass increased traffic congestion and noise, disruption associated with infrastructure projects, and decreased access of existing firms to high-skilled labor.
Fiscal Impact – This is a projection of the change in government revenues and expenditures/costs as a result of a change in the social or economic environment. In the context of LOCI, a fiscal impact is conducted for new and/or expanding firms and is not suited to estimating the fiscal impact of an expansion in housing or government.
Funds Injection – This involves the input or infusion of new monies into a community from outside its economy.
Indirect Benefits – This refers to increases in local government revenues resulting from the chain of short-term economic events that follow a development beyond those defined as direct benefits. The chain of economic events begins with the expenditures by the facility of funds brought newly into the area and continues as the local recipients of these expenditures make additional local purchases.
Indirect Costs – This is defined by LOCI as those resources required by the local government to provide services to the economic development resulting from the presence of the facility and its employees. For example, costs to provide water and sewer service to a new shopping center built to serve the employees of a new factory would constitute indirect costs. Costs of providing services to the facility are defined as direct costs, and therefore would not be included.
Indirect Impacts – These include indirect costs and indirect benefits but may also refer to other positive or negative changes resulting from a project. For example, increased employment opportunities and higher incomes are both indirect impacts. The term “indirect” distinguishes these impacts from direct impacts defined here as direct costs and benefits.
Input-output Model – An input-output model describes how the producers and consumers purchase and sell items to each other to reflect the production of goods and services in the economy. The value of an input-output model in economic impact analysis is its ability to estimate how a change in the economy, such as a new manufacturing facility, will affect other elements within the economy; that is, it describes the indirect and induced impacts. Input-output models are static models in that they do not incorporate changes in efficiency, technology, or economic development occurring above and beyond local needs triggered by a current development.
Inputs – This term encompasses raw materials, labor, machinery, services, utilities, and anything else purchased by a company or individual.
Leakage - This refers to expenditures for items either purchased outside the local economy or for items purchased locally but manufactured outside the local economy. The payment for these items leaves the local economy and ends the potential for further economic stimulation.
Local Area - A local area is the area under study. Often it is a single political jurisdiction, such as a city or a county, but can also be a region comprising several cities and/or counties. It determines the boundary of the economy under study which in turn defines the limits on indirect impacts.
Long-term Impacts - These are economic impacts due to either changes in efficiency, technology, or an indefinite chain of economic effects. An example would be a manufacturing facility built to supply a regional demand triggered by the location or expansion of one of its customers locally. Long-term impacts are seldom quantifiable within an economic impact analysis and are therefore generally considered within a strategic context rather than a comparison of costs and benefits.
Marginal Costs - These costs are estimated by examining what resources will be required to effect a change. For example, adding students to the primary education system may have high marginal costs if a new school is required, but low marginal costs if only one new teacher is needed. Because the burden of paying these costs is generally spread evenly over the community, a high marginal cost implies that general taxes must increase to maintain the same level of service. Conversely, a low marginal cost implies either that taxes could fall or that the level of service could increase with the same taxes.
Multiplier - Indirect impacts are sometimes estimated by multiplying the direct impacts (which can be measured by, for example, new jobs, additional income, or local tax revenues), by a number calculated to estimate how the local economy will adjust to the direct impacts; this number is the multiplier. Typically, the multiplier is applied only to the benefits and, thus, does not present a complete picture of true impact.
Net Benefits - The difference between benefits and costs is called net benefits. This term is often applied even though the net benefits may be negative; that is, when costs exceed benefits.
Net Present Value - Net benefits accruing over time are valued according to how far into the future the benefits are expected to be received. A discount factor is applied to each year’s net benefits to convert them to the equivalent of having received those benefits now. The sum of discounted net benefits is known as the net present value.
Planning Horizon - The planning horizon is the number of years for which costs and benefits are estimated for a project. Projects with an indefinite lifetime have largely arbitrary time horizons, generally between 10 and 20 years.
Salvage Value - At the end of the planning horizon, projects often have residual value, either as a going concern, land, or buildings. The value of these assets is estimated as if they were sold for their market value in the last year of the planning horizon and represent an additional benefit to be discounted to present value.
Short-term Impacts – These include impacts with a definite chain of economic effects, such as new commercial development occurring as a result of new residents employed by a new manufacturing facility. All of the impacts quantified in an economic impact analysis are generally short-term impacts.
Spending Rounds – When a company (or a person) receives income, either directly or indirectly, from a new facility, it in turn spends a portion of that income locally. Each time the funds are respent locally constitutes a spending round.
User Charges – Payments made by a person or company to the local government for a service based upon the level of usage of that service are user charges. Common user charges are water fees based upon the number of gallons used, solid waste disposal, and wastewater treatment.
Value Added – When raw materials are purchased and transformed in some fashion to be sold at a higher price, the difference between the cost of the raw materials and the selling price is the value added. It is commonly measured by the incomes received by the employees and owners of the company transforming the material. In the analysis presented here, value-added would equal the amount of money recirculated in the local economy as the spending rounds progress. When a local retail expenditure is made, for example, the value added would be the income paid to the employees and owners of the retail establishment. The difference between value added and the amount of the expenditure would be the purchases by the retail establishment for stock manufactured outside the local area.