Score: Experts 1, Amateurs 0

This week’s “Daily Journal” guest columnist is Michael Sanera, Research Director and Local Government Analyst for the John Locke Foundation.

Raleigh’s current controversy over impact fees is an excellent example of a one-sided match pitting experts vs. amateurs. For better and worse, the complexity of modern government requires professional experts. All levels of government hire professionally trained experts to find solutions to complex problems. These experts work either inside government as public employees or outside government for private consulting firms. Elected officials come from all walks of life and seldom have technical expertise in government operations. In other words, they are amateurs who are often at a disadvantage in dealing with government experts.

In June 2004, the amateur city council asked an expert consultant for a study of the city’s impact fee policy, noting that it had not been adjusted for many years. Now the amateur members of the city council are considering the consultant’s report that recommends, among other things, a 100 percent increase in impact fees for new single-family home construction. The report is based on the “conventional wisdom” that impact fees are necessary to pay for public infrastructure expenditures such as roads and water and sewer lines that are extended to new developments. The report accepts this assumption and therefore argues that the impact fee, which has not been increased since 1993, needs to be adjusted for inflation. Obviously, amateur city council members have difficulty arguing against the full array of facts and figures presented by this consultant’s report.

Now let’s replay this scenario with a slightly different question and a different consultant. Suppose the city council had asked the question: are the public costs of new home construction higher or lower than the tax revenues generated by that construction? Also suppose the amateur city council had asked a different expert consultant this question. Let’s say the council asked Dr. Michael Walden, distinguished professor of economics at NC State, to answer this question.

We won’t have to guess at Professor Walden’s answer because he produced a 2005 report that calculates the total economic impact of constructing100 new single-family homes and 100 multi-family housing units. Building new housing creates costs for government: new roads, extension of water and sewer lines, etc. It also produces economic activity that produces increased tax revenues. Walden calculated these costs and benefits during the construction phase and the occupancy phase for these 200 housing units. He found that, with some minor technical caveats, public benefits outpaced public costs by nearly $77,000 per year. In addition, building these homes also produced $64.7 million in new economic activity and almost 600 new jobs.

This expert’s report to the city council would argue that growth more than pays for itself. In fact, it’s not too much of a stretch to argue that the council should consider a new impact fee, but this one would transfer funds from the city to the builder. By building new housing, the builder is producing net tax revenues that should be refunded to the taxpayers.

Two additional points are important. First, if Professor Walden was hired by the city council and he produced the report described above, he would probably not be asked to write future reports. Amateur elected officials are often captive of the experts in city government who frame the questions and recommend which consultants to hire. Thus the questions and the answers are invariably skewed toward expanding government programs and taxes. This helps guarantee the job security of experts on the city payroll and the consultants who are recommended by those city bureaucrats.

Second, a double standard exists when expert consultants evaluate different city projects. The Raleigh convention center study was quite different from the impact fee study. In order to justify the expenditure of millions of taxpayer dollars to build the convention center and a hotel, consultants calculated the full economic impact during the construction and operations stages of the project. They used a multiplier to estimate the economic expansion and the number of new jobs created. On the other hand, when assessing the impact fee, consultants ignored the total economic impact of new home construction.

City council amateurs must learn that, all too often, the experts who control the questions that are asked and determine the consultants who are hired control the final policy.