ECONOMIC ANALYSIS

Short-Term Economic and Fiscal Impact Analysis of the Land and Community Heritage Investment Program

Testimony before the New Hampshire House Finance Committee on Senate Bill 401

May 2000

Prepared By: Lisa Shapiro, Ph.D.
Chief Economist, Gallagher, Callahan & Gartrell for the Society for the Protection of New Hampshire Forests

SUMMARY OF RESULTS

Senate Bill 401 establishes —the Land and Community Heritage Investment Program (LCHIP). Projects similar to what might be developed under SB 401, and New Hampshire-specific studies, were reviewed in order to provide a broad-brush estimate of the potential positive short-term economic impact on the state and the resulting positive short-term fiscal impact on the state's General Fund.

Passage of SB 401 is expected to cost the state $1.3 million over the biennium beginning July 1, 2001.1 Bonds for $3 million and $6 million will be issued with first payment due on the $3 million bond in FY 2002 and for the $6 million in FY 2003. This investment will leverage over $18 million of new investment for critical natural, cultural and historical resources.2 This new investment is expected to generate significant fiscal benefits to the state in the short-run. Using conservative base assumptions, the fiscal impact offsets about half the cost. Using more optimistic assumptions, the benefits exceed the costs to the state, resulting in no net impact on the state's General Fund.3

Broad-brush Estimates of
Fiscal Impacts of SB401 on
2002-2003 Biennium

	Base Estimates	High Estimates
Summary of Estimated Impacts
General Fund Costs (a)	$1,325,046	$1,325,046
Potential increase in General Fund Revenues (b)	$685,525	$1,951,970
Impacts Detailed by Category
Transaction costs on acquisitions	$84,456	$275,400
Wealth and investment effects from acquisitions	$18,629	$154,613
Impacts from direct and indirect recreation, tourism, forest and agricultural related activities generated from acquisitions, stewardship, and historic preservation	$484,160	$1,305,957
Restoration and rehabilitation on building and structures (construction phase only)	$98,280	$216,000
Other impacts not directly quantified Increased property value for nearby properties Savings or costs as compared with alternative developments Impact on business formation and expansion Resource sustainability

This legislation has the support of thousands of New Hampshire citizens who recognize that New Hampshire must be proactive in protecting its environment in order to ensure quality of life and sustained economic growth. Businesses throughout New Hampshire also recognize the importance of the state's environment as a recruiting tool. In fact, after extensive study of the issues affecting businesses in the state, the New Hampshire Business and Industry Association (BIA) found that the quality of life, including such measures as the condition of our physical environment, recreational opportunities, and cultural and social amenities, is an important indicator of the economic well-being of New Hampshire.4

Still, New Hampshire faces an estimated $391 million deficit over the next Fiscal Biennium (LBAO April 26, 2000). Any legislation that creates a new fiscal burden on the State must be carefully scrutinized.

The purpose of this report is to estimate the short-term potential impacts of the LCHIP on the General Fund. While there is extensive and varied literature on the relationships between open space, natural and cultural resources and the economy, estimating the long-term economic impacts of SB 401 is beyond the scope of this study. Because the program directs communities and non-profits to identify projects, and for an Authority to review and select projects to be funded, the mix of projects that will come to fruition should SB 401 pass is not known. Further, the current funding proposal in SB 401 is a temporary strategy to get the program started and to take advantage of some immediate opportunities, such as the possibility of New Hampshire receiving up to $9 million of federal matching funds over the next biennium.

With an estimated 20,000 acres of open space lost annually in New Hampshire, and community land marks and historic areas threatened, enactment of SB 401 can slow the potentially irreversible loss of land and other critical resources over the next biennium.

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TECHNICAL NOTES

Overview of Methodology and Approach

The New Hampshire Land and Community Heritage Commission's Final Report (November, 1999) recommended the establishment of a permanent program funded with at least $12 million annually from one or more dedicated funds, the General Fund, or other revenue sources. While such a funding stream is probably more appropriate for the permanent program, bonding can be justified in the short-term. The General Fund costs for SB 401 are based on the State Treasurer's estimates of the annual debt cost in FY 2002 and FY 2003 for carrying $9 million in bonds issued as proposed in the legislation.

The projects developed from the fund established by SB 401 are permanent projects. Bonding — paying for those projects over 20 years — can be justified because the benefits from these projects will accrue over the life of the program, likely well beyond 20 years. This truly is an investment program. Secondly, significant matching funds available from the federal government may be available which could not be accessed without such a program. The Conservation and Reinvestment Act (H.R.701, S.2123) is reportedly likely to pass and will be permanently funded and off-budget. Since the federal programs are likely to be annual, it's "use it or lose it" for New Hampshire.

The base estimates assume a matching rate of 50 percent, and the high estimates assume the state's bonded share will be just 40 percent of all the money disbursed over the next biennium, leading to at least $18 million of new investment in the state ($22.5 million in the high case).5 The question, then, is: what kind of short-term economic activity and state tax revenues are likely to be generated from that activity over the same period? Types of short-term economic impacts were identified for this report, and where possible, estimates on the Gross State Product were developed. To estimate the General Fund tax revenues generated by that activity, 2.1 (base) to 2.4 (high) percent of the estimated increase in Gross State Product was estimated as the new General Fund revenue. General Fund revenues generally run between 2 and 2.5 percent of the Gross State Product. Alternative methodologies and information, where readily available, were used as a check and to augment the resulting estimates.

Estimated Fiscal Impacts from Transaction Costs for Acquisitions

For analysis purposes only, it is assumed that about three-fourths of the total investment is targeted for acquisition-related costs, with the balance for restoration and rehabilitation and related costs.6 Acquisitions will require significant transaction costs — appraisals, filings, inventories, legal and other professional services. These transaction costs are assumed to go to New Hampshire firms. A range of 5 (base) to 10 (high) percent is estimated for transaction costs. Using a range of multipliers on these costs (1.3 for base and 2.0 for high) — since the funds flowing into transaction costs will also lead to other indirect and induced spending — shows that an estimated annual impact on output could be between $450 thousand and $1.8 million. In addition, there could be significant real estate transfer taxes paid for some of the acquisitions. For the base case, 30 percent of the acquisitions was assumed to be subject to the real estate transfer tax; for the high case, 70 percent. The estimated increase in state revenues from the total of these transaction costs ranges from about $84,000 to $275,000 for the biennium.

Estimated Fiscal Impact of Wealth and Investment Effects for Acquisitions

Sellers of properties acquired under the LCHIP are likely to increase expenditures on other investments, goods, and services from New Hampshire businesses. Without knowing the specifics of the transactions, it is not possible to predict the economic impact of the investment for acquisition of critical resources resulting from enactment of SB 401 with precision. Using a range of between 5 (base) and 20 (high) percent of sellers' proceeds ending up as expenditures on New Hampshire goods and services, a multiplier range of .3 (base) to 1.0 (high) for the indirect and induced spending, and a relationship between GSP and state tax revenues of 2.1 (base) to 2.5 (high), the resulting estimate for the increase in General Fund revenues for the biennium is between about $21 thousand and about $193 thousand. The range is so wide because of the wide range of possibilities for the types of sellers and their subsequent short-term responses to receiving roughly $15 million over the biennium.

Estimated Fiscal Impacts from Recreation, Tourism, Agriculture and Forest-Related Activities

Natural and cultural resources in New Hampshire are an important part of the economy. They support recreation and tourism activities, which are estimated to be among the largest industries in the state. Meals and rooms tax revenue, the second largest source of revenue, is heavily dependent on tourism. Agriculture and forest-related activities also depend on protected open spaces. The impact of these industries on the New Hampshire economy is a given. The long-run impacts on the economy are where their real value is, however, such estimates were beyond the scope of this study. Estimating how the SB 401 legislation will directly enhance these activities and the resulting General Fund revenues over the biennium beginning July 1, 2001 depends on which projects are funded. On and off-site expenditures at natural and cultural sites, especially from out-of-state visitors, boost the Gross State Product. As these expenditures are made directly at the site, and nearby hotels, restaurants, other attractions, etc., the effect on the long-run economy is multiplied. An abbreviated review of studies on the economic impacts of historic sites shows a range of economic impacts.

In-State Impacts per $1M of Spending Related to Historic Sites

	GSP per $1M
Range	$.8M - $4.4M
Average	$2.8M RIMS
Estimate	$1.8M

In order to get some estimate of the potential economic impact from the on and off-site activities generated from the SB 401 programs, the following methodology was used as a base estimate: A recent study by the Resource Systems Group estimated that direct and indirect income attributed to open space is $8.2 billion. There are 5.3 million acres of open space in New Hampshire, yielding an estimated $1500 in Gross State Product per acre of open space. A more conservative estimate of the GSP per acre was also used, setting the return at 50 percent of that estimated in the Resource Systems Group study. Because estimating the acreage which will be preserved under SB 401 is too uncertain, an estimate of the relationship between GSP and cost per acre was developed and then applied to the estimated total acquisition costs, to yield a Gross State Product estimate for these types of economic impacts.

The acquisition cost per acre used to develop the ratio is based on the average cost per acre for the previous land trust program (the Land Conservation Investment Program, or LCIP.) The result is an estimated $484 thousand to $1.3 million in tax revenue on the activity generated by these programs over the biennium. It is assumed that SB 401 funds will go to projects that face imminent threat of conversion and, therefore, absent SB 401, these projects' contributions to the economy, and subsequently General Fund Revenues, would be lost. The General Fund impact from tourism activities generated by historical sites is not quantified, but meant to be incorporated in this category of impacts. Studies also show that open space enhances the value of residential properties. While this could increase the statewide property tax revenues, it is not likely to have any effect in the next biennium because of the lag time on projects and assessments. It is difficult to make this category of estimates more precise without knowing the specifics of the programs developed under SB 401.

Estimated Fiscal Impacts from Restoration and Rehabilitation of Buildings and Structures

Restoration and rehabilitation of building and structures in New Hampshire directly and indirectly boosts New Hampshire's Gross State Product. A review of studies on the economic impacts from these types of projects both in and outside of New Hampshire yields a range of impacts.

The chart below summarizes the economic impacts estimated for a range of different projects, indexing the impacts to $1 million in construction costs, and also includes the estimated impact using a RIMS multiplier for New Hampshire.

In-State Impacts per $1M Historic Preservation/Rehabilitation Investment

per $1M
	Jobs Impact	Household Income	GSP
Range	21-36	$.7M - $.8M	$.7M - $2.2M
Average	27	$.75M	$1.7M
RIMS Estimate	34	$.73M	$2.0M

For illustrative purposes, the report assumes about one quarter of the available funds will be used for restoration and rehabilitation. Using a range of multipliers and the relationship between the General Fund and Gross State Product as used above, the estimated increase in General Fund Revenues for the biennium is between $113,400 and $270,000.

Estimated Total Fiscal Impacts on State for Biennium Beginning in FY 2002

Summing up the impacts across these categories of short-term fiscal impacts yields a positive impact of about $685 thousand in the base case to almost $2 million in the high case. Overall, impacts range from a net cost of about $640 thousand for the biennium, to a net benefit of about $630 thousand.

For a full copy of this publication complete with bibliography, please contact Lisa Shapiro at 603-228-1181.

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Notes

1. Bond payments as modeled by Treasury, provided for SPNHF, April 17, 2000.

2. This is from the short-term perspective only: the total bond payments for the next biennium as compared to the projected total new investment into the state over the same period as a result of passage of SB 401. A full cost benefit and economic impact analysis would look at the cost of the program over the life of the program as compared with the benefits.

3. Fiscal Notes to legislation in New Hampshire assess the direct measurable costs and benefits only. A fiscal impact study like this considers changes in the economy as a result of the legislation, and then forecasts the potential state level fiscal impacts. Local fiscal impacts are not considered in this report.

4. Business and Industry Association of New Hampshire (BIA) publications. "An Agenda for Continued Economic Opportunity in New Hampshire." September 1996.

5. In fact, the previous Land Conservation Trust Program yielded a $1.83 match for every $1.00 of state investment, or a 35% state share.

6. This split was assumed for purposes of estimation only and not to prejudge the actual project mix. The results of the fiscal impact analysis were not very sensitive to this assumption.

(a) Estimated payment on $3 million and $6 million bonds as estimated by Treasury. Assumes payments start as indicated.

(b) Estimates based on short-term boost to Gross State Product (GSP), assuming a range of possible projects and impacts using mid-range estimates from a variety of sources and methodologies. General Fund Revenues (GFR) estimate based for the msot part on relations between GSP and GFR. Other methodolgies used as well. (See Technical Notes for detailed explanation.)

 

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