[CPEO-BIF] On Subsidies, the NY Brownfields Program, and Cost-Benefit Analysis

["Peter B Meyer" <pbmeyer@louisville.edu>]

OK, Rob and Lenny seem to want this economist to comment ... and both
are correct in their skeptical comments on the quality of the metrics
for assessing the need for subsidies and impacts of new projects that
Larry asked about. The issues here are complex, and I apologize in
advance for the length of this note. In order to keep the comment sin
contexts, I have left the prior transmissions at the end of my comment.


So, let me offer a  few observations about cost-benefit analysis ( the
basis for most quantitative studies of public policy impacts), which is
the dominant metric used for assessing government subsidies and the
like:

(1) There used to be far more federally-funded subsidies available for
urban redevelopment but cost benefit analysis as far back as the Nixon
administration demonstrated that the economic impacts may have been
positive for the cities getting the subsidies, but produced no net gains
for the nation as a whole -- the subsidies moved economic activity form
one location to another, and did NOT produce net new jobs or incomes for
the nation -- except for construction employment. The funds could have
produced more net gains for the nation if federal subsidies had gone for
new public infrastructure, not new private developments.

(2) This historical finding does not mean that NO subsidies for private
developments can generate a public benefit, but that, on average, they
failed to do so, when viewed from a national, not local, perspective.
Part of the problem is comparing cost-benefit analyses by the federal
government and those of a number of cities was that the cities did not
see the subsidy as a cost (it was a transfer of funds from above, not
part of the money the cities had to raise through taxation or
borrowing). Any impacts outside the boundaries of the political unit
doing a cost-benefit analysis tends to have zero value in calculations. 
The state perspective is closer to the national than the local in this
regard, so Binghampton can see a subsidy as valuable while NY State may
not.

(3) Every cost-benefit analysis manual or textbook addressing the
subject discusses at length the difference between monetary and
non-monetary benefits and the problems associated with trying to
"monetized" (turn into money equivalents) those impacts that do not
immediately appear with dollar signs. I have on my bookshelf a volume
entitled "The Value of a Life". Thus environmental and health impacts,
loss of community ties, aesthetics, and other effects felt by community
residents always tend to play second fiddle to dollars invested and
profits made in cost benefit analysis.

(4) Cost-benefit analysis of possible public investments is about
future outcomes and is based on forecasts of future events and their
likelihood. This includes predicting the likelihood that some current
pollution condition will harm community residents' health -- which is
different from measuring current health conditions. (The classic
classroom example of a cost-benefit analysis involves a decision about
carrying an umbrella -- to make the decision, you have to know what
weather possibilities exist in the future -- AND the likelihood or
probability of rain.)  Any cost-benefit  analysis thus rests on a string
of assumptions about the future. This is a crucial fact, since the
assumptions made by participants in debates about public programs,
including politicians and agency officials framing policy
implementation, can be influenced by parties interested in the decisions
being made. Those with greater political access and public "voice" will
always weild more influence.

(5) As a result, no cost-benefit analysis is ever objective, so Lenny's
sense of the imbalance between demands for proof from communities and
extensions of the benefit of the doubt to developers has a proven
empirical basis.

(6) It remains possible that in some parts of the State of New York the
development profits are so low -- or tend to be so
 negative -- so
massive subsidies for brownfields may be needed to get any action by the
private sector. This does not mean that the subsidies makes public
policy sense.  This gets to the issue of  the underlying logic of
cost-benefit analysis: "opportunity cost."  The question is NOT what the
cost-benefit measure is for a given policy, program, or brownfield
redevelopment project expecting subsidies.  That one measure is
inadequate, since a comparison is required. Opportunity costs are the
other net benefits that could be gained from alternative uses of the
funds.

            The discussion of the NY State brownfield subsidies so far
has taken place with a critical and unwarranted assumption: that the
state has to provide incentives to private developers in order to get
brownfields cleaned up and reused.  It is distinctly possible that it
would be less costly to the state to borrow against future tax revenues
(rather than offer future tax credits to developers) and fund a special
branch of its environmental agency to actually acquire and mitigate the
sites. Then the sites could be sold to the private sector, at either
market price or for a subsidized price (as low at $1).  At that point
both the cost and timing risks associated with the site preparation and
pollution abatement would be gone. As a result, the return on investment
that developers would need would be lower due to the reduced risk
premium required. While a subsidy may still be needed to attract private
investment to weak real estate markets, it would, not need to be as high
as if the private sector undertook both the mitigation and redevelopment
with subsidies from the state.

          The higher the subsidy provided under the NY program relative
to the actual cost to mitigate environmental conditions, the more likely
it is that the option of public sector mitigation is more efficient than
public subsidies to generate private sector investment.  The weaker the
local real estate market, the greater the magnitude of public incentives
needed to spur private investment on brownfields. As a result, the
subsidy approach actually would be LESS efficient in weaker markets than
in stronger ones if the subsidies were tailored to need. The NY program
does not vary subsidies according to market conditions, so waste in
support for private investments.in strong markets is inevitable if the
subsidies are large enough to generate private investments in weak
markets.

We do not have the data in hand to prove definitively that the current
NY state legislation is not cost-effective. However, given the
preponderance of the evidence and the logic appropriate to a judgment, I
am confident that the state has not adequately considered the
alternative approaches and that the opportunity costs associated with
brownfield redevelopment have not been minimized by New York's
policies.


Peter B. Meyer
Professor Emeritus of Urban Policy and Economics
Director, Center for Environmental Policy & Management
University of Louisville
WEB:  <http://cepm.louisville.edu>
- - - - -
Director of Applied Research
Center for Public Leadership and Public  Affairs
Northern Kentucky University
- - - - - - 
3205 Huntersridge Lane
Taylor Mill, KY 41015
502-45-3240 (cell)

>>> Lenny Siegel <lennysiegel@gmail.com> 7/19/2007 4:54 PM >>>
Bob Paterson's comparison of risk assessment and cost-benefit analysis

in his second paragraph is intriguing.

In most cases, people - community members or workers - who believe they

have been victimized by toxic exposure face a nearly impossible burden

of proof to win compensation, while developers seeking subsidies
usually 
enjoy the benefit of the doubt: A successful development is generally 
considered good for the public.

Lenny


  Robert Paterson wrote:
> Peter could probably speak better to the metrics question, although 
> there is some controversy about how some of those numbers are
derived. 
> For example, if a brownfield site is reclaimed and a new commercial 
> facility is
created, is that new growth or just redistributed growth
as 
> merchants move from one part of town to another with newer buildings
and 
> amenities and market draw potential?  Vacancy rates go up
elsewhere….so 
> getting a clean clear answer is not always as straight forward as one

> would wish.
> 
> A full B/C analysis is time consuming and often a contested exercise

> because like risk assessment, if you torture the numbers enough (or 
> shift assumptions or estimation methods) you can get them to say 
> anything you want…That’s not to say you cant first get agreement on

> reasonable assumption and estimation methods and then say the numbers

> are reasonable in light of the agreed upon approach--by both sides of

> the issue) (this is a form of data mediation or joint fact finding).
> 
> In the end, the issue that is not stated as clearly as it should be
is 
> really one of “opportunity costs”…all else being equal, is this
the best 
> use of foregone revenues from tax abatements in cases when the level
of 
> contamination is minor and liability issues are truly negligible (and

> the open question remains, whether without subsidies, the market will

> eventually pick up and reuse the site) – can state agencies do a
better 
> job of steering resources where they are going to provide the
greatest 
> net societal benefits, and perhaps have higher expectations for local

> benefits as a quid pro quo for abatements or other subsidies? 
Perhaps 
> the number of sites that would have developed anyway with or without

> abatements and tax credits is small, but since we don’t seem to
look 
> real close, it seems like the opportunities for abuse are significant

> and real.  And given limited tax dollars and resources, waste is not
an 
> option. There may well be better places to spend for net societal 
> benefits that exceed our current approach…such as more attention to 
> brownfield prevention efforts? Or whatever….
> 
> Empowerment and enterprise zones (federal and state varieties) tried
to 
> ensure that employment gains would accrue to impacted areas with
highest 
> unemployment and ideally be part of an overall economic redevelopment

> program that is responsive to impacted neighborhoods and the overall

> community needs.
> 
> Are we asking too much and how much should we be asking of subsidies

> given to stimulate private sector brownfield action?
> 
> I’m curious what happened in DC where a small group of folks on
this 
> list met and discussed this- I was abroad and could not attend.
> 
>  If someone can send a summary off-line – that would be greatly
appreciated.
> 
> Kind regards
> 
> Bob
> Robert G. Paterson
> Associate Professor 
> Co-Director, Center for Sustainable Development
> 1 University Station B7500
> School of Architecture
> The University of Texas
> Austin TX 78712-1160
> 512-471-0734
> Fax 512-471-0716
> rgfp@mail.utexas.edu 
> 
>  
> 
> Distribution or copying of this communication is prohibited. If you 
> received this communication in error, please immediately notify me by

> telephone at the number above, and destroy the message.
> 
>  
> 
> Thank you.
> 
>  
> 
>
------------------------------------------------------------------------
> 
> From: brownfields-bounces@list.cpeo.org 
> [mailto:brownfields-bounces@list.cpeo.org] On Behalf Of
LSchnapf@aol.com 
> Sent: Wednesday, July 18, 2007 11:25 PM
> To: brownfields@list.cpeo.org 
> Subject: [CPEO-BIF] Re: Brownfields Digest, Vol 35, Issue 13
> 
> As a followup to Ken Kamlet's letter to the editor, the statistics 
> publicized by the article fail to mention the benefits from the 
> brownfield program. There is no estimation of the jobs created or
taxes 
> generated by the BCP projects.
> 
> The data only presents one side of the story..and several of the 
> attorneys I know who were queried as part of the study by the 
> Environmental Business Association brownfield task force that I chair

> indicate t
hat the estimates produced by the Division of Budget are 
> inaccurate for a number of sites by either overestimating the tax 
> credits or underestimating the cleanup costs. As one attorney told
me, 
> if the state numbers are right about the tax credit his client got,
then 
> he did not bill his client enough in legal fees. )
> 
> I would like to know if there are metrics that are used by government
or 
> academics that predict the number of jobs and taxes generated by 
> redevelopment projects. This information is missing from the data 
> generated by the state and thus does not tell the whole picture about
BCP.
> 
> Larry  
> 
> Lawrence P. Schnapf, Esq.
> 55 E.87th Street #8B
> New York, NY 10128
> 212-756-2205 (office)
> 212-876-3189 (home office)
> 203-263-5212 (weekends)
> 212-593-5955 (fax)
> LSchnapf@environmental-law.net 
> http://www.environmental-law.net/


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