Evaluating Data and Financial Assumptions in Development Proposals

Type: 
Best Practice
Approved by GFOA's Executive Board: 
September 2013
Background: 

In analyzing proposals for new development projects, governments often use just two tools. First, many governments compare a development proposal to the past performance of similar projects in other governments. However, without proper analysis, this information may be inaccurate or misleading. Secondly, many governments use benchmarking data in analyzing proposals, which again requires careful analysis and interpretation in order to avoid misleading conclusions.

A development project proposal typically includes data, analysis and conclusions showing that the project is desirable and beneficial to the government and community. A review of the proposal should include testing both the data and the assumptions on which any projected benefits are based, and evaluating any risks. The data could include a wide variety of projections such as sales, customers, volume, costs, revenue, rate of return, build-out and construction timeframes among others.

Verifying data is only the starting point of any review of a development proposal. It is likely much more important to review whether or not the assumptions are appropriate, and whether the overall conclusions logically follow from the data and assumptions. For example, in a retail development, data on sales figures per square foot may be used, which can be easily verified from reliable national sources. However, such national data does not assure that the local retail environment can support that level of sales and, even if it does, it also does not mean that the local government will see sales increase by that amount as sales may be cannibalized from other locations. In addition, even if the data, assumptions, and conclusions are appropriate, the risks should also be evaluated.

A government may not have the staff expertise to analyze the data and assumptions for all such proposals. Further, data needed for the analysis may not be readily available to the government. In such cases, governments should consider using expert advisors to conduct or assist in conducting the review.

Recommendation: 

GFOA recommends that local governments analyze all economic development proposals by evaluating the underlying data, assumptions, and the methodology used. Specifically, the GFOA recommends the following actions:

  • When making comparison to similar projects, proceed with caution - make sure that the basis for such comparisons is objective and reasonable.
  • Use benchmark data, but be cautious - make sure that fair and objective comparisons and analysis are being used.
  • Where necessary, utilize expertise from outside the organization to assist in conducting an analysis of data and assumptions.
  • When using external consultants, be aware that they may have their own biases or preferences. Consequently, even when using external consultants in a proposal analysis, do not rely solely on the consultants to manage the analysis.
  • If appropriate, request reimbursement from the developer to cover the cost of the consultants as a standard component of submitting development proposals.
  • Understand and communicate to citizens and stakeholders that there are risks with any development project, and that actual results may differ from what is predicted.

When searching for benchmark data, GFOA recommends that governments begin their search with the potential
data sources provided below, keeping in mind that many of these sources charge a fee for data.

Assumptions Information Source
Financial Information:
Retail Sales
  • Tax Returns
  • International Council of Shopping Centers1
  • Subscription Services from private real estate advisory firms
  • Retail Market Research/ National Retail Federation
Retail Pull Factors
  • Local Chamber of Commerce
  • Private studies
  • Local convention and visitors associations
Real Estate Values1
  • County assessor sales data
  • Private appraiser data
  • Residential
  • Multiple Listing Service (MLS)2
  • Non-Residential
  • Urban Land Institute (ULI)1
Real estate taxes
  • County assessor estimates
Office Rents
  • County assessor cap rate estimates
  • Private subscription services from private real estate advisory groups
Land Values
  • Private appraisals
Construction Values
  • Urban Land Institute
  • Internal engineering assumptions
  • Marshall & Swift Valuation Guide
  • R.S. Means
Hotel/Restaurant
  • Hotel/restaurant and tourism publications and magazines
  • Travel and tourism industry reports
  • Travel and tourism market research
  • Hotel market research from private firms
  • Restaurant operations reports from private firms
Gaming
  • American Gaming Association (AGA)
  • State Gaming Commissions
Sports/Leisure
  • Journal of Urban Affairs
  • Journal of Sports Management
  • ReferenceUSA
  • Billboard AudArena Guide
  • Each sport has its own trade organization which will usually have revenue, expenditure and attendance forecast data
Hospital/Clinics
  • U.S Department of Labor, Bureau of Labor Statistics3
  • Department of Health and Human Services, Center for Medicare & Medicaid Services4
Non-Financial:
Median Income
  • Department of Labor
  • Nielsen Claritas reports
Area Education Levels
  • Department of Labor
  • Nielsen Claritas reports
Area Populations
  • Census Bureau
  • Local Government geographic information systems (GIS)
Organization Structure (LLC, SCorp)
  • Secretary of State’s Office
Committee: 
Economic Development and Capital Planning
Notes: 

1 Real estate values include market, appraised and assessed values.

2 Subscription based service

3www.bls.gov/webapps/legacy/cesbtab1.htm

4www.cms.hhs.gov/NationalHealthExpendData

References: 
  • GFOA Best Practice, Balancing the Costs and Benefits of Economic Development Projects (2010).
  • GFOA Best Practice, Analyzing the Benefits of Economic Development Projects BP (2010).
  • GFOA Best Practice, Analyzing the Cost of Economic Development Projects (2009).
  • GFOA Best Practice, Developing an Economic Development Incentive Policy (2008).
  • GFOA Best Practice, Economic Development Incentives (1990).
  • Mike Mucha, "Fiscal Impact Analysis: How to Use It and What to Look Out for," Government Finance Review, October 2007.