    [From the U.S. Government Printing Office, www.gpo.gov]

                                  FISCAL IMPACTS OF OCEAN CITY

                                  BEACH EROSION CONTROL

                                                                      NOV 1981

                        QH
                        765
                         M  .3
                        F34
                        1981

                                       Vernon L. Fahle, Ph.D.
                                     ECONOMIC AND STATISTICAL SERVICES

                           P.O. Box 671   -    Annapolis, MD 21404        (301) 263-3236

                                                              November 16, 1981

                    Mr. Terry Anthony
                    Coastal Resources Division
                    Tidewater Administration
                    Maryland Department of Natural Resources
                    Annapolis, Maryland 21401

                    Dear Mr. Anthony:

                        I am pleased to submit to you my final report, FISCAL IMPACTS OF
                    OCEAN CITY BEACH EROSION CONTROL. The report examines the fiscal impli-
                    cations for Ocean City, Maryland of participating in the funding of the
                    proposed erosion control projects.

                        Ocean City has had a budget surplus in eight of the previous ten
                    years, and was able to reduce its property tax rate from $1.60 to $1.33
                    per $100 of assessable basis in FY 1980. Based on past trends, my pro-
                    jections of the City's revenues and expenditures for the fiscal years
                    1983-1987 indicate that with the reduced tax, the City will continue
                    to generate a small budget surplus on balance over the period.

                       The study included a review of three alternative projects for beach
                    erosion control; the Short Groin Interim Project Maryland's construc-
                    tion of the Corps of Engineers' Plan 2 without federal participation,
                    and the Beach Fill only  Interim Project. For each alternative the annual
                    cost of debt service was calculated assuming that the project was financed
                    with 15 year State General Obligation Bonds.

                        The estimates of the impacts on the City were based on three assump-

                    tions about the share of the project cost that would be paid by Ocean
                    City: 100 per cent, 75 per cent, and 50 per cent.

                       We reviewed several potential sources of additional revenue that,
                    could be used to finance the debt service. These sources were those
                    that were judged to be paid primarily by property owners and visitors
                    to Ocean City who also would be the immediate beneficiaries of the beach
                    restoration and erosion control. The revenue sources reviewed were a
                    restored property tax rate to $1.60, an increased room tax, a one per
                    cent sales tax add-on, an increase in the Admissions and Amusements Tax,
                    and establishing a fee for beach use.

                    COASTAL ZONE

    		    INFORMATION

                 Mr. Terry Anthony                 - 2                  November 16, 1981

                      Overall, with three alternative projects, three assumptions about
                 interest rate, and three cost sharing options, there are 27 different
                 scenarios about City revenue requirements discussed in the report.

                      The peak level of annual debt service costs for these alternatives
                 range from a high of $5.5 million to a low of $1.1 million. The estimates
                 of the additional receipts that would be produced by the revenue mechanisms
                 in 1987 ranges from $1.0 to $2.0 million (both figures are expressed in
                 1982 dollars, based on an average 10 per cent Tate of inflation in 1981
                 and 1982).

                      The analysis provides a wide range of project costs and revenue
                 mechanisms for review while the choice of a specific program for implemen-
                 tation will depend on a variety of considerations, the-findings of this
                 study indicate that for Ocean City to participate in funding of any of
                 the beach restoration alternatives will require that the City raise addi-
                 tional revenues.

                      I would like to thank the many people at the Department of Natural
                 Resources and in Ocean City who helped to provide the information used
                 in this report, and who have commented on the draft versions of the
                 report.

                                                          Sincerely,

                                                          Vernon L. Fahle

                           FISCAL 114PACTS OF OCEAN CITY MACH EROSION CONTROL

                                                Prepared for

                                         Coastal Resources Division
                                         Tidewater Administration
                                  Maryland Department of Natural Resources
                                           Annapolis, Maryland

                                           Contract No. C21-81-430

                                                     BY

                                          Vernon L. Fahle, Ph.D.
                                            Economic Consultant
                                               P.o. Box 671
                                        Annapolis, Maryland 21404

                                               November, 1981

                                               TABLE OF CONTENTS

                                                                                            Page

                   I    INTRODUCTION AND SUMMARY                                              1

                          Purpose of Study                                                    1

                          Summary of Conclusions                                              2

                   II   FISCAL CAPACITY                                                        5

                          Revenue Projections                                                 7

                          Expenditure Projections                                             8

                          Comparison of Revenues and Expenditures                             8

                   III ADDITIONAL REVENUE SOURCES                                            12

                          Restored Property Tax                                              12

                          Room Tax Add-on                                                   12

                          Sales Tax Adjustment                                               12

                          Admissions and Amusement Tax                                       13

                          User Fees                                                          13

                   IV   BEACH RESTORATION PROJECTS                                           15

                          The Short Groin Interim Beach Maintenance Project                  15

                          Corps Plan No. 2                                                   17

                          Beach Fill Interim Project                                         19

                   V    STATE FISCAL IMPACTS                                                 23

                   VI   IMPACT ON 0CEAN CITY'S "BOND RATING"                                 24

                   VII  CONCLUSIONS                                                          27

                                                        1

                                       TABLE OF CONTENTS (CONTINUED)

                                                                                         Page

                      TECHNICAL APPENDIX                                                   28
                        I   Fiscal Projections                                             28

                            Expenditures Analysis                                          29

                            Revenue Analysis                                               29

                        II  Estimates of Annualized Costs                                  32

                        III Comparison of Advantages of Project Alternatives               42

                        IV  Derivation of Project Cost Estimates                           44

    										ii

                                         LIST OF TABLES AND   FIGURES

                                                                                           Page

                 TABLE

                 I.A        Summary of Pea k Annualized Costs of Projects                    3

                 I.B        Summary of State Fiscal Impacts Per Capita                       4.

                 II         Population Estimates, 1971-1980                                  6

                 III        Prelimina'
                                     ry,Projections of Revenues and
                            EKpenditures for Ocean Cityj 1983-1987                          ..9

                 IV         Distribution of Revenues  by Source, 1979 and
                            Projected 1987                                                   9

                 V          Annual Construction Costs,  Short Groin Project                 15

                            Interim Beach Maintenance  Project,-Annualized
                            Costs and Additional.Revenue Estimates, 1983-1987               16

                 VII        Maryland Construction of  Corps Plan No. 2 With No
                            Federal Involvement, Annualized Costs and
                            Additional Revenue Estimates, 1983-1987                         18

                 VIII       Comparison of Capital Costs Under Alternative
                            Funding Options                                                 20

                 IX         Beach Fill Interim Project, Annualized Costs   and
                            Additional Revenue Estimates, 1983-1987                         22

                 X          State Fiscal Impacts Per Capita                                 23

                 FIGURE

                 1          Expenditures and Revenues for Fiscal Years 1971-1980            10

                 APPENDIX TABLES

                 A.1'       Avei:age Aruiual Population Projections for Ocean
                            City, Maryland, 1983-1987                                       31

                 A.2        Interim Beach Maintenance Project Annualized Costs,,
                            Assumed Interest Rate .0819624                                  33

                 A-3        Interim Beach Maintenance Project Annualized Costs,
                            Assumed Interest Rate .0919624                                  34

                                                       all

                                    LIST OF TABLES AND FIGURES (CONTINUED)

                  TA BLE                                                                     P-@ge

                  A.4        Interim Beach MaintenancetProject Annualized    Costs,
                             Assumed Interest Rate lol9624                                     35

                  A-5        Maryland Construction of Corps   Plan No. 2 With No
                             Federal,Involvement Annualized   Costs:, Assumed
                             Interest Rate-0819624                                             36

                  A.6        Maryland Construction of Corps   Plan No. 2 With No
                             Federal Involvement &nnualized   Costs, Assumed
                             Interest Rate 09i9624                                            .37
                  A. 7       Maryland Construction of Corps   Plan No. 2 With No
                             Federal Involvement Annualized   Costs, Assumed
                             Interest Rate .1019624                                            38

                  -A.8       Beach Fill Interim Project Annualized     Costs,
                             Assumed Interest Rate .0819624                                    39

                  A.9        Beach Fill Interim Project Annualized     Costs,
                             Assumed Interest Rate .0919624                                    40

                  A.10       Beach Fill Interim Project Annualized,Costs,
                             Assumed Interest Rate .1019624                                    41

                  A.11       Comparison of Advantages of Alternative Beach
                             Maintenance Projects                                              43,

                  A.12       Estimates    Five Year Program Short Groin Interim
                             Project                                                           45

                                                         -iv

                                          I. INTRODUCTION AND SUMMARY-

                        Ocean Cityp Maryland   is Maryland's most popular-resort   area,   attract-
                   ing more than a quarter of a million visitors on peak summer weekends.
                   The past decade has been a   period of very rapid growth for'Ocean City.
                   During the decade the permanent resident population more than tripled,
                   increasing to 4,946 from 1,493. During the same period, the number of
                   housing units, most of which are owned by non-residents, also more than
                   tripled, standing at 18,221 in 1980, up from 5,309 in 1970. This makes*,
                   Ocean City the second largest city in Maryland in terms of the number of
                   housing units.

                        Situated on a barrier island, the beaches at Ocean City     are subject
                   to.continuous erosion and storm hazard. In recent years portions of the
                   beach at Ocean City have almost disappeared, andit is clear that without
                   intervention to maintain the beaches, their recreational value is severely
                   threatened.

                        Presently, a U. S. Army Corps of Engineers'    plan to restore this
                   valuable recreational resource is before the U. S@ Congress.-_ However,
                   construction on this project is not expected to begin until at least
                   1990. Because of this advanced start date, Maryland is considering an
                   interim maintenance project that would stabilize the beach area. Also
                   under discussion is whether the State should undertake the Corps resto-
                   ration project on its own, rather than wait for the Army Corps of Engi-
                   neers' to begin its work.

                   'Purpose of StILdX

                        The present study examines the fiscal capability     of Ocean  City  to
                   participate in the funding of these proposed projects. Public        taxation
                   theory argues that when the beneficiary of a public expenditure can be
                   identified, the preferred policy is to-tax the beneficiary. Applying
                   this principal to the beach maintenance program suggests that the property.
                   owners and visitors to Ocean City, who am the most immediate beneficiaries
                   of the project, should participate inpaying for the project. Thisl of
                   course, implies that.the City should finance at least some portion of the
                   project if the benefit principal is to be applied in this case.

                        The purpose of this study is to review    the f iscal. intact of Ocean
                   City's sharing the cost of the project. To     accomplish this we reviewed
                   historical data on Ocean City's expenditures and receipts for the most
                   recent decade, and on the basis of the trends and relationships forecasted
                   the'levels, of expenditures and receipts for the fiscal years 1983-1987.

                   Summary of Conclusions

                        Our projections indicate that Ocean City's revenues under it's pre-
                   sent tai structure will be sufficient to meet necessary expenditures.,
                   Of course, revenues and expenditures in any single year are difficult
                   to forecast accurately, but the trends suggest that over the period 1983-
                   1987, Ocean City.will probably generate a small budget surplus on talance.

                        The projections indicate that for Ocean City to participate in the
                   financing of any of the non-federal beach erosion control-projects, it
                   will be necessary to raise additional revehues by increasing the present
                   tax rates, or by adding a new revenue source. Applying the benefit
                   principal described above, several taxing alternatives were evaluated
                   to determine the amount of revenue that each can be expected to generate
                   on an arinual basis.  Estimates of the revenues that each of these alterna-
                   tive revenue sources  can be expected to provideare contained in Table
                   IoA.

                        For comparative  purposes Table  I.A also contains a summary of    the
                   estimated annualized  costs of three  alternative maintenance projects.
                   The first is the Short Groin Interim Project recommended.by the Oceant
                   Bays, and Beaches Task Force of the.Coastal Resources Advisory Committee
                   and the Maryland Department of Natural Resources. The second.is the
                   cost of implementing the Army Corps of Engineers' Plan 2 without federal
                   participation. The third alternative is the Beach'Fill Interim Project
                   which is similar to the beach restoration portion of the Corps of Engi-
                   neers' Plan 2.

                        Table I.A contains   estimates for only  the peak costs of each alter-
                   native under the latest   available  interest rate @as of early September,
                   1981) for State General  Obligation Bonds.    These cost estimates are based
                   on the project being finaficed for  15 years  with the principal being repai  d
                   in equal annual installments. Three assumptions about the proportion
                   of total project costs paid by Ocean City have been used. Detailed es-
                   timates and alternative assumptions about    the interest rate are contained
                   in the text and the appendix.

                        A summary of the fiscal impacts on the.State, calculated on an     annual,
                   per capita basis, are contained in Table I.B. These estimates are for
                  .the capital and financing costs of the project alternatives only, and do
                   notinclude any portion of the annual raintenance costs which might be
                   assumed lay the State. Estimates   for additional years and iternative
                                                              L                  a
                   assumptions about interest costs.can   be found in Section V of the report.

                                                         2

                                                                                Table I.A

                                                                               Summary of
                                                             Peak  Year Annualized Costs        of Projects
                                                                Assumed Interest Rate:          -.091.9624
                                                                              (1982 dollars)

                   Assumed Local Share                    Short Groin Interim                     Maryland Construction                    Beach Fill Only
                                                                 Proj ct                             of Corp2 Plan 2                       Interim Project
                             10()P/.                           2t560,000                                 .5,136,ooo                           20269000
                              75%                              1992OtOOO                                  30852gOOO                           1,?44,000
                             5 (Y/.                            lt2809000                                  2t568tOOO                           19163,000
                   Annual   Maintenance                            598*500                                11688tOOO                           lt197,000

                                                    Estimates    of Additional     Revenues by Source, 12�
                                                                       (1,000's    of 1982 dollars)
            Fiscal Year          Projected            Restored           4% Room            5% Room             1% Sales            Admissions         User Fees
                                 .Surplus             Property             Tax                Tax                    Tax                 and
                                                      Tax,Rate                                                   Add-on             Amusement
                                                                                                                                         Tax
               1983                 300               1000                  800              lt600               1000                    900              11800
               1984                 200               lt4oo                 900              lt700               lt3OO                   900              11800
               1985                 100               i,6oo                 900              11800               lt400                 itooo              itgoo
               19,86                @400                                   1,000             12900               1,,4oo                11000              2,000
               1987                 100               1;800                10000             2tOOO               lv500                 igooo              20000

            Note i   For  an explanation      of  how costs    were   converted to 1982      dollars, see     the  Technical Appendix.

                                                      Table I   B

                                                     Summary of

                                               State Fiscal Impacts-

                                                'Peak Year Costs in

                                                Dollars Per Capita
                                        Assumed   Interest rate: .0919624

                                                                      State Share

                                                                25%                 50%

                                                                .144                289.
                        Short Groin
                        Corps Plan   2                          .298.              .596

                                                                .135               .270
                        Beach Fill

                                            1I., FISGA-L CAPACITY

                       Ocean City's revenues  and expenditures are closely tied to the size
                  of the visitor population. In Fiscal Year 1980 expenditures by   Marylandis
                  municipal areas and special taxing districts averaged $335.00 per capita.
                  Applying this average to Ocean City's resident population yields an ex-
                  pected budget of $1,656,900, which is approximately 12 per cent of the
                  amount actually expended.

                       Ocean City's sources  of,revenues are atypical as well. Forty-four
                  per cent of its revenues in FY 1980 were from local property taxes, com-
                 .pared to an average of less than 25 per cent for all Maryland municipal-
                  ities. Approximately 26 per cent of 1980 revenues were generated by,two
                  other local revenue sources, the room tax and charges for current services.
                  Only relatively small portions of total revenue were from the local Income
                  tax and federal revenue sharing, owing to the small resident population
                  in'Ocean City.

                       The City's rapid economic growth during  the 1970's has been char-
                  acterized by a building and condominium boom which has both att:racted
                  a larger permanent.populationt and helped to convert Ocean City into a
                  year-round resort community. As can be seen-in Table II, while growth
                  In the level of peak visitor population in-August has slowed in recent
                  years, the rate of increase inthe visitors arriving during the non-summer.
                  months has continued at a much higher rate.

                       For the future, it appears that the'rate of growth will decline in
                  the next few years.* Most of thechoice ocean front property has been
                  developed, and only a limited amount of suitable undeveloped land is
                  available on the.back bay. Without annexation' to provide additional
                  waterfront property for development, future expansion will be limited
                  to filling in between existing development and to replacing existing
                  structures with larger, modern buildings.

                       Continued economic growth appears assured, however. In addition
                  to the potential for redevelopment and higher densities in the older
                  sections of town, the developing year-round character of the resort Com-
                  munity provides a substantial potential for continued economic growth.
                  Estimates of the average daily population and the resident population,
                  are contained in Table II. Of the three series which include visitor
                  population (columns 2. 3 and 4). the moz@tIrapidly growing is the average
                  annual daily population. As more people elect to visit Ocean City in
                  the spring and fall seasons, the population series containing estimates
                  for the months from September to May grow at a faster rate than that for
                  the summer.

                     Ocean City currently continues to  experience rapid growth, however.
                  The City issued $7.5 million in building permits during August, 1981.

                                                       5

                                                           Table

                                                   POPUIATION ESTIMATES

                                                          1971-1980

                               Permanent       Average  3)      Average 3)       Peak    3)
                               Residents       Annual           Summer           August
                    1971       19493   1)      31olOO           65,500           1019500

                    1972                       35,100           71,900 -        @1099500

                    1973                       39,800           79.400           110,200

                    1974                       45t700           93,500           145j,600

                    1975                       52,4oo           105ti0o         ..164t100

                    1976                       609800           118,500          179,200

                    1977                       56,8oo           103,500          1491,800
                                       4)
                    1978       39559           539900           101,200          1529800

                    1979'                      63,200           .122,6oo         173.700
                    1980       49.94,6  2)     74.6oo           141,800          1999700

                    1)   Source:. 19@O   Census   of Population and    Housing
                    2)   Source:     1980 Census  of Population and    Housing
                    3)   Source: Demoflush Estimates, Greater Ocean City Health
                         Services Corporation
                    4)   Source: Special census conducted by         Ocean   City

                                                                .6

                    Revenue Projections

                         Although Ocean City experienced some fiscal difficulties during      the
                    sixties, revenues have exceeded expenditures in.eight of the last ten
                    years. The growth in revenues has been faster than expenditures and       Ocean
                    City lowered its property tax rate from $1.60 to $1.33 per $100 assessed
                    value in FY 1980.

                         Several factors can be   expected to affect the   future levelz  of rev-,
                    enues. As the number of permanent residents in Ocean City increases,
                    the amount of revenue received from income taxes, revenue sharing and
                    as transfers and grants will increase. New additions to the property
                    tax roles are expected to slow.in the near future as the available build-
                    able land becomes more scarce, however, the assessed value of property
                    should continue to.increase in real terms for two reasons. The restricted
                    supply of desirable land will cause the value of existing property to
                    rise faster  'than the general price level, and the tri-annual assessment
                    procedure assures that the property values will be reviewed on a timely
                    basis.

                         Our preliminary projections suggest that the revenues     will  continue
                    to grow in real terms over the nextIrseveral years, but that the     rate of
                    increase will.slow somewhat. Separate projections were made for major'
                    revenue categories: 1) local property taxes, 2) room taxes, 3) charges
                    ,for current services, and 4) other revenues.     A summary of the projected
                    revenues is contained in.Table III. Detailed      information on the procedures
                    used can be found in the technical appendix.

                         The City's own forecasts of revenues and     expenditures  for FY  1981
                    and FY 1982 are below the trend line in those     two years. For FY 1981
                    the revenues forecast by the City are slightly more than three per cent
                    below the trend. For FY 1982 the City's forecasts are fok revenues nearly
                    four per cent less than the amount projected from the past trends.

                         During the period 1971-1979 Ocean City's revenues, after adjustment
                    for inflation, grew at an average annual compoi@nd rate of 12.4 per cent
                    a year. For the period covering Fiscal Years 1983-1987, we have projected
                    revenues to grow at only 3.3 per cent a year. The expected decline in
                    the rate of growth in revenues is primarily due to two influences: a
                    slow down in the rate of economic expansion, and the reduced property
                    tax -rate.

                         The  projected distribution of revenues    by source are  shown in Table
                    IV.  The.relative importance of the property-tax and.charges       for  current
                    services is not expected to change significantly. The proportion of total
                    revenues obtained from the room tax is expected to increase, and the pro---
                    portion of total revenues derived from other sources is.projected to
                    decline somewhat.

                                                           7

                .Expenditure Projections

                       Historically the level of expenditures has been      more  volatile   than
                  has the level of revenues (see Figure 1). In each of the        two years for
                  which expenditures exceeded revenues, the rate of expenditures had risen
                  sharply from the previous year, then fallen back the following year.*
                  One factor that has contributed to this volatility has been the preference
                  by Ocean City for financing capital improvements out of cukrerft revenues.

                       During the next few years governmental exp-e-nditures by Ocean City
                  should grow more moderately. If the peak levels of visitor population
                  continue to grow only slowly, while"more visitors come during the non-
                  summer months, Ocean City will be able to moderate the cost increases
                  that would result from peak load problems. There also are indications
                  that Ocean City is now-willing to finance at least some capital improve-
                  ment projects, t hereby reducing the volatility of expenditure levels,

                       The projections@ of Ocean City's expenditure     are contained in Table
                  III.  These projections are based on a two stage      analysis.. All expendi-
                  tures directly tied to population levels were summed together for thefirst
                  stage of the analysis. Theseexpenditure categories were: 1) Public.
                  Safety, 2) Highways, 3) Sanitation and Waste Control, and 4) Recreation.
                  In the first stage, least squares regression analysis wa:s used to estimate
                  the average annual population levels from Table III. This relationship
                  was used to compute the expected levels of expenditures for the population
                  induced spending for each year. This computed variable was then used as
                  the independent variable for estimating the expected levels of "Other
                  Government Expenditures", in much the same way that business overhead
                  rates are computed.

                  Comparison of  Revenues  and-Expenditures

                       Taken together, the revenues and expenditures are projected to in-
                  crease at approximately the same rate, with a continued small budget
                  surplus o *n balance. It should be noted. that no allowance for inflation
                  has been included in the projections** and that continued inflation would,
                  of course, substantially affect the dollar amounts.***

                    Published data   were not- a,,raillabie for FY 1981, but the budgeted   amount
                  was less  than 1980 expenditure levels.

                     A ten  per cent inflation was assumed to     convert dollar  amounts  to
                  1982 dollars.

                      For example, an inflation rate of.nine      to ten per-cent over thefive
                  year period would require an expenditure in 1987 of more than $26 million
                  Ao maintain the same amount of purchasing power expressed in Table II.

                                                          8

                                                      Table  III
                             PRELIMINARY PROJECTIONS     OF REVENUES AND EXPENDITURES-

                                             FOR O=N     CITY 1983-1987
                                             .(1,000's  of 1982,dollars)

                              Year                      Revenues             Expenditures
                              1983                      $159200                  $149900
                              1984                        159700                  15000
                              1985                        169200                  16,loo
                              10                          169900                  16000
                              1987                        17,300                  17g200

                                                        Table  IV

                                         DISTRIBUTION   OF REVENUES BY SOURCE

                                                1979 and.PROJECTED   1987

                                                          1979                     1987
                               Pro-oerty tax                                        525
                                                          5
                               Room tax                   12%                       17%

                               Charges  for current
                                 services                 14%                       13%
                               Other revenues             22%                       18%

                               Total                        (y/.                    100%

                                                             9

                                                              FIGURE i
                                                   EXPENDITURES AND REVENUES 'FOR
                                                       FISCAL YEARS 19714980

                                     14

                                     .13

                                     it

                                     to

                                      9

                                      8                                     --expenditures

                                      7                 revenues--/

                                      6.

                                      5

                                      4

                                      3

                                      2

                                       71    72    73    74    75    76    77    78    79    80

                       sourcei Local Government Finances in Maryland, Department of Fiscal Services's 1971-1.980.

                      Althoughthe actual amount of surplus can be expected,to  vary from
                 the trends from year to year, as has been the case historically, over the
                .period the forecasts.suggest that Ocean City can expect to generate a
                 net surplus of approximately one million dollars (in constant 1982 dollars).
                 This projectedayerage yearly surplus of $200,000 is less than the average
                 annual surplus ($6oo,ooo in 1982 dollars) achieved by Ocean City during
                 the period 1wi-1980.

                                         III.  ADDITIONAL REVENUE    SOURCES

                        The preceeding section indicated     that Ocean   City's revenues 'and
                   expenditures can be expected to produce only a small surplus. This sug-
                   gestsi then, that for the City    to be able  to finance  any  new major capital
                   project It will be necessary for the    City  to generate additional revenues,

                        For Ocean City to participate in     the financing  of  any of the beach
                   maintenance projects being considered, additional revenues would also be
                   needed, of course. Accordinglyg five alternative revenue sources are
                   reviewed and estimates have been made     of the amount  of  revenues each can
                   be expected to provide. Each of the revenue alternatives was selected
                   .because the tax would be paid primrily     by the beneficiaries of the
                   project, in accordance with the public taxation principal.discussed
                   earlier.

                   Restored  Pioperty  Tax

                        One   source of potential additional revenues would     be to restore
                   the property tax in   Ocean City to its   previous level of  $1.60  per $100
                   of assessable-basis.    This measure would increase the effective rate by
                   approximately 20 per   cent and raise an additional $1-3     million In 1983.
                   The amount of increased tax receipts would rise to approximately $1.8
                   million in 1987.

                   Room Tax Add-on

                        This tax,  paid directly by overnight    visitors,  is  actually  presented
                   in two forms.   The first assukes that the    present tax rate of three per
                   cent is increased by one percentage pointl and the second assumes an in-
                   .crease in the rate to five per cent.

                        Under the  first option the estimate of     additional  revenues in 1983
                   is $.8 million, rising to $1.0 million in 1987. The.revenue estimates
                   for the second option are twice that of the fixst,, of course, $1.6 million
                   and $2.0 million, respectively.

                        An increase    in the current room tax rate would   require  authorization
                   by the General Assembly. The current tax rate of three per        cent of the
                   value of the rental   is the maximum   authorized under  current  law.

                   Sales  Tax Adjust ent

                        The above revenue source alternatives would      be paid only    by the owners
                   of prqperty and/or overnight visitors staying in      the City. Because many
                   visitors either do not own.property or do not take lodging in the City..
                   other tax or revenue mechanisms designed to reach this group,ma be desirable.
                                                                                          y

                                                           12'

                        one such mechanism would be a sales tax adjustment, the proceeds
                   of which would be placed in a special trust fund established to  finance
                   the beach project. This could be applied either within Ocean City or.
                   to a special'taxing district which include nearby areas patronized by
                   visitors to Ocean City.

                        In FY 1980 sales tax revenues in Worcester County were $lo,o2l,620,
                   with approximately 50 per cent of this amount originating with sales in
                   Ocean City. Assuming a three per cent growth-in sales in real terms
                   and a 10 per cent rate of inflation, the sales tax revenues from Ocean
                   City will amount to approximately $6.6 million in 1983. A one per cent
                   increase in the sales tax would generate $1.3 million In 1983 and about
                   $1.5 million in 1987.

                   Admissions and Amusement Tax

                        A variant of the sales tax is the Admissions and Amusement Tax.
                   The tax rate presently applied in Worcester County is two per cent,
                   which generated revenues of $269,268 in FY 1986. Under existing legis-
                   lation Ocean City could increase the tax rate to 10 per cent (five per
                   cent on sales that are also subject to the State sales tax). Assuming
                   that one-half of the sales currently subject to the Admissions and
                   Amusement Tax are also subject to the Retail Sales Tax, increasing the
                   tax to its maximum allowable rate would generate approximately $900,000
                   in 1983 and $1,000,000 in 1987,.using the same; assumptions about-growth
                                                                               G
                   and inflation rates that were used to estimate increased revenues from
                   the sales tax option above.

                   'User Fees

                        A direct method of levying charges to generate additional   revenues
                   would be to establish a fee for people using the beach. The principal
                   diff@culties with the concept of a user fee are two: 1) it would be
                   difficult to administer,* and 2) it,would potentially generate a great
                   deal of resistance as a nuisance, even though only relatively low fees
                   would generate substantial revenues.

                        Only rough estimates of the amount of revenues that would  be gen-
                   erated are possible. It is assumed that any -user fee.would be  levied
                   only on those actually using the beach. And beach use can vary consid-
                   erably, depending on a wide range of factors ineluding weather and
                   general economic conditions.

                     One possible method might be to limit the number of  access  points-to
                   the beach and install coin operated turnstiles.

                                                       .13

                      The recreational.benefit computations prepared by the ArnV Corps
                 of Engineers' estimated the number of beach user-days at approximately
                 7,000,000 during the summer. However, if it assumed that on the average
                 one-half of the population in Ocean City visits the beach on a given day,
                 the number of user-days in 1980 would be closer to 10,000,000. Based.
                 oft these figures even a modest user charge of 25 cents would generate'
                 between $1.75 and $2.5 million, based on 1980 visitor population.  The
                 lower estimates have been used in the tables  in the next chapter.

                                                      14

                                        IV. .EEACH RESTORATION PROJECTS

                       Currently, two beach  restoration projects are  actively under consid-
                  oration. The first  is an  interim maintenance project proposed by Maryland
                  to stabilize'the beaches until the Army Corps of Engineers'project is
                  started in 1990. In   addition to the detailed  examination of the fiscal
                  impacts of these two  projec@s, the costs of a.,second interim maintenance
                  project are examined  because this alternative (sand fill only) appears
                  to be most similar to.the Plan 2 option now favored by the Army Corps
                  of Engineers'.

                  The Short Groin Interim Beach Maintenance Project

                       The interim p-roject recommended by the Ocean, Bays, and  Beaches
                  Task Force of the Coastal Resources Ldvisory Committee and the Maryland
                  Department of Natural Resources is the "short groin" plan. The plan
                  recommends that 4? groins be constructed along the approximately eight
                  miles of ocean front extending from near 11th Street to the Maryland-
                  Delaware line, with 925,520 cubic yaids of sand fill to replenish the
                  beach area. The project is proposed to be carried out over a five     year
                  period, incurring the following costs in each year:

                                                    Table V

                                            Annual Construction Costs

                                                Short Groin Project

                                                    (1982 dollars)

                                        1982                      $ 3,140,000

                                        1983                        3,425,000

                                                                    3,811,000

                                        1985                        4,og?,ooo

                                        1986                        2,998,100

                                        Total                      $17,500,000

                  Note:  Total has been rounded. See Appendix    for an explanation  of the
                         cost estimates.

                                                        15

                                                                              Table VI

                                                             Interim Beach Maintenance Project
                                                    Annualized Costs and Additional Revenue Estimates
                                                                             1983- 1987
                                                              Assumed Interest Rate: '.0919624
                                                                            (1982 dollars)
                               Fiscal  Year                                         Assumed   Local Share
                                                                     100%                       757,
                                 1983                                498,000                    374lOOO                     249,ooo
                                 1984                             ly022tOOO                     7679000                     5119060
                                 1985                             19586looo                  111901000                      793,oo6
                                 1986.                            @2917@,000                 lt630tOOO                   l,,o86,obo
                                 1987                             2,56o,ooo                  lt920,000                   ll280pOO.o

                                                   Estimates   of Additional      Revenues   by Source, 1983-1987
                                                                   .(1,000's of     1982 dollars)
           Fiscal Year          Projected           Restored          4% Room              5% Room'           1%. gales           Admissions         User Fees
                                 Surplus            Property             Tax                 Tax                  Tax                and.
                                                   Tax Rate                                                    Add-on             Amusement.
                                                                                                                                      Tax
             M3                   300               1P300                800               i,6oo               1000                   900               10800
             1984                 200               19400                goo               lv700               1000                                     11800
                                  100               i,6oo                900.              lt8OO               1l400                11000               10900
             1986                 400               10700               lpooo              11900               ls,400               11000               2$000
             19.8?                100               1,800               itooo              2gooo               1000                 1,000               2,000

           Note:    Costs  do  not include      estimated   annual maintenance cost        of  $598,500     per  year  (1982  dollars). F     or  comparison
                    with Tables VII and IX, the peak lev           Iel of annual costs     would be $2,776,ooo in 1983 if this            interim project
                    were financed with      a  single bond     issue.

                       The annualized costs of this   interim project assume  that State General
                  Obligation Bonds are issued in the required amount each year. These costs
                  were calculated for three assumed   rates of interest.   The ifiost recent
                  interest rate (as of early September, 1981) obtained    by the State was
                  .0919624. This rate was varied.by + 1.0per cent to      provide a range of
                  annualized costs.

                       Three cost sharing options were considered.     Option 1 assumes that
                  the full annualized costs of the project are paid    by the City. Options
                  2 and 3 assume that Ocean City pays 75 per cent and 50 per cent of the
                  costs,.respectively.. In addition to the construction and interest costs
                  contained in the -table, approximately $598,500 in maintenance will be
                  required for annual replenishment of the beaches.*

                       Table VI compares the.first five years of annualized costs under
                  the assumed interest rate of .0919624 with projected surplus revenues
                  and the additional revenue sources described above. The annualized costs
                  under the alternate assumptions about.the interest irate vary.from those
                  in the table by plus or minus six per cent. Detailed estimates can be
                  found in the Technical Appendix.

                       As can be seen from Table VI, if Ocean City were to pa@ 56 per cent
                  of the project cost, any one of the revenue options.will generate sufficient
                  revenues to cover the costs. The four per cent room tax and the increased
                  Admissions and Amusement Tax would Pr  IOduce a small short fall on current
                  account In 1987, but this temporary shortage could be paid with.earlier
                  surpluses. Within one or two years, as debt service costs decline and
                  revenues increase, theslight short fall would be eliminated.
                       With  respect to the higher cost options, the only combinati@n     that
                  would not  provide sufficient revenue to fund them is the two options pro-
                  viding the smallest :increase in revenues. It should be observed'that these
                  projections do not attempt to forecast Inflation rates.     Because inflation
                  appears to be a long term'condition, it is expected that    the actu al. dollar
                  values in these years will be higher than in Table VI.

                  Corps Plan No.  2

                       The  beach'maintenance and storm protection plan currently recommended
                  by the U. S. Army Corps of   Engineers' is its Plan 2. This plan calls for
                  a 16.0 foot dune extending from the end of the boardwalk at 27th Street
                  north to- the Maryland-Delaware line where it would tie in with the exist-
                  :in- Delaware dune line. From 27th Street south to North Division Street
                     16.0 foot high steel sheet pile bulkhead would 'be constructed. '.'A
                     0

                  minimum beach width of 165 feet is required to insure the integrity      of
                  the dune."**

                      See Appendix for discussion of cost estimates.

                      Atlantic Coast of Maryland and Assateaque Island, Virginia,     Main Report.
                  and  Environmental Impact Statement, U. S. Army Corps of Engineers'.-je-vised
                  23 February,.1981,@P- 35.

                                                        17

                                                                    Table VII
                                                  Maryland Construction of    Corps  Plan,No. 2
                                                          With No  Federal Involvement

                                             Annualized   Costs and Additional Revenue Estimates
                                                                   1983-1987.
                                                      Assumed   Interest Rate: .0919624
                                                                @(1982 dollars)
                            Fiscal Year                                  Assumed Local  Share
                                                            loc@g                   7 5T,
                             1983                       5tl369000                3v852POOO              2956890010
                             1984                       4t938,000                3v703,000              2p4,69t66o
                             1985                       4r739tOOO                3t555tOOO              2t370oOO6
                             1986                       4t541toOO               -31406tooo              2g270,000
                             1987                       49342tOOO                31257,000              20171,000
      00
                                             Estimates of Additional    Revenues @y Source, 1983-19-87
                                                            (1,000's of  1982 dollars)
           Fiscal Year      Projected        Restored         4% Room,        .5% Room         1% Sales         Admissions       User Fees,
                             Surplus         Property           Tax              Tax                Tax             and
                                             Tax Rate                                           Add-on          Amusement
                                                                                                                    Tax
            1983              300             1000              800             1,6oo            1000               goo             10800
            1984              200
                                              19400             900             ls700            19300              goo             it8oo
            198@              loo             1,6oo             900             10800             1,4oo           10000             1,goo
            1986              4oo             1,9700           19000            4900             19400            ltooo             29000
            198?              100             it8oo            19000            2gOOO.           1,500            11000             29000

          Note:   Costs do  not include  estimated annual   mainfenance    cost of $1,688tOOO  a   year (1982 dollars).

                       This project, although more expensive,  provides a larger recreational
                  beach area than do the interim projects, and -protection against a 100
                ,year storm. Because of the advanced start date for federal constructionj
                  and uncertainty about whether the federal government will even authorize
                  the project, Maryland has under discussion.the'possibility of construct-
                  ing the recommended plan without federal participation. The following
                  discussion of the Corps Plan 2 examines the-co6ts as if Maryland initiates
                  the project in 1982.

                       The total cost of this project in 1982 is estimated to be.$32,380,000.
                  To estimate the annualized costs, it was assumed that all financing will
                  be arranged In the first year, since a tentative construction schedule
                  is not available. This assumption loaded the highest annual cost into
                  the first year, rather than having it occur later, as with the Short
                  Groin Interim Project. The changed assumption affects the level of peak
                  posts as well. For comparative purposes, if the Short Groin Project .@ '
                  were financed entirely in the first year, Its peak cost would be $.2,7769000,
                  occuring in FY 1983.

                       Under these assumptions at least two additional revenue  sources would.
                  be required for Ocean City to pay even the.50 per cent share  of the project,
                  and if the low revenue sources are used, a third revenue sourcewould be
                  required. Of coursel cost sharing a     ngements requiring the City to
                  assume a larger share of the costs of this project would require additional
                  revenue.

                       For the readers convenience, in Table VIII  we have compared the
                  differences in capital costs* to Maryland of constructing the Corps Plan
                  2 now and of initiating the Short Groin-Project now and the local share
                  of the Corps Plan 2 in 1990. The dollar cost estimates assume that
                  inflation will continue at an average annual rate of 10,per   cent per year
                  over the period.

                  Beach Fill Interim Project

                       An alternative interim project included.in the Trident   report appears
                  to be similar to the Corps Plan 2 recommendation in that it   calls for
                  beach fill with no construction of groins. It does notl howeverg include
                  the construction of dunes or bulkheads, so it is relatively less expensive..

                     DNIR has preparedamore  complete estimate of the cost  differences of
                  these alternatives  which includes annual maintenance costs as well. With
                  maintenance costs included the cost difference for Maryland to.construct
                  the Corps Plan 2 with and  without federal aid is about  six per cent.   Not
                  included in this comparison is the.cost of risk of damage from a major
                  storm or the value of the increased recreational benefits that the alterna-
                  tives would provide,

                                                                   Table VIII

                                                 Comparison of Capital  Costs Under Alternative

                                                                Funding Options

                   Project                     City Assumed Share                   Total  Non-Federal      Total Capital Cost
                                              (1,000's of dollars)                  Share  of Capital            of Project
                                                                                           Costs                Alternatives
                                           100            75            50
           Short Groin Interim
              r
                                                                        8o750                     0
              Project                    1?,500          135                            17,506,001              17,560,600

           Maryland Construction
              of Corps Plan 2            32,380         24v28O         16,1@o          .32,380,000              32, @86 0-6 0

           Cot@s Plan 2 with No
              @Interim Measure             0               0            0               23,266,000              69,409,00'0.

           Sh6rt Groin Interim    Project
              with Corps Plan 2          17,500         l3v125          8,750           40,766,00.0             86,9090000

           Not'd. The cost differences for    Corps Plan   2in.1982 and in   1990 are based on an ass
                                                                                                       umed rate  of inflation
                   of 10 per cent per year over the period. For.a detailed discussion of        the cost estimates, see.the
                  Technical Appendix..

                        This method uses sand of the proper grain size from an outside  source
                   that is pumped or hauled to the beach area.  The possible sources are
                   offshore deposits or the inlet and bays around Ocean City. The plan
                   �equires the movement of 2.6 million cubic yars of sand, with an annual
                   replenishment estimated to be 150,000 cubic yards. The maintenance
                   costs for this alternative are higher than for the other interim project
                   because a larger volume of sand replenishment is required. Trident
                   noted that the estimate of the yearly maintenance cost is uncertain be-
                   cause of difficulty in estimating the annual -rate of erosion. The total
                   capital cost of the interim project is estimated to be $14,?00,00,0 (see
                   the Technical Appendix for details).

                        The first principal advantage of the beach fill alternative is its
                   lower initial cost. However, a comparison of Tables VI and iX shows that
                   when the annual maintenance costs associated with each project alternative
                   Are included, the average annual costs of the beach fill alternative
                   exceeds that of the Short Groin Project. In spite of this, the project
                   may be preferred if it is seriously contemplated that the Corps Plan 2
                   project will be constructed either.by Maryland or the federal government.
                   Further discussion of this question can be found in.the'Appendix.

                                                      -21

                                                                             Table   IX

                                                                  Beach Fill Interim Project
                                                   Annualized Costs and Additional Revenue Estimates
                                                                           1983 - 1987
                                                             Assumed    Interest Ratei .0919624
                                                                          (1982 dollars)
                              Fiscal Year                                          Assumed Local Share
                                                                    100%                        7 5rq
                                 1983                           .2,326,000                  1,744,000                   1,163,000
                                 1984                           2,236,ooo                   it677,000                   1,118,000
                                 1985                           201460000                   lt6lo,ooo                   1,073,000
                                 1986                           2,.056tooo                  lt5429000                   1,0289000
                                 198?                           lt966too.0                  lt4?5,000                      983,000
                                                 Estimates of Additional Revenues           by Source, 1983-1987
                                                                     (1tooo's of 1982 dollars)
            FiscAl  Year       Projected.          Restored          .4% Room            5,01. R o o m       1% Sales           Admissiohs          User Fees
                                 Surplus           Property              TaX                Tax,                  Tax'              and
                                                   Tax Rate
                                                                                                              Add-on            Amusement
                                                                                                                                    Tax
             1983                 300               1000                  800              1,6oo              1,300                 900                19800
             1984                 200               1,4oo                 900              ls700              1000                  goo                11800
             1985                 100               1,6oo                 900              1,800              lr400                ltooo               1, goo
             1986                 400               11700                1,000             11900              1,,400               1,000               2goOO
             1987                 100-              lt8oo.               itooo             2,000              1,500                10000               2lOOO

          Note.,   Costs   do not   include     estimated   annual mAintenance cost of $1,197,000 a             year  (1982 dollars).

                                                 V. STATE FISCAL     I14PACTS

                          The fiscal    impacts  of the two funding     options r6quixing State
                    participation have been      assessed as an annual per capita cost for .1983
                    and 1987. These two years were selected because 1983 is              .the year of
                    highest cost for    Corps Plan 2, and 1987 is the year of maximwa outlay
                    for the Interim Project. These are summarized in-Table X. The Maryland
                    population is assum,    'ed to continue to grow-at the same annual         rate-(O.?%,)
                    that it grew during.the decade 1970-1980,

                                                            Table X
                                              @State Fiscal Impacts     Per Capita
                                                     Dollars Per Capita
                                                                             State  Share
                                                                                               50%
                    Short Groin Interim Project
                       Interest rate:       .0819624
                                   1983                            $.027                      $.0.%
                                   1987                             .136                       .272
                       Interest   rate:     .09196@4
                                   1983                             .029                       .058
                                   1987                             .144                       .289
                       Interest   rate:     lol9624
                                   1983                             .031                        o62
                                   1987                             0153                       .3o6
                    C2EE Plan     No. 2
                       Interest   rate:     .0819624
                                   1983                             .279                       *558
                                   1987                             .231                        463
                       Interest rate:       .0919624
                                   1983                             .298                       .596
                                   1987                             *245                       .500

                             e
                       Inter st rate        lol9624
                                   1983                             .317
                                   1987                            ...258                      .516
                    Beach   Fill Interim    Project
                       Interest rate:       .0819624
                                   1983                             .1-26                      .253
                                   1987                             .105                       .210.
                       Interest rate:       .0919624
                                   1983                             .135                       :.2-70.
                                   1987                             .111                       .222
                       Interest rate:       lol9624
                                   1983                             .144                       .288
                                   1987                             .117

                                                                 23

                                    VI. '.'IMPACT ON :GCF,&N CITY'S PBOND RATING"

                        It has  been the  assumption for the preceeding analysis, that       the
                  State would   borrow the entire sum.with General Obligation      Bonds, and
                  that the City would assume the responsibility for at least some portion of
                  the indebtedness. The advantage to Ocean City of this arrangement is
                  that it would obtain the lower interest rate available to        the State.
                  Without this State participation, the probable interest.rate required
                  to finance the project would be substantially higher. Business Week
                  reported in its September 21, 1981 issue that tax free municipal bonds
                  have surged to a record 12.97 per cent, and that some analysts expect
                  the rate to go even higher. Because each percentage point of interest
                  adds substantially to the annualized cost of the project, without State
                  participation in the financing arrangements, the estimates of annualized
                  costs.used for this study would require substantial revision.

                        At the present time, Ocean City does not have a formal boiid rating
                  from either Moody's or Standard and Poor's. The City has been reluctant
                  to.finance capital projects during the past decade, and has incurred
                  little in the way of indebtedness. However, as noted earlier, there
                  now appears-to be an increased willingness on the part of the government
                  of Ocean City to incur debt for capit    al projects.

                        Under the assumption that State financing is used to fundthe          beach
                  maintenance project, Ocean City's "bond rating" would have no.effect
                  on the cost of the project. The probable rating effect of this indebt-
                  edness is of interest, however, because of the probable impact on the
                                                               I                While -it is not.
                  costs to the City of financing other cap"tal proje6ts.
                  possible to establish quantitatively how bond ratings are made, the         process
                  was outlined at a seminax in Florida in March of 1981.* Included in the
                  discussion was a description of the factors considered in the rating
                  process and a set of early warning guidelines used by Standard and Poor         's,
                  to identify situations in which bond ratings may'need to be revised,

                        The rating process reviews four     broad areas: economic     factors,
                  debt factors, administrative factors, and fiscal factors.
                        Economic diversity in the municipality's tax base and*in the         growth
                  of employment opportunities are important. These two elements are con-
                  sidered to be important because they determine the community's ability
                                                                            Ficul'. While the
                  to repay. Applying this factor to Ocean CJ+_1,1 is dif_
                  City has a narrow economic base revolving around tourism, the         property
                  owners represent a diverse and relatively affluent segment,of        the pop-
                  ulation,

                    A. copy of the paper presented at'the seminar was provided by Mr. Hyman
                  C. Grossman, Vice President-Municipal Ratings, Municipal Bond Department,
                  Standard and Poor's Corporation, New York, New.York, 1981.

                                                         .24

                        The debt factors  include type of securityg debt    burden, and debt
                  history or trend. The concern here is with th6 community's ability to
                  repay the debt, and the quality of planning for capital improvements.
                  The debt burden must be measured against income and       budget.resources,
                  as well as projected debt needs. In recent years Ocean City has been
                  able to meet its financial obligations without difficulty. It also has
                  recently reduced the property tax rate while its level of outstanding
                  debt has been reduced from $2.6 million in FY 1975 to $1.8 million in
                  1980.

                        The administrative.factors are concerned-with whether the g9vernment
                  is "geared up to the job" expected of it. The tax rate and levy limita-
                  tions and debt limitations are considered important. In view of the
                  recent reduction in the property tax rate and the absence of formal lim:L-
                  tations, Ocean City shouldbe strong in these areas. A second favorable
                  aspect is the continued expansion in the tax base, although this can,be
                  expected to slow in the near future.

                        The final area is the current account analysis of fiscal factors.
                  Although Ocean City incurred a substantial deficit in FY 1980, this should
                  not affect its "rating" significantly. The concern is not great when
                  the current account deficit is wiped out in the next year, as has been
                 ,the case in recent years.

                        In general, the early warning guidelines include     operating fund
                  deficits, general fund deficits, and level of short term and overall
                  deficit. These guidelines do include some quantitative dimensions, and
                  some would be triggered by the proposed project. For example, the.City's
                  overall net debt ratio would be more than 50 per cent higher than four
                  years previously. Under some of the high cost options described previous-
                  ly, another guideline would be triggered because short term-interest and
                  the current year debt service could exceed 20 per-cent of total riBvenues.
                  For most of theprojected scenarios, the cost of financing the beach
                  project alone would not cause this limit to be exceeded. This, however,
                  does not consider that other debt may be inclurred by Ocean City between
                  now and then and this guideline could be triggered by the combined indebt-
                  edness.

                        The remaining early warning guidelines provide     trigger points   that
                  relate to short term trends in revenues and debt that cannot be anticipated
                  this far in advance.

                        Although precise determination of the    probable bond rating impact
                  ca.-mot ce made without a complete audit of    Ocean City's  1 nancJal prac-
                  tices,  based on the information available to this study, it appears that
                  Ocean  City could participate in partial financing of the project without
                  an adverse rating impact. Ocean City has experienced vigorous growth
                  during the past decade,, and has maintained a budget surplus in most years.
                  Its current level of debt isconservative, and the economic trends in the
                  City indicate that continued expansion of the tax base will increase
                  its ability to repay any future debt that may be incurred.

                                                         25

                            this.-time, there is no reason to expect an   adverse bond rating
                   imTact on Ocean City so,long as the level of debt incurred is reasonable
                   and a sound financial plan for generating necessary revenues is provided
                   at the time the debt is incurred. Establishing what can be considered
                   a "reasonable level.of.debt" is subject to interpretation, however. Based
                   on Standard and Poor's-early warning guidelines, debt service (plus short
                   @term interest) should not exceed 20 per cent of total revenues--about
                   $2.5 million for Ocean City, currently- On the other hand, Maryland's.
                   cities, towns, villages, and special taxing districts have a more con-
                   servative ratio of 8.5 per cent during the period 1976-1980--about $1.1
                   million for Ocean City currently,. Using these two points to establish
                   a "range of reasonableness" suggest that debt service costs of between
                   $1.3 and $3.0 million can be considered reasonable for Ocean City in 1983.*

                      One additional factor may affect Ocean City's "bond rating." Because
                   of the storm hazard an add4tiona-I element of risk is Dr@@ent tha-IL-, may dis-
                                               L
                   courage some investors. TAFhile this ha-zard would be a factor in any bond
                  @issue, the present willingness to invest there indicates that investors
                   could be found. Additionally, since the completion of the project will
                   reduce the risk of storm damage, the importance of this factor would.be
                   reduced by the investment being made.

                                                         -26

                                               VII. CONCLUSIONS

                       Based on the trends  in Ocean City's revenues and expenditures,   over
                  the next several years Ocean City will continue to show a modest budget
                  surplus. While year to year deviations from the longer term trends in
                 ."revenues and expenditures can be expected to  result in variations from
                  the projected balances in  any given year, on  average a slight surplus
                                                                      0
                  is expected.

                       Since no significant  budget surplus can  be expected to occur, for
                  Ocean City to participate  in the financing of any of the proposed beach
                  restoration projects, it will be necessary for the City to impose addi-
                  tional tax mechanisms to generate the necessary revenues. Several alter-
                  native taxes were reviewed, and all would be capable of generating sig-
                  nificant amounts of revenues--generally $1 million or more annually.

                       In accordance with the principal of taxation that whenever possible
                  the beneficiary of a public expenditure should be taxed, the revenue
                  alternatives reviewed were confined to those that would be paid princi-
                  pally by the property owners and visitors to Ocean City.

                       The range of alternatives among projects, interest rate costs,.and
                  local share options provided nine alternative cost functions. Each was
                  converted to an annualized.cost basis (excluding the cost of annual main-
                  tenance) for comparative purposes. Taken together there are a total of
                  27 alternative scenarios for the annualized capital costs of the alter-
                  natives.

                       The peak levels of annualized costs for each project range    from a
                  low of $1,090,000 to a high of $5,460,000, depending on the cost of the
                  project, the assumed interest rate., and the assumed share paid -by Ocean
                  City. Given this range of costs and the revenues that additional taxes
                  can be expected to generate, one additional revenue source can finance
                  most or all of the low cost scenario, two would be needed to finance the
                  intermediate range scenarios, and at least three would be required to
                  finance the higher costscenarios.

                                                                      r

                                                 TECHNICAL APPENDIX

                          This appendix contains technical details-of    the methods used  to make
                    the projections of revenuest expenditures, and annualized costs for the
                    beach maintenance projects. While this appendixis intended.to clearly
                    explain how the projections and estimates were made, much of the detailed
                    data used for this analysis is contained-only on work sheets and computer
                    tapes.                                         -7

                    I. Fiscal Projections

                          In general,,both the costs and the revenues    of city governmentlare
                    related to the size of the city. As the population      and economic base
                    expands more gervices are required to be provided and additional.capital
                    investments must be made. Simultaneously, the increased wealth and income
                    associated with the economic growth expands the tax base, providing addi-
                    tional. revenues to pay the increased costs.

                          Most techniques used to  make fiscal projections rely primarily on
                    establishing' a relationship  between governmental costs and revenues and
                    some measure of city size.    The most popular techniques use the ratio
                    method, usually based on population.

                          Ocean City, however, is not typical of cities    in either Maryland or
                    the United States. -It is the second largest'city in Maryland in terms
                    of the number of housing units located there, but it has only a relatively
                    small resident population. As a consequence, Ocean City receives a smaller
                    than average proportion of its revenues as grants and revenue sharing,
                    forcing it to rely more heavily-on own source revenues.

                          A second way in which Ocean City differs substantially from.a typical.
                    city is.that it must be capable"of delivering services to more than 250,000
                    people, even though the permanent population is less than 5,000. This
                    causes a peak loading problem in which the capacity to provide essential
                    'services must exist even though it is not used for, much of the year.

                          In preparing the projections of revenues and expenditures considerable
                    effort was devoted to selecting the explanatory variables. It was neces-
                    sary to determine whether the preferable explanatory variable was peak
                    population, average annual, or average summer popula@-ion, or whether a.
                    simple trend could account for the growth. Both linear and non-linear
                    relationships were fitted. All expenditures and revenues were converted
                    to constant dollars using the implicit deflator for GNP.

                                                           28

                             Expenditures Analysis

                        The method used here to estimate expenditures is a   variant of the
                   per capita multiplier method, widely used in situations   where expendi-
                   tures bear a close relationship to service demand. A major difficulty
                   with the per capita mutiplier' method is that it assumes  that the future
                   relationship between expenditures and population will be similar to that
                   existing in the study year., Therefore, service over- or under-utiliza-
                   tion in a particular year may result in over or under estimates of the
                   expected future levels of expenditures. Also, the ratio maybe increas-
                   ing or decreasing over time, and a single year's observation cannot ac-
                   count for this trend either.

                        The basic assumption underlying this    approach is that, over the long
                   run, the average operating cost per visitor is the   best estimate  of future
                   operating costs occasioned by growth. The principle advantage of the
                   regression method is the averaging of the relationship over several years.
                   When the ratio method is applied to a single year's data, the level of
                   expenditures in that year may reflect either excess capacity or service
                   deficiancies occasioned by lack of adjustment to the current population/
                   visitor levels.

                        Regression  tests with the population variables established that the
                   average annual population provides the "best" explanatory variable for
                   the tourist related expenditures (T e     Because of a severe autocorrela-
                   tion problem, the correction method suggested by Durbin* was used to esti-
                   mate the relationship. The equation obtained is T-      103,99? + 51-882 P
                                                                       e
                  -.with an R2 of .43 (P   population).

                        The second stage of the estimating method consisted of computing the
                   relationship between other expenditures and Te. The assumption is that
                   these expenditures.are related to the Te component in much the same way
                   as overhead is related to direct costs. The two stage analysis uses the'
                   computed values of Te as the independent, explanatory variable, thereby
                   removing the random component. This regression yielded a ratio of .80
                   for other expenditures, with a small negative intercept which was ignored.
                   in subsequent calculations. The R2 was .55.*

                              Revenue Analysis

                        Revenues are divided into four categories according to    the expected
                   explanatory variables. The largest revenue source is property taxes,
                   which are dependent on the @growth in the assessable basis and indirectly
                   on the growth in tourism. The second category is Charges for Current,
                                                               Q
                   Services, expected to be dependent on growt@ in the average annual pop-
                   ulation. The third category is room tax receipts, also indirectly de-

                     For a discussion, see Econometric Methods, J. Johnston,     McGraw-Hill
                   Book Company,  1960.

                                                         29

                   pendent on the growth in tourism. The last category is other revenues
                  'which are obtained from miscellaneous sources. Each of these is discussed
                   in turn.

                        Almost half of the revenues to Ocean City are obtained from property
                   taxes, The property tax receipts, of course, depend upon the property
                   values in Ocean City, and there are two bases for an increase in property
                   values in real terms. The first is an increase in the value of property
                   relative to other goods and services. This source ofincrease, because
                   it is dependent on scarcity, is expected to be of greater importance in
                   the future. The second source of increase is,-physical expansion, or
                   construction. This source of growth is expected to be more important
                   in the near term than in the future. Currently, Ocean City is experi-
                   encing a real estate boom, which is contrary to existing conditions in
                   most of the rest of the country. However, the supply of buildable land
                   is dwindling, and should be scarce within a few years.

                        The best regression fit relating growth  in the assessable basis to
                   increases in the average annual population was  obtained with a non-linear
                   equation. The equation explained 81 per cent of the historical growth
                   in the assessable basis.

                        The regression relationship between Charges for Current Services
                   and average annual population explained only about 50 per cent of the
                   variation. In 1980 the average revenue per average annual population
                   was $22-52. However, the additional revenue associated with an increase
                   in the average annual population was much lower, amounting to slightly
                   less than $?.00. This rather large difference between the average and.
                   marginal revenue is largely due@to the peak load problem of Ocean City,
                   due to the large seasonal variation in the number of people staying there,

                        An overriding characteristic of the revenues received for current
                   services is that they were monotonically increasing for the entire decade.
                   This suggested that either an anto-regressive equation or a trend would
                   produce a better regression fit. The equation used for the projections
                   is an auto-regressive relationship that produces an average growth rate
                   of approximately one per cent per year. The equation explained 75 Per
                   cent of the historical growth of these revenues.

                        An increasingly important source of revenue to Ocean City is the,
                   room tax. This tax is, of course, also a function of the amount of
                   tourism, but the best regression fit obtained was one which related the
                   room tax receiDts, to tourism indirectly through Increases in the assess-
                   :ablebasis. This relationship exiDlaineed 75 per,cen-L. of the variation
                   in receipts, producing an average increase of $4.72 in receipts per year
                   for each $1,000 increase in the value of the assessable base.

                        The final category ofrevenues is "other revenues"l which includes
                   a diverse variety of sources such as local income taxes, State grants

                                                        30

                   and transfers, federal revenue sharing, and miscellaneous     receipts.
                   Individually each of these sources is quite small rela   tive to total
                   receipts in Ocean City, and collectively these receipts amount to approx-
                   imately 20 per cent of total revenues. While some of these revenues are
                   related@;to tourism, most are not, and to a large extent the rate of growth
                   of these revenues is not dependent on the rate of growth of.Ocean City.
                   Therefore, these revenues-have been simply trended over the-period. The
                   average yearly increase in these revenues has been approximately $184,000
                   per year, and the projections as6ume that this amount of annual.increase
                   will co ntinue over the next .few years.

                        The most  significant factor affecting growth in both revenues and
                   expenditures is the growth rate   of average annual population in Ocean
                   City, defined  as described in the main body of the text. The best fit
                   with historical data for average anhual population was a non-linear re-
                   lationship in  which the independent variable was the average annual POP-
                   ulation.of the previous year.

                        This equation  produced a  slowly declining growth rate. The average
                   compound rate forecast for the entire projection period, 1982 through
                   1987t is 3.2 per cent. However, the expected yearly growth in average
                   population is expected to decline from slightly more than four per cent
                   for'1983 to approximately 2.4 per cent in 1987. The.projected average
                   annual population for Ocean City for the period 1983-1987 are contained
                   in Table A.I.

                        The equations  described earlier were applied to these projected levels
                 .,of annual average population, as appropriate, to obtain the projected
                   levels of.expenditures and revenues in each of the forecast years.       The

                                                     Table A.1

                                            Average Annual Population

                                      Projections for Ocean City,,Maryland

                                                    1983-1987

                              Year                                      Population

                              1983                                         78,400

                              1984                                         81,100

                              1985                                         83000

                              1986                                         85,900

                              1987                                         88,000

                   'first stage expenditures equation for   tourist related revenues  was applied
                   directly to  the population forecast, and then adjusted,.using the second
                   stage equation,  to reflect the levels of other expenditures, producing
                   the projections  of total expenditures   in a relatively straight forward
                   manner.

                        The forecasts of revenues were somewhat more@complex because of      the
                   indirect relationship between revenues    and average annual population.
                   Both.the property tax revenues and the    room tax revenues are related to
                   average.annua.1 population indirectly via the projected levels of the
                   assessable basis. As noted earlier, the assessable basis.is a non-linear
                   function of the average annual population. The procedure used was -to
                   estimate the assessable basis as a function of population, then a     djust
                   for inflation. In teal terms, the projected growth of the assessable
                   basis is expected to be 3.7 per cent in the 1982-83 period, gradually
                   declining to approximately 2.1 per cent in the 1986-87 period. However,
                   the forecast level of,assessable basis for 1983 includes a substantial
                   adjustment for inflation which accounts for most of the increase in assess-
                   able basis between YY 80 and FY 83.

                        The remaining projections for    service related revenues and other
                   revenues were simply extrapolations of the trends identified in the
                   equations cited earlier. This also was a relatively straight forward
                   application of the equations.

                   II. Estimates of Annualized Costs

                        To evaluate the,fiscal impacts of Ocean    City sharing   in the costs
                   of the beach maintenance projects it was necessary to estimate annualized
                   costs of the alternative projects. All estimates of the annualized costs
                   are based on two common assumptions. It is assumed that Maryland General
                   Obligation Bonds are issued to finance the project, and that the bond
                   issue. is to be retired completely within 15 years, with equal portions
                   being retired annually. Any significant deviation from these assumptions
                   would, of course, substantially affect the annualized costs.

                        The annualized capital costs of all three projects*are contained      in
                   Tables A.2 through A.10. The cost for each of the. three project alter-
                   natives has been calculated for three assumptions about interest rates
                   and three assumptions about the proportion oftotal-costs -Daid by Ocean
                   a iLy.

                        In early September, 1981.the State of Maryland issue of General
                   Revenue Bonds obtained an interest rate of .0919624. Given the present
                   uncertainty of financial markets, this rate can only be viewed as       an
                   approximation of the actual interest costs, so this base rate was       varied
                   by � one per cent to calculate a range of annualized project costs, to
                   reflect this uncertainty.

                                                          @32

                                                         Table A.2

                                           interim Beach Maintenance Project

                                                    Annualized Costs

                                            Assumed Interest Rate .0819624

                                                         Assumed Local Share

                          Year             10 (Y/O                  75%                  50%

                          1983             467,000                 350,000              233sOOO

                          1984.            959,000                 71  9,000            479,ooo

                          1985           1,489,000               1,117 000              745,000

                          1986           2,041,000               1,531,000            1,021,000
                          1987           2,408,000               1,806,000            1,204,000

                          1988           2,312,000               1,?34,ooo            1,156,ooo,

                          1989           2P217,000               1,663,000            1.108,000

                          1990           2,122,000               1,591,000            1,061,000

                          1991           2,026,ooo               1,520,000            1,013,000

                          1992           1,931,000               1,448,000              965,000

                          1993           1,835,000               1,376,ooo.             9181000

                          1994           1,74o,ooo               1,305,000              870,000

                          1995           1,644,ooo               1,233,000              822,000
                          1996           1,549,000               .1,162,000             7749000

                          1997           1,453,000               1,090,000              727,000

                          -1998          1,148,000                 861,000              574,ooo

                          1999             842,000                 631,000              421,000
                          2000.            528,000                 .396,ooo             264,,ooo
                          2001             .216,ooo                162,000              108,000

                          Note: Above costs     do not include estimated annual      maintenance
                                  costs of $598,500 per year (1982 dollars).

                                                        Table A .3

                                           Interim Beach Maintenance    Project

                                                    Annualized   Costs

                                            Assumed Interest   Rate .0919624

                                                        Assumed Local Share

                                           lov
                          Year                 0                    7516                5C%

                          1983             498,000                 3?49000              249,000

                          1984           1,022,000                 ?67,000              511,0W

                          1985           1,586,ooo               1,190,000              793,000

                          1986           2,173,000               1,630,000           1,oM,ooo

                          1987           2,56o,ooo               1,920,000           1,280,000
                          1988           2,452,000               1,839,000           1,226,ooo

                          1989           2,345,000               1,759,000           1,173,000

                          1990           2,238,000               1,679,000           1,119,000

                                         2,131,000               1,598,000           1,o66,ooo

                          -1992          .2,o24,ooo              1,518,000           1,012,obo

                          .1993          1,917,000               1,438,000              958,000

                          1994.,         1,810,000               1,357,000              905,000

                          1995           1,703,000               1,277,000              851,000

                          .1996          1,596,000               1,197,000              798,000

                          1991?          11488,000               1,116,ooo              744,000

                          1998           1,1?2,000                 8?9,000              586,ooo

                          1999             856,000                 642,000              428,ooo

                          2000             535,000                 401,000              267,000

                          2001             218,000                 164,ooo              109,000

                          Note. Above costs     do not include estimated annual maintenance
                                  costs of $598,500 per year (1982 dollars).

                                                             34

                                                    Table A.4

                                        Interim Beach Maintenance Project

                                                 Annualized Costs

                                        Assumed Interest Rate  .1019624

                                                    Assumed Local Share

                        Year            ioc%                  75%                5 Tlo

                        1983            529,000               397,000           265,ooo

                        1984          1,086,000               814,000           543,000

                        1985          1,684,000             1,263,ooo           842,000

                        1986-         2,304,000             1,728,ooo         1,152,000

                        1987          2,711,000                               1,356,ooo*

                        1988          2,592,000             19944#000         1,296,000

                        1989          2,474,000             1,8559000         .1,237,000

                        1990          2,355.000           .1,766,ooo          1,177,000

                        19.91         2 ,236,ooo            1,677,.000        1,118*000

                        1992          2,117,000             1,588,000         1,059,000

                        1993          11999,000             1,499,000           .999,000

                        1994          1,880,000             1,410,000           940,000

                        1995          1,761,obo             1,321,000           881,000

                        1996          1,642,000             1,232,000           821,000

                        1997          1,524,000             1,143,000           762,000.1

                        1998          1,196,ooo               897,000,          598,000

                                        870,000               652,000           .435,000

                        2000            542,000               4M,ooo            271,000

                        2001            220,000                16@,ooo          110,000

                        Note: Above 'costs do not include   estimated annual maintenance
                               'costs of $598,500 per year  (1982 dollars).

                                                         35

                                                    Table A-5

                                    Maryland Construction of   Corps Plan  No.  2

                                           with no Federal Involvement

                                                 Annualized  Costs

                                         Assumed Interest Rate .0819624

                                                     Assumed Local Share

                        Year             i00%                   7L
                                                                  %                 50%

                        1983           4,813,000             3,6og,o,oo         2,4o6,ooo

                        1984           4,636,000                                2,318,000

                        1985           4t459vOOO             3,344,000          2,22qjOOO

                        1986           4,282,000             3,211,000          2,141,ooo

                        198 7          49105-000
                                             9               3,079,000          2,052lOOO

                        1988,          3P92.8tOOO            2-1946, ooo        1,964,ooo

                        1989           3,751,000             2,813,000          1,876,ooo

                        1990           3,574,000             2,681,000          1,787,000

                        1991           3,397,000             2,.548,ooo         1,699,ooo

                        1992           3,220,000             2,415,000          .1,61o,ooo

                        1993           3,043,000             2g282,000          l,5Z2vOOO

                        .1994          2,866,ooo             2pl5O,OOO
                        1995           2,689,000             2,017,000          1,345,ooo

                                                             1,@@9000           112-
                        1996           2,513,000                                     6,000

                                                             1 -2,000
                        1997          i.'2,336,000             7)

                        Note: Above   costs do not  include'estimated annual maintenance
                                costs of $1,688,000 per year (1982 dollars

                                                         36

                                                   Ta ble A. 6

                                   Maryland Construction   of Corps  Plan No. 2

                                          with no Fedexal Involvement

                                                Annualized.Costs

                                       Assumed Interest Rate .0919624

                                                   Assumed Local Share
                       Year              -lop%,-              75%                -5-L%
                       1983           5,136,ooo            3,852,000          2,568,ooo
                       1984           4,938,ooo            3003,000           2,469,ooo
                       1985           49?39tOoo            .3,555,000         29376POOO
                       1986           4,5419000            3,406,1000         2 9 270 v'000
                       1987           4o342,000            3t257,000          2rl?l'OOO
                       1988           4,144,000            3,1089000'         29072,000
                       1989           3,945000             2,959,000          l,W3rOOO
                       1990           3,747,ooo            2,810,000          1,873,000
                       1991           '3,548POOO           2,661,000          1,774,000
                       1992           3050vOOO             2t5l2jOOO          10675,000
                       1993           3,151sOOO            2,363,000          1,576,ooo
                       1994           2,953,000            2,215,000          1,476,ooo
                       1995           2,754POOO            2,o66,ooo          1,3??J000
                       1996           2,556,ooo                               10278,000
                       1997           2,357,000                               1,179,000

                       Note: Above  costs do. not include estimated annual.,maintenance
                              costs of $1,688,000 per year (1982 dollars),

                                                      37

                                                    Ta ble A-7.

                                    Mary]-and Construction of Corps Plan  No. 2'

                                           with no F ederal-Involvement

                                                Annualized Costs

                                       -Assumed Interest Rate  .101962,4

                                                   Assumed Local Share

                        Year             100%,                 7L%                50%

                        1983           5,4609000            4,0951,000-        2#730*000
                        1984           512409000            3s93OtOOO          Zs6209000
                        1985           5,020,000            39765,000          2.9510@,000
                        1986           4,8009000            3,6oo,000          2  9400,000

                        1987           495809000            3l4359000          2p290,000.

                        1988           4,36o,ooo            39270,000          291801000

                        1989  -        @4,1400000           3,105*000          29070,000

                        1990           .3,919,000           219401,000         1,,96o,ooo

                        1991           3,699,ooo            2,775,000          10850s,000

                        1992           3,4799000            2,6og,ooo          1,74o.ooo
                        1993           38259,000            294449000          1.,63o.ooo

                        1994           3,039,000            2,279,000          19520,000
                        1995           2 9 81'9, 000        2,1149000          1,4099000
                        1996           2,599,000            1,949,ooo          1,299,000

                        1997           2,379,000            lv7849000          1.189,000

                        Note:   Above costs do not include  estimated annual majntenance
                                costs of $1j688,000 per year (1982 dollars).

                                                         38

                                                     Table A.8

                                           Beach Fill Interim Project

                                                 Annualized Costs

                                         Assumed Interest Rate: .0819624

                                                       Assumed Local Share

                                               10 0%           75%,            50%

                      1983                    2,179,000     1,633,000        10090,000

                      1984                    2,099,000     1,574,000        19050,000

                      1985                    21019,000     1,514,000        1,010,000

                      1986                    1,9399000     19454,000          969,000

                      1987                    11859,000     1,394,000          929,000

                      1988                    1,779,000     lt3349000          889,000

                      1989                    1#6990000     112740000          849,000

                      1990                    1,619,000     1,214,000          809,000

                      1991                    1,538,000     1,154,000          769,ooo

                      1992                    1,458,000     1,094,000          729,000

                      1993                    1,378,000     1,034,000          689,ooo

                      1994                    1,298,000        974,000         649,000

                      1995                    1#218,000        913,000         609,000

                      1996                    19138,000        853,000         569,000

                      l9w                     1,058,000        7513,030        529,300

                   Note:   The above costs do not include es timated annual maintenance costs
                           of $1,197,000 (1982 dollars).

                                                         39

                                                        -Table A. 9

                                              Beach Fill Interim Project

                                                     Annualized Costs

                                            Assumed  Interest Rate: .0919624

                                                           Assumed Local Share

                                                 - low"            - 7L%- -           50%

                       1983                      2,326,000        1,744,000        1,163,000

                       1984                      2g236,000        1,6779000        191189000

                       1985                      2,146,ooo        1,61o,ooo        1,073,000

                       1986                      2,056,ooo        1,542,000        1,028lOOO

                       1987                      i,966,ooo        1,475,000          983,000

                       1988                      1,87 6,000       1,407,000          938,000

                       1989                      1,78?,000        1,340,000          893,000

                       1990                      1,69?,ooo        1,273,000          M,000

                       1991                      1,607,000        1,205,000          803,000

                       1992                      1,51?,000        1,138,000          ?58,000

                       1993                      1,427,000        1,070,000          714,000

                       1994                      1,337,000        .1,003,000         669,ooo

                       1995                      lt24-7,000          935,000         624,000

                       199"                      1      010               Onn
                                                                                     Z70,000

                       1997                      i,o67,000           801,000         534,000

                    Note;   The above costs do not include estimated annual maintenance costs
                            of $1,197,000 (1982 dollars).

                                                            40

                                                    Table A. 10

                                          Beach Fill Interim Project

                                                Annualized Costs

                                        Assumed Interest Rate: .1019624

                                                      Assumed Local Share

                                              100%            75%'            5 Q%

                     1983                    2,473,000     1,854,ooo        1,236,ooo

                     1984                    2,373,000     1,780,000        1,186,ooo

                     1985                    2,273,000     1,705,000        1,137,000

                     1986                    2,174,000     1,630,000        1,08?,000

                     1987                    2,074,000     1,555,000        1,037,000

                     19B8                    1,W4,ooo      1,481,000          987sOOO

                     1989                    1,875.000     1,4o69000          937,000

                     1990                    1,775,000     1,331,000          887,000

                     1991                    1,675,000     1,256,ooo          838,ooo

                     1992                    1,5?6,ooo     1,182,000          788,000

                     1993                    1,476,000     1,10?,000          738,000

                     1994                    1,376,ooo     1,032,000          688,000

                     1995                    1,277,000        957,000         638,  000

                     1990'                   1,177,000        883,000         588,000

                     1997                    1,077,000        8081000         539,000

                   Note:  The above costs do not include estimated annual maintenance costs
                          of $1,197,000 (1982 dollars).

                                                        41

                        For each project and assumed interest rate, three assumptions about
                   the share paid by Ocean City have been made. The f irst column contains
                   the full annualized cost of each alternative, assuming that the City
                   finances the entire project. Colivrms two and three assume that Ocean
                   City finances 75 and 50 per cent of the costs, respectively.

                        The annualized costs for the Short Groin Interim Projects differ
                   from those of the other two projects in one important aspect. Planning
                   for this project has reached the stage where a preliminary construction
                   time table has been prepared. Accordingly, the annualized costs of this
                   project reflect that time table, and it has been assumed that financing
                   of the project is conducted over a five year period.

                        For the remaining two project alternatives no such schedule is avail-
                   able, and for expository purposes it was assumed that all financing is
                   arranged in the first year. This assumption slightly distorts the com-
                   parisons among the three alternatives in that, for the latter two projects,
                   the highest annual costs occurs earlier and are slightly higher than. would
                   be the case if financing were phased with a construction time table. While
                   these differences are relatively minor, the reader should be aware of
                   them when making comparisons of the costs of the alternatives.

                        To aid the reader in making these comparisons, the peak cost of the
                   Short Groin Interim Project was computed using the same assumptions as
                   were used for the other two projects. At the    .0910,624 rate of interest
                   the peak cost for the 100 per cent option is $2,776,ooo. Other options
                   are affected proportionately. The effect of the phasing of financing over
                   the five year construction period is to reduce the peak level of debt
                   service costs by about eight per cent.

                   III. COMPARISON OF ADVATUAGES OF PROJECT ALTIERII@DATIVES

                        As an additional aid to the reader, Table A.11 was prepared. The
                   principal advantages of the four project alternatives have been briefly
                   summarized. The major contrast evident in this table is between- the two
                   inte-1-im projects. If construction of the Corps Plan 2 is expected, whether
                   by Maryland or with federal participation, the beach fill alternative would
                                                                1 cost including ma tenance
                   be the preferred choice. Although its annuap                     in
                   is slightly higher than the groin project, it would reduce Maryland's cost
                   of constructing Corps Plan 2 by a minimum, of 45 per cent, however it is

                                                         42

                                                                           Table A.11

                                                                  Comparison of Advantages of

                                                           Alternative Beach Maintenance Projects

                     Project           Recluce Long       Expected Level           Increased            Maximum              Expected
                                       Shore Drift           of Storm            Recreational          Amount to            Reduction
                                                            Protection              Beach 3)         Count Towards          in Cost of
                                                                                                      local Match          Corps Plan 2

                 Short Groin                                                                                                       2)
                   Interim Project           Yes          14 year s orm            Smallest          Sand fill
                                                          in 198,                  increase          portio
                                                                                                     Only

                 Corps Plan 2                 No          100 year                 Maximum
                   without federal                        storm                    increase              N/A                  N/A
                   participation                          in 1984

                 Beach Fill Only
                   Interim Project            No          20 year  - orm         Medium to           All pro  ects            45% 2)
                                                          in 19M. 4'@            maximiun            costs
                                                                                 increase

                 Corps Project Only
                   in 1990                    No          100 year                 Maximum
                                                          storm                    increase             N/A                   N/A
                                                          in 1990

                 1)  This assumes that Hie Corps of Engineer's project is authorized by Congress prior to the start of construction.

                 2)  This is the per cont of total construction costs derived by deducting the cost of beach fill provided by the
                     interim project from the total sand needs estimate for the Corps of Engineer's Plan 2.

                 3)  The expected beach width upon completion of some projects was not specified. These judgements are based on
                     the estimates of tx,,ach fill required by each project.
                 4) Sourcet Final Repprt Interim Beach Maintenance at Ocean City, Trident Engineering Associates, August 30, 1979.
                     These estimates incorporate the 10 year storm protection provided by the existing beach.

                   IV. DERIVATION OF PROJECT COST ESTEMA.TES

                        The cost estimates used in this report were made as consistent as
                   possible to provide a common basis for comparison. Accordingly all of
                   the estimates were adjusted to expected 1982 price levels to conform
                   more closely to those prepared by the Shore Erosion Control Program,
                   Capital Programs Administration, Department of Natural Resources. The
                   estimates, provided by the Tidewater Administration are detailed in
                   Table A.12. The estimates are based on the assumption of a 10 per cent
                   rate of inflation and the following modifications to the Trident Study
                   estimates:

                   1. -Estimated engineering design costs have been included.

                   2.  Estimates are for a total of 47 new stone groins, with beach fill.
                       The Trident figures for these items have been adjusted to reflect
                       current and estimated future dollar values. .

                   3.  Construction of groins by the town of Ocean City in FY 79, FY 80
                       and proposed for FY 81 requires realignment of the groin field as
                       originally proposed by the Trident Study in order to achieve optimum
                       groin spacing.

                   4.  Stone extensions to several existing timber groins, as originally
                       proposed, is no longer feasible due to the realigrLment of the groin
                       field and deterioration of a number of existin- timber structures.

                   5.  Potential cost savings derived by using existing stone groins as
                       foundations for new, extended, groins is expected to be off-set by
                       the cost of modifications to the basic structures to compensate for
                       design differences.

                        The adjustment to the costs of the Corps Plan 2 project consisted
                   of a simple expansion of the 1980 estimate to allow for two years of
                   inflation at 10 per cent per year. The calculation was 26,?6o,ooo x
                   (1 1)2 = 32,380,000 to obtain the estimated cost for 1982, and 26,?0'0,000
                   x @1.1)10 = 69,4og,ooo to obtain the estimated cost for 1990.

                                                         the 1982 cost of the Beach Fill
                        The adjustment used to estimate
                   Interim 'Project was somewhat more involved since additional information
                   was available. In its final report Trident angineering based its project
                   cost estimates on dredging cost data estirnating the ccst of sand fill
                   a.       a,7        r-@@r c@_,bic y@_rd for @r-e and s@a-,f
                       Y4    .-d ? U -                -              ... --
                   respectively. Subsequently, Trident revised its estimates of the cost
                   of dredging small quantities of sand up-,rard to $6.00 per cubic yard.*

                   * Additional Data for Trident's Interim Beach Maintenance at Ocean City
                   Report, Trident Engineering Associates, Inc., October, 1979, P. 7.

                                                        441

                                                       Table A. 12

                                            Estimates - Five Year ProGram
                                             Short Groin Interim Project

                    First Year

                          Design 10 groins        @ $ 10,000 each        $ 100,000
                          Construct 10 groins     @ 171,900 each           1,719,000
                          Sand fill 10 groins     @ 132,100 each           .1,321,000

                                                                                            $ 3,14o,ooo

                    Second Year

                          Design 10 groins        @ $ 11,000 each             110,000
                          Construct 10 groins     @ 187,500 each           1,875,000
                          Sand fill 10 groins     @ 144,000 each           1,440,000
                    Third Year'                                                             $ 3,425,000

                          Design 10 groins        @ $ 12,000 each             120,000
                          Construct 10 groins     @ 203,100 each           2,031,000
                          Sand fill 10 groins     @ 166,ooo each           1,66o,ooo

                                                                                            $ 3,811,000

                    Fourth Year

                          Design 10 groins        @ $ 13,000 each             130,000
                          Construct 10 groins     @ 218,700 each           21187,000
                          Sand fill 10 groins     @ 178,000 each           1,?80,000

                                                                                            $ 4,o97,ooo

                    Fifth Year

                          Design 7 groins         @ $ 14,000 each              98,000
                          Construct 7 groins      @ 234,300 each           1,64-0,100
                          Sand fill 7 groins      @ 180,000 each           1,26o,ooo

                                                                                            $ 2,993,100

                                                                   Grand Total              $17,471,100
                                                                   Say $17,500,000

                                                            45

                       The estimates used for this study also inf lated the 1979 cost of
                  dredging large quantities of sand by 50 per cent, raising the cost to
                  $4.28 per cubic yard. This estimate was then ad usted for three years
                  of 10 per cent inflation to obtain $4.28 x (1.1, = $5.70 as the estimated
                  dredging cost per cubic yard in 1982. The tota-1 cost of the project
                  was arrived at by multiplying the per unit figure by the estimated 2.6
                  million cubic yards of sand required by the project to obtain an estimated
                  project cost of $14.7 million in 1982.

                       The revisions to the cost of beach maintenance after completion
                  of the project were derived by applying the inflation factor to the
                  appropriate estimate by Trident Engineering or the Army Cor-ps of Eiigineers.
                  The, calculations for the beach fill were based on the Trident estimate
                  of $6.00 per cubic yard for sand, adjusted for three years of inflation
                  ($6.00 x [1.1]3 = $7.86). The adusted estirate for the Corps Plan 2
                  was adjusted for two years of inflation ($1,395#000 x [1.114   $ls688tOOO)-

                                                      46

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