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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 I I I I I I I I I I I I I I I I I I 1100111111111[11110 3 6668 14109 47811