Economic Impact Studies: Legitimate Or 'Voodoo'?

Jul 14, 2011

Economist John Connaughton presents a quarterly economic forecast. Jobs, jobs, jobs! Politicians and booster groups love to tout their role in creating jobs. Often their quest is helped along by economic impact studies that get boiled down to a sound byte. But the public generally knows little about how those numbers are determined and used to rally support for publicly-financed projects. Many of those numbers in the Charlotte are can be traced back to UNC Charlotte economist John Connaughton. In his 33 years at the university, Connaughton has become THE guy local businesses, booster groups and government officials look to for economic insight. His studies predicted big benefits for Charlotte from the NBA Hornets, the Panthers, the new Bobcats arena, Uptown museums, the Whitewater Center, the NASCAR Hall of Fame and industries including film, motorsports and cable television. Along the way, he's attracted some critics. "I think that what Dr. Connaughton did was a puff piece to help market a project," says Belmont City Councilman Bill Toole, referring to a recent study from Connaughton that predicts the proposed Garden Parkway toll road will be a huge boost to Gaston County - even though the road's Final Environmental Impact Statement says it will actually drain jobs from the county. Connaughton was paid $35,000 for his work, all funded by the Gaston Regional Chamber of Commerce. The study is part of a PR and ad campaign to drum up support for the controversial toll road. Toole opposes the Garden Parkway, but he's also troubled at how much weight these economic impact studies carry. He says these reports are the single most important thing that is done in the public policy arena, "Because no elected official wants to stand up and say 'I'm standing in the way of new jobs.'" These reports usually run 50 to 100 pages and are packed with statistics, graphs and economic models. Toole says most elected officials flip to the executive summary, read the bolded sentence about the hundreds of jobs and millions of dollars the project will bring and vote 'Yes.' Mecklenburg County Commissioner Bill James has seen that happen time and again. He's against spending public money on pretty much any economic development project, but he finds these studies particularly suspect. "I've just seen too many of them to believe that it's a coincidence that every single study that's produced, virtually, talks about what a great idea it is," says James. "It's always a great idea." Following The Study Money Trail Finding out exactly how much money is spent to produce these economic impact studies proved difficult. The economists who do them don't like to disclose the details of their client negotiations. Some clients, in turn, don't want to violate that trust either and are reluctant to give details. The numbers often are not available through open records requests either because in many cases - particularly at UNC Charlotte - the private contract work a faculty member does is not part of the government record. The one thing booster groups always emphasized to WFAE was that no public money was used to fund the studies. That's another reason getting specifics is tough. Generally, the funding comes from a local chamber, business alliance or private businessman. We were routinely bounced from one person to the next - "Call the Chamber. Call the City. Call X or Y business, they helped pay for it." And when we made those calls, the end result would typically be someone saying "That was before my time." Or "I don't recall the exact number." In most cases efforts to get a copy of an impact study for a project dating back a few years also came up empty. To the people who commission these studies, their value is clearly to rally support for public funds. After a project is built, the studies seem to disappear. Rarely has any economist in the Charlotte area made an effort to revive an economic impact study and revisit its accuracy after a project has been built. John Connaughton did say he did it once with his NBA Hornets projections and found he was right on track. John Connaughton has heard this all before. WFAE was able to document at least 22 economic impact studies Connaughton has done. He says it's no coincidence they all predicted positive outcomes; the negative ones never saw the light of day. "Whether it becomes public or not, is not in my hands," explains Connaughton. "It's in the hands of the individual company who's paid for the product in the report. And a lot of times they're not happy with the economic impact and they simply don't release it." Connaughton says that's happened to him at least 10 times, but he won't name the projects. On break from teaching this summer, he's working on another economic impact study and asked that we meet at a coffee shop instead of his office. He says he doesn't use university resources for these projects - it's all private work, separate from his $107,000 university salary. Connaughton won't say how much he charges for the studies, but says he's no hired gun. His clients merely provide a basic set of information about the project. Outside of that, "they have essentially no ability to influence what the numbers are," says Connaughton. These impact studies have become a cottage industry over the last 20 years. Some economists tell WFAE they get between $5,000 and $50,000, depending on the project. Private accounting and consulting firms charge charge more. In North Carolina, a handful of university professors, including Connaughton are the 'go-to' guys. They all use a standard formula and software program, but they have a lot of flexibility in crunching the numbers. Here's how it works: A booster group - say for the NASCAR Hall of Fame - figures it will attract at least half a million people and hire a couple hundred workers in its first year. Connaughton starts there. "We always take a look at those to make sure those numbers are reasonable, to make sure they're not trying to hype the numbers," explains Connaughton. "There's always a process of double-checking what the client provides you to make sure it's realistic." But before he plugs those numbers into the formula, Connaughton considers how far the effect of those visitors and jobs might be felt: restaurants would have more diners, hotels more guests, gas stations more traffic. They'll have to hire more staff to handle the new business, and then those new workers will dine and shop and drive, too. This ripple effect is called the "indirect" benefit of a project and it usually makes up a big part of the final number in an economic impact study. For the NASCAR Hall of Fame, Connaughton estimated a total benefit of 550,000 visitors the first year, 1,000 new jobs and $61.8 million pouring into Charlotte's economy. That was way off. The Hall of Fame only had about half that many visitors. Research done by Craig Depken - another economist at UNC Charlotte - finds economic impact studies are consistently too rosy. "The methodology tends to be flawed because they're trying to predict something that's going to happen 7 to 10 years in the future," says Depken. "And I don't know that there's any methodology that will predict 7 to 10 years in the future." Connaughton himself says his economic impact studies have a short shelf-life. His NASCAR Hall of Fame report didn't account for the recession, for example. Still he believes his predictions will prove right eventually. . . not that we'll ever be able to measure all the ripple benefits of a new road or museum or a giant man-made river at the Whitewater Center. "Hell, you'll never know!" admits US National Whitewater Center Executive Director Jeff Wise. "There's no way to measure it after the fact." Wise paid Connaughton an undisclosed sum - which he swears was modest - back in 2003 for a study that predicted the Whitewater Center would pump $36.7 million a year into Mecklenburg and Gaston Counties. The facility defaulted on its construction loans and had to restructure that debt, leaning on public money to stay afloat. Wise says the Whitewater Center has turned a corner now - making a profit and employing more people than Connaughton predicted. But he acknowledges the economic impact studies he got - and others like it - are "100 percent speculative on the front end and the backend." "These numbers are pure voodoo," says Wise. "But at the end of the day though, they're still important, because there is some impact and you need to try and measure whatever that is." Wise says you can't go empty-handed when you're trying to get investment from banks and local government. But when those impact study numbers are released, the media latches on, because they're easy to quote. And before long, the best guess of an economist is being touted as the reason to get something built.

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