What's wrong with RIMS II studies when used with the V&T railroad?

RIMS II studies are based on work done by the Bureau of Economic Analysis. The RIMS II handbook is available at the BEA website at http://www.bea.gov/scb/pdf/regional/perinc/meth/rims2.pdf)

This document is intended to address the impact of the 15-20 year long construction phase of the Carson City – Gold Hill railroad project. The RIMS II study may be more accurate once the railroad begins operating, but has several problems when estimating the local economic impact of the $65-70 million the Commission will spend on construction.

The idea behind a RIMS II study is to use the 'velocity of money' concept to justify spending on large projects. The basis is to say that for every dollar spent on a project, more than one dollar of economic activity will result in a given area.

As noted in the RIMS II handbook, these studies are more appropriate for large scale projects like military base openings and closing and state-funded projects. Economic impact is greatest when the source funding comes from outside the area and has a primarily local impact. The Carson City Railroad Reconstruction project often has the opposite effect, because it takes local tax money and pays it to contractors from California, Illinois and Pennsylvania.

If the RIMS II concept as applied to Carson City's rail project was really true, then the logical conclusion is that government should take 100% of our money and spend it on tourist railroads, amusement parks and bowling alleys like the one in Reno. Obviously there are limits to the concept.

The limit in this case is the opportunity cost. More on this later in this document, but the basic idea is that for every dollar of sales tax paid and forwarded to this rail project, the Carson City community loses more than one dollar of economic activity. Then some of that money is taken out of the community.

There is also a deadweight loss. Money spent in the private sector has a higher velocity than money spent on government projects. The administrative and regulatory overhead is much lower for private business compared to government expenditures. The mulitplier effect is higher for private dollars!

Chosen Consulant – Stone Consulting

Study done by Stone Consulting, who has extensive experience with privately operated tourist railroads. Unlike other full tourist railroads, the source of funding for Carson City RR construction is mostly a public source. This in part is why comparisons to other tourist railroads are not apples-to-apples. Remember that most politicians admit the operation of the train will lose money. They argue that the benefit in terms of added business, tourism and jobs will be a net benefit to the community.

At the same time they have private operators who want to run it at a profit. Assuming these private operators can run the tourist train at a profit (they can), these profits will go to the private company. The government bodies that pay for the construction of the railroad will not split the operation profits.

I do have great respect for Stone Consulting, now known as TransSystems. Stone/TransSystems does have a wide variety of experience areas, including equipment valuation. I wonder why they weren't used to do a valuation on the #18 McCloud, the Commission owned locomotive that runs (nearly for free) on Sierra Railroad properties.

Stone also managed the operator selection process for the Commission and performs track and tunnel inspections for other railroads. They have been involved in this project for years and know the tourist railroad business well. My argument is not with Stone, it's with the data provided by the Commission and with the way the Commission will spin this study.

OK, that's enough background and theory. Let's look at the specific criticisms:

RIMS II Studies are the Cheap Alternative to Area Specific Studies!

As noted in the RIMS II handbook, RIMS II studies are an inexpensive substitute for more accurate and detailed specific surveys. They are expected to come within 10% of the expensive area-specific studies. If the Commission really needs this data it would be worth the cost to perform a region- and project- specific study.

BEA Economic Area Doesn't Exist for Carson City

According to the RIMS II handbook, there is no BEA Economic area for the multi county area including Douglas, Lyon, Carson City and Storey. Economic area 151 for Reno, NV was likely used.

According to the Stone Consulting study just provided to the Commission, RIMS II studies are normally used for federally or state funded projects, not projects where the majority of funding came from locally collected taxes:

RIMS II Economic Analysis Methods

Estimates of secondary impacts (the multiplier effect) are based upon the United States Department of Commerce,

Bureau of Economic Analysis (BEA) Regional Input-Output Modeling System (RIMS II). RIMS Il is based upon

national and regional input-output tables developed by BEA over the last twenty years. RIMS Il has been used by

(among others) the U.S. Department of Defense to estimate regional impacts of changes in defense spending, the

New York State Energy Office to estimate regional impacts of energy policy, and the New York State Department of

Economic Development to estimate impacts of travel industry expenditures.

Study Does Not Measure Opportunity Cost

The RIMS II study does not recognize that local and tourist spending is a zero-sum game. Take, for example, moneys raised from room taxes. The Commission likes to claim these taxes are paid by tourists and don't affect local business or citizens. The are ignoring the economic concept of opportunity cost.

A tourist who has to spend extra money on room taxes will not spend those dollars on additional tourist expenses. The cup of coffee at Dutch Brothers or the sandwich at the Nugget has it's own multiplier effect that is much more local, in that local employees keep their pay in Carson City unlike the employees in the next section on the use of California contractors.

Are California Contractors Accounted For?

Some construction phases were awarded to Granite Construction, a Watsonville, CA based company with a world-wide shareholder base. Corporate profits and some back-office operations do not have a positive impact, instead they have a reverse impact by taking local money out of the area to provide Granite's nearly 17% gross margins.

In addition Granite awarded the track-building subcontract to H&H, a California company with California employees. While local motels, stores and restaurants receive some benefit, the bulk of the money earned by these employees goes to pay rent, mortgages, living expenses and retirement savings of their CA-based workers.

Thankfully the Quilici's local company Q&D was chosen for the next phase of construction. This will have a positive impact on Washoe County.

Oil and Fuel Costs Do Not Have a Positive Local Impact

In the RIMS II 2008 study the claim is that spending $207,000 on oil and fuel has a positive local impact of $327,000. This is hard to believe. Local fuel and oil sellers make a slim profit margin on fuel and oil sales. Even large US oil companies make a small profit percentage. As is repeated so often in todays political discussions, the majority of money spent on oil and fuel goes to oil producing nations.

Since there is no Gold Hill Chevron refinery and no Comstock Light Sweet Crude, the overwhelming majority of the positive economic impact goes to oil states like California, Texas and Pennsylvania, as well as foreign countries like Canada, Mexico, Venezuela, Russia, Iran and Saudi Arabia.

HYPE ALERT: Consistent with the Picken's Plan claims and Democrat party political theory, some of the local taxes collected by the V&T Commission wind up in the hands of terrorists. OK, that's a little overboard, I admit, but we hear this all the time about money spent on oil.

Engineering, Planning, #18 Lease and Operations Costs Take Money Out of Carson City

Manhard Consulting is based in Illinois. Stone Consulting / TransSystems is based in Pennsylvania. Some of the money spent on engineering, planning and consulting has a negative local impact because it takes local tax dollars out of the area to provide the profits for these out of state companies. The multiplier effect happens in Illinois, Pennsylvania and California.

In addition, by choosing to break the contract with Storey County's Virginia and Truckee Railroad and making an agreement with Sierra Railroad, the operating profits will ultimately flow out of state. We already see Carson City's assets benefitting out of state Sierra Railroad in the lease of the #18. The money paid by Sierra hardly covers the depreciation and wear and tear on the #18 locomotive.

This leaves aside the ongoing sale of Sierra Railroad to Patriot Rail. There is a great chance that the Commission will lose their operator. Then they will hire Stone Consulting again to choose a new operator, causing more local tax dollars to flow out of state.

RIMS II Studies Look at Commuter Passenger Rail, Not Tourist Rail

The entire RIMS II handbook does not have the word tourist in it. The section on railroads is intended for commuter and freight projects, not tourist rail. Stone Consulting then applies RIMS II to tourist rail. Here's the classification under TRANSPORTATION, COMMUNICATIONS, AND UTILITIES:

65A Railroads and related services; passenger

ground transportation:

65.0100 Railroads and related services .................. 40, 474, *4789

65.0200 Local and suburban transit and interurban

highway passenger transportation.

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What RIMS II does for tourism is to cover the economic impact and multiplier of a hotel project, for example.

CONCLUSION

I am not saying the RIMS II study is without foundation. It just has problems and will support overinflated claims by the Commission. Remember that when this train gets up and running many of the tourists will stay in Reno, not Carson City. If a bus service were established from Reno directly to Virginia City, Carson City could be bypassed altogether.

The Commission is trying to have their cake and eat it too. They commission a study with a big number, $90 million of economic impact. They want Carson City voters to believe that entire impact lands in Carson City. On the other hand, when the blame Washoe County for not funding the project, they tell the truth and say that Washoe will get most of the benefit.

Thanks for reading, if more people started asking questions I'd be a happy camper!

Jim Lohse, jim@traincop.com

PS -- For more information on issues raised here, see these articles:
LETTER TO THE EDITOR -- 10/4/2008 -- V&T funding formula could be enforced -- Jim Lohse
ARTICLE -- 10/03/08 -- V&T Economic Impact Study Just In ... Lohse Responds to RIMS II Economic Impact Study
ARTICLE -- 9/30/08 -- Next phase of V&T work gets apparent low bid
EDITORIAL -- 9/28/08 -- V&T Cooperation Amounts To Wishful Thinking
ARTICLE -- 9/26/08 -- Carson City continues to fund majority of V&T Railway project despite law telling other counties to contribute
ARTICLE -- 9/09/08 -- Sale of proposed V&T operator may be in works