Economic and Fiscal Impacts City of Detroit Model

We developed a sophisticated economic model for the City of Detroit to estimate the effects of a change in a state law that would eliminate the city's long-standing residency requirement for city workers. This required a particularly complex analysis, as all of the following were direct results of the policy change:

• The number of residents in the city would change.

• The economic contribution of those residents would change.

132 For example, putting in enough retail service establishments to service a growing population probably does not require rethinking the "constant technology" assumption.

• The taxes paid (and city services used) by those residents would change.

In addition to these direct results, we anticipated some indirect results as well.

Key Assumptions

The key assumptions we used included:

• Detroit is one of the largest cities in the U.S. with a population of approximately 1

million, and has a well-defined border and separate taxing authority. Local effects were only those within the city.

• The new policy would go into effect on a specified date. The alternative was current law.

Modeling Resident Behavior

The fundamental microeconomic dynamics of the model matched that of the residents. Should the law change, those residents that were formerly constrained in their residence choices would become free to move to other locations. Some of these individuals would move outside the city.

We anticipated that most residents who wanted to migrate outside the city would not do so immediately, given the large transaction costs associated with selling and buying a home, as well as the other disruptions that occur when a family moves. Therefore, we built into the simulation model a partial adjustment feature and projected the results out five years or more.133

Scenarios: GUI for Model

The model allowed for one change-of-residency to affect the migration of workers in and outside the city. This change, in turn, affected five different tax bases and the tax revenue.

We created a custom graphical user interface (GUI) to allow us to input different scenarios. Each scenario assumed different speed of adjustment, number of migrants, and other factors. Thus, we were able to confidently project the economic and fiscal impact of the change in law after reviewing the likely impact under numerous scenarios.

Use of the Model and Output

The resulting report was used in a number of arbitration proceedings on labor contracts, budget preparations for the city, as well as in testimony to the state's legislature.134

133 For an extended discussion of this important behavioral dynamic, see "Modeling Dynamic Behavior: Adjustment" on page 156.

134 P.L.Anderson, Economic and Financial Impact Assessment of a Change in Residency Requirements in the City of Detroit, Michigan, Lansing, MI: Anderson Economic Group, December 1999; available at: http://www.andersoneconoinicgroup.coin; Report and testimony given at State of Michigan Act 312 arbitration hearings, 1999, 2000; testimony to the Michigan House of Representatives, local government committee, 2000.

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