Coastal cities in California typically rely on seasonal tourism to receive revenues that sustain annual budgets. Laguna Beach is arguably one of California’s main tourist cities, with millions of one-day visitors coming each year. Starting in 2000, four trolleys were purchased and deployed during the three summer months (June, July, and August), charging riders a small fee for an all-day access to hop on and off the trolleys at multiple stops located throughout the city. Using Laguna Beach’s annual fiscal budgets, the California State Board of Equalization’s databases on taxes, and other transportation databases, we will compare the cost of implementing and continuing a year-round free public trolley service with the benefits observed in which we believe to be caused by the service. In this research, there is an analysis of the benefits that Laguna Beach County enjoys by using the trolley system. Finally, there is a conclusion on whether the trolley system is beneficial to the city.
Keywords: Trolley, capital, cost-benefit analysis
A Cost-Benefit Analysis of an Improved Public Transportation Program in Laguna Beach, California
Laguna Beach, California is largely a tourist destination. According to the city’s official website, approximately 3 million visitors venture into the city each year. This equates to almost 8,300 visitors a day. The city identifies its visitors as “beach-goers, trail patrons, bar/restaurant patrons, and festival attendees/participants” (City of Laguna Beach). There are three figurative “gateways” into the city: Laguna Canyon Road acting as the eastern entrance, the southern entrance on Pacific Coast Highway (PCH), and the northern entrance on PCH. With limited access to and from Laguna Beach, traffic congestion and limited parking are frequently observed. In the summer of 2009, the City Council of Laguna Beach appropriated funding to implement a public trolley service, which allowed four trolleys to circle up and down Pacific Coast Highway through the city. Initially, this new service cost $1-2 for an all-day pass, and 119,671 riders came aboard that summer. In the next two years, the service was made free, and ridership more than doubled to roughly 260,000 riders. By 2015, 21 trolleys were deployed, carrying roughly 656,936 riders throughout the year (Laguna Beach FY Budget 2014/2015).
With a free service, there are costs that are not covered by revenues directly made from the service itself. In order to fund the free service, Laguna Beach received subsidies in the form of grants from the Orange County Transit Authority (OCTA), the Laguna Beach Budget Parking Fund, and the Transportation Development Act of 1971 (TDA). The TDA draws its funding from two smaller funds, the Local Transportation Fund (LTF), which is derived from a ¼ cent sales tax levied state-wide, and the State Transit Assistance fund (STA), which is derived from a diesel fuel sales tax also levied state-wide. (California Department of Transportation). The Laguna Beach Transit and Parking funds draw their revenues directly from taxes levied in the City. These internal taxes include property taxes, sales taxes, business taxes, and other smaller taxes. Property tax and sales tax together provided more than 50% of Laguna Beach’s revenues (Laguna Beach FY Budget).
Do the Benefits of a Free Trolley Program Justify its Costs?
Determining whether a public activity has any social benefit is one of the most challenging activities in a public system. One of the most prominent methods used is the cost-benefit analysis (CBA) of the entire project. Barget and Gouguet (2010), describe CBA as the principles of social economics that evaluate the net inflows to the local population. Impliedly, although a project may not be profitable on its own, if it has a net gain to the local population, then it is a viable venture. Therefore, a CBA analysis evaluates all costs and benefits associated with a project in order to determine if there are any net benefits from it. In light of this, the cost side should not only analyze the financial costs of the project, the opportunity cost should also be included in the calculation of the total cost. When evaluating the benefits side, there should be the measurement of the increase in the value of consumption among residents as well as the benefit of consumer surplus (Longo & Dawson, 2008).
Dwyer, Forsyth and Spurr (2006), describe the consumer surplus as the willingness of consumers to pay for a commodity less the actual price charged. Simply, it shows the excess utility that consumers enjoy when they purchase products. Accordingly, even if the revenues generated by a public service are minimal, there might be some undisclosed amount in terms of the consumer surplus. The opportunity cost is always difficult to calculate due to the complexity in determining the potential benefits that would have been earned if these resources had been invested in alternative projects. In light of this, a complete analysis of a project is essential in determining its CBA.
Weimer (2009), note that when analyzing the CBA of public projects, an analyst should evaluate the spending, travel improvement, access improvement, and non-monetary impacts associated with the projects. Generally, this multi-tier analysis method provides a broad look at the direct and indirect impacts of infrastructural projects. To begin with, capital investments are important sources of employment to thousands of individuals in the US. Weimer (2009) posit that as much as 24,000 jobs are directly created for every 1 billion dollars spent on public transportation in the US. Besides capital investments, there are a lot of jobs created in public transport operations. Public transport operations indirectly support other business such a fuel stations, mechanics, and car wash businesses. Moreover, there are a lot of individuals who are directly employed to work and operate public transport vehicles, trucks, buses and railway systems.
Tom and Jones (2007), note that direct investments in the capital and operation of public transport have induced and indirect effects on the economy. Simply, indirect effects refer to economic effects caused by direct investments such as the purchase of trucks and buses. They also include the direct purchase of fuel for ongoing operations, both of which support employment and create jobs. Induced effects refer to the further additional sales by operations workers and suppliers who earn income from public transports employment. Simply, these additional sales are in terms of finances needed to pay for the private expenses of these individuals.
According to Todd (2008), public transport has benefits of improving the traveling experience among the public. Todd notes that public transport has four major direct impacts; improved reliability, improved safety, reduction in traveling cost, and reduction in traveling time. In relation to time saving, improved public transport system reduces traveling time due to high-quality services. Time saving also occurs when the public transport develops an interconnected and predictable transport network, which does not experience traffic jams. Finally, the development of a reliable and predictable public bus service, such as a trolley system, reduces congestion and improves the flow of traffic, which in turn enables individuals to save traveling time.
In terms of traveling cost savings, a properly developed public transport leads to cost saving in three groups; travel costs in existing public transport, due to a change in fare as a result of the new service. Simply, the introduction of trolleys has an impact on the fare charged by taxis and similar transport systems. Similarly, those who opt to use the properly established public transport system save costs associated with fuel, maintenance, and parking incurred when using a private vehicle. Finally, there is a reduction in costs associated with ownership, which is the cost saving that occurs when individuals decide not to buy a vehicle (Todd, 2008).
Improved public transport system has the benefit of reducing the traveling and safety cost. The improvement of public transport by the introduction of safe buses reduces the rates of accidents and accordingly the risks of injuries and death among travelers. The reduction of congestion also reduces congestion-related accidents. Consequently, there is also a reduction in the cost associated with traffic enforcement. According to APTA (2007), the fatal accidents for transit passenger per mile was 1/25th that of highway passenger per mile between 2002 and 2006. The main cause of this huge difference was due to the occupancy and accident rates for public transport, as well as that of accident rates for roadway vehicles in alternative congestion levels.
Market Mobility and Agglomeration
Weisbrod (1997) notes that public transport systems have a direct impact on an area’s economy. Specifically, there is an increase in market mobility and access, as well as spatial agglomeration economies due to clustering of similar complementary activities. Market mobility and access simply mean that improved transport enables businesses to access skillful employees who travel from far-off areas to their place of work. Better still, due to improved transport, businesses cluster in a particular region, which enables them to benefit from various complementary advantages of operating within the same locality. Crain et al. (1999), opine that improved access to a market results in increased productivity for a business. According to Daniel (2005), the clustering of businesses enables them to access specialized labor, which results in higher productivity. In fact, Daniel (2005) acknowledges that the improved transport system, by using public buses and trolleys, is the reason for the existence of many cities. To elaborate, most cities do not have the parking space and road capacity to accommodate their workforce unless they use trolleys and buses.
The agglomeration benefits also have the effect of improving the quality of life of businesses and employees who decide to stay in a specific region. These benefits result in the rise in the value of land and rent depending on an area’s access to transport. Generally, areas that are near a transport system cost more in terms of rent or the price of land or the building. For example, in 2000, researchers in the University of Toronto found out that homes with the value of $225,000 but are close to a subway generate an additional $4,000 more than those that are far from this transport system (Canadian Urban Transit Association, 2003).
Capital and Operation Investments
The manner in which investments in the public sector are spent has a great impact in influencing a region’s economy. According to the APTA, in 2007 29% of investments in the US public sector were spent in capital investment vehicles and equipment (APTA, 2007). The remaining 71% was spent in operations and maintenance activities. In light of this, it is evident that there is a lot leakage in expenses that are used in the public transport. These funds end up in the hands of third parties who develop local economies. Better still, the US BEA input-output tables indicate that 76% of public transport vehicles, 81% of trucks, and 87% of supporting equipment are made in the US. Evidently, this information shows that the public transport sector increases the economic development within the country. To enumerate, the increased investment in public transport results in an increase in business opportunities for local companies. In light of this, analytical measurements of productivity of a region, such as GDP, business outputs, labor income, and the number of total jobs created can be used to evaluate the impact of a public transport system in a region.
This chapter will discuss the following subtopics, data and sources, techniques of data collection, research design, and data analysis.
This research has used quantitative methods to analyze the data and form an objective view of the economic benefits of the trolley in Laguna Beach, California. According to Babbie (2010), in an analytical research generalization and assessment of numerical data can be done using quantitative analysis to find the relationship between various variables. The assessment of the economic impact of a transport system entails various analytical methods, which are determine the relationship between expenses used in transport such as fleet maintenance. They also determine the financial incomes generated by the transport system such as transit funds income and transit funds net revenue in assessing the overall tax collected. The regression test and analysis of variance (ANOVA) have being found to be effective in determining the existence of any relationships on tax collection, income from transit lines, expenses on fleet maintenance, and revenue from transit lines.
This project was done on a multiple regression analysis using excel to find whether the tax collected in Laguna Beach depends on income from transit lines, expenses on fleet maintenance, and revenue from transit lines. In this research, the Pearson correlation tests showed whether there exists any relationship between the independent variables and the dependent variable. The ANOVA test was used in the determination of the accuracy of the hypothesis. The data used in this analysis was the actual expenses, incomes, and taxes collected in Laguna Beach from 2004 to 2015.
The research used the following hypothesis:
H0: The development of the trolley systems increases trade in Laguna County, which results in higher tax collection.
H1: The development of the trolley system does not increase trade in Laguna County, as a result, there is no change in tax collected.
The following model was developed for the research:
LAGtax= K + X1FM + X2IF + e
LAGtax = Tax collected in Laguna County
K = Constant at the Y-intercept
X1 = Variable for fleet maintenance
FM = Fleet maintenance
X2 = Variable for Federal Bank Interest Rate
IF = Federal Bank Interest Rate
Data and Sources
Statistical data was accessed from the City of Laguna Beach official website and the Wordl Bank Website. The data was from 2004 until 2015. The year 2015 data was not used in the analysis since it did not show the actual expenses incurred in fleet maintenance. Simply, if this data had been used it would have resulted in the development of a misleading model.
Techniques of Data Collection
Primary data was used in this analysis. The data was collected from the City of Laguna Beach official website. Secondary data on the US Federal Bank Interest Rate was accessed from the World Bank website. Since only primary data was used, the paper minimized the occurrence of any error in the development and analysis of the model. After extraction and classification of relevant data into appropriate groups, a regression test was conducted to evaluate the accuracy of the hypothesis in the research model.
The collected data was analyzed based on Keynesian economic theories. Specifically, increased government spending has the impact of improving and accelerating economic development (Harcout, 2008). The impact of the Federal government monetary policies was also assessed by using the Federal Reserve interest rate. In particular, an increase in interest rate has the effect of reducing inflation, as well as increase cost of borrowing, which in turn slows investments. This policy is a contractionary policy. On the contrary, a decrease in interest rate has the effect of increasing inflation levels and investments. It is an expansionary monetary policy. Accordingly, the increased spending by the government of Laguna Beach County through the establishment of a trolley system was expected to spur economic growth in the area by increasing the disposable income of individuals directly employed by the trolley company. In addition, the trolley network was expected to result in increased trade in the area through increased tourism. There was also expected to be an increase in the value of property in areas where the trolleys passed. In general, the increased trade activities and the value of property were expected to increase the county’s tax. Simply, there would be increased property tax, when individuals sold houses and income tax from business profits.
Findings and Discussions, Conclusion
Using a multiple regression analysis, the following regression model was developed for Laguna Beach County.
LAGtax= 9,407,891.93 + 75.911 FM -125078891 IF
LAGtax = Tax collected in Laguna County
K = 9,407,891.93
X1 = 75.911
X2 = -125,978,891
Regression Analysis of the Model
|Adjusted R Square||0.792834341|
|Coefficients||Standard Error||t Stat||P-value||Lower 95%||Upper 95%||Lower 95.0%||Upper 95.0%|
|Federal Bank Interest Rates||-125078891||26368578.88||-4.743482447||0.002099355||-187430672.1||-6.3E+07||-1.9E+08||-6.3E+07|
This model illustrated that there is a positive relationship between the tax collected in the General Fund in Laguna Beach County Tax and Fleet maintenance. An increase in fleet maintenance by one unit has an impact of 75.911 times on the Laguna Tax collection in the General Fund. There is a negative relationship between Federal Bank Interest Rates and the General Fund in Laguna. A one percent increase in the Federal Bank Interest Rates has a
-125,078,891 on Laguna Beach General Fund.
In the ANOVA analysis, the F-critical was 0.002778. Therefore, it was significant since it was less than 5%. Fleet maintenance and Federal Bank Interest variables had a p-value that was less than 5%. Accordingly, we accept the null hypothesis that an increase in trolley system in Laguna Beach increases the net tax collected in Laguna Beach County. In particular, the model illustrated that an increase in Fleet maintenance, which resulted in an increase in tax collected. Since tax is a percentage of revenue from sales or from personal incomes, then fleet maintenance resulted in more sales for the suppliers of spare parts, more jobs for mechanics, and ultimately more sources of taxable income. The negative relationship between the interest rates and tax is because tax is a disincentive, which discouraged trading activities. In turn, this led to less income and accordingly, less tax collection.
Tax Collected in Laguna County
The tax collected in Laguna County acted as a measure of economic performance in the region. When there are a lot of economic activities, there is always more income for businesses and similarly higher salaries. Accordingly, the increase in tax collected is a representative of low economic performance, while high tax collections illustrate more economic performance in a region. Noteworthy, this model assumed that the tax collection was at optimal levels in the represented periods and there was no change in taxation policies.
The final analysis showed that fleet maintenance had a positive relationship with an increase in tax for Laguna Beach County. Notably, the county tax collection in this model acted as a proxy for measuring the increase in the economic performance of the county. Fleet maintenance results in an increase in disposable income in the county. Specifically, the workers, such as mechanics, employed to carry out this work have more disposable income, which they spend in the county. The increase in incomes also leads to more demand for the town’s property. The demand for property in Laguna increases the prices for houses, which leads to more property tax. On a similar breath, a significant percentage of resources are sourced from Laguna County when fleets are maintained. Therefore, local businesses thrive by supplying spare parts and other consumables for fleet maintenance. Further, there are indirect beneficiaries from fleet maintenance such as hotels, solons, lodgings, and shopping malls where direct beneficiaries from fleet maintenance spend their income. In turn, these funds promote the growth of businesses in Laguna, which results in higher income and in turn more income tax. In light of this, the positive correlation variable for the fleet maintenance was economically realistic. To emphasize, the Keynesian economics note that an increase in government spending and investments (in this case the Laguna Beach Trolley) results in more economic growth.
Federal Bank Interest Rate
Interest rate plays an important role, since monetary policies have a direct effect on economic performance. Whereas the Trolley system aims at improving and accelerating economic growth and development, for its success, there must be a friendly economic environment. Worth remembering, the Trolley system is free, therefore, it does not directly earn income for the County. Nonetheless, it acts as an appropriate incentive for economic growth by creating an enabling business environment. In light of this, the income tax represented by the General Fund is not only affected by the Trolley system, it is also influenced prevailing economic conditions in the county, such as the interest rates. Therefore, the use of the interest rate in the model was able to show the relationship it had with the model and its overall impact to the tax collected.
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