The Economic Impact of a Proposed Street Graphics Control Ordinance

This article was originally published in the April 1977 issue of Signs of the Times magazine. The article concerns a proposed sign code in Madison, WI.

By Dr. R. James Claus and Nancy Romer

 

In doing an economic-impact study, the technique of cost-benefit analysis often is used. That is, one discusses all the available benefits and then tries to estimate all the costs. Unquestionably, this approach, although useful, remains imprecise. The cost-benefit analysis becomes more imprecise, however, in attempts to analyze social implications and to attach a cost or a benefit to various acts in those terms. We feel that the proposed Madison sign code is beyond being assessed in reference to a negative or a positive cost for, say, aesthetics or social implications. We see in it few positive social implications and almost no implications for the environment or for excellence of design. Therefore, it is appropriate to talk about the code from the point of view of gross impact.

This report will consider three separate categories of interest: 1) Individual interests. These include the retailer, personified by the owner of a store or business establishment, the person who may hold the land of the commercial site, and the consumer. 2) Municipal interests. We will then talk about some of the implications of revenues lost by the City of Madison. 3) State interests. We will discuss losses to the state at large.

Sources
The type of data required for a report of this type was not readily available. Remember, the main contribution of this study will be found in its format and approach, rather than in a strict assessment of hard data and the implications therefrom. This paper attempts to deal with simple questions that have not been asked before, such as: How many businesses will be required to readjust their sign programs because of the adoption of this code?

A fact that has been obscured, and makes such a question so difficult, is that one must examine the 1966 Madison sign code. It provides the relevant criteria: If signs do not meet the 1966 code, they must be made to conform to the proposed code. But, in fact, this code is the sine qua non (condition) of forcing compliance with the earlier code.

This background supports the problems of understanding the potential economic impact. For purposes of this report, assume the City of Madison includes approximately 55% of Dane County’s population. Note that some of the figures provided to us were for all of Dane County.

Number of businesses affected
The data being used in this report is far from precise and concise. At best, it is sometimes a postulation and conjecture. There is, however, uniform agreement that approximately 50% of the businesses — not merely the retailers, but industrial and commercial business establishments as well – now have some form of sign that is nonconforming under the proposed code.

Therefore, we can begin by stating how many businesses may be affected. Many of the observations made is the report on the City of Madison were prepared with the assistance of Joel Peterson, the economic development coordinator. The project was underwritten with the help of a comprehensive planning grant from the U. S. Department of Housing and Urban Development (HUD) for the City of Madison.

We estimate there are 2,385 retail stores and 21 shopping centers. That means, at a minimum, approximately 1,000 business retail establishments will be required to bring their signs into compliance. Notice we say “signs”. If one took the aggregate, one could find something nonconforming on each business in Madison. But we will conservatively state that only 50% of the businesses have nonconforming signs. Let us step back and explain that assumption.

Cost of replacement
Let us assume, for these 1,000 retail businesses, not counting industrial plants, the cost to remove signs averages $100 per business. This is the first direct cost for removal. During the first year, sign removal for this sector will be $100,000. This figure is probably less than 25% of the real cost.

Let us suppose that the businesses would average 100 square feet of signage to replace the nonconforming ones. The average cost ranges between $30 and $50 per sq. ft. of sign. Therefore, the cost of replacement, very conservatively, would average between $3,000 and $5,000 per business.

For purposes of discussion, nevertheless, let us assume an average cost of only $1,500 per business to replace lost signs. The cost of the new sign must include maintenance, upkeep, installation and manufacturing. That is another cost for 1,000 businesses of $1,600,000, which represents the first direct cost of implementing this code. If it is equitably and uniformly applied to all Madison businesses, the cost will range between $1.5 to $5 million.

But let us keep the estimate modest, and assume the first cost individual merchants are forced to bear is $1.5 million. This assumes merchants do replace the signs that are required to be removed; experience has shown that to be true.

Cost to the city
In this removal, the city will have a cost. By way of comparison, the City of Phoenix, AZ reported a total cost of $127,000 for five inspectors to administer and enforce its sign-control legislation, which was much less rigorous than the ordinance proposed for Madison. Assuming proportionate costs, Madison, with only one inspector, would require approximately $22,000 in gross costs to the City to implement the program during the first year. The nominal figure makes no allowance for legal fees.

Influence on the lending of capital
The next stage of costs for businesses will be borrowing of money. Letters from financial intermediaries in Madison state, because the code calls for the taking of property on the basis of unclear rules, it will cause atrophy in the decision-making before loans are made. Put in common parlance, the code will cause uncertainty and risk. This doesn’t include business potentiality lost because someone couldn’t go into business — losses known in equity law as damages for pain and suffering. We are talking about direct interest costs.

Assume 2,000 Madison retailers borrow an average of $10,000 each for land, inventory and building loans. This figure, of course, is extremely low — the annual per household retail sales in Madison in 1976 averaged $8,505 dollars. (It is probably more realistic to estimate an average of $25,000 to $50,000 loaned per business.)

But, for this discussion, if we assume that 2,000 merchants borrowed $10,000, then $20 million is borrowed annually.

Suppose the loan rate is affected by 1% because of the sign code’s uncertainty. This figure also represents a conservative estimate given the extreme risk of the possible taking of property and the uncertainties proposed by this sign code.

The risk can be expected to raise the interest on the loans described by another $200,000. Therefore, the $1.5 million for the take-down and replacement of signs, plus a minimal increase in interest of $200,000, is approximately $1,800,000.

Whether one says the bankers will make an extra $200,000, or that costs to the business community go up by that same figure, is merely a difference of emphasis. The fact is, probably all things wash. The risk being introduced into the community is simply a $200,000 risk from which no one gains.

Costs to the consumer
Ultimately, the consumer will paying for these costs in the marketplace. All increased operating costs will be passed on in the price paid for consumer goods. While no one questions the importance of environmental legislation, design legislation and the like, one must admit, ultimately, the base cost of the goods we buy must offset those additional costs of manufacturing. The ordinance simply adds to the risk of entering the marketplace. The cost of that risk must be passed on to the consumer.

Motel revenues
Another important indirect cost with immediate implications for the city involves motel revenues. Paul R. Reilly, City Comptroller, provided data that, between October 1975 and September 1976, gross motel room charges in the City of Madison totaled $10,384,700. The room tax revenue collected by the City of Madison was $623,082.

Here are other figures provided by Holiday Inn. These figures compare the business done at the average Holiday Inn with the volume done in Brentwood, CA, a location where legal restrictions prohibited the motel from having a rooftop identification sign, and limited the size and location of exterior signs on the building.

Other information about the motel industry suggests the importance of signage. A study by H. E. Morgan found that 25% of the people who have reservations at a motel, but drive past and don’t see the sign, will not go back to find the motel. Research shows approximately 42% of the people who stop at a motel say they were attracted by the sign.

We can state that being deprived of adequate signage is expected to cause a loss of at least 10% of motel revenues. That may appear to be a minor factor, but it means a drop of $1 million in motel revenues for Madison, and a significant decline of approximately $62,000 room tax to the City of Madison.

Other retail losses
Other retail losses can reasonably be anticipated to follow. We know from the presentation of Tom Coenen, executive vice-president of a gasoline retailers’ association and owner of a retail business, that a great deal of local business comes from impulse stops. This claim is supported by the testimony of Octopus Car Wash in Madison. Many of their customers are not looking for a place to stop, but are prompted to stop by the signage they see. Much of this business is from travelers or transients who might well not spend their money in Madison, but in surrounding areas, if they do not see commercial information that encourages impulse sales. Therefore, the potential loss here is not restricted to the motel industry, but to many sectors of the local business community and to the city because of tax losses.

Tax consequences
No consideration has been given to estimating the possible downstream effects on the real estate and personal tax structure in the City of Madison. In these areas, the code is going to affect people in two ways. First, it will cause a decline in property value for the owners, which will in turn have an immediate effect on property taxes because they’re based on property values. It matters little whether one uses a percentage of market value, say 65% of the market, and then attaches a mill tax rate, or if one takes 100% value.

We recognize the way of reaching this assessed value changed since this method was used. As we understand it, Madison now uses a 100% evaluation. Regardless, if a sign code negatively affects the ability of property to produce income, it will affect property values. If the market value is affected negatively, the base of the taxes will decline and subsequently the city will have to drop its yield of property taxes.

We can reference the formula used in the 1965 HUD-funded study of Madison to show what this amounts to in taxes. First, take 65% of the assessed value (Class B-Commercial) and then multiply it by 44.43 per thousand. This means taxes of more than $20 million.

A 1% change in that value represents more than $200,000. Coenen says he can increase the volume of business at his service station by 30% by using a small incidental sign to advertise a price leader, such as cigarettes. An item featured on a sign raises business by 33%. It is safe to say that the potential value of marginal sites is enhanced by signs. Denial of the right to use such signs may mean a real tax loss of close to $2 million. Additionally, there will also be a concomitant loss in personal property tax, which would amount to another $50,000 to $60,000 because of the mill rate of taxing. At a minimum, we are now working on a figure close to $2 million in losses to retailers during the first year of the code alone.

Sales tax
The loss in sales-tax revenue can also be estimated. Madison must recognize that, certainly, sales tax revenue is involved (which is $39,096,090 for Dane County). A good portion of that would not be lost. But the way in which sales are made might nevertheless be affected. In some industries, as much as 40% of all revenues come from purchases made on pure impulse.

For instance, when the owner of Octopus Car Wash was interviewed, he said between 5% and 15% of the customers who stopped at the carwash in the summer were tourists or people passing through the area who stopped on pure impulse. They saw the sign and stopped. Inadequate signage might take significant portions of that revenue out of the state of Wisconsin to surrounding states. We will not attempt to attach a figure to this.

It is important to remember that we are not dealing with a person driving down the street, looking for information, ready to stop one place or another to get his car washed. Rather, we are dealing with the actual motivation of people to spend money in an economy. To remove a direct incentive of that range of commercial activity demands that some consideration be given to losses to the state.

Costs to the state
In this context, we begin to consider additional costs to the state. According to the 1972 census in Madison, there was $66,956,000 in wages in the retail sector. (With normal inflation factors, this may now be close to $80 million.) Let us suppose that Madison resembles the United States average of having 58% of the work force employed by small business. (More than 75% of all retailers nationally are classified as small businesses.) Forty-eight per cent of the gross national product is known to be contributed by this type of business. If there is a 1% disallocation in that figure because of the proposed sign code, and 1% of businesses are forced out of business, losses will be incurred by the state. From immediate readjustment, there will be more than $600,000 lost in wages. That is a description of individuals losing money, but it really goes further. The state must step in and provide the money necessary to pay unemployment compensation to the people affected by these losses.

Administrative costs
Most of our observations so far have pertained to the content of the code. We also note that the language of the ordinance will have direct consequences in costs because of the difficulty of understanding the language. We shall provide a study conducted by a sign company in Massachusetts, and presented to HUD, that documents administrative costs incurred by vague language in a sign code. In many instances, the cost of obtaining permits exceeded the costs of the signs being installed.

The potential increase in administrative costs to be paid by Madison businesses cannot be accurately anticipated here, but it should be considered. It can be expected to be a minimum of $50 extra per sign. This means, during the first year alone, the business community will have to pay an extra $50,000. It makes little sense to ask for federal grants to develop a program that undermines the purpose of rebuilding a viable economic base for Madison.

Communication in marketing strategies
Through manipulation of the entire commercial-communication system, we are not only seriously disallocating resources in the retail sector, we are also creating significant costs for government. One wonders, having looked at this report, what lesson may be drawn. We think it is: recessions start at the retail level. It’s where one feels and sees them first, for obvious reasons.

It is difficult to justify the sophistic, paradoxical claims now popular in Madison such as “more is less” or that “if everyone is given less advertising, everyone will have more.” That view is naive and erroneous. Anyone making such a statement understands nothing about marketing strategies.

All gasoline service stations are not the same. A retailer who uses price leaders to attract business, so that he can sell more gasoline, operates considerably differently from the retailer who sells gasoline, but gets most income from repairing cars. As each business person adopts a market strategy, he must develop a communication system that is reasonably related to his needs.

Representatives of small-business groups are among the first to agree. A spokesman for the National Federation of Independent Business (NFIB), testifying at the HUD-sponsored Urban Signage Forum, spoke out strongly on this point; the vice-president of the National Restaurant Association addressed the same problem (Signs of the Times, July, 1976 issue, pages 46-47, 85 and 61). Anthony Stasio, of the Office of Advocacy of the Small Business Administration, spoke on behalf of signs in hearings before the Federal Energy Administration (June 1976).

The consequences of the proposed sign code in Madison will involve the wages of people in Wisconsin, the value of their property, the sales-tax income to the state and potentially increased unemployment costs that the state will have to bear. The number of signs in the city will decrease, but it is equally likely that the number of businesses will decrease also.

Summary

This study discusses only two kinds of loss: 1) immediate loss that in many cases may be described as an “out of pocket” loss and 2) the loss in valuation on property. The out-of-pocket loss can readily be estimated as between $2 million and $5 million, depending on the terms used. On the other hand, there is the loss in present value of about $3 million, which may be as high as $10 million.

If one thinks of the situation in terms of a savings account, the real significance of the second step of losses becomes more evident. If a person had money in a bank bringing interest, and the rate declined, he would suffer a loss. Suppose one had $100 in a savings account, drawing interest at 6% per year. A sudden drop in the interest rate to 5% would cause the interest to go from $6 to $5 per year. But the real loss would be $20 because it would require $120 in the same account to bring in the same return of $6 per year. Much of the loss in Madison is of that kind. A loss in the return to the city has followed from a decline in the overall value of assets. That is a cumulative loss which this study does not even attempt to establish. Conservatively it might be as high as $50 million.

Posted in Blog: Rhetorical, Most Popular, Sign Codes, Signs' Advertising Value.