Impact Fees
I see impact fees being discussed online in regards to Sugar City. Let me say up front that I'm no expert on impact fees. Also, these are my own opinions.
A couple of years ago, I think now, I read a public notice about the city of Rexburg raising their impact fees for new residential and commercial construction. They raised their fees substantially, and I know Idaho Falls just adjusted their fees as well this year (when anyone says the government "adjusted fees," it almost always means "increased fees").
I have also discussed impact fees with residents of Sugar City. Some residents think the city should be charging impact fees on all new construction, residential and commercial. They see impact fees as a pretty straightforward way to make new residents and businesses pay their "fair share" for the services and infrastructure new construction requires.
A simple definition of "impact fees" is one-time fees a property owner has to pay for development on their property, with the intent that the fees will help the city pay for any additional infrastructure needed because of the new construction. The infrastructure could be roads, additional water or sewer lines, parks, etc.
These fees are in addition to the normal fees (e.g. utility hook up fees; permit and inspections fees) and required infrastructure (e.g. sidewalks, curbs, street signage and lights, water and sewer lines) the property owner must already pay for when developing their property.
In order for a city to charge impact fees, it has to conduct a rather thorough and expensive study (or studies) to try to determine formulas that would give a accurate fee rates. These studies have to be updated at least every 5 years, and the money collected from impact fees have to be spend within 8 years of collection.
Impact fees are very popular with many politicians because they can charge unknown future residents and businesses rather than long-time and more recent residents and businesses--who may already be concerned about new construction--for necessary infrastructure, which seems much more "voter-friendly." I appreciate this position--I'm on the city council, and it's not an easy decision to vote for cost increases or debt of any type for the residents and particularly when increases are connected to growth. I'm a resident, after all.
Impact fees are also popular with some long-time and more recent residents and business owners initially because they often see impact fees as "growth paying for itself," which, again, sounds reasonable.
However, I think impact fees are more complex than we might think. This is a rather lengthy post, but I think impact fees are an issue worth thorough consideration. When I consider any proposed or potential or revised ordinance in the city, I try to imagine the possible effects on residents.
Let's consider a few common scenarios as they relate to impact fees.
Scenario One (not exactly "impact fees," but related)
A new area of the city is going to be developed. The property owner is, of course, going to pay for the normal infrastructure within the new neighborhood: roads, curbs, sidewalks, street signage and lights, water and sewer lines, etc. However, the the area being developed is outside the current water and sewer line system. The lines will have be extended out to the new neighborhood.
Rather than pay for the line extensions with current reserve capital funds or taking on debt through loans or bonds, the city has established additional fees for this situation. The cost of the line extensions are calculated and the property owner developing the land will be required to foot the bill.
If the property owner decides to still go ahead with the construction, they can recoup or "claw back" the added fee costs by passing the costs onto all new residents and businesses in the new neighborhood over time.
Scenario Two (Downsizing Long-term Residents)
Mr. & Mrs. Jones are long-time residents of Sugar City. They have recently retired and want to stay in Sugar City but are looking to downsize from the house in which they raised their family.
They decide to buy a new townhome in Sugar in a newly constructed neighborhood. They have two cars, but Mr. Jones doesn't drive very much on his own any more, so they decide to sell one of their vehicles.
They are on a fixed income. Their impact on city services and infrastructure is dramatically less than it was when they were in their old home and raising their children.
Yet, when they buy their new townhome, the developer passes along the required impact fees, raising the price.
Scenario Three (Buying an Older Home)
The Smiths purchase the Jones' old home. The Smiths are a family of two working adults, near the top of their earning power, and have four teen-agers. Between them, they drive four cars. Their impact on city services and infrastructure is easily four to five times more than Mr. & Mrs. Jones.
Because they bought a home in the older part of town, the price didn't include any pass-along impact fees. (Though, I've heard of cities adding impact fees based on some kind of formula in these types of situations even when you are buying an older home.)
Scenario Four (Rental Costs)
Mr. & Mrs. Jones have a daughter who recently found a job in the area. She is a recent college graduate and feels blessed to have landed a decent early-career job. She's excited to be able to move back to Sugar City and be near her parents and others she has known her whole life.
She finds an apartment in a new neighborhood in Sugar. She is just beginning her career. She has one car.
Her monthly rent is higher than it would have been because of the impact fees the property owner who developed the land passes along to renters.
Scenario Five (Multi-Generational Home)
Mr. & Mrs. Franz are a young couple struggling to make ends meet. They have two small children. They decide the best thing they can do is to move back in with Mrs. Franz's parents in Sugar City.
The household goes from two retired people with two cars to a multi-generational household of six people with four cars.
The Franz's don't pay any impact fees moving back into their parents' house despite the additional stress they contribute to the city's services and infrastructure.
Scenario Six (Building a New Business)
John lives in Sugar City and is a small business owner who wants to build and open a new shop. He explores possible opportunities in various cities in the area. He knows his profit margin will be very thin, particularly in the first few years.
He finds a suitable location in Sugar City to build, but once he calculates in the normal construction fees and requirements along with the added impact fees, he decides to build somewhere else.
Scenario Seven (Renting a Storefront)
Frank and Hillary want to open a small business. They find a nice newly built store front in Sugar City to rent for their business. The rent is higher than it would have been because of impact fees paid by the developer, who then passes the fees through to Frank and Hillary, who then pass those fees through to customers coming into their shop.
Scenario Eight (ADUs)
The Gonzalez family decides to build an ADU (Accessory Dwelling Unit, aka "in-law cottage") on their property for their aging parents. After calculating the cost of the new construction, they then have to add up to several more hundreds or even thousands of dollars for the impact fees.
Scenario Nine (Home Improvements or Renovations)
Larry and Sheila Martin have three children and twins on the way. They decide to remodel their home. Adding a new bedroom and bathroom means they will need to factor in the impact fees as part of the project costs. (Of course, cities can exempt certain types of new construction such as ADUs and home renovations or pro-rate them according to some formula, but this comes with its own sticky points and requires additional plan and code tracking and enforcement by the city.)
Impact Fee Concerns
"Fair Share"?
As these scenarios suggest, I think it's at least debatable to say that impact fees make new residents and businesses pay for their "fair share" of city infrastructure and services and don't affect long-term and more recent residents who moved in or developed their property before impact fees were established.
Impact fees are not actually based on a specific someone's specific comparative impact on a city. There are two common methods for calculating impact fees: based on the size and/or type of new residence/construction or the projected growth of a given area combined with the type of development planned for.
"Tax" on the Most Vulnerable?
Impact fees often seem to be a "tax" on the most economically vulnerable members of our communities such as single-income households, young people just starting out, retirees and others on fixed incomes--those who may be unable to afford the traditional single-lot-single-house property, which is ironic because a family of four living in a newly built condo or duplex, generally has a lower impact on city services and infrastructure than a similar family living in an older single-unit home on a separate lot.
Ethical or Legal Issues?
There may also be some ethical and/or legal concerns when impact fees are used by a city for things that may not be directly related to the express purpose of the fees. (There have been and are quite a number of lawsuits in regard to this issue.)
For example, a city charges a developer "park impact fees" on new construction and then uses the money to install softball diamonds in an already existing park. It might be difficult to demonstrate before a judge that the softball diamonds are necessary in order to meet the additional stresses put on the community by the new development that had to pay the fees, especially if the city already required or negotiated open space and other recreational set-asides (or "exclusions") in the new neighborhood that the property owner had to provide.
Or a city has a major infrastructure project that is necessary regardless of new development, and the city requires new construction to pay impact and/or capacity fees and uses that money or money "freed up" by that money to complete the project. ("Capacity fees" are another type of impact fee specifically dealing with water and sewer systems.)
For example, Sugar City has (and has had) some major wastewater line projects that must be done. These projects would need to be done even without any new residents moving into the city. Claiming that the project has be done because of the new construction and then charging fees to newcomers that older residents don't have to pay might be a cause of ethical or legal concern.
If Sugar City had no new development at all for the last few years, these wastewater projects would still have to be done--the lines are simply way past their life expectancy--and the full cost of the projects would be spread out over a smaller population of residents. New residents (and businesses), especially new residents in relatively higher density housing, actually help lower the per unit cost of such projects for all residents.
Like with many government programs or systems over time, impact fees may have a tendency to get out of hand, increasing in type and cost and complexity, and being used, in a sense, to control private property use, denying owners the ability to use their property how they wish to within the already established zoning and ordinances of the city. This problem could lead to a property owner claiming he has been priced out of his construction plans because of impact fees, and he may then have grounds to pursue a lawsuit against the city for an illegal "taking" of the value and use of his property.
Do Impact Fees Harm Beneficial Commercial Growth?
Impact fees could also negatively affect beneficial commercial growth in a given area. For example, if Sugar City would benefit from additional commercial areas in order to maintain a diversified tax base to maintain the city at the level residents would like, impact fees may make our zoned commercial areas less attractive to this potentially beneficial development.
Will the City Become Dependent on Impact Fees?
Another concern may be if we fund necessary city services and infrastructure through impact fees or through monies "freed up" by incoming impact fee money and the city gets used to paying for things through incoming impact fees. The services and projects funded by impact fees can be in real dire straits when the economy turns and new construction slows dramatically. We would then be scrambling to find funding sources for the entrenched government services that were developed and managed on an expected stream of impact fee funding. (The same could be said of any fees the city charges for new development: the city should avoid becoming dependent on such fees for normal operation so if new development slows or stops, the city won't be in a bind.)
Are There Other Options?
I think a reasonable approach is when the city and landowners wishing to develop their property work together in good faith to come up with an agreed upon plan. If we see the property owners as partners in our goal of maintaining productive, beneficial growth, then they are often more than willing to provide benefits to the city because doing so will also immediately benefit them.
For example, a property owner may agree to provide land for a school within the intended neighborhood. Doing so, of course, dramatically helps the community, probably lowering the tax money needed by the school district much more than school-related impact fees would, and it also increases the immediate value of the land around the school for the landowner.
Such negotiated projects might be a better solution than mandatory impact fees that seem to pit the city against the landowners. The results of cooperative agreements are immediate and direct, and we maybe we could get more bang for the buck with such projects than we could with impact fees, and we would avoid the possible concerns listed above. Property owners see impact fees as costs they wish to avoid; they see negotiated "set-asides" for the community as added value to their development.
The idea that "all this growth is tolerable as long as the developers pay for it," is probably not the best way to consider managing growth as it takes the sense of community benefit out of the process and turns into simply a transaction to be completed--"well, they paid all the fees so I guess they can build it..."
It seems to me, a fair way for residents and businesses to pay their "fair share" of needed city services and infrastructure is simply the system that is already in place. As residents and business become part of the city, they pay for the city.
There's no one currently living or working in Sugar City who had to pay impact fees, directly or indirectly, when they moved into or opened their business in the city. I'm not sure requiring future businesses and residents to pay some kind of upfront "membership" fee to move into the city and then also pay for the city as they live or work here is the best plan.
The traditional method of collecting money through taxes and fees to run the city has some weaknesses as well, for sure, but it is a method more directly tied to actual current use of the city services and infrastructure than impact fees are.
Of course, we want property owners to develop their land according to the legal vision the residents have for their city. We require property owners developing their land to install infrastructure, everything from sewage lift stations, utility and water and sewer lines, to secondary irrigation systems, to curbs, sidewalks, signage and street lights. We require a certain percentage of the developed land to be set aside for open space, walking and bike paths, and often other community-based needed areas such as for parks and fire stations, and more can be required or negotiated. These requirements and negotiated "set asides" seem reasonable and manageable to me.
Of course, there should be no special treatment with any kind of fees for new construction. All property owners should know upfront what the fees are, and the city should avoid "playing favorites" by exempting some property owners from fees that everyone else pays regardless of what kind of agreement could be made.
There are some reasonable counter-arguments to the ideas I've presented here. However, currently, after considering this issue, I'm generally not in favor of impact fees.
I'm not trying to make our city grow, but I realize we are growing. I'm confident the growth can be planned for and maintained for the benefit of all. There are headaches and costs, for sure, but, in the long run, I think our kids and their kids and any new residents and businesses now and in the future will appreciate the efforts.
If you made it all the way to the end, thanks for the long read!
PS. If you're interested: Here is the state law governing impact fees.