Impact Fees Part 2

 

Impact Fees Part 2

The topic of impact fees often cycles around during city budget time, understandably. I guess this is part two of my thoughts on impact fees. (This link takes you to part one if you want to read it.)

I’m no expert on the history of and legalities surrounding impact fees. I’m becoming more knowledgeable about the practical arguments surrounding the justification and use of such fees.

 When I think about topics like this, I often try to think of a number of questions that relate to the topic in the context of Sugar City. For example, here’re are some I initially thought of regarding impact fees:

·       Would charging impact fees actually allow a city to reduce their tax rate or decrease utility rates? What other factors have to be considered?

·       Why do so many cities that charge impact fees also have higher utility rates than Sugar City? What other factors have to be considered?

·       Why do so many cities that charge impact fees also have a higher tax rate than Sugar City? What other factors have to be considered?

·       Why do so many cities that charge impact fees also use LIDs to force residents at their own cost to install or replace curbs and sidewalks on their streets? What other factors have to be considered?

·       Do impact fees reduce costs to residents now and over time?

·       Should new residents pay additional city infrastructure costs or fees that current residents don’t pay?

·       How do developers deal with impact fees in addition to other infrastructure requirements they have to agree to?

·       What is the main driver increasing water, sewer, and garbage rates?

For supporters of impact fees, one of the assumptions often seems to be that if a city charges impact fees, then utilities fees such as water, sewer, and garage would go down or at least not go up as much as they would if the city didn’t charge impact fees for new development. I’m not sure that this is how it works.

Despite claims to the contrary, growth is not always the reason for rates increasing. For example, if we have the sewer rate set perfectly to match all associated costs of our wastewater system, we would still need to increase the rate the next year by at least the amount of inflation or we would be out of whack—that’s even if there were no population growth at all in the city that year.

As I understand it, by law, impact fees cannot pay for operational costs, salaries, maintenance or repairs, or regular replacement of old equipment. Impact fees can only be charged and used for new projects laid out in a city’s capital improvement plan. Over time, there does seem to be a correlation (maybe even a causal relationship) between impact fees and utility rates, but it goes in the other direction from how we might wish, meaning, the use of impact fees may actually lead to higher rates over time.

As I’ve said before, many politicians like impact fees because they seem a straightforward way to appease voters by claiming impact fees make sure that “growth pays for growth.” As I stated in Part One, there are some ethical concerns in such statements for me—one being that no one currently living or running a business in Sugar City ever directly or indirectly paid impact fees when they made Sugar grow by moving here. It’s expensive enough to move to a new city or new housing. I think there is a way to plan and manage a city such that we don’t have to charge newcomers, residential or commercial, a hidden upfront “membership” fee to live there.

Maybe looking at a real situation here in Sugar City will help us work through all of this.

Currently, Sugar City doesn’t have impact fees. Developers were required to build a new well and a water storage tank in the south end of Old Farm Estates. They paid for the engineering, permits, inspections, materials, water lines, equipment, construction, etc. After the facility was completed and inspected and approved, the developers deeded over the facility to the city at no cost to the city. (This process is used for other infrastructure we require in new neighborhoods, such as parks and bridges, roads, etc.)

Well, who ends up paying for the new tank that will service the new residents (and the entire city, actually) in the new housing? I assume the developers will pass (and have been passing) the cost to the new residents. The new residents will pay for the new tank facility though increased prices of the new housing units. I think this is the most straightforward way of having “growth pay for growth.” 

In practical terms, current residents did not pay for the construction of the new well and tank. (There are exceptions, of course. For example, if current residents sell their older home and move into the new housing, they will pay their share of the new well and tank included in the price of the new house. I address other examples in part one of my comments on impact fees.)

So, Sugar City doesn’t pay for the new tank, the new residents do. And now we own and have the responsibility of operating and maintaining the new well and tank. The idea being that as new housing is completed and water and sewer hook-up fees are paid (fees for ensuring the city can cover the proportional cost of capacity or service expansion) and residents move into the new housing and begin paying their water and sewer bills, the city will be able to plan for the operation, maintenance, and eventual upgrade or replacement of the new well and tank. 

Basically, the new residents have paid for the new tank and given it to the city. Now they contribute to the operation and maintenance of it (and all the other city facilities) in the same manner as older residents do, by paying their monthly utility bill.

An obvious wrinkle here is that even as we got a “free” new well and water tank, we now have to take care of it. And such costs don’t ever go down, do they? Inflation, wages, materials, it all seems to go up. The water rates have to match the costs for maintaining the well, pump, lines, and tank. But if we have the rates set correctly, the increased rates are not a direct function of growth—we would have new residents contributing on equal footing with older residents.

If we take the same example and throw in impact fees, the situation changes a bit.

It’s worth double checking my information here, but as I understand it, in Idaho, impact fees can only be designated for four areas of improvement or expansion:

1. Transportation and roads
2. Public safety such as Fire and EMS
3. Public safety such as police
4. Park and open space

And there are at least three legal standards that have to be met:

• The project has to be explicitly laid out in the city’s Capital Improvement Plan
• Impact fees can’t exceed the proportional share of infrastructure costs specific to the new development
• Funds can’t be used to upgrade old infrastructure to a higher standard of service than what currently exists

(Here’s the Idaho statute governing impact fees.)

In our example, everything remains the same except, in addition, the developers would have to pay some specific form of impact fees, which the city would then be in charge of spending over the next 8 years for a specific project that met the above requirements. And, remember, the city could not use impact fees for operational, maintenance, or repair or replacement costs. Also, note that water and sewer projects are not included in the options for impact fees.

We can assume that the additional impact fees would be passed onto the shoulders of new residents in the new neighborhood, once again increasing the price of their housing a bit more. They paid for the new well and tank and now they are also paying for some other project in the city. And, of course, whatever project we used the impact fees for, the city would then need to factor in its continued maintenance, depreciation, and eventual replacement.

Some people claim that these “free” projects directly increase utility fees and rates and even increase tax rates overtime, rather than decrease them. (Two related concepts you can look up if you’re interested: “life cycle cost trap” and “infrastructure municipal horizon.”)

“Make growth pay for growth” fits well on a bumper sticker, but I’m not confident it accounts for all that should be considered when it comes to impact fees. 

I can come up with a counterargument or two to my own position here, including how to know or how to measure if developers are passing along any savings from not paying impact fees to their buyers. Still, in the end, I’m unconvinced that impact fees would improve our situation with rising city fees and utility rates or even with any infrastructure needs we may have. I suspect impact fees may even complicate our situation more, and they wouldn’t reduce the cost of high-priced housing so challenging to first-time buyers and others.

If you made it to the end--that's impressive, haha. This is a long one!