Sunday, August 26, 2007

Cost of Growth: Impact Fees & Feelings

One hot topic during our growth debate is the subject of so-called ‘Impact Fees’, and whether they are fair or adequate. That’s a fair question that needs an adequate answer, so here goes my 2-cents worth:

Boring as they are, some definitions may be helpful, so bear with me a minute while these are explained –not by me- by the experts. [If you don't want to wade through this stuff, just scroll toward the end for the Bellingham specific information]

First, here is just the Executive Summary from a full Brookings Institute Report titled “Paying for Prosperity: Impact Fees and Job Growth”, which is available on-line at the following URL:
by Arthur C. Nelson and Mitch Moody
June 2003

Executive Summary

Growth costs money. And increasingly many municipalities, confronted with tax-averse electorates, have turned to impact fees--one-time charges against new development--to pay the costs of growth. Traditionally, these costs have been financed by property taxes. However, those revenues have proven mostly inadequate to fund the roads, water and sewer infrastructure, and schools required by new residential and commercial development

Impact fees, though, are not universally accepted. Conventional wisdom among some private interests and public officials is that impact fees constrain local economic development, serving as a de facto "tax" on capital, stifling investment, and driving job growth to other fee-free jurisdictions. Supporters argue impact fees act as an investment in the community, spurring economic growth through the timely provision of new infrastructure and the expansion of buildable land. Given that impact fees often pay for public infrastructure projects, understanding the relationship between impact fees and local economic development, defined here as local job growth, is key.

This report addresses the controversy around impact fees by reviewing the academic literature concerning the effect of impact fees on employment and the economy generally. In addition, the report presents a new analysis of the relationship between impact fees and job creation by assessing impact fee and economic data, assembled for the period 1993 to 1999, for the 67 counties of Florida. Overall, the paper finds that:

• Property tax revenues increasingly fail to cover the full costs of the infrastructure needed to serve new development. More and more, political resistance to property taxes compromises the conventional way to pay for infrastructure needs brought on by new development. Consequently, new property values would have to be very high or property tax rates raised across the board to pay for the full array of infrastructure needs For example, one study of a rapidly growing city in Georgia in the 1990s found that the city faced a 50 percent shortfall in funding the new infrastructure demanded by new development and would need to raise $90 million more than it projected in total revenues from all state and federal transfers and property taxes.

• Impact fees, like user fees, offer a more efficient way to pay for infrastructure than general taxes, and ensure benefits to those who pay them. Academic literature suggests that the aggregate benefits of impact fees improve efficiency in the provision of infrastructure. While impact fees often do not reflect the full price of infrastructure improvements, fees do make the economic linkage between those paying for and those receiving benefits more direct, and so promote economic efficiency. The obvious direct economic benefits include the actual infrastructure investment, such as new roads, new schools, and new water and sewer extensions. Indirect benefits include improved predictability in the marketplace, knowing when and where infrastructure investment will occur, and that all developers are treated equitably.

• Impact fees increase the supply of buildable land. In the absence of impact fees, local governments may not have the revenue necessary to accommodate growth. With impact fees, they gain necessary infrastructure¾ water, sewer, drainage, and road facilities¾ to open new parcels of land development. One study also found that impact fees may reduce uncertainty and risk for developers by giving them a reasonably predictable supply of buildable land.

• Impact fees have complex effects on housing prices. One particularly thorough study of the effect of impact fees on housing prices found that fees reduced land prices by the amount of fees paid but also raised finished house prices by about half again the fee amount. One interpretation is that while impact fees lower raw land prices as predicted by conventional economic theory, the amount of the fee reflecting infrastructure value is recovered in the sales price. Additionally, the increment above the fee represents the value of the infrastructure as a whole and/or the certainty perceived by the market that facilities will be provided at a desired level and quality of service (i.e. no congestion) regardless of growth pressures.

• Impact fees do not slow job growth. In this study, we find, at minimum, that impact fees are not a drag on local economies. At most, impact fees are the grease that helps sustain job growth in the local economy.

While impact fees will continue to draw detractors, this paper shows that impact fees are a practical and valuable tool for financing local infrastructure needs. Without them, growing communities may not be able to sustain growth. In short, impact fees can directly fund vital infrastructure improvements, while increasing the supply of buildable land, improving predictability in the development process, and indirectly promoting local employment at the same time. Faced with the growing demand for investment and the public resistance to tax increases, localities in growing regions that institute impact fees may become more prosperous in the long run than communities in such regions that do not have them.
The second source to cite is the Municipal Services Research Center in Seattle, at this URL:
which contains this information available:

Impact Fees
▪ Introduction
▪ Reference Sources
• State Statutes and Administrative Regulations
• Court Decisions
• Growth Management Hearings Board Decisions
• Frequently Asked Questions
• List of Jurisdictions with Impact Fee Provisions
▪ Documents
▪ Information by Topic
• School Impact Fees
• Transportation Impact Fees
▪ Impact Fee Surveys
▪ Library Resources

Impact fees are charges assessed by local governments against new development projects that attempt to recover the cost incurred by government in providing the public facilities required to serve the new development. Impact fees are only used to fund facilities, such as roads, schools, and parks, that are directly associated with the new development. They may be used to pay the proportionate share of the cost of public facilities that benefit the new development; however, impact fees cannot be used to correct existing deficiencies in public facilities. In Washington, impact fees are authorized for those jurisdictions planning under the Growth Management Act (RCW 82.02.050 - .100), as part of “voluntary agreements” under RCW 82.02.020, and as mitigation for impacts under the State Environmental Policy Act (SEPA – Ch. 43.21C RCW). GMA impact fees are only authorized for: public streets and roads; publicly owned parks, open space, and recreation facilities; school facilities; and fire protection facilities in jurisdictions that are not part of a fire district. Setting fee schedules for impact fees is a complex process typically involving rate studies; generally, impact fees do not recover the full cost of a new facility since these fees must be directly and proportionately related to impacts associated with new development.

This impact fees page includes links to materials addressing technical and legal aspects of impact fees, sample ordinances, and fee schedules.

Literally, A ton of stuff for those so inclined!
Are you still with me on this? OK, here’s more specific information about Bellingham’s Impact Fees:

The City is authorized by State law –not required- to collect impact fees -by that name- for four specific reasons; Transportation, Schools, Parks, and Fire. We do have fees on the first three, but not on Fire. Every impact fee has built-in restrictions on the use of the funds, and it is a matter of practicality -and political will- to enact them at a high enough level to cover the 'full costs' of growth. Basically, it is impossible to collect 100% for any impact fee, because of both the legal restrictions placed on these funds and the politics.

The City does not set School Impact Fees, it only COLLECTS those that the Bellingham School District asks us to collect for them. And, the BSD has to officially bring the City a recommendation before we can act on it. Since I've been on the Council, we have never failed to approve any fee request brought to us by BSD. If folks believe more fees are justified, they need to direct their attention at their local School Board, since that is the jurisdiction which must actually develop the proposal for increased SIFs and then legally administer it. Whenever the Board brings a request to Council, it has always been approved!

Since School District boundaries don’t necessarily coincide with City Limits, there are many areas that fall in the County. I'm not sure if Whatcom County collects these fees for all for those areas of the BSD that lie outside the City Limits, or not, but they probably would if asked to do it.

SI Fees are always contested by the development community, which hires consultants and lawyers to fight for lower fees. Of course, the School District also has to hire its own consultants and lawyers too. Even those fees that do get collected have severe restrictions on their use and are subject to legal challenge, making this somewhat of an accounting challenge as well. Primarily, the BSD has used these fees to purchase temporary classrooms, since School Bond Issues have enjoyed a good success history. Notwithstanding that, I believe the Bellingham School District does have a relatively low School Impact Fee in comparison to other cities in Washington, at around 10 to 11% of projected growth costs.

The City’s Parks Impact Fee was enacted last year at 35% of the projected cost of growth, which now amounts to over $4000 for every new single-family dwelling. Since the Parks, Recreation & Open Space Plan is now an element in Bellingham’s Comprehensive Plan it is reviewed and updated periodically, with 2008 being the next scheduled time. It is anticipated that our Parks Level of Service may also be reviewed for possible adjusted to enable more sustainability in land supply and future costs. At that time, an increase to the PIF may also be considered.

Transportation Impact Fees are now being collected at just over 50% of the projected incremental cost of growth for arterials used by the entire community. That is on top of all of the costs for internal streets and related sidewalks, lights, curbs and gutters, which are also paid by developers. Nine years ago, TIF’s amounted to only about 8.5% of estimated growth costs, but these had been steadily increased up to about 23%, when last year a higher, but simplified and fairer method was adopted.

The City does not have a Fire Impact Fee because one has not been needed. We rarely build new fire stations, and when we do, special bond issues always seem to pass easily at the ballot. Fire Station #6 was built recently at Deemer Road and Bakerview, our first additional one in 27 years. Future annexations and changes in how fire apparatus may be acquired and disposed of may allow looking at Fire Impact Fees in the future, but currently this is problematic.

Some good news that might not be expected relates to three Public Works Utility Systems, each of which has fees and charges called 'System Development Charges'. These SDC’s function similarly to impact fees, and are designed to capture 100% of their development costs! The Water, Sewer and Surface & Storm Water utilities are all so-called Enterprise Funds that are established to completely pay for themselves through rates, charges and permitting fees. Eben Fodor even gave us an 'attaboy' for that.

So, to wrap this up, the impediments to collecting 100% of impact costs from development are these: legal restrictions, political will, difficulty in ascertaining actual costs associated with any particular development, risk of unduly increasing housing costs by sudden increases and the fact that some development -industrial and commercial- actually does already pay for itself, plus provides jobs, goods and services that directly contribute to our economy. In our system, capitalism and risk-taking are still rewarded, with the caveat that the environment and social equity must be respected. Its not a perfect system, but it is the one we have.
One last thought: For those who attended Eben Fodor's talk on Jan. 12th, 2006 that was sponsored by Responsible Development, with these Co-sponsoring organizations: Pro-Whatcom, King Mountain Neighbors, Neighbors for Birch Point, A-1 Builders, Adaptations, A W.I.S.H., Childlife Montessori School, Building Performance Center; Organic Press, Ferndale Citizens for Wise Growth, Whatcom Watch, Sustainable Bellingham and Attraction Retreat.

Look at page 88 of Fodor’s ‘Better Not Bigger’, Figure 5-6. What you will see is a Table titled ‘Cost of Public Infrastructure’ ‘New Single-Family House, Oregon, 1996’

Cost Item Amount Bellingham
School Facilities $11,377 ~11% [School District & State jurisdiction]
Sanitary Sewerage 5,089 100%
Transportation Facilities 4,193 50.1%
Water System Facilities 2,066 100%
Parks & Recreation Facilities 797 35%
Stormwater Drainage 510 100%
Fire Protection/EMS 470 Bond & Levy Funding
Total $24,502

Maybe we’re not doing so badly after all?