Development Impact Fees and the Acquisition of Infrastructure

This article considers the impact that the use of impact development fees has on the level of capital investment made by local governments in the United States. Using a sample of 85 cities, we find that the use of fees is associated with lower levels of capital spending. The data also reveal that the debt-to-expenditure ratio for these cities is associated with higher levels of capital spending, leading us to conclude that fees act as a quasi-pricing mechanism regulating the amount of capital investment demanded by developers. Development impact fees are designed to transfer a portion of the capital cost for new infrastructure from the public to the private sector. Their specific purpose is to ensure that new development pays its own way, alleviating the burden that would otherwise fall to existing property owners. In many cities, fees are required of builders and developers to help pay for water and sewer systems, streets and street lighting, drainage systems, and parks or green space. Thus, part of the infrastructure or services normally provided by the local government is funded by the developer rather than by general revenue. Eighteen states have passed legislation authorizing local governments to adopt development fees; one state, Florida, has used them for a number of years without specific enabling legislation. Fees have been defended successfully as an appropriate exercise of local government police power in the absence of state legislation (Nelson & Duncan, 1995). States generally have not set specific schedules of fees for cities. Local governments must decide on the percentage of the actual cost of infrastructure that they will attempt to recover. Portions of the fees paid by a developer are often negotiated on a case-by-case basis (Snyder & Stegman, 1987). The result is that fees vary among cities, and even within a city, fees may vary considerably over time or from one development project to another. The variation in the manner of implementing fees, described by Snyder and Stegman (1987), raises a number of questions about the effects that fee adoption has on local government investment in infrastructure. In this article, we present a discussion of development impact fees and how local governments have used them. Then we conduct an empirical analysis using data from US cities to determine the effect that the use of development fees has on the level of capital investment made by *Direct all correspondence to: Wes Clarke, Department of Public Administration, University of North Texas, P.O. Box 310617, Denton, TX 76203-0617. E-mail: [email protected] JOURNAL OF URBAN AFFAIRS, Volume 21, Number 3, pages 281–288. Copyright © 1999 Urban Affairs Association All rights of reproduction in any form reserved. ISSN: 0735-2166. local governments. The data show that the use of fees is associated with lower levels of capital acquisition. The possible causes and the implications of this finding are subsequently discussed. USE OF DEVELOPMENT IMPACT FEES Cities in California, Colorado, and Florida were among the first to adopt impact fees (Snyder & Stegman, 1987). In these states, property tax increase limitations and environmental concerns were major contributors to the fiscal stress that forced local governments to find new funding sources for infrastructure. Fees have also been adopted in jurisdictions where unusually high levels of growth would have placed an undue burden on the existing tax base. Local governments adopt fees by ordinance and must comply with any enabling legislation passed by the state. Often, a set fee schedule is used for on-site exactions, while off-site exactions are negotiated on a case-by-case basis. On-site exactions are those paid per unit developed, such as a fixed fee per water connection in a residential development. Off-site exactions may be charged when a developer’s project creates additional demand, such as for water sewage treatment, that cannot be met without increasing the city’s investment in plant or equipment. For instance, the city may have to install a new lift station to handle increased sewer flows, or it may have to upgrade water mains to handle additional demand. If a city has unused capacity, developers may be charged a fee when they place a demand on that capacity. At least one city in this survey calls its exactions “equity investment fees,” referring to the consumption of existing system capacity or equity. A number of cities charge for arterial street improvements required to increase traffic capacity when a developer’s project creates demand beyond the city’s current unused capacity. In their survey of Texas cities, Gilliland and Ramseur (1990) found a lack of consistency in the structure of impact fees even though the Texas legislature had passed legislation in 1987 that set guidelines for their use. In particular, cities have been slow to adopt fee structures in conjunction with a comprehensive development plan or capital improvement plan in order to avoid arbitrariness. The Texas law also requires consistency so that one developer or builder does not pay a higher amount than another. (A builder quoted by Snyder and Stegman (1987) said, “I don’t care how much infrastructure I need to build, as long as I know my obligation before I buy the land and all my competitors are being treated the same.”) The Texas law allows cities to set up separate districts, each with its own fee schedule that reflects the actual cost of development in that district. For instance, if a particular area, because of its geography, needs more sewer lift stations than another area, its fee structure may call for higher sewer connection fees. The law also stipulates that the districts be well defined and consistent with the overall development plan. A second survey of Texas cities revealed that larger cities are more likely than smaller ones to adopt impact fees (Gilliland, Krebs, & Vanderberg, 1992). Only 5% of the smaller communities in that survey had adopted fees, whereas 37% of larger cities had adopted impact fees, primarily for water and sewer connections. Interestingly, the smaller cities that had adopted fees reported collecting 90% of the cost of infrastructure improvements while larger cities collected only 55% of costs (Gilliland et al., 1992). Apparently, smaller cities that adopted fees did so out of a great need for revenue. For all cities in this survey, the average impact fee charged was just over $1,000 for a singlefamily residence, typically collected at the time a building permit was issued. Only five of the 73 large cities included in the survey charged a fee for street improvements. The difficulty in determining an appropriate fee for street improvements also makes them susceptible to legal challenges, which are discussed below. The Government Finance Officers Association completed two national surveys in 1989 on the use of fees. The first survey found an increased use of fees for facilities related to growth. In a study based on the second survey, Leithe and Montavon (1990) determined that the percentage of infrastructure costs recovered through fees varied across states from an average of 2% in Texas to an average of 60% in California. Property tax limitations as well as growth probably determined California’s early and heavy reliance on development fees. 282 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 3/1999