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Appendix A Background PaPer on ImPact Fees Edward wEinEr Transportation Consultant t he situation of a sharp increase in base personnel being transferred to new or expanded facilities is somewhat analogous to an unanticipated new, large private development occurring within a metropolitan region. In such instances, the metropolitan planning organization may need to redo its long-range plan and shorter-term transportation improve- ment program. Typically, regional leaders negotiate with the developer and require that certain conditions be met to ameliorate the negative impacts of the development, and they often impose fees to offset any capital improvement needs as a result of the development. If the devel- opers in such instances are unwilling to pay the impact fees, the local governments can refuse to allow the development. There are a number of aspects to creating and implementing impact fees for new developments. deFInItIons (Powell et al. 2006) Exactions, the on-site construction of public facilities or dedication of land, have been used for decades. Impact fees, also called exactions, were instituted in the 1920s as a local financing tool. Where no appropri- ate land was available for a traditional exaction, off-site land or a fee in lieu could be substituted for a dedication. Over time, these fees came to include capital costs for on- and off-site improvements brought about by new development. Rooted in the idea that new development should pay its way, impact fees have been increasingly used to pay for improvements traditionally paid for by property taxes. They are generally a one-time charge on new development by local government to pay the develop- ment’s proportional share of capital improvements as a condition of approval for a building permit. New development requires improvements such as roads, utili- ties, parks, and schools as well as police, fire, and solid-waste disposal services. Historically, such improvements were financed with bonds and local property taxes supplemented by state and federal grants along with subdivision dedications and fees. These public expenditures were seen as a spur to private investment. However, a combination of more complex (and costly) improvements, environmental considerations, a dramatic 97

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Federal FundIng oF transPortatIon ImProvements In Brac cases decline in federal expenditures on local infrastructure in the 1980s, and the property tax revolt epitomized by Proposition 13 in California led local governments to search for other methods of financing needed infrastructure. Consequently, California has been a leader in developing impact fees. Exactions and impact fees have grown increasingly popular with local governments as a supplementary financing source. Altshuler et al. (1993) found that, by the mid-1980s, approximately 60% of local governments used impact fees along with in-kind levies. Under California law, a fee is defined as a monetary exaction other than a tax or special assessment. Fees share two characteristics with taxes. First, they are levied on developers as a monetary charge. Second, they are often assessed on a proportional basis; localities cannot tax with- out specific legislative authority from the state. This distinction between taxes and fees is important in the evolution of impact fees. Impact fees, exactions, in lieu fees, and compulsory dedications are often treated as synonymous as they all are established as conditions for obtaining final development approvals. However, dedications are sometimes treated differently than impact and in-lieu fees. The courts have reviewed these exactions through a series of cases in an attempt to more clearly define their appropriate use and proper legal role. legal Issues The legal basis for government intervention in the development process is derived from its police power to protect the public health, safety, and welfare of its citizens. Through a series of court cases, mostly based on California cases, a set of standards have been established on the application of impact fees. They apply to both legislatively imposed and ad hoc fees. A government entity imposing an impact fee on development projects must meet several standards. It must do the following (Powell et al. 2006): • Establish the purpose of the fee; • Establish the use of the fee, including public facilities to be financed; • Show a reasonable nexus between the purpose of the fee and the type of development; • Show a reasonable relationship between the public facility to be constructed and the type of development; • Show a reasonable relationship between the specific amount of the fee and the cost of public facilities attributable to the project; and 98

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Background PaPer on ImPact Fees • Account for and spend collected fees only for the purposes intended with provision for the return of unexpended funds. Consequently, in most states, impact fees must meet the rational nexus and rough proportionality tests. First, there must be a reasonable connection between the need for additional facilities and new develop- ment. Second, it must be shown that the fee payer will benefit in some way from the use of the fee proceeds. Third, calculation of the fee must be based on a proportionate fair-share formula. advantages and dIsadvantages oF ImPact Fees (opp 2007) advantagEs There are several advantages to the use of impact fees by local communities. Reduced Borrowing by Local Governments For a local government entity struggling to pay for infrastructure necessi- tated by new growth, impact fees can work to alleviate some of the fiscal burden associated with the expansion of growth-related infrastructure and services. The most obvious benefit of impact fees is the revenue- raising capability. Rather than relying heavily on property taxes, which may already be high or capped by the state government, a local gov- ernment is able to diversify its revenue stream through this alternative source. In addition to the general diversification of revenue sources, the fee-imposing entity is able to receive the revenue associated with impact fees in one lump sum, as opposed to waiting an extended time, which is the case with many of the standard taxes collected at the local level. This, in effect, enables a more concurrent or synchronized development of infrastructure. Thus, the funds to pay for the infrastructure are readily available when the development is required and installed, instead of hav- ing to finance the cost over time with debt-servicing costs associated with the usual forms of revenue. Politically Popular Impact fees are popular with elected officials who are aware of the gen- eral population’s discontent with the perceived inequity associated with paying the costs for new development. Furthermore, impact fees are imposed upon future voters—not current ones—something of interest to many policymakers looking at reelection prospects. 99

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Federal FundIng oF transPortatIon ImProvements In Brac cases User Equity Some people believe that new residential development generally does not generate enough tax revenue to cover the costs it incurs in local munici- palities to provide new infrastructure and public services (Opp 2007). Impact fees make new development pay its fair share of infrastructure costs and allow new development to cover something closer to its fair share of the infrastructure that is required. Impact fees ensure that the infrastructure can be provided in a timely fashion. To Slow Growth Some people argue that impact fees have the possibility and potential to curb sprawl. As developers are faced with additional fees for develop- ing green space, it is possible that they will either opt not to develop at all or will look inward at a redevelopment opportunity, both of which work to counter the problem of sprawl. Although impact fees have been linked with curbing sprawl, their effectiveness varies from state to state. If one locality imposes an impact fee on a developer that the developer does not wish to pay, it is possible for that developer to simply develop in a neighboring jurisdiction to avoid the fee, potentially eliminating the sprawl-curbing benefit altogether. Promotion of Community Planning The development of impact fees requires communities to assess the costs of infrastructure deficiencies as well as the costs imposed by new devel- opment. As such, impact fees are a logical and worthwhile planning tool for local governments. The process promotes local land use and eco- nomic and community planning. disadvantagEs Impact fees come with several disadvantages. Increases in New Home Prices A major issue associated with impact fees is the supposition that they are passed along to the consumer through higher housing costs. An increase in new home prices can be especially significant for communities trying to expand their inventory of low- and moderate-priced houses. If residential developments are inflating home prices as a result of the use of impact fees in a community, then the potential for affordable housing may be in 100

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Background PaPer on ImPact Fees jeopardy. Also, some studies have indicated that certain types of impact fees reduce the prevalence of multifamily housing developments. Difficulties in Establishing and Administering Impact Fees (Adams et al. 1999) The establishment and administration of impact fees requires a number of complex accounting procedures. There is a need to establish level-of- service standards for the various infrastructure elements. The costs of meeting these standards before and after development need to be esti- mated. These costs must be fairly apportioned between new users and existing development. Fees need to be earmarked for the infrastructure imperilments and applied in a timely manner. Cost-accounting proce- dures need to be established and administered to track all the steps. Other Equity Issues The counter equity argument is that existing residents never had to pay impact fees, so new residents and businesses should not be obligated to do so. Traditionally, provision of public services has been a major func- tion of government. Impact fees require capital payments at the begin- ning of a facility’s life. Thus, they create problems of intergenerational equity when current users are required to pay for facilities used for a long time into the future. There can also be equity concerns when the fees cover improvements over too large an area, which benefit existing devel- opments beyond the impact area. level oF ImPact Fees In the context of transportation facilities, these requirements can be difficult to satisfy and can impose significant administrative costs. For example, additional traffic studies might be required to demonstrate how much residents of a new development will benefit from transportation facilities financed with impact fees. The rational nexus and proportional- ity requirements limit the ultimate revenue potential of impact fees. Current practices, however, may fail to maximize the revenue potential. Since fees traditionally have been imposed at the local, not state, level impact fee analyses often do not account for the effect of new development on state-administered roads as well as local roads and other transportation facilities. If state as well as local transportation needs were included to a greater extent in impact fee analyses, more revenues might be dedicated to transportation uses. 101

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Federal FundIng oF transPortatIon ImProvements In Brac cases Facilities eligible for impact fees include roads, water, sewer, storm water, parks, fire, police, library, solid waste, and schools. Roads are the only facility eligible in every state that has impact fee enabling acts. The following table provides data from the 2006 National Impact Fee Survey (Duncan Associates) on impact fees for roads by type of land (Aecom Consult 2007). Single- Multi- Retail Office Industrial Family Family per per per Unit Unit 1,000 ft2 1,000 ft2 1,000 ft2 National average $2,305 $1,568 $4,562 $2,654 $1,587 Sample size 213 212 203 204 203 National average $1,930 $1,322 $3,774 $2,177 $1,348 without California Sample size 178 177 167 168 168 without California The impact fees for the single-family unit are based on a typical three-bedroom house of 2,000 square feet. For the multifamily unit, the impact fee is on a per unit basis for a typical two-bedroom unit of 1,000 square feet. Impact fees for retail, office, and industrial are per 1,000 square feet for a typical 100,000-square-foot shopping center, commercial building, and industrial building, respectively. The data on impact fees are shown with and without inclusion of California, as impact fees for roads in California for a single-family unit top out at $17,754. The high for the remainder of the county is $6,527. For the most part, communities use average cost pricing rather than marginal cost pricing. Average cost pricing occurs when the gov- ernment charges everyone equally for the same service, regardless of the real cost to provide that service to a particular user. For example, transportation fees set on an average basis would charge all homes on half-acre lots the same regardless of the number of occupants, cars, or commuting mode. A key question is why marginal cost pricing is not being used more frequently. One reason is that the costs of developing and implement- ing a more accurate pricing system are high. It is a much more difficult technical task to determine marginal versus average-cost pricing systems. In a perfect situation, the marginal costs of serving each development and the extent of facility use by each household would be calibrated 102

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Background PaPer on ImPact Fees and assessed. In practice, this is beyond the technical capacities of most local governments. Even calculating marginal costs by area, such as for neighborhoods, is difficult to understand and explain, which makes adoption and implementation unlikely. Another reason is that political costs are high. Communities may choose not to use marginal cost pricing because they do not want to discriminate among members of the community, especially if the com- munity is homogeneous in many respects. Such policy may seem fair; all residents have equal use of the highways and are free to travel as they choose. To such communities, it does not matter that some may travel more or less than others. calculatIng ImPact Fees To assess impact fees, communities must demonstrate the need for addi- tional facilities as a result of the new development and not because of exist- ing facility deficiencies. The standard to which an impact fee will be held is that the fee does not exceed a proportionate share of the costs that the local government incurred or will incur to accommodate the new development. A valid fee-setting process or nexus report should include the following: 1. Projections of the future residential and nonresidential popula- tion to be served by the proposed facilities; 2. Identification of current and future service levels for each public facility needed; 3. Determination of additional facilities or additional capacity needed in each facility category to serve the projected popula- tion at the desired level of service; 4. Estimates of the projected costs of additional facilities or service capacity; 5. Estimates of the other fees and taxes paid by the new development; 6. Apportionment of the costs of additional facilities or capacity between the existing population and new residents and busi- nesses proportional to their contribution to the need for the facil- ity and adjusted so that costs of upgrading current deficiencies or improving existing service levels are not levied on new develop- ment and taking account of other fees and taxes they pay. This process requires a transportation impact study to develop the needed information and make accurate estimates of the various costs to equitably divide the cost among the various parties. 103

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Federal FundIng oF transPortatIon ImProvements In Brac cases FaIr-share mItIgatIon Background Another option similar to the impact fee model is fair-share mitiga- tion. State transportation agencies and local governments may have the authority to require developers to mitigate the transportation impacts of their development projects through a traffic impact assessment (TIA) process. This process is similar to the impact fee model but operates at the state level under the authority to maintain safety or level of service. For state transportation agencies, development review and fair-share assessment are generally triggered by a request for an access connection permit to a state highway. The goal is to maintain a desired level of service and safety on a roadway by ensuring that new development contributes its fair share for those improvements that are made necessary by the added traffic attributable to the developments. Information from a traffic impact study (TIS) is needed to establish that the required mitigation is roughly proportional to the proposed development’s impact, as required by law. The required contribution may be in the form of land for right-of-way, money (or fees), construction of an improvement, or some combination. In addition to fair-share mitigation of development impacts, the agency may negotiate with a developer for other infrastructure improvements aimed at overcoming existing deficiencies. State transportation agencies and local governments have varying authority to require developer mitigation. For example, most states may require mitigation for clear safety reasons, whereas state authority to require mitigation of capacity impacts varies. ProcEdurE Fair-share mitigation can be determined in many ways, depending on guidelines or mandates issued by the state transportation agency. Generally, the applicant is first required to conduct a TIS according to a methodology established in coordination with the state transportation agency. The TIS assesses the effects of a proposed development on the surrounding trans- portation network, the ability to get traffic on and off the site, and the need for off-site mitigation. General components of a TIS include the following: 1. A description of the proposed development and its access routes, 2. Details of existing and probable future traffic conditions, 3. An estimation of the traffic likely to be generated by the devel- opment as proposed, 4. Traffic impact and capacity analysis, and 5. Recommendations on improvements to mitigate the impact. 104

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Background PaPer on ImPact Fees The TIS process involves identifying a traffic impact area based on some threshold of magnitude by assigning new development trips to the transportation network. In Florida, for example, developments of regional impact must include in their impact analysis any location where their trips would consume 5% or more of the maximum level-of-service capacity. Any deficiency caused by development trips within that impact area must be mitigated, with the amount of mitigation most fairly determined based only on that proportion of new trips that trigger the deficiency. Most states rely on TIA guidelines and case-by-case negotiations, which makes consistent treatment a challenge—particularly when administration is decentralized into district or regional offices. Others have systematic programs with standardized requirements and proce- dures that are applied uniformly. The latter group tends to provide a more consistent and equitable process for the applicant. However, the complexity of the TIA process and the potential for manipulation on both sides makes fair-share exactions sometimes inequitable and gener- ally cumbersome to administer. advantagEs and disadvantagEs Advantages There are several advantages to the fair-share mitigation process: • It provides a process for ensuring that new development pays its fair share of improvement needs that are necessary to accommo- date the added traffic from the development. • Systematic guidelines and administrative procedures help to stan- dardize administration, improve equity of contributions, and reduce miscalculation. This also provides predictability for developers. • Isolating only that development traffic that exceeds level of service helps to increase fairness and proportionality of contribution. Disadvantages There are also some disadvantages to this approach: • It is inequitable. Some consume “free capacity” or pay less on roads that others have invested in, while others must pay to mitigate. • It can be disproportionate, depending on the timing and size of development; later developments pay more as more trips are likely to trigger a deficiency, and larger developments will trigger a larger number of deficiencies on more links. 105

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Federal FundIng oF transPortatIon ImProvements In Brac cases • It is complex and data intensive; TIS can be easily manipulated to show more or less impact, which increases administrative costs for the agency and consultant costs for the applicant. • It requires highly trained staff to produce and to administer. • There is a potential to double-charge for cross traffic between two developments on deficient segments, if not accounted for in the calculations. • It requires clear statutory authority and systematic procedures and requirements; case-by-case negotiations produce inconsis- tent and inequitable results. aPPlIcatIon to Brac cases A number of elements of the impact fee model can be applied to BRAC cases. However, the process would require some analytical rigor to ensure equity among all parties. Moreover, to date, impact fees have been assessed only at the community level and not at the state level. Nevertheless, the principles that have been used to structure impact fees at the local level can be a useful basis for allocating costs resulting from personnel increases in military bases. Application of the impact fee model requires a TIS. Following the impact fee model, the first step in the application would be to assess the deficiencies in the existing transportation system before the personnel increases in the military bases occurred. The costs to alleviate these defi- ciencies would need to be estimated. These costs would not be assessed to the military. Next would be an assessment of the system improvements require- ment to accommodate the additional travel demand resulting from the increases in military base personnel. The costs to meet these require- ments would then need to be estimated. Since the new development contributes some taxes and fees that could be used to offset some of the cost of needed infrastructure, these financial payments need to be estimated. Finally, the costs of meeting the additional travel demand due to the new development can be attributed to the new development based on its share of traffic on the facilities needing improvement. In estimating the cost attributed to the new development, the taxes and fees credited to it need to be subtracted. The process requires careful accounting to ensure that the proper payments are made and that the funds are used to improve the transpor- tation facilities in a timely manner. 106

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Background PaPer on ImPact Fees reFerences Adams, J. S., J. L. Cidell, L. J. Hansen, H.-J. Jung, Y.-T. Ryu, and B. VanDrasck. 1999. Development Impact Fees for Minnesota? Transportation and Regional Growth Study Series, Report 3. Center for Transportation Studies, University of Minnesota, St. Paul. October. Aecom Consult. 2007. Commission Briefing Paper 5A-11, Evaluation of Impact Fees and Value Capture Techniques. Section 1909 Commission. Aecom Consult, Arlington, Va. Jan. 19. Altshuler, A. A., J. A. Gómez-Ibáñez, and A. M. Howitt. 1993. Regulation for Revenue: The Political Economy of Land Use Exactions. Brookings Institution, Washington, D.C., and Lincoln Institute of Land Policy, Cambridge, Mass. Landis, J. M. L., D. Dawson, and L. Deng. 1999. Pay to Play: Residential Develop- ment Fees in California Cities and Counties. Institute of Urban and Regional Development, University of California, Berkeley. August. Newport Partners and Virginia Polytechnic Institute and State University. 2008. Impact Fees and Housing Affordability: A Guidebook for Practitioners. Prepared for U.S. Department of Housing and Urban Development, Washington, D.C. June. Opp, S. 2007. Development Impact Fees as Planning Tools and Revenue Genera- tors. Practice Guide 17. Center for Environmental Policy and Management, University of Louisville, Louisville, Ky. Powell, B., E. P. Stringham, and J. Estill. 2006. Taxing Development: The Law and Economics of Traffic Impact Fees. Independent Institute Working Paper No. 65. The Independent Institute, Oakland, Calif. Dec. 13. Williams, K. M. 2006. Alternative Funding Strategies for Improving Transportation Facilities: A Review of Public Private Partnerships and Regulatory Methods. Cen- ter for Urban Transportation Research, University of South Florida, Tampa. December. 107

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