17comments.pdf

Politics

of

Impact

Fee

Methodologies

James

B.

Duncan,

AICP

and

Norman

R.

Standerfer,

AICP

Development

impactfee systems are acontroversial topic

among

developers

and

planners. This articleproposes that the use of locationally-sensitive impact fee methodologies can

have

positive effects

on

the cost _of

development

and

thepriceofthefinalproduct.

The

authorscautionlocal officialsagainst

jumping on

the"developmentfee

bandwagon,"

and

using fees to raise

new

revenues rather than as a regulatory

measure

to

meet

growth

needs.

Development

impactfeesystemsprovokeheated debate

among

proponents

and opponents

concerningtheequity

ofcost-shifting, theincidenceof

who

ultimately bearssuch

costs,

and

the effectivenessorefficiencyofmarginalcost

techniques in the provision of

new

infrastructure.

The

recent publication of Paying for

Growth:

Using

Development

Fees toFinanceInfrastructure

by

the

Urban

Land

Institute,

may

causeopponentsofimpactfeesystems

to voice

renewed

justification for their positions, based

upon

the report's

summary

conclusions.Butbeforeevery

builder, developer

and

realtorheedsthe clarioncallofthe

report to rush to the steps of his statehouse in order to

seek statutory prohibitonstoimpactfees,it

would

bewell to

remember

the sad state of affairs surrounding the current infrastructure financing crisis.

The

continued

rejection of local infrastructure

bond

taxinitiatives;

mora-toriums;uncertainty, extortion

and

regulatorydelay;

and

decreasingfederal

and

stateassistancearetheveryreasons

that"surrogates"forinfrastructureadequacy, in the

form

offairsharedevelopmentfees,wereoriginallyconceived.

The

authorsofthisarticle

were

among

thefirstto

cau-tion against the perils

and

pitfalls of badly conceived

development

feesystems

and

poorlyconstructedimpact

assessment methodologies.

Such

systemscanexhibit

most

oftheserious defects

and

consequencesallegedinthe

UL1

report.

However,

properly conceived

and

designed

meth-odologies

may

justas wellhaveneutraltopositiveeffects

on

theequity,incidence, efficiency

and

politicsofimpact

fee systems.

The

Trend

Toward

Cost-shifting

Simultaneouslyfacedwithdeterioratingexisting infra-structure

and

growth-generatedrequirementsforexpanded

facilities, local

governments

have

begun

to focus

upon

development

feesas promisingalternatives to increased

local taxes.

As

aresult, thelocaldevelopment

community

has

become

the targetofanarray of

new

impact-oriented,

cost-shifting techniques

employed

to permit each

new

development

project to

pay

its "fair share" of

new

in-frastructure

demands.

The

early efforts to

implement

development

impactfee conceptsfocused

upon

issuesof

legal defensibility.

As

a result of the pioneering efforts

and

litigative experiences of a variety of leading edge

communities

and

practitioners, the converging base of

judicial standards

and

tests upholding police

power

de-velopment

fees has been established.

Having

discovered the generalformulaforlegal

accep-tance, far too

many

communities

are leaping

on

the

development

fee

bandwagon

with onlya

minimal

under-standingof theoperativeeffect

and

implicationinherent

in themechanicsoftheendless variety ofimpact

assess-ment and

feeapportionment methodologies.

The

politics

of preparation

and

publichearing related to a

proposed

new

systemaregenerallyhighlydebated

and

controver-sial.

The

eventually adopted ordinance represents an uncomfortable

compromise

among

politicalexpediencies,

methodological tinkering, urgentfacilityneeds,

and

the perceived underlying urge toreform the

way

infrastruc-ture

was

formerly locally financed.

The

attendant publicdebate invariablycenters

on

asser-tions

by

proponentsthat

growth

should

pay

its

own

way,

that

new

development

should

pay

its fair share of

new

costs,

and

that the

new

system will foster the

growth

management

objectivesof

more

efficient provision

and

utilization offacilities.

Opponents

counter-argue constitu-tional

and

statutorytaxation

and

takingissues, intergen-erational inequities,risingcostsofdevelopment, housing

unaffordability,

and

anti-business, non-competitive

eco-nomic

disadvantages

which

will result

from

such

new

fees.

There is

no end

to the availability of literature

and

new

development

exaction

and

feesystems

now

prolifer-ating.

However,

until recently, verylittleseriousresearch

hasbeen, or could have been, undertaken to provide a

common

basisofempirical evidence concerning the

opera-tive effects of marginal cost impact fee methodologies, becauseoftheirlack oflongevity

Now

a

number

of

pub-lished surveys, case studies

and

similar research efforts

are beginning to appear.

The

ULI

report has

made

a

major

contribution to a

common

framework

for analysis

by

both proponents

and

opponents

of the operativeeffects ofimpact fee

metho-dologies.Based

upon

its

summary

conclusions, thereport

cannot becharacterized as a levelorneutralplayingfield

for analysis, but

more

as the first significant effort to

attempt todevelopdesignstandardsforthelocation

and

construction of the ballpark.

Tom

Snyder,

Mike

Stegman

and

the

ULI

are to be

commended

for their significant efforts.

Equitable

and

Efficient

by

Whose

Standard?

Traditionally, infrastructure at the local

government

levelhaslargelybeen financed through theproperty tax

on

land

and improvement

values.

From

an

equity stand-point, this

means

individual taxpayers bear financial

responsibilityfor infrastructureaccordingtotheir "ability to pay," not

on

the basis of useor impact,

which

is the

"benefit" principle of equity.

The

benefit principle is

similartothe privatecompetitivemarketprinciples

where

individuals

must pay

specificallyforthe

goods

orservices

they

consume. Development

fees represent a political

policy shift to the benefit principle, requiring

new

de-velopment

to

pay

its "fair share" of

new

infrastructure:

requirements

on

aproportional impactbasisratherthan

on

a value basis.

The

privatemarket theoryoffreecompetitionsuggests that price is the

primary

determinant of

economic

effi-ciency. Inthe public

good

and

servicefinance arena,user

fees,

development

fees

and

impactfees are

most

akinto

the benefit principle of equity, whiletaxes

on

value rep-resent the other

end

of the equity spectrum. Price, as represented

by

eithertaxesorfees, allocatesresources

most

efficiently

when

priceapproaches or equalsthemarginal

cost of producing

an

additional unit of infrastructure.

Marginal cost pricing is said to occur naturally in the

fantasyland of perfect competition.

To

the extent that

marketfailuresexistintheprivate sectororthatthepublic

sectorisprovidinginfrastructure at prices

below

marginal

cost, infrastructureisallocatedinefficiently.

To

the extent that the

development

oflandimposesability-to-pay costs

on

thecommunity-at-large

and

the developerdoesnot

pay

hisproportional,fairshare ofsuchcosts, therewill exist

inefficient spatiallocation of

development

and

inefficient

allocation of the costs to various land uses.

Opponents

ofmarginal cost approachesto

infrastruc-ture financingargue that the benefit principle of equity

results in a reallocation offormer costs, previously

bor-rowed

or deferred

by

the community-at-large through

taxes, to

new

feestothe

development

project

which

raise

thecostofdevelopment

and

ultimatelythe costofthe

end

product.

The

next extrapolation is to argue that

new

businesses

and

new

residents, without voice, are being

treatedunfairlyin relationtoestablishedones, raising

new

questions of intergenerational equity

and

incidence of bur-den. Equity, efficiency

and

incidenceissues are debated hotlywithin thecontext of

competing

ability-to-pay

and

benefitviews

on

equity, an extension of the traditional

City Hall political debates relating to "them versus us,"

"neighborhood

versus developer," etc.

A

third

view

ofequity, thehorizontalequityprinciple,

providesa

more

rational

framework

forsuchissues.

The

principleofhorizontalequityholdsthatpeopleinsimilar situationsshouldbetreatedsimilarly, orthattheyshould

contribute the

same

amount

tothefinancing of infrastruc-ture.This

view

of equityis

complementary

tobothother views,

and most

appropriate to planning,

development

regulation

and growth

management

considerations of a

spatial, geographic dimension. This

view

of equity

per-mitsassessment offinancingtechniquestobe addressed compatibly withthe

more

traditionalconcerns of the plan-nerfor location,timing

and

sequencingofinfrastructure.

Horizontalequitypermitspublic policytoconcentrate

first

on

thepolitical values ofcapital

programming,

ade-quacy

offacilities

and

the pattern of futurelanduse

and

development

as they affect theutilization ofcurrent ex-cess capacity, theproblemsofexisting deficiencies

and

the

planningforneeded

new

infrastructureintermsofreality,

notjust theory.Boththe privatesector

and

thepublic

sec-toragree that thefinancing of

new

infrastructureshould encourage

economic

efficiency, orderly

development

and

the

optimum

use of public facilities.

Debate

remains

polarized

between

thepros

and

consof appropriate

alter-native financing techniques based

upon

the effects of

"ability-to-pay" versus "benefit" approaches.

Equity, Efficiency

and

Incidence

The

horizontalequity

view

canservetolevelthe play-ingfieldfor debate.

The

cruxof

most

debatecenters

on

issues of intergenerationalequity.

Opponents

of impact

res-identsor businesses,

new

orexisting,

who

chose to

make

a

common

or similar locational decision. Itisimmaterial whethera

new

development

has financeditson-

and

off-site costs via a special taxing district or

an

impact fee

system(both constitute formsofmarginal cost-shifting).

Those

who

purchase a

home

in a certain

development

arepayingas aresultoftheirlocational decision. In real-ity, the largest market for

new

housing is not new,

in-migrating residents, but existing residents desiring

new

homes.

The

intergenerational

arguments

dissolve

when

tested against horizontal equity.

The

costs

which

new

development

may

impose

on

a

city for

new

infrastructure differ

from

location to loca-tion

and

vary

by

typeof use.For

development

tobe effi-cient, these costs

must

be considered in

making

either

privateor public capitalinvestment decisions. All other

externalities being equal, private

development

locating

where

costsarelowest is

most

efficient.

However,

private investment decisionstolocateelsewhere,dueto the private benefits ofview, waterfrontor similar amenities, reflect

theincorporationofhigheroffsettingprivatebenefits.

To

the extent that all

development

isrequiredto

assume

its

actual,locationallydistinctmarginalinfrastructurecosts, it can be considered efficient.

The

horizontal

view

of equity again reduces the efficiency test of

development

to the locationally sensitiveprice decision for the

home

buyer,

whether

new

or current resident.

Achievingefficientprovision

and

utilizationofpublic infrastructureis believed to occur

where

useis equal to

themarginalcosts ofprovision

and

when

benefits exceed

costsintheprovisionof infrastructure. Iforderly

develop-ment and

efficient use of public facilities are to be en-couraged,

we

must

recognize thelimitsof the pragmatic

applicability of the various views of equity as they are

assumed

tooperateinthe pure, competitivemarketarena. Alternativefinancingtechniques

which

shiftcostsfurther

alongthespectruminthe direction of

more

nearly equat-ing actual marginal unit costing reinforce efficiency

considerations.

With

thepropertytaxgeneralobligationbond,

we

have

theleastfinancing technique.

Then

comes

the

geographi-cally defined special taxing district, followed

by

the generalized, zonal

approach

to impact fees.

The

most

equitableapproach, however,embracestheuse of highly

locationally-sensitivecomputerized

models

forassigning

impact fees.

Impactfeesystemsthatare locationally precise

and

sen-sitive

most

completely define the truest off-site costs of

a development.

Such

systems reflectlower off-sitecosts

attributable to existing

unused

capacity within close

proximity

and

conversely reflecthigheroff-site costs

at-tributabletoseriously deficientcapacityproblemsinclose

Transportation improvements.

proximity.

To

the extent thatthe

form

offinancingofsuch

costsrepresentsthe truestmarginalcost, as

do

impactfees

versusspecialtaxdistrict or general obligationbonds, the

impactfeesupports

more

efficient use

and

provision of public facilities than other alternatives.

Efficient production

and consumption

of housing are

most

directly affected

by

the price of land, costs of

fi-nancing

and

the supplyofbuildablesites.

The optimum

allocation

environment

is the purely competitive free

market.

The

real

world

forproduction

and consumption

ofhousing isthelocal political jurisdiction.

A

myriad

of constantlychangingfactors distort the type

and

quantity ofhousingthatisbuilt

and

consumed

ina local jurisdic-tion. This is also true for non-residential uses.

The

most

obvious distortion factors relate to the rate

of

growth

being experienced at

any

point in time.

Both

production

and consumption

are affected

by

periods of rapidgrowth, slow or declining

growth

rates, the avail-ability of

and

ratesfor financing, inflationary pressures

on

labor

and

materialcosts

and

theeffectsofspeculation

and

inflation in land costs.

Propertytaxes, special assessments, exactions

and

im-pactfeeshavetheeffectof increasing thecost ofhousing

relativetoothergoods, thereby loweringtheir

consump-tion

below

efficient levels. Since infrastructure

must

be provided

from one

of these alternatives, the horizontal

view

of equity

would

supporta marginal cost

approach

as thebetter alternative to

make

up

these

payments

for infrastructure.

Thereis substantial agreement that local

government

attitudestoward

growth

reflected

by

theirregulatory

their pro-growth versus

no-growth

orientation have playedasignificantrole intheprovision orrestrictionof available supplies ofdeveloped land with respect to

de-mand.

The more

time-consuming

theregulatory process

and

the

more

growth-restricting thecommunity'sattitude,

the less available are adequate supplies of developable

land.

Such

factors similarly distort the production

and

consumption

ofhousingin termsof

economic

efficiency.

The

effectsof the factors describedabove, taken alone orincombination,distortproduction

and

consumption. Furthermore, theyaffect thepriceofhousing

by

dwarfing

the absolute cost of locationally-sensitive impact fees.

When

sound

planning, linkedcapital

programming

sys-tems, streamlined regulatoryprocedures

and

locationally-sensitive, methodologically correct impact fees systems

are well integrated, they can have a neutral to positive

effect

upon

development

costs

and

the price of the

fin-ishedproduct. Thisis particularly true

when

theresults

of suchintegrated

growth

management

systems

remove

artificialortheretoforeunresolvedpoliticalconstraints

on

the supply of developable land.

The

issueofincidence ofburden, or

who

pays,isgreatly affected

by

themethodological

approach

inherentin the

chosen financing technique.

Stegman and Snyder

imply

thattheonly"fair"

methods

arecontinuedgeneral obliga-tion

bonds

orspecial taxingdistrictsspreadingthe costs

toall according to their ability topay.

The

development

community would

argue that charging impact fees

re-quires such costs to be

added

directly to the final price

Growth impacts.

ofitsproduct, therebyraising thecostofhousingto the

new

resident. This issimilar to

moving

the incidence of

who

pays

from

thedevelopertothebuyerof

new

homes, or forward shifting such costs.

Since property values reflect underlying

economic

usage, it is not unusual to find a typical single family

house

appraised at $60 per square foot while

an

office

complex

is appraised at

$80

to

$120

per square foot in

the

same

locale.

The

developerof

commercial

property

therefore can argue,

under

the ability-to-pay principle of taxes, that he is

and

has been paying

up

to twice as

much

or

more

persquare footthan residentialproperty

developers.

In fact,

when

contrasted with a fairshare

peak

hour

road impactfeesystem, using themarginal cost benefit

principle, officebuildingsusuallygenerateonlyone-third of the

peak hour

trafficthattheequivalentsquarefootage

insinglefamily

homes

generate.

Only

intherarestof

con-ditions,

when

theuniform marketvalueof officeproperty

equals three times theper squarefootvalue ofresidential

property, can the price of infrastructure

under

taxesbe

saidtobefairorequalinthemarginalcost sense, relative to impact fees.

Uniform

feeschedules

which

incorporate overgeneral-ized zonal service areas provide

no

incentive for

devel-opment

to occur in

one

location or another. Precision

systems incorporating high degrees of locational

sensi-tivity, such as the pioneering

Broward

County, Florida

TRIPS

system, represent the leading edge offair share

marginal cost impact fee practice.

Such

locationally-sensitivesystemshave

two

other

sig-nificant attributes.

They

promote

efficientuse of currently

existingcapacity

by

providinga

more

accurateassessment

of impacts

and

incentives in the

form

of lower fees to

developerschoosingtobuildinlocations

where

capacity

exists.

The

locationally-sensitivesystem similarly

facili-tatesthetruestincorporation ofsuch impactfeecosts into

thetotalland

improvement

costdata

upon

which

invest-ment

decisions are

made,

thus permittingbothshort-

and

long-termsiteacquisitiondecisionstoincorporatesaid fees into land acquisition price negotiations.

The

result is a

high propensityfor such fees to be capitalizedor offset

in the price paid for land.

The

Politics of

Impact

Fees

Impactfeesfindtheir legalbaseunderthepolice

power

and

as such are extensions of traditional planning

and

regulatory activities.

They

are integral

components

of policy decisions relating to the provision of adequate

facilities

and

services, not unlike other regulatory

min-imum

requirements

found

intraditionalsubdivision

and

of

many

local

governments

to

view

impact fees as a

panaceafor instant

new

revenuesresultinginadistortion ofthe motives thatshouldexist for theiradoption.

The

raising of revenue

becomes

the objective, not the

regu-latory requirement that

development

provide adequate

facilitiesbothon-

and

off-siteinamarginalcost, fairshare

manner.

Fartoo

many

planners

and

electedofficialsview impact

feesas

new

sources of discretionary revenues. Infact, the rash of poorly conceived, overgeneralized, minimally

locationally-sensitivemethodologiessweepingthe

coun-try

promotes

the revenue versus regulatory

view

of

im-pactfees.

The

operativeeffectofthesepoor methodologies

istoforcethedevelopment community, throughthepolice

power

ploy, to

pay

fees into local trustfundsinorderthat local

governments

can

expend

such funds in a

manner

meeting the flimsiest benefit test

and

remain legal.

The

ULI

report attemptsto point out that

among

the

short-comingsofimpactfeesistheirlossofexpenditure

discre-tion. Inreality, thebenefit-expendituretestofimpactfees

is the

paramount

safeguard that the

development

com-munity

should be

demanding from

their feepayments.

Itshould

come

as

no

surprise that the

proposed

adop-tion ofan impactfeeordinance shouldraiseconcerns

on

the part of the

development community. Stegman and

Snyder havearticulatedtheabusiveeffectsofpoorly

con-ceived, non-locationally sensitive impact fee

methodol-ogies.

On

top of ever-changing ordinance requirements

and

increasing processing delays, the

development

com-munity

understandably reacts to

oppose

impact fees as

adding to itsproblems.

On

the other hand, thegeneral taxpayer, particularlyinhigh

growth

environments, feels

compelledto rejectever-burgeoningtaxestosubsidize

new

development and

is supportive of

any

technique

which

purports to shift the costs to the developersor users of

new

development

projects, regardless of the operative

effect of the chosen methodology.

The more

achosen impactfee

methodology

looks

and

operateslikea tax, the greater the likelihood that itwill exhibitallof the seriousconsequences

and

defectsalleged

by Stegman and

Snyder.

The

effectsof such

methodol-ogies areincompatible withall threeviewsofequity,

and

magnify

the distortionaryimpacts

upon

goals ofequity, efficiency

and

incidence.

The more

a chosen impact fee

methodology

seekstoemulateCalifornia's"impacttaxes,"

the greater the likelihood that suchfees willfall short of

fairshare, marginalcostobjectives

and

benefit-expenditure

tests.

Facility

Type

Methodologies

The

concept of horizontal equity provides

decision-makers

with the

most

effective

forum

forconsideration

of infrastructure financing alternatives. Private market

decisions

and

publicfacilitycostsshare

one

common

at-tribute

which

distinguishes

one

project

from

another,

and

which

impactssuccessful

market and

financing decisions

. . .location, location, location!To the extent thatchosen

methodologies can, within state-of-the-art professional

and

technicalcompetence,isolatefairshare,proportional

impactsof site specificor locationally

common

impacts

upon

specificinfrastructure capacities, itshouldbe

incum-bent

upon

government

to

do

so for all police

power

regulatory

development

fee systems. In so doing, the operative distinction

between

a tax

and

a fee are

made

apparent,

and

the bestapproximationofproportional

im-pacts

and

fairshare assessments can be achieved. Fairness

and

equityinapplication

among

"development

projects,"large

and

small, isbest demonstratedto

poten-tial payers of

development

fees

when

their"fairshare"is

clearlydistinguished

by

theirlocationalinvestment

deci-sioninrelationshiptoadequatefacilities. Privatemarket

development

decisions arebased

upon

thetotal estimate of acquisitions, development,

and improvement

costs,

which

vary

among

locations.

Development

feesareinrealitysurrogatesforthe

same

project's off-site infrastructure costs

and

should varyin

precisely the

same

manner

to assure

minimal

method-ological distortion of cost effects

on development and

housing. Facilitytypemethodologies shouldexpress the

proportionaterelationships

among

location, facility

ser-vicearea,

minimum

acceptedstandardsforfacilities

ade-quacy and

costs for utilization or expansion ofexisting

or

needed

capacity.

Facility type methodologies, to the extent possible,

shouldreflectclearly articulatedpublicfacility

and

service

standards

and

locational determinants in coordination withthe

community

comprehensiveplan.Thesestandards

shouldconstitute the

minimum

levelof service

adequacy

declared as publicpolicy.

Only

with suchdeclaration of

measurable standards can existing excess capacity or

deficiency be properly determined

and

further needs

projected.

The

ultimate political reality of properly conceived, locationally-sensitivefairshareimpact

methodology

isa

new

degree of regulatory certainty.

Such

systems serve

tolimitthedeveloper'sliabilityincomparisontothe

selec-tive

and

arbitrary

employment

of negotiated exactions

and

extortionary practices

which

fall almost exclusively

on

the

medium

to large scale developer.

James

Duncan

isPresident-electof the

American

Planning

Association.

He

iscurrentlyDirector oftheOfficeof

Land

Development

ServicesinAustin, Texas.

Norman

R.

Stan-derferiscurrentlyDirector ofthe

Department

ofPlanning