Revenue Credits: The Methodological Frontier National Impact Fee Roundtable Arlington, VA October 5, 2006

Presenters  Clancy Mullen  Duncan Associates, Austin, TX  “Revenue Credits: Back to First Principles”  Randy Young  Henderson & Young, Redmond, WA  “Revenue Credits: Three Approaches”

Overview  Legal Framework  Park Impact Fee Example  The Standard Florida Approach  Overly Complex  May End Up Under or Over-Charging New Development  May End Up Exempting High-End Developments  The “Global Approach”  Does not Credit Outstanding Debt  Requires Restrictions on Use of Capital Revenue  An Alternative Approach  Based on Basic Principles is Worth Consideration

Case Law  Banberry Dev’t Corp. v. S. Jordan City, Utah Supreme Court,1981: “municipalities should consider...   the relative extent to which the newly developed properties... have already contributed to the cost of existing capital facilities (by such means as user charges, special assessments, or payment from the proceeds of general taxes)...   the relative extent to which the newly developed properties... will contribute to the cost of existing capital facilities in the future...”

State Enabling Acts  14 of 27 State Enabling Acts Require Some Consideration of Revenue Credits  SC:...  SC:... In determining the proportionate share of the cost of system improvements to be paid, the governmental entity imposing the impact fee must consider the:...(4) extent to which the new development is required to contribute to the cost of existing system improvements in the future;... (7) availability of other sources of funding system improvements including, but not limited to, user charges, general tax levies, intergovernmental transfers, and special taxation.

Two Basic Principles (1) New Development Should not Have to Pay for a Higher Level of Service than Existing Development (2) New Development Should not Have to Pay Twice for the Same Level of Service

What Deserves Credit?  Clear Cases  Future Debt Service for Past Improvements Counted in Existing Level of Service  Funding used to Remedy Existing Deficiencies  Optional Cases/Grey Areas  Future Grant Funding for Specific Growth-Related Improvements  Dedicated Local Funding that Must be Spent on Growth-Related Improvements  Earmarked Local Funding (e.g., Gas Tax)  Historical/Planned Expenditure Patterns  Past Property Tax Payments by Vacant Land (Mandatory in 6 States: HI, IL, UT, VA, WA, WV)

Park Impact Fee Example  Locality has Dedicated Funding Source for Capacity-Expanding Park Improvements  Alternative 1: Existing LOS/No Credit  Dedicated Funding will raise LOS for All  Alternative 2: Future LOS/Credit  Dedicated Funding will pay for Existing Deficiencies  Bottom Line: Same Impact Fee

Park Impact Fee Example  Existing LOS/No Credit  Existing 85 acres/17,000 pop. = 5 acres/1,000 pop.  Cost/ac. = $100,000; fee = $500/pop. = $1,500/unit  Growth = 100 units/year = $150,000 = 1.5 acres/year  Future 100 acres/20,000 pop. = 5 acres/1,000 pop.  Future LOS/Credit  10 year sales surtax = $100,000/year = 1.0 acre/year  Future 110 acres/20,000 pop = 5.5 acres/1,000 pop.  Deficiency = $850,000/17,000 pop= $50/person = $150/unit  Fee = $550/pop. = $1,650/unit – $150 credit = $1,500/unit

Florida School Impact Fee Credits  Local Capital Improvement Tax (CIT)  2-Mill Property Tax Earmarked for Capital Improvements  Standard School Credit Methodology is Complex:  Give Full Credit or Historical/Planned % to Capacity?  Credit Total Property Tax or Resid. Share Only?  Use Tax Base/Student or New Home Taxable Value?  What Assumptions of Future Home Value Appreciation?  How Many Years of Future Tax Payments to Credit?  What Discount Factor for NPV Calculation?

Results of Standard School Credits  May Not Result in Lower Fees  Fees May be Higher than Under Alternative Approach  May Unnecessarily Reward High-End Developers  Can Claim Bigger Credit and Lower Fees for High-Value Homes

Alternative Approach  Base Fees on Existing, Paid-For LOS  Cost per Student = Cost/Station x Stations/Student – Outstanding Debt/Student  No Property Tax Credit Needed  No Existing Deficiencies  Level of Service Excludes Outstanding Debt  Any Discretionary CIT Expenditures for Capacity Raise LOS for all

Example Standard Calculation Annual Tax Payments Per Student$1,444 % of Capital Funding for Capacity46.50% Annual Capacity Payments per Student$671 Present Value Factor (5.24%, 20 Years)15.61 Future Property Tax Credit per Student$10,476 Capital Cost per Student Station$23,565 Impact Fee per Student$13,089 Student Generation Rate0.316 Single-Family Fee$4,136

Example Alternative Calculation Capital Cost per Student Station$23,565 Existing Capacity per Student0.827 % Capacity Paid For58.5% Impact Fee per Student$11,408 Student Generation Rate0.316 Single-Family Fee$3,605

Advantages of the Alternative  Simple  Clearly Based on Basic Principles  No Need for Complex Calculations  Progressive  Only Relevant Factor is Student Generation  Larger Homes Generate More Students