1. THE CONTINUED EFFECT OF IMPACT FEES PAT WALKER, PAT WALKER CONSULTING MATT ROJAS, SQUIRE PATTON BOGGS (US) LLP Arrested Development

2. Presentation Objectives Review status of implementing sections of 9- 463.05 Discuss issues cities/towns are facing with implementation Discuss upcoming audit requirements for cities/towns without an advisory committee Potential RFI for audit services Questions

3. A.R.S. §9-463.05

4. Unauthorized Fee Categories Starting January 1, 2012, fees could no longer be collected for unauthorized fee categories §(K)  General government fees, administrative buildings, larger library/park facilities, arts & cultural fees, police/fire training centers, solid waste collection/disposal, etc.  By January 1, 2012, revised fee schedule with unauthorized fees deleted/reduced out of existing schedule were adopted

5. Treatment of Previously-Collected Fees Where development fees have been collected and accumulated for a purpose that will no longer be permitted under the amended statute:  Accumulated fees are “grandfathered” and can continue to be expended for the purpose for which they were collected through January 1, 2012; §(K) Alternatively, must be spent in the same “category” of necessary public service §(K)(1)  Example: fee collected for police training facility could be spent on other police facilities If accumulated fees are not expended by January 1, 2020, must be distributed equally among remaining fee categories (likely unconstitutional – we don’t recommend this one) §(K)(2)

6. Treatment of Fees Pledged to Debt Service “Grandfathering” of dedicated fees for debt service:  Where an existing fee (adopted prior to January 1, 2012) was pledged to debt service of facility financed prior to June 1, 2011:  The development fee may continue to be collected as necessary to meet those debt service obligations – even if the fee is no longer within an authorized category under SB 1525 §(R), Sess.L.§(4)  After August 1, 2014, can only be used to pay P&I on that debt service  Until August 1, 2014, any existing fee (i.e., fee adopted prior to January 1, 2012) can be pledged to debt service if it is a fee within an authorized category and it was included in an IIP adopted before June 1, 2011  The existing fee can continue to be collected after August 1, 2014 (i.e., after the adoption of a new fee schedule) if it meets these requirements §(S)

7. When an IIP Has to Be Amended IIP does not need to be amended for any change to planned infrastructure that:  Addresses only infrastructure elements in the existing IIP AND  Changes will not, individually or cumulatively with other amendments, increase the level of service in the service area OR  Cause an increase in the development fee of greater than 5 percent when a new or modified fee is assessed as a result of the changes to the IIP Notice of these amendments must be published at least 30 days before adoption; advisory committee must be informed §(D)(10) Regardless, IIP and land use assumptions underlying the IIP must be reviewed and/or updated a minimum of once every 5 years §(D)(3)  If update necessary, municipality must prepare update before 5 year expiration; hearing must be scheduled and notice provided within 60 days of completion of proposed update §(D)(4)  If update determined to be unnecessary, municipality must provide notice of this determination and provide process for objectors to file written objections §(D)(8)

8. Tracking Development Fee Expenditures and Refund Requirements Critical to carefully track fee collections and expenditures to maintain compliance with required time-frames and avoid refunds  IIP should identify realistic, conservative time-frames for completion of infrastructure items against which development fees are charged  IIP amendments should track and reflect any delays or changes in construction schedules or required infrastructure  Maximum of 10 years for most NPS infrastructure; 15 years for water/wastewater  Document financing agreements and reservations of capacity to avoid running afoul of new “entitlements” to immediate service  Consider more extensive use of development agreements, and disclose relevant agreement provisions in the IIP Tie fees and fee collections to infrastructure in a manner that limits the potential for and scale of future refunds  Remember that refunds only have to be paid against fees collected AFTER July 31, 2014; will have limited near-term effects

9. Tracking Grandfathering Rules Procedures in place to track new grandfathering rules?  Indexing rules are no longer effective or permitted; all fees must incorporate projected cost inflation in the originally adopted fee  Developments are entitled to pay under fixed/frozen fee schedule for 24 months after grandfathering trigger Suggest implementing procedure to issue written “frozen” fee schedule to developers at the time of the fee grandfathering trigger (with identified 2-year expiration date)  Commercial, industrial, multifamily: final site plan or subdivision approval  Single-family residential: initial building permit

10. Ten Percent Rule? I. If the development fee was collected for the construction of all or a portion of a specific item of infrastructure, and on completion of the infrastructure the municipality determines that the actual cost of construction was less than the forecasted cost of construction on which the development fee was based and the difference between the actual and estimated cost is greater than ten per cent, the current owner may receive a refund of the portion of the development fee equal to the difference between the development fee paid and the development fee that would have been due if the development fee had been calculated at the actual construction cost.

11. Review of Critical Dates January 1, 2012  Development fee moratorium lifted; new fee programs can be adopted  Unauthorized fees must be dropped from all existing fee schedules July 31, 2014  Last date that collected development fees will not be subject to refund requirements August 1, 2014  New fee programs must be in place; municipalities can no longer collect existing fees unless grandfathered January 1, 2020  All accumulated existing fees must be expended within fee category; remaining fees distributed

12. REPORTS & AUDITS

13. Annual Report Requirements Report must be posted on website and submitted to Clerk 90 days after close of fiscal year Can be “unaudited figures” Amount spent on capital project and location of project Amount spent on items other than a capital improvement project (i.e. development fee study, interest, etc.)

14. Changes to Annual Reporting Requirements Annual report requirements expanded as follows:  Must address each service area  Must address debt service obligations for any facility for which development fees are a source of funding (and the timeframe to repay those obligations)  Must address funds advanced by the municipality that will be repaid from development fees in greater detail (source of funds, terms of repayment) §(N)

15. ARS §9-463.05 (G)(2)

16. Task Force In December, a number of Finance Professionals met to discuss biennial audit requirements Communities that did not go with Advisory Committee are faced with an audit this year Issues discussed by team:  Know of 1 City that has completed audit  Many firms have offered to do audit  “Certified Audit”  Who can do the audit?

17. Task Force Audit has 3 parts:  Progress of IIP – Not clear by definition of “Inequities of implementing the plan”  Revenues collected and expenditures made for “each project in the plan” Revenues not tracked per project  Evaluate inequities – Is it on timing of projects or inequities on imposing the development fee?

18. Task Force When does audit need to be completed? Statute doesn’t specify. 2 years from effective date was group consensus August 1 effective date, 25 month audit? June 30 audit? Tie to annual report?

19. Task Force Review DIF ordinance to see what audit would contain (i.e. level of service in each service area?) Firm that did IIP and not study could do the audit? Agreed upon procedures – given by employees of the entity-problem? RFI has been developed and asking for feedback

20. Arizona Revised Statutes 9-463.05 Biennial Audit  In addition to Annual Report  Conducted by “qualified professionals”  Reviews: Collection and exp. of fees for EACH project Level of service in each service area Land assumptions Public Hearing within 60 days of release

21. Advisory Committee – Squire Sanders Alternative: biennial audits of land use assumptions, IIP, and development fees  Must be done by qualified professionals  Cannot be same professional that created the fee study  Public comment and public hearing required 21

22. Biennial Audit Alternative –Gust Rosenfeld In lieu of advisory committee, municipality may provide for an independent, biennial certified audit of land use assumptions, IIP, and development fees §(G)(2)  Must be conducted by “qualified professionals”  Cannot use same consultants that prepared the IIP/fee study documents  Must be posted and reviewed at public hearing within 60 days

23. Questions/Discussions

24. Contact Information Pat Walker – pwalkerconsulting@aol.compwalkerconsulting@aol.com 480-694-7179 Matt Rojas - matthew.rojas@squirepb.com matthew.rojas@squirepb.com 602-528-4000