Impact Fees
(from Maine Townsman, July 2000)
by Kate Dufour, Legislative Advocate, MMA

According to the Maine Department of Human Services, between 1990 and 1996 the population of Maine increased by 1.2%. In that same time period the populations of Cumberland and York counties increased by 3.3% and 4.2%, respectively. This high level of new residential growth forced some municipalities in Southern Maine to look for alternatives to the property tax in order to fund at least some of the increasing cost in municipal infrastructure necessary to accommodate the new growth. One alternative is impact fees.

Impact fees can be assessed on new residential, commercial and industrial development to offset the cost of additional municipal infrastructure made necessary by the development. Impact fees have predominately been used to raise the revenue necessary to fund additional road, sewer and water infrastructure needs. With the onset of the latest economic boom, a few high-growth municipalities are considering new uses for impact fees. Some of the new alternatives being examined include impact fees to offset ongoing school construction costs and the preservation of open and recreational space.

The type of growth dictates the kinds of impact fees used by municipalities. Municipalities with high commercial and industrial growth will typically focus their impact fees on infrastructure costs such as roads, water and sewer. In municipalities with high residential growth, local officials are exploring new uses for impact fees. The Cumberland County towns of Falmouth and Freeport, which between 1990 and 1996 experienced population growths of 15.7% and 13.2% respectively, are examining the use of school impact fees.

Impact Fee Law

The authority and process for developing and assessing impact fee ordinances is outlined in Title 30-A MRSA, section 4354. Under the umbrella of home rule authority, municipalities are authorized to assess impact fees to support infrastructure facilities such as wastewater, water, solid waste, public safety facilities and public safety equipment, roads and traffic control devices, and parks and open space. While the law lists some examples of the type of infrastructure improvements that could be partially funded through impact fees, the law also includes a phrase that does not limit municipalities to those six examples. During this last legislative session, lawmakers clarified that among other types of infrastructure, school construction can also be supported by impact fee revenue.

Although municipalities are authorized to adopt impact fees, the restriction and requirements associated with assessing impact fees are stringent. To support an impact fee ordinance, a thorough analysis of existing and future needs is required to clearly illustrate the need for this special type of assessment. A municipality must show that the new growth is directly responsible for the additional infrastructure.

When adopting formulas to assess impact fees municipalities must follow four standards.

First, the impact fee must be reasonably related to costs directly associated with the new development. An impact fee assessment formula must be constructed in a way that it connects the expenditure of the collected fees to the benefits received by the new development paying the fee.

To properly assess impact fees it is helpful to create per-capita or per-household use standards for infrastructure. For example, an analysis might show that the local water facility provide an average of 200 gallons per day of drinking water to a three-bedroom home. The creation of per-capita use standards enable town planners to cost out the impact of development on existing infrastructure.

The formulas created must also take into consideration credits attributable to new development. If the municipality issues a bond to assist in funding expansions of infrastructure, it should be acknowledged that the new development will pay a percentage of that debt through property taxes. That future payment of taxes must be taken into consideration when assessing the impact fee.

The second standard requires that the funds collected from impact fees be segregated from the municipality’s general revenue and expended solely on the infrastructure projects for which they were collected.

The third standard requires municipalities to establish a reasonable schedule for expending the funds in a manner consistent with the capital investment component of the comprehensive plan. While the state law does not specifically state what constitutes a reasonable schedule, most municipalities adopt a 10-year timeframe. This time period is consistent with the State Planning Office’s recommendations for adopting a long-term capital improvements plan.

Fourth, municipal impact fee ordinances must also establish a mechanism for refunding the impact fees actually paid should the payment exceed the municipality’s actual cost for expanding the infrastructure or should the municipality fail to meet the ordinance deadline.

An example of the calculation of an actual impact fee is provided in a sidebar to this article.

Falmouth

In the 1970’s, the town of Falmouth issued 25 single-family permits annually. In the 1980’s, that figure had grown to 50 new permits each year. During the 1990’s, the number of new permits increased to 100 per year.

In 1990, the U.S. Census had Falmouth’s population at 7,610. A recent analysis by Planning Decisions of South Portland projects the town’s population at the end of last year at 9,450. The town’s planning staff have created statistical profiles on the population effect of various residential growth rates. According to Town Planner George Thebarge, if the town’s residential development were to increase to 150 permits a year (which is not unfathomable given past growth rates and other events happening in Falmouth and in surrounding communities), the town’s population would double in 20 years.

With these increasing growth trends in mind, the town’s Comprehensive Planning Committee is examining the use of a school impact fee to offset the municipal cost associated with the projected new development.

In order to develop an equitably assessed school impact fee, the committee conducted extensive research regarding the cost associated with replacing Falmouth’s high school and elementary school. Based on a 10 unit, four bedroom development with a total assessed value of $3 million, the town determined that the school’s capacity would increase by seven new K-8 pupils and one high school pupil.

Using that research, the town found that to meet future growth (an estimated 1,000 new homes over the next 10 years) high school capacity would have to increase to accommodate 350 additional students. The high school currently provides for 400 students. The town then determined that 150 of those additional students would be attributable to past growth, and 200 students in the projected increase would be attributable to future growth. The local cost of increasing high school capacity to 550 student in order to meet past growth would cost $465,024. The local cost for accommodating the 200 "future growth" students over the next decade would cost $71,363 or $71 per new home.

The reason for the significant difference in projected local cost for accommodating the past growth (150 students) and for accommodating future growth (200 students) is found in the calculation of state subsidy for school construction. In this case, the town will have met its "circuit breaker" in such a way that the local cost for additional "future growth" construction are minimized.

The impact for building a new elementary school is estimated to be significantly higher due to the fact that town presumes it will be responsible for funding the entire $7.5 million project. As was done to determine the high school expansion cost attributable to new development, the town first determined that school capacity would have to increase from 610 to 1,120 elementary-level students. The town estimates that the annual cost of elementary school construction to accommodate that growth will be $601,819 — $431,304, of which will be attributable to "future growth". The per-household cost of future developments on the elementary school will be $431.

With this information the town is proposing to assess a combined elementary and high school infrastructure impact fee of $5,000 ($500 per year over a 10-year period) on all future single family developments.

Freeport

Although Freeport’s effort to address ongoing growth is still in its preliminary stages, a group of concerned citizens is working with the town to address the use of impact fees to manage the financial implications of new development. The Residential Growth Committee, consisting of 15 community members representing a cross-section of Freeport’s residents, was created to examine the impacts of growth and to find alternatives for managing rather than restricting growth in the town.

The committee has committed itself to accomplishing four tasks: 1) review existing growth areas and examine possibilities of creating a new growth area; 2) amend subdivision regulations to promote cluster developments and preservation of open space; 3) identify and work to protect significant areas of the town, such as historical properties, scenic views and roads; and 4) investigate the use of impact fees to address increasing municipal expenditures.

The timetable for the committee is to hold public meetings in the month of September to share any proposals that are developed and receive feedback on them. It is expected that the committee will propose to adopt open space and school impact fees ordinances on new development. To meet the town’s need for open space, the residents of Freeport recently supported a $500,000 recreation bond.

Impact Fee Future

The prevalence of impact fees in the future will be based on two circumstances: the performance of the economy and the success of impact fees in other municipalities.

Although throughout the state there are many examples of how municipalities have successfully assessed water, sewer and road infrastructure impact fees, high and ongoing levels of residential growth are requiring municipalities to examine the use of impact fees for additional purposes such as schools and open space. As more municipalities go through the exercise of carefully calculating the costs and benefits of new development, the duplication and creation of similar models in municipalities across the state will become more common place.

Although the use of impact fees is, in some circumstance, a good alternative for defraying the cost of increasing municipal infrastructure, in order to adopt an equitable impact fee it is necessary that all the supporting data are well-documented, the impact fee calculation is rational and easily explained, the impact fee assessments are carefully monitored, and the impact fee ordinance receives regular maintenance and updating as circumstances require.

 

SIDEBAR: Calculation of An Impact Fee

Municipality A has created a sewer treatment capacity standard of 200 gallons/day per three-bedroom home. A new 10 unit single-family three-bedroom development is being built in the municipality. The municipality has borrowed $2 million at a rate of 7% over 10 years to expand the treatment facility to address capacity issues associated with past growth as well as for the new development. The cost per-unit for expanding the wastewater infrastructure is $5,000. The average assessed value of a three-bedroom home in the new development is $100,000.

To properly assess the impact fee on the new development the municipality’s first step is to determine how much of that cost is attributable to the new 10-unit development. This is calculated by multiplying the per-unit cost of the expansion by the number of new units.

Cost Attributable to New Growth = Per Unit Cost of Expansion X Number of New Units.

Next, the municipality must adjust the cost attributable to the new growth by the Unit’s contribution toward the debt repayment ($2 million loan) through property tax assessments. For example, if the new home is assessed at $100,000 and the debt mill rate is .000175, each unit’s annual debt repayment assessment is $17.50.

Annual Debt Repayment Contribution = Assessed Home Value X Mill Rate to Pay Debt

In order to determine the new unit’s total debt repayment over the next 10 years, the present value must be calculated. The present value is calculated because the payments may decrease over the life of the loan. The present value determines what an investment made today will cost in a defined date in the future. Present value is calculated by dividing the future payment (annual debt repayment contribution) by one plus the interest rate raise to the term of the loan.

Present Value = Future Payments (Annual Debt Repayment)/(1 + Interest Rate ) Term of Loan

Municipality A would determine the present value of the debt repayment over the next 10 years by dividing $20.00 by 1.0710. The result of which is a per-unit contribution to the debt of $140 over the life of the loan. The impact fee assessed on the new development must be credited by the future debt payment. Based on that information the municipality could assess on each new three-bedroom home an impact fee no greater than $4,860, which is the difference of the per-unit cost minus the debt repayment.

Adjusted Impact Fee = Cost New Growth to Expand Infrastructure – Total Debt Repayment