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Democracy on the Front Lines
City Administrator’s Blog
Walter Denton
August 3, 2006
A few weeks ago, the Illinois Business Journal asked me to write an op/ed article in favor of impact fees. The Journal has a regular “Point/Counterpoint” section that features opinions from opposing sides of an issue. In my article, I explained how the City uses annexation fees, park land dedication, and other fees so that growth pays for itself rather than being funded on the backs of current residents. The issue has not been published yet, so I don’t know who wrote the “Counterpoint” piece opposing impact fees, but I assume it will be someone like Jerry Rombach, the executive director of the Southwestern
Illinois Home Builders Association.
It is unlikely that most O’Fallon residents subscribe to the Illinois Business Journal, so below is the full text of my Impact Fee article.
Impact Fees
Growth is typically seen as a positive aspect in most cities -- good for tax revenues, good for economic development, and good for overall community vitality. But growth often comes at a high price. Rapid development can leave a city strained in its ability to finance the associated infrastructure expansions (water and sewer, roadways, police and fire protection, parks and recreation, etc.). Revenue sources such as property taxes and sales tax are designed to fund operating expenses for current residents and businesses, not for growth. Property taxes on new construction take time to come in, often lagging 12-18 months after occupancy of the home or business. Meanwhile, the infrastructure services are needed as the growth happens.
This leads to a policy dilemma among city officials: how to promote growth in your community without burdening current residents to finance the new infrastructure costs they are not creating. What is the true cost of residential development when you include infrastructure improvements and the extension of city services (police, fire, park, maintenance, etc.)? How should the costs of infrastructure for new development be paid? Should growth pay for itself?
This is where impact fees come in. These one-time fees are imposed on new residential developments to help offset the cost of needed infrastructure and service expansion, such as water and sewer extensions, school and park land acquisition, and road construction.
State law has a narrow definition for what is an “impact fee,” but for the purposes of this article I will define impact fees more broadly to mean any fee imposed by a city to recover the costs of new development. By this definition, cities have been using impact fees for many years. We charge permit fees to cover the costs of reviewing building plans and inspecting construction. We charge water and sewer tap fees to cover the cost of connecting new developments to our water and sewer systems. We require developers to build the roads and utilities for new subdivisions at their cost. Developers routinely add these fees into the sale price of the house as the cost of doing business.
What are commonly referred to as “impact fees” are an extension of the same trend: What about covering the cost to build roads to get out to the new subdivision? What about covering the cost to build new fire stations to serve the new development? What about providing park land to serve the children who are moving into the subdivision? What about assisting the schools to accommodate the increased enrollment from new homes?
Of these newer forms of impact fees, the City of O'Fallon has adopted annexations fees and park land dedication fees. In 2001, the City of O'Fallon imposed annexation fees for new and current development when they are annexed into the city. Illinois is fortunate to have one of the best annexation agreement laws in the nation. The fees assessed through these annexation agreements are used to help offset the city’s cost of providing infrastructure and services for the new residents, such as arterial and collector roads, park space, and recreational amenities. Initially, they were $1,000 per housing unit but were adjusted in 2003 to $2,250 per housing unit.
Since these annexation fees have been in place, the City has experienced four consecutive years of record new housing starts, from 240 in 2002 to 384 in 2005. The first six months of 2006 has seen a slight decline in housing starts, but we are still on pace for around 330 new homes (which would be the second highest ever).
Another area of concern by the City Council was the severe shortage of community green space. Our 2001 Park Master Plan indicated that O’Fallon was deficient in park space and that six acres of park land is needed for every 1,000 residents. O’Fallon has increased about 700 residents per year, so we needed a mechanism to dedicate new parks to keep up with the influx of people in the new subdivisions. City staff met with local homebuilders and developers over a four-month period to draft a sensible park land dedication ordinance.
The ordinance calls for developers to dedicate six acres per 1,000 new residents (or every 353 new homes at 2.83 people per household) or to pay fees in-lieu of land consisting of $59,000 per acre of park land required. This works out to be roughly $1,000 per residential unit. The city decides whether to take land or fees, depending on the suitability of the land and the amount of land to be dedicated. As another alternative, the city will credit developers up to 50% of the required dedication acreage for use of private open space within the subdivision.
Studies have shown that houses located within 800 feet of a park or open space have an increased value of 5%-15% on average, depending on the type of house and park/open space. Contrary to some criticism from the development community, the city developed the ordinance for the clear purpose of obtaining park land, not to collect fees. There are instances where the city accepts a fee in-lieu of land in smaller subdivisions where the amount of land to be dedicated is generally less than what the city wants to accept for public ownership.
School impact fees have received a lot of attention recently, and the City of O'Fallon considered a school land dedication ordinance earlier this year. Our school system has also experienced a dramatic increase in enrollment as a direct result of the city’s rapid growth. To assist the schools in managing this increased enrollment, the City Council approved a school land dedication fee, contingent upon the Village of Shiloh also passing the fee. Our ordinance was not implemented due to the failure to pass the fee in Shiloh. State law requires school land dedication fees to be based on “specifically and uniquely attributable” information provided by each school district, not on an ideal standard everyone would like to achieve. We calculated the fees based on information the schools gave us from their Needs Assessments and Capital
Facilities Plans. While the school land dedication fee would have helped the schools, it was not intended to replace other funding mechanisms the schools have at their disposal for facility construction efforts.
With the $2,250 annexation fee and $1,000 fee in-lieu of park land fee, some have criticized the city for adding these excessive, unnecessary costs on the backs of the new residents. One of the criticisms against school impact fees is that 40-50% of new home buyers are current residents of the city so they are not impacting the schools. This argument has some relevance for schools, but not for public infrastructure and parks. These services must be extended to new subdivisions regardless of whether they are new or current O’Fallon residents.
One thing to keep in mind is that over the last three years, building material costs have escalated 24%, which are approximately 50% of the cost of the house. For example, the materials cost for a new $300,000 house have increased more than $37,000 over the last three years. In comparison, the $3,250 in additional city fees pales in comparison, particularly when considering the great responsibility placed on the city by the taxpayers to provide high quality roads, parks, police and emergency services, and at the same time trying to keep the municipal portion of our property taxes under control. Over the same three year period, the CPI for city services increased 13.5%. So while the builder’s costs have been going up, our costs also increase to provide these necessary services in fiscally challenging times.
Is there a threshold where too many fees and additional costs will take its toll on housing? Intuitively, we would all agree that there is a ceiling somewhere that would do just that, but there is no consensus on where that line is. During the process of implementing these fees, we were often told that development would stop in O’Fallon and go elsewhere if we continued to press for additional fees. However, housing starts in O’Fallon have remained strong.
Impact fees can be seen as an investment in the community, providing money for the current and future community growth. Without them the cost of growth gets passed on to the current tax base through increases in taxes, or by the city borrowing money through bonds, which also get paid off (plus interest) through the current and future tax base. Impact fees are collected upfront as the impact occurs, consequently getting the money into the needed infrastructure improvements much sooner, as well as creating a closer linkage between who pays for and who receives the services is made.
While the effects of these impact fees may be difficult, if not impossible, to quantify, the desirability of a community goes beyond a house’s sale price. Numbers indicate that people want to live in O’Fallon because of our great schools, safe neighborhoods, and family-oriented parks. These high quality services are not cheap and are paid for, in some small part, by impact fees.
So while we realize there is a threshold where too many costs are piled on, we must also remember that people demand excellent city services and they don’t want to pay more in taxes. So, as with most things in life, we are trying to find that difficult, reasonable balance between fees, services, the building community, and ultimately, the taxpayers.
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