By Jessica Cook, Director of Fiscal Consulting
Jon Cameron, Senior Municipal Advisor | Managing Director
Jason Aarsvold, Senior Municipal Advisor

Best Practices for Implementing Impact Fees

Many residents and policymakers in growing communities are concerned about the cost of infrastructure to serve new growth such as streets, utility extensions, and parks.  A common philosophy in this realm of public finance is that “growth should pay for growth.”  Impact and development fees are ways state statutes allow municipalities to help offset the costs of some new public facilities necessitated by growth.

The advantage of impact fees is that they allow the municipality to collect revenues sooner than  property taxes which may be closer to the time the infrastructure needs to be installed.  To the extent that development fees can pay for infrastructure, the new property tax revenue can offset the cost of ongoing services to accommodate new development, such as public safety and street maintenance.  The development community, however, generally sees development fees as an impediment to its objectives and uses its political influence at the state and local level to reduce or refund them.  Therefore, when setting impact or development fees it is important to follow best practices.  These vary by state, in accordance with state statute.

Impact Fee Best Practices for Wisconsin

A municipality may enact an ordinance under Wis. Stat. § 66.0617 that imposes impact fees on developers to pay for the capital costs necessary to accommodate land development. Municipalities can collect impact fees for highways, as defined in Wis. Stat. § 340.01(22), and other transportation facilities, traffic control devices, facilities for collecting and treating sewage, facilities for pumping, storing, and distributing water, parks, playgrounds, and land for athletic fields, solid waste and recycling facilities, fire protection facilities, law enforcement facilities, emergency medical facilities, and libraries.

To implement an impact fee, a municipality must complete a public facilities needs assessment that 1) takes an inventory of existing public facilities, and identifies existing deficiencies in those facilities; 2) identifies new, expanded or improved public facilities required because of new land development based upon identified service standards; and 3) provides a detailed estimate of the capital costs of providing new, improved, or expanded public facilities including an estimate of the effect of the proposed impact fees on housing affordability in the municipality.

To meet these statutory requirements, Wisconsin municipalities should consider the following:

• Conduct an impact fee study that justifies the fees charged. A well-designed impact fee study will allow the reader to follow the methodology and math behind quantifying the capital cost of a facility that is related to new growth and impact fee eligible.
• Include capital projects in the impact fee study that either will happen or have a high probability of proceeding. If there are projects in your impact fee study that will not proceed, it is important to update the study to remove the project and consider alternative projects as necessary.
• Perform a deficiency/growth analysis of facilities and impact fees based upon identifiable service level standards. Examples of applicable service level standards include the number of acres of parkland by type per 1,000 residents, police or firefighters per 1,000 residents or library design standards as established by the Wisconsin Department of Public Instruction.
• Maintain a well-documented impact fee tracking system in the event you need to demonstrate impact fees are being spent or whether you need to refund the fees. In Wisconsin, impact fees need to be spent within eight years from the time of collection. There is a 3-year extension for sewer impact fees only. Also, ensure that you are spending the impact fees only on the specific projects that were listed in the impact fee study.
• Work to incorporate a strategy for using impact fee revenues. In many cases impact fees are imposed for capital facilities that a municipality finances with debt. Using impact fee revenues to help pay a portion of annual principal and interest payments over time can be a viable strategy for spending impact fee revenues and helping abate the debt levy for applicable projects or offset impacts to utility rates.
• To the extent that your municipality has or is considering a water impact fee, the Public Service Commission (PSC) will request a copy of the impact fee study during your next conventional water rate case. The PSC will expect to see assets that are identified in the study to be recovered with impact fee revenues to be booked into the utility’s contributed rate base. This can have an impact on cash flow for impact fee related assets, so it is important to build a cash flow analysis that takes into consideration a reasonable estimate of expected annual impact fee revenues.
• It is important to update impact fee studies regularly as conditions change within your municipality. This can include completing projects in the study and updating the calculations to reflect actual costs, checking total impact fee revenues collected against the amount identified in the impact fee study, and updating population and land use growth projections as warranted.

Impact Fee Best Practices for Minnesota

Minnesota statute is more restrictive than Wisconsin’s statute when it comes to what a municipality can charge development fees for; however, there is greater latitude in setting fees. Minnesota municipalities can only charge developers for utilities and park expansion.

Sewer, water, and storm water.  Most cities charge a development fee for each of their utilities.  This fee, by statute, must be “just and equitable.” Generally, we interpret this to mean that connection fees should pay for 1) cash-funded infrastructure that will serve growth; 2) debt service on debt that financed such projects; or 3) buying-in to unused capacity in the existing system.  For example, if the water treatment plant has available capacity, then development fees could be used to pay for a portion of the costs to finance or rehabilitate the existing plant.

Municipalities have the latitude to structure fees in a way that best suits their needs.  A common structure is to have two charges for the water and sewer utilities, respectively.  The first is  a “trunk” or “area” charge based on acreage.  Commercial or multifamily land  use that requires larger trunks may be charged more per acre than single-family use. The trunk charge is usually collected when land is platted.  The second charge is a “connection” charge and is usually based on a residential equivalency unit, or SAC unit if the municipality is in the metro area.  Storm water development fees are charged based on acreage, with higher fees for more impervious types of development. Many municipalities give credit on storm water fees to developers who install storm water facilities on-site.

Utility related development fees can be justified through a rate study that shows that  the cost of capital projects (for new growth or unused system capacity) is equal to or greater than the projected development fee revenue. If you are a growing community with a significant amount of development fee revenue, we recommend accounting for that revenue in a separate fund. The growth-related capital purchases and debt would also then be accounted for in the connection fund.

Park Dedication Fees. Through the subdivision process, municipalities may require that a reasonable portion of land be dedicated for public park and recreational use.  Often, municipalities will instead collect a cash fee in lieu of land dedication.  These fees are generally set by ordinance and must follow the methodology prescribed in state statute.

Municipalities that collect cash fees must set them aside in a special fund.  The cash must only be used for the acquisition and development or improvement of parks.  The cash cannot be used for ongoing maintenance of parks or other recreational facilities.

Municipalities must also demonstrate an essential nexus between the fees or dedication imposed and the purpose sought to be achieved by the fee or dedication. The fee or dedication must bear a rough proportionality to the need created by the proposed subdivision or development.

Regular review of local park dedication fees and structure are recommended.  This review will not only ensure compliance with state statute, but also confirm that all different property types are contributing appropriately to the municipalities’ park dedication fund.

Regardless of your state, the main principle that applies to setting impact and/or developer fees is that the uses of the fees should be clearly identified and quantified.  In addition, the fee revenue should be tracked and accounted for in a way that your municipality can substantiate its use retroactively if a challenge should arise.

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