Fri, Nov. 15

Impact Fees
Developers, municipalities at odds over benefit of 'tax'

To builders and developers, it is a burdensome tax that discourages growth. To cities struggling to keep service levels and infrastructure needs on pace with swelling populations, it offers a revenue stream solely dedicated to growth-related improvements.

Development impact fees, according to many builders, are albatrosses around the neck of economic development. And in most cities - although not all - they also serve the purpose for which they were designed: to fund long-term capital projects for street, public safety and park facility improvements needed as a result of new development and growing populations.

Some services, such as trash collection and water, are paid through user fees (essentially a monthly bill to each customer), while others are paid with a percentage of sales or property taxes.

In 1982, state lawmakers responded to rapid population growth by passing legislation that allowed cities to charge impact fees to new developments - commercial, residential and even industrial construction. The idea was to use the revenue collected to offset the costs incurred in providing public services to those developments and to plan for public infrastructure needs in the future.

The town of Payson in Gila County, for example, experienced an 88-percent growth spurt at the same time the state population grew 38 percent. Faced with the need to develop water resources and provide basic services, the town council there invoked its own fee ordinance in 1997, although implementation took another year in order to overcome community objections.

Payson's clash with developers reflects a battle that has played out again and again in cities and towns throughout the region and the state. As municipalities fight to keep up with the demands imposed on them by the influx of new residents, builders likewise fight to keep their businesses afloat and their products affordable.

Some cities have had the fees in place for years, while others have just recently considered implementing them. The city of Prescott began charging impact fees in 1995, long before the housing market crash. Lake Havasu City in Mohave County only recently began studying and discussing the fees.

And still others, such as Holbrook, Snowflake and Bullhead City, don't charge impact fees at all.

Timing is everything

In 2001, after six years of charging impact fees, the city of Prescott updated them to reflect rapidly changing demographics and continued strain on existing facilities that resulted from new growth. Having been early to the punch, Prescott is now seeing the benefits of impact fees.

"Since 1995, the city has collected nearly $13 million in impact fees that have helped to defray the cost of growth-related projects totaling $11.1 million," according to a 2006 report.

Through fiscal year 2007, the city spent $7 million in impact fee proceeds for a new community center, a library branch, two neighborhood parks, trailhead enhancements and the design for a new downtown fire station.

The greatest expenditure - about $3.8 million - went to the city's Big Chino Water ranch project to import more water to the area. Sedona and Payson had similar advantages in implementing the fees early on.

It is said that most things in life are a matter of timing, and for several communities, the fact is they jumped on the impact fee bandwagon just in time to see the bottom fall out of the housing market.

Camp Verde, for example, estimated raising $3.8 million from impact fees in five years, or an average of $760,000 per year. At the end of January 2008, 10 months after the fees took effect, the town had collected just $42,125.

Fees for the town of Clarkdale went into effect in November 2007, and predictions made during the onset were that the town would take in $243,966 the first year.

Clarkdale has yet to collect a dime.

Impact fees have been in place in Kingman only since July of 2006. In the first year, despite revenue projections of nearly $2.8 million, the city had collected only $784,000 - about 28 percent of the projection. And because of controversies surrounding the fees - specifically the building community's opposition - officials have been hesitant to spend any of the money. With four new members of council taking office in June, it's likely the fees will be either reduced or abolished, so officials currently are playing it safe to avoid possible litigation that could result from such measures.

Fees in Kingman add nearly $2,900 to the cost of a single-family home and more than $26,000 for a 5,000-square-foot commercial building - prices that are medium-ranged compared to other cities. But with thousands of homes sitting empty and idle in foreclosure or for sale - and because Kingman is the only city in Mohave County so far to implement the fees - builders have called for an evaluation that better reflects the market.

Housing slump's impact

Because of the housing market crash, it's difficult to lay blame to impact fees for slowed growth, but builders across the state continue to battle with municipalities, some pleading with officials to lower the fees; others suing to stop them altogether.

In Kingman, building permits for home construction fell 360 percent from 2005 to 2007 (the fees were implemented in 2006.) But the number of commercial construction permits actually rose - a fact that Kingman Mayor Les Byram cites often in combating arguments against the fees. Commercial permits jumped more than 55 percent since fiscal year 2005.

With a 9 percent annual growth rate, Yuma has held steady in commercial development as well, but the city's housing market has slowed considerably in the last year. When the fees were first implemented, Yuma was looking at subdivisions with plans for as many as 5,000 homes. This past year, Yuma issued fewer than 200 residential building permits.

"We're in a holding pattern on the rate until we figure out what the economy will do," Yuma City Administrator Mark Watson said. "It's been a good source of revenue and it's been generally good for getting some infrastructure in the ground as part of our capital plan. We've been able to do some projects we would not have been able to do."

Commercial fees and conflicts

It's accepted that cities charge developers hook-up fees to sewer and water infrastructure, and contractors building in a community don't often put up a fight to pay for those hook-ups. But it's a different story when it comes to impact fees.

According to Guy Gorman, community development and economic development director for the town of Parker, "There was no opposition to the impact fees" when the city enacted them. That seems to be an anomaly.

Prescott Finance Director Mark Woodfill said the city reviews impact fees about every five years. Its latest increases, although gaining support by many, drew a number of objections from the community.

The greatest objection came from the Yavapai County Contractors Association, which complained that increasing the fees to the maximum amount allowed by law would cause homebuilders to build elsewhere. In the face of opposition, only police and fire impact fees were increased.

That has also been the case in Kingman, where members of the local chapter of the Northern Arizona Building Association have fought tooth and nail over the city's fee structure. Although the rates are not unaffordable in comparison to other Arizona cities, homebuilders have argued that the fees make Kingman less competitive with its neighbors, as the two closest cities - Bullhead City and Lake Havasu City - do not (yet) charge the additional fees.

The homebuilders association in Mesa sued the city for imposing a "cultural" fee on new developments. When the lawsuit was filed in September, the city had just increased its fees on the cost of building a new home. The new fees, averaging $8,300 for a single-family home, rank 12th in the state, city officials told the Goldwater Institute.

Another sore point has been Prescott's decision to assess the bulk of the city's impact fees only on homes - not commercial buildings. Some cities don't charge fees to commercial construction under the premise that sales-tax generating entities already pay for themselves by contributing revenue to fund city services. That's the case in Payson, and in Prescott, officials charge commercial only for sewer and water infrastructure.

Late in 2006, the Home Builders Association of Central Arizona filed a complaint in Yavapai County Superior Court contending that Prescott and the Town of Prescott Valley were violating the state law that requires that "development fees must be assessed in a nondiscriminatory manner ..."

"The legal challenge is because neither Prescott and the Town of Prescott Valley are collecting impact fees from non-residential (construction)," said Russ Brock, vice president of municipal affairs for the association.

The homebuilding association in Kingman also has been active in pushing back against the fees, although to no avail. Despite association members' pleas to lower the fees and the mayor's desire to help builders in light of the market slump, a review in August 2007 yielded no results.

Gauging success

The millions of dollars spent on capital projects in cities that beat the market bust seem to show that impact fees are a worthwhile policy, both in theory and reality; they were able to use the money for its intended purpose of funding long-term infrastructure improvements that resulted from new growth. Other cities found themselves in a cloud of controversy and either no money to show for it or actual revenues that were far short of projections. Some cities have yet to implement impact fees at all. While it may be difficult to prove that impact fees discourage growth, gauging whether or not they fulfill their purpose seems to depend on location, timing and who is being asked.

Western Newspapers, Inc. staff writers of The Kingman Daily Miner, Williams-Grand Canyon News, Daily Courier, Today's News-Herald, Verde Independent, Camp Verde Bugle and Palo Verde Valley Times contributed to this story.

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