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Chapter 6. Implementation Considerations

6.1 Basic Principles

Creating a DIF program can be a costly and labor-intensive process. A well-planned fee program can generate sufficient funds to allow public agencies to adequately meet the increased public facility or service needs that new developments create. A poorly planned program can result either in not collecting enough money and being forced to pay for new developments through the general fund or in collecting too much money based on an unsupported fee program, thus exposing the program to a fee challenge.

According to the League of California Cities (LCC), for example, the basic principles that can help guide the implementation of a DIF program can include the following (2003, 7–9):

• Plan for future growth/development. Understanding where growth may occur within the jurisdiction can help in planning for specific public facility needs. In planning for such needs, to the extent practical, local governments should explore the opportunities for marginal cost pricing (i.e., leveraging the existing capacity as much as possible for geographic equity, as presented earlier). Typically, the local GP can serve as a guideline in this respect, and if obsolete, the GP should be updated before basing fees on the plan’s growth projections.
• Strike the right balance in fee structuring. Although it is important to tailor each fee to address a particular impact and to avoid broad-brush fees that could be subject to legal challenges, creating too many fee categories may create administrative difficulties in implementing and accounting for fees once they are collected. Also, new developments cannot be made to pay more than their fair share (especially for existing deficiencies), and fees must bear a reasonable relationship to the actual cost of providing only the incremental public services that new developments require.
• Establish reasonable LOS goals. The GP generally specifies the acceptable LOS, in accordance with the applicable standards, at which certain types of public facilities must be maintained. Although a jurisdiction cannot require new developments to pay for existing deficiencies, it can require new developments to provide an acceptable LOS, including deciding more generally whether to raise or lower the current LOS for public facilities. As an example, it is possible to use expenditures from the general fund to raise the LOS for existing developments while requiring new developments to pay for incremental LOS above what is currently in place.
• Keep the legislative body informed. At the beginning of the process to enact fees, it is important to ensure that the city council or other local decision-making body understands the nexus requirement. For slow-growth communities, the body needs to understand that new developments cannot be required to mitigate current deficiencies. For pro-growth communities, the body needs to recognize that undercharging new developments may result in a mandate that general fund monies be used to maintain required service levels.
• Assess effect on development feasibility. Too many exactions might hurt rather than help, the local economy. Before a jurisdiction starts creating multiple layers of fees, it would help to consider what types of developments are most affected by high impact fees and whether new fees will help or hinder the kinds of development it wants to encourage.⁷⁰
• Consider use of development agreements as appropriate. Development agreements (DAs), contractual arrangements between local jurisdictions and developers (where significant developer concessions can be negotiated in exchange for long term vested rights), are generally not constrained by the DIF legislative nexus requirements. If DAs are used, a provision should be included, whereby the developer waives any right to contest fees under DIF legislative provisions.

6.2 Key Implementation Elements/Processes

In chapter 4, presented basic legislative processes involved in establishing a DIF program at the local level. This section elaborates further on the key implementation elements identified in .⁷¹

Decision to Establish DIF Program

Once a jurisdiction has considered the areas where growth may occur and the scope of public improvements that will be required by this growth, it can decide to proceed with establishing a DIF program. As presented earlier, establishing a DIF program will depend on the relevant State and local laws, but it generally will require the following:

1. Projecting the future growth that will be served.
2. Identifying the current and projected LOS for each public facility.
3. Identifying any additional facilities or improvements that will be needed to accommodate future growth.
4. Allocating the costs of providing the needed public services between the existing population and
   new population.

In addition to the basic principles outlined in the previous section, the LCC also recommends the following additional factors to consider when establishing a fee program (2003, 11–12):

• Don't adopt too long of a time horizon for future growth. Pick a reasonable period within which the required improvements could be built and projected development could occur.
• Identify all infrastructure improvements for nexus study. Identify all improvements in which impact fees can be applied—including impact areas that are obvious (e.g., congested intersections) as well as those that are less obvious (e.g., the lack of art in public places)—and think creatively about the use of impact fees. Public input prior to initiating a fee study may help in identifying such improvements.
• Consider holding at least two public workshops. Public participation at the beginning of the fee process gives the program the opportunity to answer their questions and incorporate their concerns into the program. Public participation near the end of the process, before bringing the required ordinance for resolution, can highlight any potential legal challenges and allow jurisdictions an opportunity to respond appropriately before final action is taken.

Commissioning a Nexus Study

Once a jurisdiction decides what public services and infrastructure will require funding through impact fees, the next step is to commission a nexus (or fee) study. As presented in section 5.1, the goal of the nexus study is twofold: (1) to establish the legal support to impose the fee (i.e., nexus between the impact created and the amount of the fee imposed) and (2) to quantify the projected impact on local infrastructure. Unless the fee being considered is extremely rudimentary, an experienced consultant can help determine legally defensible fees. Consultants can also help identify fees that had not been considered and propose funding alternatives if impact fees are not sufficient.

Once a local agency proposes a fee study, developers may rush to secure project approval before the new fees are in place. To avoid this, the agency may consider passing a resolution requiring that all future development participate in the pending fee program, or it may attach conditions on approval, requiring new development to comply with whatever fee program the agency ultimately adopts.

Developing CIP

As presented earlier, many jurisdictions prepare a CIP in conjunction with a fee program. A CIP establishes a schedule of improvements necessary to accommodate the projected growth and typically includes the approximate size, location, time of availability, and estimated costs of all improvements to be financed through fees. The CIP is closely tied to the local GP that delineates when, where, and how growth may occur within the jurisdiction. Local governments may develop capital improvements for their entire jurisdiction or for specific geographic areas where they established SPs.

Public Hearing and Procedures

State DIF-enabling legislation typically delineates specific procedural requirements to be satisfied in both establishing new fees and increasing an existing fee, including public hearing requirements. For example, the MFA in California requires that the local agency must conduct at least one scheduled public meeting with appropriate prior notices. Any costs incurred in conducting the required public hearing may come from the proceeds of the enacted fee. Upon adoption of the required ordinance and resolution, the fees become effective 60 days thereafter. The legislation also requires that a local agency make available, for public review, data indicating the cost to provide the service for which the fee is charged and the anticipated revenue sources to provide the service, including general fund monies if used.

More generally, the legislative body (e.g., the city council) cannot delegate the responsibility of adopting or increasing impact fees to its planning commission or other body. It alone adopts the necessary ordinance and resolution, including considering a fee amount that is lower than the actual
cost of providing public services. Some jurisdictions have found that taking a conservative approach with less than 100 percent full cost recovery can often help avoid challenges that the fee is too high (LCC 2003, 16).

Preparing Staff Report

In addition to the fee study and CIP, the staff report for adoption of a DIF program should also be a part of the administrative record. The city attorney should work with community development or public works staff to ensure that all required evidence is presented. A well-drafted staff report can be the crux of the legal defense of the fee. Any conclusions or opinions made by staff in the staff report or at the public hearing constitute "substantial evidence" for purposes of any future legal challenge. The staff report should refer to any improvement or infrastructure standards set forth in the GP or any SP and explain how the fee will help in meeting these standards (LCC 2003, 17).

Drafting Ordinance and Reaching Fee Resolution

An ordinance is a law or statute adopted by a municipal legislative body. A resolution is a formal expression of the opinion or will of an official municipal body, serving as a basis for adoption by a vote. The ordinance establishing the fee program provides the legal basis for the imposition of the fee and required procedures, as dictated by relevant State and local legislation. Although the resolution can contain the actual amount of the fee, it is not advisable to include the amount of the fee in the ordinance itself. Any change to the fee would generally require a formal ordinance amendment.

According to the LCC (2003, 18), for example, local DIF ordinances can generally include the following elements:

• Legislative findings supporting the imposition of fees.
• A section formally establishing distinct fund categories for each of the fees.
• A provision for an automatic annual adjustment for inflation.
• A statement specifying when developers pay the fees.
• A provision providing an appeal procedure.
• Provisions for exemptions or credits.

Annual Accounting for Fees

Once the local government pass the fee ordinance, the jurisdiction can start collecting fees. DIF-enabling legislation typically requires that jurisdictions account for every fee that they collect under its terms. It is generally required that funds jurisdictions collect for each capital facility or service be deposited in separate accounts and not commingled with any other funds for other impact fees. While funds are accruing for individual capital facilities, the jurisdictions are often required to keep track of each fund and provide an annual fee report. If they fail to accurately account for the collected fees, they may need to refund the fees. The details depend on the fee ordinance, the State enabling legislation, and any other applicable laws.

For States required to do an annual accounting, local jurisdictions may need to have the following information available at the end of each fiscal year (LCC 2003, 18):

• A brief description of the type of fee in each account or fund.
• The amount of the fee.
• The beginning and ending balance of the account or fund.
• The amount of the fees collected and the interest earned.
• An identification of each public improvement on which fees were expended and the amount of
  each expenditure.
• An identification of the approximate date by which the construction of the public improvement
  will commence.
• A description of any interfund transfer or loan and the public improvement on which the jurisdiction will expend the transferred funds.
• The amount of refunds made and any allocations of unexpended fees that are not refunded.

Annual Review of CIP and Audits

If the public agency adopts a CIP along with the DIF program, it may need to update the CIP regularly. In addition, anyone can request an audit of a local agency’s fee to determine whether the fee exceeds the amount reasonably necessary to cover the cost of the services provided. The local agency or an independent auditor may conduct the audit. All costs that the local agency incurs by preparing the audit may be recovered from the person requesting the audit.

Fee Collection Process

As presented earlier, impact fees can be collected at different times and different rules can apply for different structures, which can make the collection more complicated. For example, residential developments that include multiple DUs may be required to pay fees on the following:

1. A pro rata basis for each dwelling when it receives its final inspection or CO.
2. A pro rata basis when a certain percentage of dwellings have received their final inspection or CO.
3. A lump-sum basis when the first dwelling in the development receives its final inspection or CO, whichever occurs first.

It is up to the local agency to decide which of these three payment options it requires. If a different payment schedule is critical for the local agency, execution of a development agreement may provide an alternative fee collection approach.⁷²

Dealing with Fee Challenges and Refunds

State DIF-enabling legislation generally provides specific procedures for challenging DIFs. The challenges can be to fees imposed on a specific development project or to legislative approval of a fee program. For project-specific challenges, the protesting party may sometimes be required to pay all impact fees in full when due regardless of the pending challenges. In general, both the protesting party and local jurisdictions are subject to strict timelines in terms of when to file the protest, when to issue written notices, and when to provide documentary evidence. Also, procedural requirements may be different for different fee categories (e.g., water/sewer linkage fees vs. road impact fees).

A local agency generally cannot withhold approval simply because a party protests the fee. However, it can deny a project on other grounds even if the fee is challenged. It is important that the legislative body knows this principle before deliberations commence on a project in which fees are likely to be an issue. In addition, the imposition of fees that triggers the protest period typically begins when the local agency first imposes the fees as a condition of approval, not when the developer actually pays the fee.⁷³

In California, for example, for a project-specific challenge, if the court finds in favor of the developer, the court will direct the local agency to refund the unlawful portion of the payment with interest (LCC 2003, 23). Similarly, for a fee ordinance challenge, if the court finds the ordinance or resolution invalid as enacted, the court will direct the local agency to refund the unlawful portion of the fee plus interest. The refund will go to any person who has complied with the protest provisions of the DIF-enabling legislation.

6.3 Standardization and Transparency

In a recent comprehensive survey of impact fees and other development charges in California, one of the key findings was the difficulty of estimating the total fees (referred to as the fee stack) on any specific development project (Mawhorter and Reid 2018). This lack of transparency can prevent the State and localities from tracking and assessing the feasibility and reasonableness of fees. One way to lift the burden of unknown development fees is for localities to develop standards pertaining to the following:

1. Determining the amount of fees that can be charged.
2. A fee transparency policy with up-to-date fee schedule information in an easily accessible
   public format.
3. A clear framework of when local agencies can charge or change fees during the development process (Raetz, Garcia, and Decker 2019, 5–6).

In the past, the American Planning Association (APA) addressed some of the issues related to standardization as part of its broader impact fee policy guides (see sidebar 6.1).

Developers draft a pro forma⁷⁴ as a first step in conceptualizing a potential project, and the cost of all local development fees represents an important line item in that project budget. Impact fees and other development charges can make up a big portion of developers’ project budget, and these fees can vary widely from jurisdiction to jurisdiction.⁷⁵ For developers, this broad range makes it very difficult to estimate the fees for their projects because there are no standard costs across a given State. Without standardized systems, developers are not able to accurately predict total project costs, which is critical for the predevelopment stage. As a result, many developers are not willing to take the risk of starting a project without knowing the costs and often decide to take their projects elsewhere.

According to recent surveys, development fees are also often set with no oversight or coordination between departments that are responsible for administering different fees, further complicating what can be a disorganized process. Since there is no formal standard system for development fees, developers often rely on informal relationships with planning or building officials, putting smaller development companies with less connections in a disadvantageous position (Raetz, Garcia, and Decker 2019, 17).

According to the same surveys, developers typically begin by searching online for development fee schedules to come up with an estimate of fee costs. Beyond estimating project feasibility, development fee schedules also provide a window into the cost of building at the local level, as well as funding priorities for the local jurisdiction. Those priorities are reflected in the nexus studies that provide the foundation for establishing a specific impact fee and a locality’s related fee schedule. Key aspects of fee transparency, therefore, are availability and accessibility of fee schedules, nexus studies that explain the basis for fee calculations, and annual reports of accounting for fees that are already being implemented.

The same surveys also found that although a few localities post their nexus studies online, these studies are rarely easily accessible to the public and are often outdated. Fee schedules can also be challenging to find and are not always updated or complete. Although a few jurisdictions provided a centralized master fee schedule online, representing a neat compendium of all fees, most have adopted their fees through different ordinances and/or post them on different departmental websites, complicating the process of identifying and estimating fees.⁷⁶ Finally, it was also challenging to obtain annual fee reports, indicating a significant barrier to determining whether local agents are levying, collecting, and spending fees appropriately. Some jurisdictions do not consolidate all of their impact fees in a single annual report, making it necessary to request reports separately from different departments.

Despite these shortcomings, a few select localities were able to find remedies to the transparency and standardization challenges, representing best practices they could apply more widely (see sidebar 6.2). The following summarizes key recommendations from the aforementioned survey:

• Post all nexus and feasibility studies on the localities’ websites using a standardized format, if possible, rather than assuming the public can understand consultant reports.
• Release nexus and feasibility studies well in advance of fee adoption, allowing time for the public to review and debate their reasonableness.
• Post clear, comprehensive, and up-to-date fee schedules on a single regularly updated master fee schedule on the website of a department typically catering to developers.
• Provide clear fee maps (and, if possible, interactive GIS map for cross-checking) for neighborhood-specific fees identifying other non-DIF development charges subject to different legislative requirements.
• Provide fee estimates as well as guidance on how to calculate fees, including sufficient guidance to enable estimation of all fees for a given project early in the development process.

6.4 Internal Administrative Capacity

One potential disadvantage of implementing a DIF program might be that it is complicated and expensive to implement. Adopting a DIF program may carry additional costs to the locality because of the need for increased staff resources, for increased interdepartmental coordination, and for analytical rigor pertaining to nexus and feasibility studies.

All things being equal, a fee program may slow potential growth because developers may prefer to locate their projects in a community without impact fees. A fee program may also reduce the price of undeveloped land, as presented in chapter 3, because impact fees can act as a deterrent to develop open land. Establishing the right level of impact fees that does not impede developments, thus, requires localities to engage in more professional and sophisticated capital facilities planning processes, requiring additional administrative staff with the necessary skills. In addition, one of the administrative factors that contribute to the success of a fee program is having an innovative mindset and internal capacity to review, deliberate, and implement an impact fee program (Carrión and Libby 2000, 4).

In many ways, the transparency-related challenges of finding detailed fee schedules, annual fee reports, and nexus studies online presented in the previous section reflects a lack of resources at the local level. For less-resourced public agencies, the daily work often takes precedence over conducting a full review of all development fees or consolidating annual reports and nexus studies. Requiring a higher level of transparency for nexus studies, for example, would impose additional administrative costs on local agencies. Although the cost of gathering relevant data and posting nexus studies can be relatively low, translating nexus studies for the public might be more challenging.⁷⁷ More generally, any added requirement focused on increasing transparency should consider the internal budgetary and staff capacity implications.⁷⁸

In general, as presented earlier, there can be significant variations in designing and setting fees. Different types of fees require different types of nexus analysis, resulting in localities adopting different multipliers for different facility types. The multilayered fee structure often calls for interdepartmental coordination and staff resources with a cross-departmental knowledge base. In the planning stage, for example, there needs to be extensive coordination between land use and facility planning because impact fees depend on a comprehensive land use and capital improvements program. In the implementation stage, in part because of political priorities, revenue needs, and different departmental authorities, fee implementation can often involve staggered rollouts of different fees in which the fee management responsibility needs to be split across multiple departments.

In addition to technical and financial departments, the role of the city attorney or the locality’s legal department also becomes critical in creating a legally defensible fee program that is consistent with the relevant State and local statutes. At minimum, the city attorney’s responsibilities typically include the following:

1. Drafting the fee ordinance and reviewing all project documents (e.g., fee study, staff report, council resolution, etc.) to ensure the creation of a full and proper record.
2. Ensuring that the fee study complies with the State enabling legislation.
3. Ascertaining that the fee study is written in understandable English.

The success of an impact fee program can also depend on the analytical rigor in nexus studies and, more important, in development feasibility studies that ultimately lead to the adoption of specific fee levels. As presented earlier, the depth of analysis undertaken by localities is often a function of resources available and some localities do not commission additional analysis beyond a nexus study, relying instead on more informal methods, such as working groups or comparing with neighboring communities. As a result, fees are often set at levels that fail to optimize revenues and hinder new developments.

To remedy the internal capacity issue, some localities with fewer resources have been able to devise a solution through a joint procurement strategy. For example, as presented earlier, the City of Palo Alto and 15 other jurisdictions in San Mateo County, California, hired one consulting firm to conduct separate (but combined) nexus and feasibility studies for each jurisdiction, resulting in cost savings of as much as 75 percent for all jurisdictions. Similar resource savings can be achieved when inter-jurisdictional fees are applied through regional collaborations—in this case, a single nexus and feasibility study is conducted across multiple jurisdictions. This illustrates one way in which smaller localities can innovate to reduce the cost of nexus and feasibility analyses while maintaining the necessary analytical rigor.

Footnotes

⁷⁰ For example, high residential impact fees can price low-income households out of the housing market and encourage developers to construct larger, more expensive homes in markets that can more easily absorb higher fees. Similarly, high commercial impact fees may drive business tenants to a neighboring city or an unincorporated area that has lower fees. One way to address such issues is fee waivers.

⁷¹ FHWA is not involved in these processes.

⁷² See Value Capture: Development Agreement and Other Contract-Based Value Capture Techniques—A Primer (FHWA 2020).

⁷³ According to the LCC, for example, it is also critical that the local agency provides written notice when a development project is approved, consistent with legislative requirements (LCC 2003, 23). The timeline to file suit typically does not begin until the notice is delivered to the developer, and failure to file the notice may result in an open-ended statute of limitations. This could place the agency in a vulnerable position should the developer build out the project and then file its protest and lawsuit. The easiest way to ensure the provision of proper notice is to include the required language into the agency's standard fee condition.

⁷⁴ For real estate investors, a pro forma is a report that gathers current or estimated income and expense data to project the net operating income and cash flow of a proposed property.

⁷⁵ According to the recent survey in California, for example, the fees can vary from $12,000/DU in Los Angeles to $86,000/DU in Fremont for multifamily housing and from $28,000/DU in Sacramento to $171,000/DU in Fremont for single-family housing—as much as a sevenfold difference (Mawhorter and Reid 2018).

⁷⁶ For a given fee, once online users can locate the fee schedule, they found fee calculations in most cases to be straightforward. They encountered more complications when they attempted to calculate total development fees for a proposed project, which ranged from unavailable or obsolete fee schedules to missing maps for neighborhood-specific fees.

⁷⁷ The upfront expense and administrative burden could be lowered by grandfathering in existing nexus studies, and localities could fold this added transparency into future contracts with nexus consultants.

⁷⁸ Raetz Garcia, and Decker (2019, 31) recommend that the increased transparency could perhaps be paired with additional support and/or technical assistance from the State.

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