Best and Worst Methods of Calculating Impact Fees

By Malizia, Emil | Public Management, September 2006 | Go to article overview

Best and Worst Methods of Calculating Impact Fees


Malizia, Emil, Public Management


Methods of calculating impact fees were developed and debated in the 1980s and early 1990s, in response to legal decisions that formulated the "rational nexus" test. Since then, methods have become simpler but less accurate. Some appear biased in favor of justifying higher impact fees for local governments, which are after all the clients paying for most impact fee studies, including regular updates.

HIGHER OR LOWER FEES?

Higher maximum impact fees give local governments more negotiating room with real estate developers and homebuilders. The higher the maximum fee, the greater the potential discount that developers may receive, to arrive at politically acceptable fee levels. Developers have rarely taken legal action, which would only delay the provision of needed public facilities and slow development. But many developers have called impact fees "pay to play" charges and have tried to win such compensatory concessions as higher densities.

In recent years, local governments have come under increasing pressure to find revenue sources beyond property taxes. Many have begun to charge impact fees at or near maximum levels. Developers have begun to push back, viewing the proposed fees as excessive and the methods on which they are based as suspect. In places where this confrontation occurs, local government managers and public officials need studies based on conservative methods that measure impact and benefit more carefully, even if the result is lower maximum fees.

In other local jurisdictions, developers remain willing to pay to play, perhaps because they can pass fees forward to space consumers or backward to landowners. In these places, managers and public officials may prefer aggressive methods, which result in higher maximum fees.

IMPACT FEE METHODS

A general approach to estimating maximum impact fees--and one that is intended to meet the rational nexus test--is presented below. This approach involves one conservative and one aggressive alternative for conducting each estimation task. For managers and public officials in jurisdictions with an adversarial development community, the conservative approach is better than the aggressive one. For those in jurisdictions with a cooperative and compliant development community, the opposite is the case.

Techniques presented below pertain to public facilities financed from the general fund (roads, open space, schools). Defensible impact fees for these facilities are more difficult to calculate, compared with those involving facilities for which special enterprise funds exist (water supply, sewage treatment, utilities). The relationships between demand/consumption and supply/capacity and the benefits received by fee payers are less clear. Thus, the rational nexus test is harder to meet.

Rational nexus requires evidence that new development causes a need for public facilities, is charged its fair and proportionate share of capital costs, and benefits from the public facilities provided. Rational nexus can be viewed as a continuum subject to broad or narrow legal interpretations. The aggressive methodology assumes a broad interpretation of rational nexus, whereas the conservative methodology assumes a narrow one. Under each task discussed below, "C" stands for the conservative method, and "A" is the aggressive alternative.

All methods driven by rational nexus involve estimating need/impact, capital cost, level of service, credits, and benefits.

1. Estimate need/impact.

C: Population, employment, and other growth forecasts over the next five- or 10-year horizon are translated into forecasts of new development (dwelling units, square footage of commercial space). These forecasts are disaggregated into the land use categories to be charged impact fees. The most appropriate demand indicator is determined (population, number of school-aged children, square footage of commercial space, and so forth to connect the demand generated by new development to the needed public facilities. …

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Best and Worst Methods of Calculating Impact Fees
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