How are Jurisdictions Spending Your Impact Fees?

Filed in Codes and Regulations, Land Development by on January 23, 2019 3 Comments

Have you ever wondered if the impact fees your company is paying to various jurisdictions are going toward their intended purpose? Interestingly, they often are not.

Over the last 30 years, the Development Planning & Financing Group Inc. (DPFG) has been working with NAHB, HBAs and various home building companies in reviewing, critiquing, and determining the overall fairness and equity of the impact fees proposed by associated jurisdictions.

Over the last seven years, DPFG has conducted a number of in-depth audits of municipalities’ fee programs and we can now conclude greater transparency and oversight are needed related to the expenditure of fees.

Common misuses of fees

Most jurisdictions attempt to utilize fees for the intended purposes. There does, however, appear to be an almost uniform disconnect between the departments that prepare the fee study (e.g., manager, public works and finance departments) and the departments and/or personnel that collect and expend impact fees (accounting and public works departments).

In states with no fee audit requirement, DPFG’s audit findings have found the misuse of impact fees in four general areas:

  • Using fees to correct existing deficiencies. While reviewing a fee study, it was noted that federal and state authorities had cited a jurisdiction for not having sufficient fire stations. The jurisdiction was required by the authorities to use its own non-impact fee funds to construct a second fire station to adequately serve its existing population. During the peer review of the impact fee accounts, we discovered that the jurisdiction expended approximately $935,000 of impact fees it was collecting for fire stations 3, 4, and 5 for the construction of the second fire station.
  • Using specific impact fees to fund non-authorized capital facilities. During a review of a jurisdiction’s water impact fee accounts, for which separate impact fees were being collected for water capacity and water distribution, DPFG uncovered that the jurisdiction had utilized $4.1 million collected for water distribution to finance water capacity projects. The same jurisdiction also expended approximately $2.2 million in impact fees specifically for sewage collection facilities to fund the wastewater treatment plant, for which it was collecting a separate fee.
  • Using fees for the payment of non-capital assets. A jurisdiction funded more than $2.1 million in public works and park department salaries, payroll taxes, health insurance, vacation pay, overtime pay, and even retirement benefits. Fees were used to fund departmental office supplies, cellular service, travel, and meals.
  • Using fees for the repair and maintenance of existing facilities. In another jurisdiction, approximately $218,000 in funds were used to repair and replace existing park facilities rather than to construct new park facilities. The city has agreed to replenish the funds taken from the fee accounts through their general fund.
Ensuring proper expenditure of fees

Most state impact fee statutes are vague and open to interpretation, which often leads to misuse.

A possible solution is enacting impact-fee enabling legislation that outlines specific rules and guidelines for the estimation, collection, and expenditure of impact fees. This legislation should also provide a means for independent third parties knowledgeable in impact fees, public infrastructure, accounting and finance to audit the jurisdiction’s expenditure of impact fees.

As a starting point, industry associations may want to consider a broader effort to implement more specific legislation related to the estimation, collection, and expenditure of impact fees. By providing more detailed guidelines and implementing regular peer reviews of fee accounts, both the public and private sectors can feel more confident that jurisdictions are utilizing impact fees for their intended purpose, which is to provide necessary infrastructure for new growth.

Carter T. Froelich, CPA, is managing principal of the Southwest and Mountain Regions of Development Planning & Financing Group Inc. This post was adapted from an article in the Fall 2018 issue of Best in American Living. Read the full article here

Comments (3)

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  1. Ken Andersen says:

    I find that this article is quite interesting. I have found in our local communities that over the years this same sort of thing has happened. In checking the use of fees we found that one agency was using the impact fees to pay for rent of a community center. We had to take them to court to solve the issue. We have in the last month asked for an accounting of IF’s and was given only the amount collected and what subdivision they were collected for. Nothing else. We are currently working to get a better audit.
    DeKalb County Building and Development Association, DeKalb County IL.
    Ken Andersen, Executive Officer

  2. Over the last fifteen years or so, a number of local jurisdictions have been successfully sued in the state of Washington for the misuse of impact fees. I expect to see many more such suits, as they have resulted in large sums of cash being credited back to builders. We are getting better at watching them, but what we really need to do is get some reasonable caps on impact fees. We just paid over $12,000 for a whole litany of impact fess for a project in Blaine, WA. All the infrastructure is in place, and was paid for by the developer, yet they are getting these fees from each new home that is being built. It is wrong, especially since most of the homes here now never even provided their own infrastructure; it was all paid for by their property taxes.

  3. HArrt Crowell says:

    I do not understand why anyone is upset about paying all of these necessary fees. We builders make giant profits on each home we build and the unwary consumer does not car in the least that we have these fees.
    In fact the builders should actually reduce the price of the homes by the amount we pay for these fees instead of raising the price of the homes, after all the price of homes is rising a lot every year because of these fees and the lease we can do is to reduce the price at least as much as the government adds.
    Except if we do reduce the price of the houses the continuing property taxes would not be able to increase and the homebuyers will be unhappy they do not get to add an annual increase to government
    JUST Kidding About This but accurate.

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