Impact Fees: Who Pays for Community Development?

Dianne Lueder with Daryl O. Cooper and Michael Greeley

Real estate development is a mixed blessing that has stirred much controversy wherever it occurs. On the one hand, the development means a larger and stronger tax base. On the other hand, more homes mean more people to serve. This has an impact on all local government services. Water and sewer, roads, fire and police protection, schools, parks and libraries are affected by the addition of more homes and/or commercial buildings to the service area.

The debate on impact fees centers on two questions:
How do you measure the impact? Who pays for the additional service capabilities required by growth? Stakeholders in this debate include builders and real estate developers, local governments, the individual homebuyer, all of the current property tax payers in the service area, and state and federal legislators. All the stakeholders have a different view on who should pay and the type of impact incurred.

Home builders and real estate developers tend to see requests for impact fees as limiting real estate development because of the increase in home costs due to the addition of the fees to the purchase price. In some cases, impact fees are even viewed as a Machiavellian attempt to prevent growth altogether.

Home buyers, as a group, may blame impact fees for increasing home purchase prices beyond their means. A 1992 Reader's Digest article entitled "How Government Makes Housing Unaffordable" examines the issue of impact fees with the point of view that "local government is making it nearly impossible for millions of Americans to buy a median-priced home in the town of their choice. The problems created by government include zoning, permit mazes and exorbitant impact fees."¹ An editorial in US News and World Report titled "Not in My Back Yard" cites a report on why housing is no longer affordable. The report found that local regulations, zoning ordinances, including impact fees, and environmental laws have raised the cost of an average new home by 25 to 35 percent.²

Current property owners and taxpayers, at least those who are aware of the broader picture of community living, are concerned that their taxes will be raised to foot the bill for infrastructure improvements required because of new housing or commercial development. Resistance to shouldering this burden is often why it is difficult to win approval of referenda for new schools. Home owners are often the most vocal opponents to new development until the question of who will pay for the sewer, water, schools, roads, etc. is resolved to their satisfaction.³ Current residents want builders to pay their fair share.

Local governments see impact fees as the answer for funding the service expansion required by housing and commercial development. New building sites stress on existing sewer and water systems, roads, schools, fire and police, parks and libraries, everywhere more people will need to be served. The impact of residential and commercial property hits both the capital development budget and the operating budget of the government agency. Rapid or unanticipated growth may mean an immediate need for a new school building or sewer and water lines for which money is not available from current income or capital reserve funds. Operating funds are negatively affected because the tax income from new properties is not collected for up to one year or more after the property is occupied. Meanwhile, the new residents require service. In addition, state and federal regulations and standards require the local government agency to provide services to the new development that complies. Keller, Texas, a suburb of Fort Worth that experienced very rapid growth, was forced to comply with an order from the Environmental Protection Agency to upgrade their sewer system to meet the demands of the expanded population or face a forced shut-down

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of the system. Impact fees were the only way they could find enough money fast enough to meet the challenge.⁴

State and federal legislators are being pressured to pass laws that balance all the concerns about impact fees. A search of the EBSCO Business Source database in November 1995 produced articles about impact fee controversies in Albuquerque, Milwaukee, Phoenix, Nashville, New Orleans, Baton Rouge, Orlando and in the states of Washington, Utah, California, Texas and Oklahoma. Illinois legislators struggled in 1994 and 1995 with several bills intended to regulate school impact fees.

No easy answers were found in a review of the literature, but there was a central issue that emerged regarding impact fees. The press and the public generally view the local government agency as the "bad guy" in the impact fee issue. Terminology such as "local governments are devising creative financing schemes to dragoon builders into coming to their rescue"⁵ is common place. This seems to reveal a lack of understanding about how local government is financed and a deep skepticism about the stated needs of the local government agencies. The public wants assurance that the impact fees are based on a real need, that the need is stated at the time the fee is imposed, and that the local government agency is accountable to use the impact fee for the intended purpose. While there seems to be some level of understanding that the government services cost money to provide, everyone wants to pass the buck on who pays.

While the size of impact fees libraries might request is far less than that requested for schools, parks, sewer and water, libraries are lumped together with all other government agencies in the impact fee debate. An article in the Chicago Tribune about proposed impact fee legislation in Illinois quotes the head of the Home Builders Association of Illinois as saying, "Keep in mind that the $7,000 (in a bill drafted by the school alliance) is just for schools. Other impact fees could be exacted for roads, parks, libraries, water and sewer."⁶ Progress in impact fee legislation will be facilitated when the public and the other stakeholders trust that all the local government agencies are stating their dollar needs for impact fees in direct relation to specific objectives linked to established performance standards.

The first step in establishing this trust is to determine what impact a new development has on the agency. If a development is large enough, a new facility or an addition to the existing facility (a capital expenditure) may be required. True impact fees are intended for capital costs. Development may also necessitate additional staff and materials. These are generally considered to be operating costs and would be considered questionable costs for impact fees since they should be paid by the property taxes generated by the new homes or commercial developments. Numerous cases in various states, including Illinois, have held that to pass constitutional muster, the need for the fee must be "specifically and uniquely attributable" to the new development requested to pay the fee. The formula adopted to establish the appropriate impact fee should have a logical connection to the impact of the development and should cite the relevant standards that determine the service parameters of the specific agency.⁷ Statutory language exists in Illinois that would support the imposition of fees for park and schools sites, but there is no corresponding language for libraries.

Until statutory language permitting impact fees includes libraries, libraries need to work together with other local government agencies to lessen any negative impact of growth. Libraries should take an interest in any development plans that will affect their ability to give quality service and communicate their concerns. Communication and cooperation between local governments may be the best method to facilitate development agreements as an alternative to the impact fee. Library boards and administration should work to foster such cooperation on an ongoing basis.

An annexation or development agreement is a negotiated contract between a developer and the village or city considering a proposed development. By signing an agreement that includes a library donation, the developer indicates his acceptance of that term and his willingness to pay the same. Each such agreement would be a separate contract. The library would need to request that a donation be included in any annexation or development agreement entered into by the village or city. Because each agreement is a separate contract, it is not likely that such language would be included in a municipal code or ordinance requiring such a donation.⁸

The library needs to analyze each development for its potential impact on library service. In cases where there is extensive growth in an area over a short time span, the library may need to consider whether added space in the library is needed for patron seating and collection storage. Library space planning guidelines should be used to state the space needs in objective terms related to specific standards for service. Cost per square foot for an addition or new library facility can be identified using construction cost guidelines published annually. This information should be used in

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any request to the local municipality to include a library donation in any annexation agreement.

Rapid increases in population can put excessive pressure on the available collection of a library. When requesting an inclusion of the library in an annexation agreement, the extent of the burden on the library collection should be expressed in terms of a formula tied to established service standards and book costs. A sample formula for a library donation per residential unit follows:⁹

A. Avenues to Excellence, a standard for public libraries in Illinois, recommends that __ books per new patron be required to maintain an adequate book collection.

B. According to the Bowker Annual, the average cost per book is $___.

C. The following table of population density is an excerpt of the density table prepared by the Illinois School Consulting Service, showing the population generated by a six county sample for 1993. This chart is generally indicative of the current and short range projected family size for new developments.

Population

Residential	# Bedrooms	Population Generated
Detached Single Family	2	1.979
	3	2.801
	4	3.631
	5	3.630
Attached Single Family	1	1.068
	2	2.077
	3	2.403
	4	3.243
Apartments	efficiency	1.360
	1	1.753
	2	1.821
	3	3.018

Formula for Cash Contribution. The cash contribution will be equal to the number of books per person multiplied by the cost per book multiplied by the number of people per unit. For example, the contribution for a 3 bedroom attached single family is calculated as follows:

___X $____ X 2.403 = $____

(books per patron X cost per book X persons per household= $____)

The impact fee issue is likely to rage on as a topic of legislative debate until there is general acceptance that: (1) new development does create an impact on local infrastructure and governmental services; (2) there is a cost to be paid to provide the necessary infrastructure and services for increased housing and commercial development; (3) established legal or professional standards at the state, federal and local levels should be used to determine the level of impact by comparing existing infrastructure and services to those required by the standards if the development occurs; (4) impact fee requests are based on the actual needs of the agency using the established standards; (5) accountability to spend the fees for the purpose requested is built into any impact fee law; and (6) there is acknowledgment that the burden of new development needs to be shared by all the stakeholders involved. In the meantime, negotiating individual annexation or developer agreements between local government agencies and real estate developers may be the most defensible way to achieve the same goals as intended with impact fees. Success using this method will depend on local government communication and cooperation. The ability of the local community to reject developments that don't have a long-term interest in maintaining infrastructure and services also is very important. Negotiations for the annexation or developer agreement are where the stakeholders will determine how much each is willing to contribute to infrastructure and services in order to facilitate the proposed development. The job for libraries is to make sure they are part of a strong local government coalition and that they are ready to state library needs clearly and effectively in the negotiations.

Footnotes

1. Armbrister, T. (1992, March). How Government Makes Housing Unaffordable. Reader's Digest [CD-ROM], p. 89. Available: EBSCO Magazine Article Summaries Full-Text Elite: Item: 9204060949.

2. Gergen, D. (1991, July 22). Not in My Back Yard. US News and World Report [CD-ROM], p. 60. Available: EBSCO Magazine Articles Summaries Full Text Elite: Item: 9107221596.

3. Lyne, Jack. (1993, August). U. S. Infrastructure Only "Fair", Executives Say. Site Selection & Industrial Development [CD-ROM], p.894. Available: EBSCO Business Source: Item 9312083468.

4. Karmin, M. W.; Cohen, G. (1990, August 6). Beyond the Property Tax. US News and World Report [CD-ROM], p. 78. Available: EBSCO Magazine Article Summaries Full Text Elite: Item 9008061986.

5. Ibid.

6. Handley, John, "Impact Fee Impasse Heads for Springfield," Chicago Tribune, March 19, 1995, Sunday Real Estate Section, Final Edition, p. 5A.

7. Klein, Thorpe and Jenkins, Ltd. Legal opinion to Roselle Public Library District, Roselle, Illinois, February 14,1995.

8. Ibid.

9. Klein, Thorpe and Jenkins, Ltd. Legal opinion to Roselle Public Library District, Roselle, Illinois, March 6,1995.

*Dianne Lueder is the Executive Director of the Roselle Public Library District. Daryl 0. Cooper is the President of the Board of Trustees, and Michael Greeley is the Secretary of the Board. They have been active in researching impact fees and ways that libraries may receive a developer or annexation fee to ameliorate the impact of new housing and commercial development on library services.

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