Cost Accounting in Local Government

Development Impact Fee Calculation – Demystified

The calculation of Development Impact Fees (DIFs) sounds very technical and it can be, but the process is not insurmountable.  First off a consultant can take you through the process, but the consultant will need a great deal of input from staff. Without staff involvement, the report simply can’t be completed.   Having done this a few times, I’ll attempt to demystify the whole process, which is equal parts basic math and explanatory text.

An impact fee is simply the identification of a denominator (the new development anticipated, stated as a land-use database) and a numerator (the cost of projects needed to accommodate that same new development), and then distributed by the proper nexus for that infrastructure.  When placed in their proper places, the result is a DIF fee schedule.

Land-use Database – Initially you have to know the magnitude of the development increases to your agency.  Planning staff will need to provide their best estimate of what is on the ground now (e.g. 12,375 developed detached dwelling units), and how many more can be expected (e.g. the zoning code will allow the construction of 8,750 additional detached dwellings).  For those of you scoring that at home, that is a 71% increase in demand for every service the City provides: law enforcement, fire suppression/medic, circulation system, storm drainage capacity, parks, community centers and the list goes on.  Planning would also need to give you that same data for the six broad land-uses that cover most of the agency’s land uses.  The six broad land-uses include: detached dwellings, attached dwelling units, mobile home units, commercial lodging, retail/service and office, and industrial uses.

Nexus of Demand – Identify the “nexus,” which is the mathematical “thing” that most precisely identifies demand from any given infrastructure, like calls-for-service for police and fire services, daily trip-miles for the circulation system, impervious surface rain run-off coefficients for storm drainage, and the number of new residents for libraries, community centers and parks.  The agency’s existing infrastructure establishes the de-facto existing Level of Service (LOS) in lieu of a Master Plan.  Adding new demands to a static infrastructure capacity will result in a reduced LOS to the existing residents and businesses.  The avoidance of this reduction to the LOS is the whole point of the DIF calculation process.

After the nexus is identified and applied to both the developed and undeveloped six land use parcels, you can see the magnitude of the increased demand that will result from the approval of the new development identified in the land-use database.

The two words you need to understand when calculating development impact fees (DIFs)

Now, assuming that the City does not wish to see its current levels of service decrease, you will need to identify what infrastructure is needed to (keyword following) accommodate that anticipated new development.  I use the word accommodate because it best describes the process of identifying projects that are (second key word following) capacity increasing. This refers to items such as: more park acres to accommodate the new residents, more lane miles to accommodate the new business-related daily trip miles, or an expansion to the police station to house the new officers needed to respond to the new calls-for-service expected from all new development.   Realistically this pretty well excludes replacement of that sixty year old fire station because it’s 60 years old and not because of added demands from new development.

O.K., the math part is done, so next comes the wordsmith part.  Lastly, most everybody in municipal finance is aware of the five findings (in Government Code §66000) required in order to adopt impact fees.  You must explain, textually, the following:

  • The purpose of the fee.
  • The use of the fee.
  • The relationship between the use of the fee and type of development paying the fee.
  • The relationship between the need for the public facility and the type of development project.
  • The relationship between the amount of the fee and the cost of the portion of the facility attributed to the specific development project.

If you did the math portion right, you merely need to explain how you accomplished those steps.  However, if you can’t explain how you did the math portion, then you have over-reached in what projects you included earlier.

Put the two together and you have a highly defensible set of impact fees. The most important thing to remember is that the fees and the nexus need only to meet the reasonableness test. They do not need to be calculated to exactness.

Many a new finance director in a city that has a DIF schedule calculated by RCS will ask me the following question: “I’m getting requests from the various infrastructure managers for the expenditure of existing DIF revenues and I need to know what we can spend our existing impact fee collections on”.  Those DIFs may have been calculated before you were there or during your tenure.  My answer to that is always, “Those things that the City said they were going to spend them on when they were calculated and adopted”.  I let them know that in order to be sure that the requested expenditures are within the confines of §66000 of the Government Code, find the DIF report that contains the calculations and findings for those existing DIFs.  If you don’t have a copy, you need one (I would recommend starting with the city clerk, they never toss anything out, if not then contact the consultant that did the study.

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