Cost Accounting in Local Government

Methodology Utilized in DIF Calculations

Back in 1988, RCS identified two distinct methods for calculating development impact fees (DIFs) and identified them as inductive and deductive.  A third method, buy-in calculation, would be limited to public utilities and will not be addressed here. Using fire safety services as an example, the inductive and deductive methodologies are briefly described below.

INDUCTIVE DIF CALCULATION

This method employs DIF calculation by determining the cost and the capacity of a particular facility and identifies it as the model for all similar facilities.  What is known is the cost and capacity of a particular facility, and what is unknown is the base amount that will require use of the facilities and thus the total magnitude of those facilities that will be required.  As an example, your fire chief might determine that a two bay wide by two vehicle deep fire station can meet the needs of a population of 5,000 dwelling units or 10 million square feet of business space, or any pro-rata combination of the two. This methodology is helpful when the amount of additional residents and business square feet (at build-out of the city) is unknown.  Using this method, and assuming land and construction costs to be uniform throughout the state, the fire impact fee would not vary from jurisdiction to jurisdiction.

Advantage of Inductive Calculation.  One of the advantages to this type of fee is that it is absolute. When permits for 10 million square feet of manufacturing, commercial, or office space, or 5,000 dwelling units are issued, there will be enough DIF revenues collected for the model station, but not necessarily for the station that might be required.  Major changes to the City’s General or Community Plan growth estimates become irrelevant.  It simply doesn’t matter what is privately constructed in the City. Whatever is built will pay for its pro-rata share of the need based upon that model. It is, in effect, no-fault DIF estimating.

Disadvantages to Inductive Calculation. A significant disadvantage to this method is that the fee is based on the model and does not take into consideration unusual or specific needs that may affect the cost and thus the appropriate fee.  Additionally, it tends to focus on the ultimate or final product, such as the model fire station, but ignores overhead or support facilities such as fire administration offices, vehicle maintenance, or training facilities.

DEDUCTIVE DIF CALCULATION

This method of DIF calculation can only be accomplished by determining three major factors, they are:

1)      Land Use Database. What additional residential, commercial, and manufacturing development is expected to create demand for additional facilities or infrastructure based upon the city’s community (or general) plan and the zoning code?

2)      System Capital Improvements. What specific master plan facilities will be needed as a result of the identified demand growth?

3)      Land Use Demand (Nexus) Generators.  What are the factors that differentiate the demand for the services from one land use to another, or how does a detached home create demand for police services as opposed to a light manufacturing plant or any land use?

What becomes known are the specific facilities and any unusual circumstances that define the need for those specific facilities, including the cost of the identified facilities and the base of undeveloped parcels over which to distribute the financial responsibility for land use demand generators, and therefore the resulting project costs.  This method creates valid fees that will differ from city to city because it recognizes the specifics of geography and locally defined levels of service of each agency.

Need for Definitive Information.  The deductive method clearly requires a greater amount of effort as it requires a comprehensive needs-planning effort for the entire agency, both developed and undeveloped.  As an example, a fire department often has an adopted standard of a five minute or less response to all fire alarm calls.  However, it could be that part of a given city is very hilly and has five acre estate lots, each accessed by a slow curving road, while the rest of that city is flat, developed to five dwelling units to acre and is served by a typical grid circulation system.  Add to that there are 60 undeveloped acres in the City zoned as a manufacturing area with a private plan for an ammunition factory, a fireworks factory, and a gasoline refinery.  You can see the issues.

To meet and maintain the standard five minute response in this city, a station built in the hilly portion of the City would only be able to serve 500 homes, while a station in the flat area would be able to serve 3,500 homes.  The proposed factories and refinery are special cases where a five-minute response may not even be sufficient.  The result is that the cost to supply the appropriate level of service to the three above described areas will differ per dwelling unit or business square foot for each area of the City.  Information supporting such calculations will take effort to generate but are required to calculate a valid DIF schedule.

Advantages of Deductive Calculation. The advantage of a deductively calculated impact fee is that it will relate directly to the specifics of each city because the more than 500 cities in the state of California all differ in needs and standards.

Disadvantages of Deductive Calculation.  There are, unfortunately, numerous disadvantages to this calculation method.  Initially, this method requires a great deal of effort to generate the information necessary for a valid calculation.  Omitted projects will result in inadequate fee collections for all of the facilities/infrastructure needed.  The development community may find the results confusing as the resulting DIF schedule will vary from agency to agency, sometimes with little understanding as to why.  The deductive approach may also identify a disparity between the amount of infrastructure currently provided by the existing community with that being required by the future community.  Lastly, this type of fee will likely require more frequent updates.

IS EITHER METHOD MORE CORRECT OR HAVE GREATER VALIDITY?

Neither method is more correct.  Both methods, with proper information, would be a reasonable representation of what it costs to accommodate the public infrastructure needs and service levels of new development.  Thus, both retain inherent validity.  However some work better with one method over the other.  Public infrastructures that lend themselves well to the inductive DIF calculations are capacity specific wastewater treatment plants, water treatment plants, community and aquatics centers, and parks. Facilities that lend themselves to the deductive DIF calculations are circulation systems, wastewater collection lines, water distribution lines, storm drainage systems, police protection, fire suppression, and many others.  As shown by the above fire example, some infrastructure can be calculated using either method with similar results.

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