Can Impact Fees Cover Operational Costs?

Can Development Impact Fees (DIFs) cover operational costs? This question eventually comes up in every DIF meeting I have ever attended with city staff. Unfortunately, the answer is always the same; DIFs cannot cover operational costs. DIFs can only cover capital improvements that help maintain the city's current level of services.

Over the years, I have realized that this question regarding operational costs results from a need for more understanding regarding the fundamental nature of DIFs. To be clear, it is not the city staff's responsibility to understand DIFs; that is why there are consulting companies like RCS. However, a basic overview of DIFs can still be helpful for any city staff.

One of the paramount issues with DIFs covering operational costs is how they are charged. A DIF is a one-time fee charged for the entire life of a building. In other words, if you were to build a detached dwelling today, the DIF might be $30,000. However, this amount would have to cover the expansion of city services for the rest of that dwelling's lifetime. While this is a good solution for mitigating the increased demand created by a new residence on the city's services (such as water and sewer lines), it is not a reliable source of revenue for a city employee's salary. Relying on fees charged for new developments to cover a city employee's payroll is neither legal, prudent, nor realistic.

Understanding the intention of AB 1600 is also crucial in understanding why DIFs cannot cover operational expenses. Assembly Bill 1600 is also known as the Mitigation Fee Act, and the name of the bill itself clearly reflects its intention. The bill was created to mitigate the impact of new developments on a city’s infrastructure. It was not created to address existing deficiencies, and it is not a silver bullet that will fix all the city's financial problems. Under AB 1600, DIFs exist so that cities can derive millions of dollars in funding for capital improvements to maintain the city's level of service. As such, while DIFs are vital to protecting the existing level of service as a city grows, and expands, they were never designed to cover operational costs.