Development Impact Fees

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Avondale City Manager Charlie McClendon and Spencer Kamps of the Homebuilders Association of Central Arizona debate the merits of development impact fees. The legislature is currently considering placing a moratorium on impact fees that cities charge homebuilders to help pay for roads, sewers and other public infrastructure related to growth.

Ted Simons: Arizona law allows cities and towns to charge home builders development impact fees as a way to make growth pay for itself. The money collected from these fees is used to build roads, sewers, water treatment plants, and other infrastructure related to new development. But home builders say impact fees are often too high and that they stifle growth by making homes more expensive. Lawmakers included a three-year moratorium on impact fees in the current budget bill that they had passed but have not yet sent to the governor. Joining me to talk about the merits of impact fees is Spencer Kamps, Vice President of Legislative Affairs of the Home Builders Association of Central Arizona and Avondale City Manager Charlie McClendon. Thank you both for joining us on Horizon.

Both: Thank you

Ted Simons: Spencer let's start with you. The idea of a three-year moratorium on impact fees, why is this a good idea?

Spencer Kamps: It's no shock to anybody throughout this economy is in a recession. The home building industry is in an actual depression. Case in point, in ‘05 we have at a high of 65,000 permits. Last year we did 13,000 permits. This year we are facing about a 50% reduction and on track to do about 5,000 permits this year. And the result of that is enormous job losses in construction. We have lost over 100,000 employees. We are at an employment rate of about 7, 8% last time I checked. And the legislature had the foresight and the knowledge to say, let's put something in this budget that creates jobs, quite simply. And the impact fees are, in fact, a barrier to actually building a home now days in the down pricing market. And this proposal would, in fact, create job. Case in point a thousand new homes creates 17,000 jobs. So simply doubling our projected permits this year from 5 to 10,000 creates almost 8,000 jobs. While providing sales tax revenues to the state and to local communities.

Ted Simons: OK. Why is a moratorium a bad idea?

Charlie McClendon: Well, the concept that growth ought to pay for itself is a long standing and good public policy decision that lawmakers in Arizona made a long time ago. And the fact is if we can't collect impact fees on new development, we still incur the costs associated with providing the infrastructure to serve that development. If we can't collect it from new development, that means existing residents have to pay for it. So it's really a matter of redistributing the costs and I find that short sighted and really unfair to existing residents that already paid their impact fee when they bought their home, and now will have to pay again either through higher water and sewer rates or some sort of other fee to collect that same amount of money. Because these treatment plant expansions and things aren't free. We just got done spending $43 million in Avondale to expand our wastewater treatment center. It was not needed to serve the people that live there already but because of long lead time to construct that we had to get it ready so we could accommodate growth when it occurred.

Ted Simons: I want to get you to comment on jobs in a second but to that point the idea that current residents are basically going to get hit again, your response.

Spencer Kamps: Well, it's simply not true. Because the fact of the matter is during this down turn what do we have sitting out there all over America but unfinished neighborhoods, quite honestly that are drawing complaints from people that live in these communities. You have 50,000 lots out there that have, what, infrastructure. I would argue long and hard that that infrastructure is already bought and paid for. It's serving those developments. You can go pull a building permit today on those lots. I would argue long and hard that growth has paid not only its fair share but more than its fair share to the tune cities have $600 million in reserve accounts in these impact fee accounts. So what we are saying is let's relieve this barrier temporarily to go allow those 50,000 lots that have infrastructure to be built.

Ted Simons: Talk about those lots that are there. They have already got what they need.

Charlie McClendon: Well, it's not true that they have what they need. They have the infrastructure necessary within that subdivision. They have the water lines, the sewer lines, the streets within the neighborhood. But the fact is when people move into those homes, and start using bathroom facilities and things, it has to go somewhere. And that's where the connection into the broader system becomes important. We have to have capacity at our treatment plants to treat the sewage even though the infrastructure may already be in that neighborhood, and it's about a four-year process to get a treatment plant expanded. So we had to incur the costs already to serve that new growth.

Ted Simons: Were fees charged on some of these lots with the infrastructure? Were those fees already charged?

Charlie McClendon: No. The fees are charged when the building permit for the home is issued. And so if you have got a lot that there's no construction on it, no impact fee has been paid yet.

Ted Simons: Is that how you see it as well?

Spencer Kamps: Yeah. I think Charlie brings up a great point. First of all, if you had a project, a development project meaning a planned community approved in 2000, and the city and at that time the city's fees were, say, $10,000 per lot. In a city over the course of the last eight years the city decided to raise those fees, all those increased fees apply to that lot even though at the time of approval your cost was $10,000 a lot. That's a barrier, number one. And number two, Charlie points out a great point. Impact fees are being used to fund infrastructure for not that home, but future homes. And what we are saying, and he brought it up in the wastewater example, we have an obligation in the future to provide the services but all the lots that are out there today that are vacant have infrastructure, and we are saying give them a temporary relief to do what, create sales tax revenues where cities are hurting and create jobs. And in an economy like this, when 100,000 people have been put out of work in our industry, we think that's a noble goal and so does the legislature.

Charlie McClendon: I think the argument that job growth is necessary, no one can argue with that. However, I would argue that creating a false economy to spur home development is not necessarily in our best long-term interest. This predicament we are in was partially caused by an oversupply of housing. In our community we have neighborhoods where 20% of the existing homes are standing empty, and I'm not sure that it's in our best interest to do something to cause new homes to be built when we have this oversupply of existing homes. I think we need to let the market forces work and get that supply and demand back in balance.

Spencer Kamps: I would like to respond to that because Charlie's view, I think, is valid. Not going to happen. It's the view of 2005. The cash is not there. Ask the banks. For anybody to go out and willy nilly build homes. We are a demand-based industry. We don't build a home until we have a contract signed. There are people that are attracted to foreclosure sales and they should go buy those homes but there are also people attracted to only new home sales and they ought to be able to have the opportunity to purchase one in this market.

Ted Simons: Are you saying that it might be better to sacrifice some jobs, construction, home building jobs, if it means down the road in the future healthier cities?

Charlie McClendon: I think there is some validity of that argument and the fact is the jobs are already gone. We could do something to spur development right now, perhaps, and bring some back. Although I don't think that there's a demand for a lot of new homes no matter what the impact fee is right now. And I do think that it's important for us to build a more sustainable economy in the future, and I think getting this oversupply absorbed by the market and letting the market forces work is critical to our recovery.

Ted Simons: Comment on that, please.

Spencer Kamps: If there's no demand this is not a problem. If there's no demand and there's a moratorium in place and no homes are being built and the cities don't lose out any revenue. The cities aren't losing revenue, aren't losing out on any revenue right now because there's no growth. Theoretically Charlie is right, nobody's buying homes. Let's take this chance and create some jobs and try and spur some economic development. What we are talking about here is capital. We're not talking about funds that would go into a city's general fund. We are talking about capital needs only. And of all the measures in the budget, the sales, the single assessment ratio, the V.L.T. cut, this one by far spurs more jobs than anything out there and has the least amount of impact to cities.

Charlie McClendon: I think it has tremendous impact to cities.

Spencer Kamps: Compared to single assessment?

Charlie McClendon: I think existing residents that will have to pay twice that will bear the burden of this, we spent $43 million to expand our wastewater treatment plant part of which was financed through borrowing because we didn't have $43 million just sitting in the bank. We have to make the debt payment on that every year. If we don't have impact fees coming in, then, our existing residents have to pay that. And the fact is if allow homes to be built without paying that fee, we never collect from them.

Spencer Kamps: Impact fee revenues because no new home destruction how are you paying that bond debt now?

Charlie McClendon: We are paying it out of the reserve that you indicated was in those funds.

Spencer Kamps: They are wisely using their reserve to fulfill their financial obligation. We are asking them to do that.

Charlie McClendon: Let me talk about those reserves. In our sewer impact fee fund at the end of 2008, we had $20 million in fund balance. Because that had been being saved up throughout years because we knew that this planned expansion had to come. At the end of this year, June 30th of 2009, we will be under $100,000 in that fund because we spent that money for the purpose for which it was collected. Anybody who saves for anything understands that. If you have a college fund for your child you better have a high balance in there right before they start college because it's going to start going down.

Ted Simons: Please, go ahead.

Spencer Kamps: Well, I mean, simply put, every municipality in the Phoenix area has continued to raise fees in this downturn. Six communities right now are increasing -- considering fees. I understand how they want to run their city but at end of the day, in these economic times, their decision is to actually stifle potential job creation as opposed to helping it. Like in California and Florida where many communities have looked at lowering their fees.

Ted Simons: How can cities in this situaion, when there's not much going on, prepare for the next boom? And it may be a capital B or lower case B but it's coming. It will start upticking soon. How can they prepare without losing out on these fees?

Spencer Kamps: The fact of the matter is if anybody was to put a development in the production today, takes about three and a half years to get through the entitlement process. Putting your infrastructure which was required as a condition of zoning. Not impact fees, a condition of zoning. Takes three and a half years which is why we chose the time frame three years because no new projects are going to get put on line. Number two, we are talking as if impact fees are the only way to provide infrastructure. They are C.F.D.s. There's no sewer capacity you are not going to be approved. It's against the law. There's a multitude of ways to provide infrastructure and the question is, the question for the legislature, the questioner for the people watching in show is, does it make good sense for those 50,000 lots that have infrastructure to be provided an opportunity for a new home in this down priced market and create jobs? That's the question.

Ted Simons: That's the question?

Charlie McClendon: Well, the question really is who pays? We know the costs of providing this infrastructure. And the question is, no, they don't. They don't have the capacity at the sewer plant, streets have to be expanded. When new traffic comes on the roads you have to install traffic signals. Our model is to be paid by impact fees.

Spencer Kamps: The state legislature --

Ted Simons: Yes.

Spencer Kamps: Made a decision not to build another school because of funding issues. A critical, critical infrastructure need of schools. And what they are saying is we need to build more stuff because in this economic down turn, over job creation, that's ultimately what we are looking at here.

Ted Simons: Real quickly, are you saying, we have about 30 seconds left, are you saying the infrastructure, yes, for this little plot it's there? That plot is there but surrounding areas still need fees to help pay for development?

Charlie McClendon: The infrastructure within a subdivision may be there but it has to tie into a bigger system. The sewage has to go to the treatment plant. It's not self-contained in that neighborhood and that's really where the costs come in.

Ted Simons: Last question for you. Should growth pay for itself?

Spencer Kamps: Absolutely.

Ted Simons: So you agree to that.

Spencer Kamps: Impact fees are an important tool out there. We have never said otherwise but at the send of the day during these economic times, do impact fees hurt economic growth? And they do. Case in point, in Avondale lots are at 12,000, impact fees are at 25,000.

Charlie McClendon: That's not true. The impact fee he's quoting, the majority of the homes built in our city are using 3/4 inch meters and the fee for that is going to be much less.

Ted Simons: OK. Gentlemen, I have to stop you right there. You sons of guns, thank you very mulch. Great discussion and great debate. That is it for now. I'm Ted Simons. Thank you so much for joining us. You have a great evening.

Charlie McClendon:Avondale City Manager;Spencer Kamps:Homebuilders Association of Central Arizona;

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