TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Javier Carcamo, Finance Director
PREPARED BY: Paige Hartman-Salazar, Management Analyst - Special Projects
SUBJECT:
title
Adoption of Development Impact Fees and Nexus Study
end
RECOMMENDATION
recommendation
Conduct a Public Hearing related to updating the City’s Development Impact Fees;
Adopt Resolution No. 24-4733 entitled: A Resolution of the City Council of the City of Murrieta, California, Approving an Update of the Public Facilities Development Impact Fee Schedule and Amending the City’s Fee Schedule; and
Adopt Resolution No. 24-4734 entitled: A Resolution of the City Council of the City of Murrieta, California, Adopting a Development Impact Fee Nexus Study, which Includes the Five-Year Fee Report (AB1600) for the Fiscal Year 2022/23 and Making Findings Required by the Mitigation Fee Act.
recommendation
body
PRIOR ACTION/VOTE
On April 19, 2016, staff presented a status update on Development Impact Fees to the City Council in a Workshop (Non-Action).
On June 21, 2016, a public hearing was conducted where the City Council considered all reports, and public testimony on the matter and continued the item to the July 19, 2016 Regular Meeting (Vote:5-0).
On July 19, 2016, the City Council adopted Resolution No. 16-3602, replacing Resolution No. 98-612 and establishing a new Development Impact Fee Schedule, and imposing a phased-in approach for some residential and office development for projects with entitlements no later than December 31, 2016 (Vote: 4-1).
On May 16, 2023, the City Council approved an Agreement with Willdan Financial Services to conduct a Development Impact Fee Nexus Study in the amount of $86,520 (Vote: 5-0).
On February 20, 2024, staff presented a new Development Impact Fee Nexus Study and updated fee schedule to the City Council in a Workshop (Non-Action).
CITY COUNCIL GOAL
Maintain a high performing organization that values fiscal sustainability, transparency, accountability and organizational efficiency.
BACKGROUND
History
A development impact fee (DIF) is a monetary exaction charged by a local government to a developer in connection with the implementation of an approved development project. DIFs can vary widely between jurisdictions because of differing facility needs. With the passage of Assembly Bill 1600, known as the 1987 Mitigation Fee Act (Government Code Section 66000 and following), the State of California recognized the burden on local governments from the rising costs associated with needed infrastructure and population increases associated with new development. The Mitigation Fee Act secured a system for identifying and collecting specific fees, dedications, reservations, and other exactions that local jurisdictions could regularly impose when properties are developed.
In October 1998, the City of Murrieta (City) first established its DIF program to fund new public facilities and purchase equipment required to provide essential services required by the demands of new growth and development. As a part of this process the City prepared a Master Facility Plan to identify the equipment and infrastructure needs required to meet the service demand of the increased residential population and business community (service population).
In 2013, the City Council approved an Agreement with Willdan Financial Services (Willdan) to prepare an updated Master Facility Plan and an updated DIF study. The Master Facility Plan reflects the combination of equipment, infrastructure, and facilities needed to support the build-out of the General Plan and Parks Master Plan.
In 2015, the City Council approved an Agreement with Willdan to conduct a Master Facilities Plan Update and Development Impact Fee Calculation Study. Staff presented a status update on DIF to the City Council in a Workshop in April 2016. Two public hearings were held, one in June and one in July. On July 19, 2016, the City Council adopted Resolution No. 16-3602, which replaced Resolution No. 98-612 and established a new DIF Schedule. Due to the cost increase, a phased-in approach was used for residential and office development for those issued entitlements no later than December 31, 2016.
Current Study
A Request for Proposals (RFP) for a Comprehensive DIF Study was advertised on February 10, 2023, with a submittal date of March 7, 2023. Willdan was awarded the agreement to conduct a new DIF Nexus study to ensure the City complied with new legislation, Assembly Bill 602 (AB 602).
With the addition of AB 602, Government Code Sections 65940.1 and 66019 were amended and Section 66016.5 was added. AB 602, which went into effect on January 1, 2022, requires a nexus impact fee study to be completed at a minimum of every eight years and imposes new requirements for specific justifications on how fees are calculated. One of the new requirements in AB 602 is the use of a square footage-based fee for residential development rather than the current per-unit charge.
The following infrastructure categories are included in the City’s DIF program:
• Law Enforcement
• Fire Protection
• Streets, Minor Bridges and Culverts
• Traffic Signals
• Storm Drainage
• General Facilities
• Park Facilities
• Community Centers
• Public Library
Development Impact Fees are imposed one-time on new residential and non-residential development only. According to the California Mitigation Fee Act, local agencies must prepare and consider a study documenting the following when adopting impact fees:
• Identify the purpose of the fee;
• Identify the use of fee revenues;
• Determine a reasonable relationship between the fee’s use and the type of development paying the fee;
• Determine a reasonable relationship between the need for the fee and the type of development paying the fee; and
• Determine a reasonable relationship between the amount of the fee and the cost of the facility attributable to development paying the fee.
Methodology
In preparing for this Nexus Study, each department reviewed its facility, equipment, and service level needs to determine comparable facility and service needs for the anticipated future population growth and related new development.
The Nexus Study uses one of three approaches to calculate facility standards and allocate the costs of planned facilities to accommodate growth in compliance with the Mitigation Fee Act requirements for each fee category included in the study.
The existing inventory approach is based on a facility standard derived from the City’s existing level of facilities and existing demand for services. This approach results in no facility deficiencies attributable to existing development and was used to calculate the Fire Protection, Law Enforcement, General Facilities, Parks, and Community Center facilities fees.
The planned facilities approach allocates costs based on the ratio of planned facilities that serve new development to the increased demand associated with new development. This approach is appropriate when specific planned facilities that only benefit new development can be identified or when the specific share of facilities benefiting new development can be identified. This approach was used to calculate the Streets, Minor Bridges and Culverts, Storm Drainage facilities and Traffic Signal fees.
The system plan approach is based on a master facility plan in situations where specific facilities are needed to serve both existing and new developments. This approach allocates existing and planned facilities across existing and new developments to determine a new development’s fair share of facility needs. This approach is used when it is not possible to differentiate the benefits of new facilities between new and existing development. This approach was used to calculate the Library facilities fees.
Workshop
On February 20, 2024, staff presented a report and presentation on the DIF Study and fee update to the City Council in a workshop and received public comments and direction from the City Council. Before the workshop, the City Clerk's Department notified interested parties with an active notice on file. Subsequent to the workshop, City staff received a letter of comment from the Desert Valley Builder Association, which can be found in Attachment 6. The City’s formal response addressing their observation can be found in Attachment 7.
Recommendation
Since the last study was conducted in 2016, various components of the DIF schedule no longer accurately reflect the current construction costs for planned facilities. Between 2016 and 2023, fees for the DIF program were never adjusted to account for inflation-related construction cost increases, which according to the California Construction Cost Index, increased by 47.7%.
Staff proposes a combination of approaches that best reflect the facility needs and services required by the City for future growth while recognizing the impacts to future projects. Table E.1 represents the new proposed fees.
For comparison purposes, Attachment 3 shows the current DIF amounts versus the updated proposed fees and the delta between the two in a fee per-square-foot measurement.
Staff also recommends several policy provisions, including a phase-in schedule for industrial and office DIF, grandfathering of fees for defined projects, and an annual inflation adjustment. During the DIF workshop, DIF credit policy was discussed as an alternative to a phase-in approach. At this moment, City staff does not recommend a DIF credit policy.
Grandfathering/Phasing
Staff is recommending a three-year phased-in plan for industrial and office fee types. Effective July 1, 2024, the industrial DIF will increase $1.017 per square foot per fiscal year until July 1, 2026. At that time, the industrial DIF will be established at the maximum justified fee of $4.68 per square foot. Similarly, the office DIF will increase $1.537 per square foot per fiscal year until July 1, 2026. At that time, the office DIF will be established at the maximum justified fee of $13.60 per square foot. The table below summarizes the proposed fee per fiscal year.
In addition to the phasing plan, staff is proposing a grandfathering clause that allows for projects that meet the following criteria, to be allowed to pay the current DIF fees as established by the 2016 DIF Nexus Study. For projects that are currently in the plan check review phase with the Building and Safety Division by June 30, 2024, the developer/owner will be allowed to pay or prepay the Development Impact Fees until June 30, 2025. Projects that are not in plan check review by June 30, 2024, are subject to pay the updated DIF in accordance with the 2024 DIF Nexus Study (Attachment 1). The updated fees will go into effect July 1, 2024, if approved by the City Council. Below is a snippet of Attachment 8 of this report which details the criteria for the grandfathering provision.
|
Residential Land Uses |
|
|
Residential - Single Family (SF) |
• All projects that are in the plan check review phase with the Building & Safety Division, on or before 06/30/2024, may pay the Current (Adopted FY 2016/17) Fee. These projects will have until 06/30/2025, or upon the issuance of a building permit (whichever occurs first), to pay/prepay their DIF fees. All projects that qualify will be notified. • Projects that are not in plan check review on or before 6/30/2024 or that have not paid/prepaid their DIF fees by 06/30/2025 are subject to paying the Updated Fee. • There will be no phasing for Single Family Residential projects. |
|
Residential - Multi-Family (MF) |
• All projects that are in the plan check review phase with the Building & Safety Division, on or before 06/30/2024, may pay the Current (Adopted FY 2016/17) Fee. These projects will have until 06/30/2025, or upon the issuance of a building permit (whichever occurs first), to pay/prepay their DIF fees. All projects that qualify will be notified. • Projects that are not in plan check review on or before 6/30/2024 or that have not paid/prepaid their DIF fees by 06/30/2025 are subject to paying the Updated Fee. • There will be no phasing for Multi-Family Residential projects. |
|
SB 330 Residential Projects |
• Projects that follow the provisions of SB330 relative to fees for residential projects, that have filed a zoning application that was determined to be complete, have their development fees frozen for 30 months from the date of final approval. |
|
Non-Residential Land Use |
|
|
Commercial |
• All projects that are in the plan check review phase with the Building & Safety Division, on or before 06/30/2024, may pay the Current (Adopted FY 2016/17) Fee. These projects will have until 06/30/2025, or upon the issuance of a building permit (whichever occurs first), to pay/prepay their DIF fees. All projects that qualify will be notified. • Projects that are not in plan check review on or before 6/30/2024 or that have not paid/prepaid their DIF fees by 06/30/2025 are subject to paying the Updated Fee. • There will be no phasing for Commercial projects. |
|
Office |
• All projects that are in the plan check review phase with the Building & Safety Division, on or before 06/30/2024, may pay the Current (Adopted FY 2016/17) Fee. These projects will have until 06/30/2025, or upon the issuance of a building permit (whichever occurs first), to pay/prepay their DIF fees. All projects that qualify will be notified. • Projects that are not in plan check review on or before 6/30/2024 or that have not paid/prepaid their DIF fees by 06/30/2025 are subject to paying the Updated Fee subject to the phase-in provisions below: • On 07/01/2024, *Phase 1 of the Updated Fee will be in effect (33.3% of the increase). • On 07/01/2025, *Phase 2 of the Updated Fee will be in effect (33.3% of the increase), with the potential for an inflation adjustment. • On 07/01/2026, *Phase 3 of the Updated Fee will be in effect (33.3% of the increase). This will be the final phase, with the potential for an inflation adjustment. |
|
Industrial |
• All projects that are in the plan check review phase with the Building & Safety Division, on or before 06/30/2024, may pay the Current (Adopted FY 2016/17) Fee. These projects will have until 06/30/2025, or upon the issuance of a building permit (whichever occurs first), to pay/prepay their DIF fees. All projects that qualify will be notified. • Projects that are not in plan check review on or before 6/30/2024 or that have not paid/prepaid their DIF fees by 06/30/2025 are subject to paying the Updated Fee subject to the phase-in provisions below: • On 07/01/2024, *Phase 1 of the Updated Fee will be in effect (33.3% of the increase). • On 07/01/2025, *Phase 2 of the Updated Fee will be in effect (33.3% of the increase), with the potential for an inflation adjustment. • On 07/01/2026, *Phase 3 of the Updated Fee will be in effect (33.3% of the increase). This will be the final phase, with the potential for an inflation adjustment. |
For residential projects that meet the requirements of the Housing Crisis Act, Senate Bill 330 (SB 330), these projects must follow the provisions of SB 330 relative to fees. SB 330 pertains to only residential projects and applicants must submit a preliminary application to lock in the current fees. Residential projects that have filed a preliminary application have 180 days to submit a full zoning application. Once the Planning Division has deemed the full application packet as complete fees will be frozen and applicants have 30 months from the date of final approval to begin construction. A detailed Information Bulletin, IB-215 on the Housing Crisis Act, SB 330, and IB-225, Pre-Application Process for SB 330, are available on the Planning Division’s webpage.
Inflation Adjustment
Going forward, the City Council will need to update the City’s fee schedule on an annual basis based on the California Construction Cost Index (CCCI). The change in the cost index will be evaluated on a January-to-January basis, as time is needed for the CCCI to be updated, taken to the City Council for approval, and the sixty-day requirement waiting period before an increase in fees can be implemented. City staff also recommends that the annual inflation adjustment be capped at a four (4) percent increase; therefore, the resulting inflation adjustment will either be the change in the recommended inflation index or four (4) percent, whichever is lower.
Public Notice and Notifications
A public notice was published on March 16, 2024, in the Press Enterprise and was made available for public review on March 18, 2024. The City Clerk's Department notified interested parties with an active notice on file.
A public notice was published on March 31, 2024, in the Press Enterprise and was made available for public review on April 1, 2024. The City Clerk's Department notified interested parties with an active notice on file.
In addition, on January 25, 2024 the Director of Finance delivered a presentation to the Development Advisory Group (DAG) on the DIF Study.
California Environmental Quality Act (CEQA)
Adopting a nexus study and fee schedules does not constitute a “project” under CEQA pursuant to State CEQA Guidelines Section 15378(b)(4) because these actions involve the creation of a government funding mechanism that does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
Conclusion
Development Impact Fees are a vital funding source needed to ensure that new development pays its fair share of infrastructure and facility costs on a pay-as-you-go basis to avoid creating impacts on the existing City’s infrastructure, service levels, and residents.
It is important to note that even with collecting these fees, other funding sources will be required to fully fund the improvements identified in the Nexus Study. This is due to impact mitigation fees not covering the costs of existing deficiencies and only the additional impacts on the new development system.
It is also important to note that the City Council can adopt a lower fee than the maximum fee calculated in the Nexus Study. However, doing so would mean that the General Fund would need to further subsidize the remaining costs to construct needed facilities and maintain service levels. In other words, all of the residents of the City of Murrieta would be paying for a portion of the costs rather than the development that is generating the impact.
The detailed presentation of the results of the nexus study and the impact fees proposed here will assist in discussing the appropriateness of the recommended fees. The City’s consultants will be available to the City Council for any questions regarding the study and fee update.
FISCAL IMPACT
There is no fiscal impact associated with the delivery and presentation of this report. The consulting work described was previously approved and budgeted in the FY 2022/23 operating budget. Adjusting the DIFs toward full cost recovery will positively impact the City’s Capital Improvement Budget revenue in order to have funding to complete the necessary projects, with the amount dependent on the level of development impact and type of project.
ATTACHMENTS
1. Final Development Impact Fee Nexus Study (including 5-Year report)
2. Proposed New Development Impact Fee Schedule
3. Comparison Chart of Current and Proposed Fees with Difference
4. Notice for the Public Hearing to Adopt a new DIF Nexus Study
5. Notice for the DIF Schedule
6. Desert Valley Builder Association (DVBA) letter
7. City’s Formal Response to DVBA
8. Grandfathering/Phasing Schedule
9. Resolution No. 24-4733
10. Resolution No. 24-4734