TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Javier Carcamo, Director of Finance
PREPARED BY: Paige Hartman-Salazar, Management Analyst - Special Projects
SUBJECT: Development Impact Fee Nexus Study and Fee Update Workshop
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RECOMMENDATION
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Receive agenda report and presentation on the Development Impact Fee Nexus Study and Fee Update and provide direction to staff regarding the updated fee schedule.
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PRIOR ACTION/VOTE
On December 1, 2015, the City Council adopted Resolution No. 15-3477, approving an amendment to the Agreement with Willdan Financial Services to conduct a Master Facilities Plan Update and Development Impact Fee Calculation Study in an amount not to exceed $14,970, and amending the 2015/16 Capital Improvement Plan by appropriating funding in the amount of $14,970 in available Development Impact Fee funds (Vote: 5-0).
On April 19, 2016, staff presented a status update on Development Impact Fees to the City Council in a Workshop.
On June 21, 2016, a public hearing was conducted and considered all written and oral reports of staff, public testimony on the matter and pushed for another meeting in the future.
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 in the form of those with entitlement no later than December 31, 2016 (Vote:4-1).
On May 17, 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.
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 the local government to a developer in connection with the implementation of an approved development project. A DIF can vary widely from one jurisdiction to the next 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 the DIF program to fund improvements to public facilities and purchase equipment related to providing essential services based on the demands created by new growth and development. 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 to prepare an updated Master Facility Plan and an updated Development Impact Fee 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 Financial Services to conduct a Master Facilities Plan Update and Development Impact Fee Calculation Study, and staff presented a status update on Development Impact Fees 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 Development Impact Fee Schedule. A phased-in approach was used for residential and office development for those issued entitlement no later than December 31, 2016.
Current Study
A Request for Proposal (RFP) for a Comprehensive Development Impact Fee Study was advertised on February 10, 2023, with a submittal date of March 7, 2023. Willdan was awarded the agreement to conduct a new Development Impact Fee 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 went into effect on January 1, 2022, and requires a nexus impact fee study to be completed at a minimum every eight years and new requirements for specific justifications on how fees are calculated. AB 602 also requires the use of a square footage-based fee for residential rather than the current per-unit charge.
The following infrastructure categories are included in the 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 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. This approach calculated 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 needed facilities serve both existing and new development. This approach allocates existing and planned facilities across existing and new development to determine 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.
Recommendation
Since the last study was conducted in 2016, various components of the DIF schedule do not 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 CA Construction Cost Index, increased by 47.7%.
Staff proposes a combination of approaches to reflect best the facility needs and services required by the City for future growth. Attachment 3 Table E.1 represents the new proposed fees.
For comparison purposes, Attachment 3 Table E.2 shows the current DIF amounts for prototypical square footage for each of the five category types, potential phasing options for Industrial and Office categories, and a representative example of fees from two neighboring jurisdictions.
Staff is also proposing two provisions in addition to the phasing option shown above. First, is a grandfathering provision whereby projects with applications that have been “deemed complete” before the effective date of the new, proposed fees, will be able to pay the fee in effect at the time their application was “deemed complete.” The second provision, if approved, would be used instead of phasing for Industrial and Office projects. Although the details still need to be worked out, Industrial and Office projects would be eligible for a sliding scale fee reduction based on the number of jobs they bring to Murrieta. This incentive-based provision would encourage job-creating projects to locate in Murrieta.
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 which 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.
Note that even with collecting these fees, other funding will be required to fund the improvements identified in the Nexus Study fully. This is due to impact mitigation fees not covering the costs of existing deficiencies - only the additional impacts on the new development system.
It is 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 subsidize the remaining costs to construct needed facilities and maintain service levels. In other words, 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
The work completed by our consultants was previously approved and budgeted in the FY 2022/23 operating budget. The proposed development impact fee schedule update will increase projected revenues within the multiple DIF funds.
ATTACHMENTS
1. Draft Development Impact Fee Study Update
2. Current DIF Fee Schedule Summary
3. Tables E.1 and E.2