2000-01-24 - Written Comments of the Impacet Fee ProcessOFFICIAL RECORD
Capital Improvements Advisory Committee
Of The City of Southlake
Written Comments on The Impact Fee Process
Submitted To The City Council
In Advance of The Public Hearing
To Be Held February 1, 2000
January 24, 2000 JAN 4 2000
Dear City Council: -,
Introduction ----
These comments are provided to comply with Chapter 395 of the Local Government Code, which outlines the
process and procedures necessary to initiate and update impact fees in Texas. As background, the City Council appointed the
Planning & Zoning Commission (P&Z) to fulfill the role and duties of the Capital Improvements Advisory Committee
(CIAC), as allowed by law, since there is at least one representative of the real estate, development, or building industry who
is not an employee or official of the City. Our charge included the legal duties of the CIAC:
The advisory committee serves in an advisory capacity and is established to:
• To advise and assist the political subdivision in adopting land use assumptions;
• To review the capital improvements plan and file written comments;
• To monitor and evaluate implementation of the capital improvements plan;
• To file semiannual reports with respect to the progress of the capital improvements plan and report to the
political subdivision any perceived inequities in implementing the plan or imposing the impact fee; and
• To advise the political subdivision of the need to update or revise the land use assumptions, capital
improvements plan, and impact fee.
Since none of the current members of the P&Z have served in the capacity of the CIAC in the past, the staff and
consultants were required to start at ground zero and, in essence, place us in a classroom setting regarding various planning,
engineering, legal and financial principles upon which impact fees are to be established. To assist us in this process, a
staff/consulting study team ("Study Team") was available throughout the process. The Study Team included City of
Southlake professional staff, as well as Financial Consultant Lewis McLain, Cheatham and Associates (water and sewer
engineers), and Kimley-Horn and Associates, Inc. (roadway/traffic engineers). We have spent over a half -dozen meetings
spanning an eight -month period evaluating the impact fee process, asking questions and providing our advice in almost every
aspect of the impact fee preparation elements. For the sake of brevity in this report, the council has been or will be furnished
the following information:
• The Land Use Assumption Report prepared by City staff.
• The Water & Wastewater Impact Fee Report prepared by Eddie Cheatham, P.E. and Lewis F. McLain, Jr.,
Fiscal Planning Consultant.
• The Roadway Impact Fee Report prepared by Kimley-Horn & Associates, Engineers.
• The minutes from our seven meetings.
We will not attempt to restate the details of these reports or the full conversations and issues discussed in our
meetings. Instead, our comments will be regarding our observations of the process. We relied heavily on the expertise of the
City staff and consultants engaged to conduct these studies in compliance with state law. However, we individually and
collectively made in-depth inquiries of the Study Team and provided a considerable amount of advice that was incorporated
into the final reports. The particular highlights of our advisory duties are contained in these written comments being sent to
you in advance of a public hearing on the impact fee process and results.
Observations and Advice
Land Use Assumptions.
• The land use assumptions (LUA) have been altered significantly from the previous study to recognize a
reduction in population and housing counts based on current land use philosophies of the Council and P&Z,
zoning actions that have taken place since the last study and estimates of future land uses and densities. We
concur that these assumptions appear to be reasonable.
The LUA have been revised to show an increase in non-residential growth, with a particularly significant
acceleration in growth expected over the next ten years. These assumptions were increased after our initial
review at our request and based on our expectations of growth. The staff then refined the final projections
after consultation with several developers and independent industry experts familiar with the Tarrant
County/DFW Airport area. The result is still an aggressive growth plan for the commercial sector, and we
concur with the final staff report.
Water and Wastewater CIP.
The Water and Wastewater Capital Improvements Plan (CIP) was presented to us with an overview of the
system design, the specific projects located throughout the City and the cost details. The major
infrastructure is either in place or in the design stage. Most of the major infrastructure facilities, such as
elevated storage tanks, ground storage tanks and transmission lines are sized for ultimate needs since it is
usually both uneconomical and impractical to upsize tanks and transmission lines once they are built.
Therefore, most of Water and Wastewater CIP decisions made in the past have established the current plan.
However, the process of system sizing and the rationale for tank and line locations were explained to us.
Our comments would be general observations that the natural geography of Southlake and past decisions
appears to have resulted in a water and sewer system that is sized to provide safe and sufficient capacity to
the City.
We did spend a considerable amount of time discussing the cost estimates used in the previous studies in
light of known costs for projects that have been built and expected costs for those remaining projects. It
appears that the cost estimates in prior studies have been replaced with much higher costs associated with
the 1999 CIP. The consultants and staff provided us with some comparable actual costs for similar lines
based on various line sizes. We did note some cost variations regarding the economies of scale built into
some projects. At our request, the staff and consultants reviewed the initial estimates more carefully and
provided us new numbers that appeared more reasonable, supportable and accurate to our satisfaction. We
therefore concur with the cost estimates provided to us, which resulted in a significantly higher revised cost
of the Water and Wastewater CIP than was in the previous study. Given our understanding of actual costs
that have been incurred by the city, the cost estimates contained in the 1996 report were considerably low
due in part to the committee's decision to not adopt the recommendations provided by the consultants.
It was brought to our attention that the sizing of most Water & Wastewater facilities to meet ultimate needs
produces a significant amount of capacity that remains unused until the City approaches those build -out
estimates. For example, the large Denton Creek transmission line that crosses the City's northern half and
stretches to the Denton Creek Treatment Plant has been put in place to serve the ultimate needs since
replacing or paralleling that line would be cost prohibitive. And it was pointed out that the incremental cost
of larger line and tank sizes is an economical decision as long as the reserved capacity is absorbed within a
reasonable number of years. Therefore, we concur that the necessary reserved capacity built at more
economical costs, when built once and for all, achieves those economical goals with full usage. The City is
set to serve the expected remaining growth in the Water and Wastewater system consistent with the Land
Use Assumptions, both for the time period covering the next ten years and the ultimate LUA.
Roadway Capital Improvements Plan.
The Roadway CIP presented us with a greater challenge in the sense that most of the projects are those yet
to be built. However, it is a requirement that all projects on the Roadway CIP be also on the Master
Thoroughfare Plan adopted by the City. Therefore, the chief issues surrounding the Roadway CIP are when
the projects are going to be built and how they may be phased into the overall construction plans and
financing capabilities of the City. The Study Team presented us with a list of roadway projects, followed by
a discussion of the tie-in to the Master Thoroughfare Plan. Our ability to understand and appreciate
roadway projects on the visible ground level was considerably greater than water and sewer lines that are
under the ground since we travel and see the traffic needs across the City. We concur with the Roadway
CIP in terms of the needs and urgency to provide roadway improvements in Southlake.
We were shown the detailed assumptions of roadway costs, including schedules defining pounds of lime
and square yards of road construction materials. The costs of roadway projects have risen sharply in the
1999 roadway impact fee update. It appears that part of the reason for the dramatic increases was very low
estimates used in the prior study, somewhat due to a lack of knowledge of roadway bids in Southlake at
that time and partly due to the economic conditions that have changed in this region in the past three years.
The net result is a Roadway CIP that has unit price estimates significantly higher than in the prior study and
a higher aggregate cost to be considered in this update. We concur with the more realistic cost estimates
based on the engineering and staff presentations that were made to us.
We were briefed on an aspect of the Roadway CIP that merits a separate comment from us. The Roadway
CIP as well as the Water and Wastewater CIP have to be predicated on the Land Use Assumptions, as
previously mentioned. There is a distinct difference in the roadway system compared to the utility system,
however, that creates a different phenomenon to be appreciated. The Water and Wastewater system is a
closed system that has to precede the ability for growth to occur. By closed, we mean that it serves
Southlake residents and none other. And the utility system has to precede the growth in that water and
wastewater services must be in place prior to the construction of houses and buildings. Those utility
services are not conducive to reliability or convenience fluctuations for fire protection and general public
health reasons. Hence, a large portion of the Water and Wastewater facilities has to be built in advance.
In contrast, the roadway system is an open system that can lag the surge in growth. The roadway system by
its very nature is open because it does serve a population greater than Southlake. It can lag the growing
demand to a certain extent simply by being deficient during the peak uses throughout the day. Hence, a
roadway system of some minimum nature suffices to a point in time. Dirt roads, then gravel roads and then
two-lane roads designed with no shoulders and for light traffic are in place at the time growth begins and
can handle most of the daily travel demands except in the morning and afternoon periods when peak
conditions exist. The penalties include traffic coming to a dead standstill and rerouted traffic distributed
throughout the roadway system by any means available. These are major inconveniences but are not
pronounced public health and safety issues until total gridlock is reached.
The net result of these discussions, our findings and the basis for these particular comments in this report
focus on the sense of magnitude and urgency we believe to merit your attention. The Roadway CIP is large
and expensive and has to be built on top of the very passageways that are already loaded with traffic. These
higher cost results make perfect sense to us in that a four -lane roadway that is replacing a fully loaded two-
lane roadway is a completely different proposition than a new roadway that is cut across an open field with
no traffic considerations. We concur with the Study Team's points that we are recounting in our comments,
but the most convincing evidence is the personal validation we all experience and can acknowledge as
Southlake citizens traversing the City. The previous study apparently initialized and validated the cost of
the Master Thoroughfare Plan but assumed that not much construction to ultimate standards would be
implemented within the first three years of the ten-year CIP. This 1999 updated Roadway CIP, predicated
on an accelerated growth plan in the commercial sector, presents a picture of magnitude and urgency that
has taken a quantum leap in the last three years but changes even more dramatically over the next ten years.
We concur with the Study Team's justification that the City needs to translate the Master Thoroughfare
Plan into a $60 million implementation schedule over the next ten years alone. The Roadway Impact Fee
study is a by-product of a larger process that moves plans into tangible projects, but is a reflection of that
larger process.
The pronounced growth in the commercial sector presented a condition that was not obvious to the Study
Team or to us until the calculations were finalized. The linkage of the LUA to the Roadway CIP produced a
huge imbalance between the forecasted demand for roadways and the supply of roadways associated with
the CIP. It was further concluded that an adjustment for the commercial demand that was going to be
placed on the state highway system needed to be recognized to more accurately reflect a portion of the
future commercial growth that will not be served by the Southlake roadway system. This is a new aspect of
the Roadway Impact Fee Study that was of particular interest to us for two reasons. It was demonstrated to
us that an undersized roadway system matched with the LUA demand factors results in an artificially lower
Maximum Roadway Impact Fee - a calculation to comply with a legal procedure that is lower than the true
cost of a roadway. That does not make sense to us and is not good stewardship. But the second reason is
that the adjustment is necessary to reflect reality. When the shift in balance to the commercial sector that is
larger than the residential sector and the largest share of the commercial sector is located on the state
highway system, then a portion of the of the LUA-based roadway needs must be reduced to accurately
reflect the non -state roadway system to be built and maintained by Southlake. We reviewed the factors
attributed to the calculated reduction to recognize the state highway system and recommended the
consultants review the adjustment based on issues raised by the CIAC. The engineers further reviewed
their methodology, but were not comfortable making changes to the recommended adjustments.
• There is one final comment related to the enormous focus we placed on the Roadway CIP and related
assumptions. Even with the state highway travel adjustments just mentioned, it was demonstrated to us that
there is still an imbalance between the projected need in roadway sizing and the LUA report. In other
words, there is a projection that the Roadway CIP provides less supply than the LUA report estimates will
be demanded by the new growth. The answer to that dilemma appears to have two solutions.
o The first is to limit growth. However, it has been demonstrated that a major part of the undersizing
or deficiency is related to traffic that is currently here in Southlake, from both the citizens of
Southlake and citizens from other cities that use Southlake's roadway system, none of which is
recoverable from impact fees other than what has already been collected. Also, most of the future
growth is related to the commercial sector that will benefit the overall tax base equation for
Southlake.
o The second is to expand the roadway system's capacity. We are perfectly aware of the local
sentiments regarding adding more lanes and the general nuisance of roadway construction
projects, especially when too many are implemented too close geographically and in too short of a
time frame.
• The bottom line is that the Roadway CIP is undersized, even when the demand factors of new growth are
reduced to reflect the portion estimated to be carried on the state highway system. The result is that five out
of the eight service areas have calculated Maximum Impact Fees that are artificially less than the
estimated true cost. There were several reasons we declined to advise the Study Team to go back to the
Roadway CIP drawing board to locate and recommend additional projects or projects to be upsized.
The Roadway CIP, as presented, totals $60 million over the next ten -years. That seems like a
considerable challenge in itself.
o But the last convincing piece of information that led us to leave the Roadway CIP unchanged is
that the resulting Maximum Roadway Impact Fees calculated by each of the service areas provide
the Council with an ability to raise the fees above their current levels if the Council should desire
to do so. We have separate comments regarding the actual fee level to set for collection purposes.
Equivalency Tables.
The Equivalency tables are based on the relationship of the capital requirements of a Service Unit, a
common measure placing all land use categories on an equal or equivalent basis. A Water and Wastewater
Service Unit has been established to be a Single Family Living Unit Equivalent (SFLUE) or a one -inch
water meter. A Roadway Service Unit is defined as a Vehicle -Mile (VM) of travel during the peak afternoon
and evening (PM) hours generated by various land use categories. A single-family residential household
generates 3.03 VM in the revised Roadway Equivalency table, an increase from 2.85 VM in the previous
study.
The Water and Wastewater equivalency tables are based on the water meter size. These tables are rooted in
engineering standards for the measured capacity of each meter size in relationship to a Single Family
Living Unit Equivalent (SFLUE), which have not changed. The basis for this equivalency table has not
changed since the original 1990 study and is consistent with the general equivalency tables around the
region, according to the information we have been given by the Study Team. The table is found in the
Water and Wastewater Impact Fee Report. Therefore, we spent little time evaluating or discussing this
equivalency table and see no reason for recommending any changes.
The Roadway equivalency tables are a different story. First, many of the factors that are incorporated into
this equivalency table are based on an authoritative manual produced by the Institute of Traffic Engineers
(ITE). This manual has been revised since the last study was conducted, so there was a need to reflect those
changes in the roadway equivalency tables. However, our review was much more in-depth and resulted in
several adjustments. There are hundreds of specific use categories in the ITE manual. To tie every possible
category into our equivalency table adds complexity, possible confusion and a burden that was not
attractive to any of us. On the other hand, the current equivalency table appeared to need refinement.
Therefore, we spent numerous hours discussing the categories and concluded with a recommendation to the
Study Team to rework the table considerably. The Study Team and the CIAC acknowledged the resulting
product that was fair and equitable and better represented the land use categories for Southlake. We concur
with the Roadway equivalency table as presented in the final report that has been provided to the Council.
Financing/Study Costs.
The Water, Wastewater and Roadway CIP included eligible costs for the financing and study components
of the CIP. The addition of financing costs is based on a model used in previous studies that matches a
theoretical stream of impact fee revenues over a ten-year period with expenditures for debt service over a
20-year period. The net result is influenced by interest rates as well as the amount of the total CIP that is
being financed. Information provided by the Study Team estimates financing costs ranging between 25%
and 34% of the cost of the capital.
• There is a small component of the eligible costs that include the impact fee study updates. These costs, as
well as the financing cost assumptions, have been included in accordance to previous studies and appear to
be reasonable.
Accounting Reports.
• We were presented with a summary of the accounting reports of impact fees collected, the interest earned,
the amounts spent and the resulting balances from inception (1990 for Water and Wastewater impact fees
and 1996 for Roadway Impact Fees) through September 30, 1999.
• The schedules indicate a compliance with the impact fee laws that stipulate that separate funds be provided
for each of the impact fee categories: water, wastewater and roadways. They also show that interest has
been earned from the invested monies and that those interest earnings are properly credited to the
individual funds.
There has been spending of those funds, particularly water and wastewater impact fee funds, in accordance
with the eligibility prescribed in the impact fee laws. That is, they must be spent on capital projects shown
on the adopted capital improvement lists or on debt service related to bonds issued for those eligible
projects. Certain study costs are also eligible. We have relied on representations made by the Study Team,
and the accounting reports indicate that the impact fee programs have been an integral part of the financing
program for water and wastewater projects in recent years. The roadway impact fee monies collected are
mostly still on hand and are available to be applied to the program shown on the previously adopted CIP
and will be used for the amended and expanded CIP made part of this 1999 update.
• Due to the importance of the impact fees in terms of financial support coupled with the potential for the
annual collections of fees to fluctuate with economic conditions, we were advised by the Study Team that
the City generally follows the policies reflected in the calculation of the Maximum Impact Fees. That is,
while some of the impact fee monies can be and have been used to be spent directly on a capital project, a
large portion of the monies are used to offset the debt service payments resulting from the issuance of debt
on financed projects. The financing of projects is generally a requirement since impact fees pay only a
portion of the total cost of projects, and projects have to be built in advance of having sufficient fees on
hand to build complete projects. For example, most projects serve a significant portion of the existing
population, which is an ineligible portion of the capital projects other than impact fees that have been
collected in the past. The other reason for maintaining a reasonable fund balance is that economic
conditions could cause a sudden and rapid drop in impact fee collections. Therefore, it is the City's policy
to use impact fees mostly for debt service and only to the extent that those funds are on hand at the
beginning of the budget year so that tax and utility rate payers can be provided a stable stream of debt
service cost reduction even during years of fluctuating collections. We concur with the information we
have been given as being reasonable and representative of the responsible fiduciary policies of the City.
Maximum, Equilibrium and Collected Impact Fees.
• Our orientation by the Study Team included an explanation of three different levels of impact fees:
Maximum, Equilibrium and Collected Impact Fees. Our comments will address all three.
Maximum Impact Fees are those developed in accordance with the statutory requirements imposed on
governments developing and charging impact fees. The Maximum Impact Fee that can be charged is the
result of dividing the cost of the capacity projected to be absorbed over a ten-year period (the numerator)
by the Service Units projected to be added during that same ten-year period (the denominator). The Service
Units have to be based on the LUA report. The task of the CIAC is to review the methodology used to
arrive at the numerator and denominator, which we have done. The calculation then becomes legal
arithmetic. The result is not ours to change unless we have found a reason to advise a change in the
methodology and assumptions used to derive the numerator and denominator. Since we were made part of
the process that evaluated and even shaped the methodology for arriving at the numerator and denominator,
we concur with the calculated Maximum Impact Fee. It is required that these fees be published in advance
of a public hearing for water, wastewater and each of the eight roadway service areas.
The Equilibrium Fees are a reduction of the Maximum Impact Fees necessary to recognize a condition that
exists but are not legally required calculations. The Study Team informed us that an original part of the
enabling impact fee legislation passed in 1987 (and effective as of 1990) was to calculate the cost of
serving a Service Unit. The developer -initiated bill (SB-336) pushed for a reduction in the calculated cost
to recognize that a portion of the cost for new growth infrastructure is paid in the form of tax and utility
bills. We understand that the Study Team concurs with that general argument and has established from
previous analyses that the portion of the capital paid by new taxpayers and ratepayers ranges from 25-35%.
An impact fee payer (through their builder) pays an impact fee followed by tax and utility bills as soon as
six -months later. The utility bills include a component for debt service related to capital projects built to
serve both existing and new growth. We understand that an argument may be made that to charge 100% of
the cost of capital in the form of an impact fee and then to pay tax and utility bills that includes the cost of
capital facilities for the existing population could result in a double -charging condition. Therefore, the
Study Team presented us with a theoretical Equilibrium Fee that is 75% of the calculated Maximum Impact
Fee. We recognize that it this proposition extends to the policy area reserved to you and is beyond the
current legal requirement to calculate a Maximum Impact Fee, without a reduction for payments made by
future tax and utility payers. The issue, however, is worthy of our comment, since it is a related matter
presented to us for our education benefit and extends to your policy formulation area.
There was a related piece of information presented to us that also deserves our comment even though it was
presented as part of the educational aspect of our orientation. There was a bill (HB-2045) introduced into
the last legislature that modified several aspects of the impact fee calculation steps. This bill passed both
the House of Representatives and Senate by voice vote and was vetoed by the Governor. We have been
advised by the Study Team that municipal advisors expect the bill to come back up again in the next
legislature. The portion of the bill that was most objectionable to cities was a mandate that the Maximum
Impact Fee be the same as the Equilibrium Fee explained above but with the least amount of reduction to
be fifty percent (50%) regardless of the supporting data for the reduction to be less. The Study Team
suggested that this action from the developer community establishes a potential benchmark. We comment
on this only to the extent that we pass this information on the City Council for the educational value and for
the forthcoming policy decision as to what fee to actually charge, which is discussed next.
• The Collected Impact Fee is that amount, when said and done, is the check that has to be written by the
builder when paid to the City. The City's current Collection Fees are as follows:
o Water Collected Impact Fee - $1,450 per SFLUE.
o Wastewater Collected Impact Fee - $950 per SFLUE.
o Roadway Collected Impact Fee - $1,200 per SF Residential Unit or $421.05 per VM.
We were asked to inform you that every municipal wholesale customer served by the City of Fort Worth
has to pay an impact fee for treatment plant and transmission facilities except for the City of Southlake due
to a favorable contract that is to be revised before the next impact fee update. That means that irrespective
of the Collected Impact Fee level the Council sets, there will be an increase of almost $500 per SFLUE
needed in the near future. This fee will add to the financial burden of the new growth yet will only be a
pass-thru and of no benefit to the City of Southlake.
Lastly, it is clear to the CIAC that there is no legal obligation to recommend a Collected Impact Fee level,
and there was even discussion among the CIAC that it moves into policy areas outside the legal realm of
our charge by Chapter 395 of the Local Government Code. However, we were advised that it was the
practice of previous CIAC to provide a recommendation. We were told by the Study Team that the
previous recommendation was made by a single member of the CIAC offered as a conciliatory measure to
conclude the CIAC review sessions. We were told that other cities establish their Collection Impact Fees
by striking a balance influenced by the cost information in the studies, the fees charged by surrounding
communities, and by a knowledge of what might be considered tolerable by the local development
community. The Collection Fee level is largely a market sensitive decision.
We therefore concluded that the CIAC should not offer a specific recommendation, leaving that policy
decision up to the City Council. It is apparent to us that we would want a considerable amount of
information in order to provide a recommendation, if requested to do so by the City Council. If the decision
is market -based, then area surveys and a working knowledge of the tolerable limits of the local developer
community are factors that the Council needs little or no assistance other than what the staff might provide.
We believe that if a decision by us is to be made regarding the Collected Fee level, that we would require a
considerable amount of time and study to understand the elasticity of the economic influence of impact fees
in Southlake as well as other cost factors that might shape a policy decision such as this.
Conclusion
• We as a Capital Improvements Advisory Committee believe we have fulfilled our charge by thoroughly
exploring the underlying assumptions and factors that went into the development of the Land Use
Assumptions, Capital Improvement Plan and other technical and financial issues.
• We advised the Study Team on numerous issues and on virtually every aspect in which we had expertise
and insights in our role as P&Z Commissioners and residents of Southlake. The Study Team made changes
in every area where we were convinced our input needed to be reflected, even though some of those
changes were small. Many of the changes were extensive, but in all cases we believe that our active
involvement resulted in a more accurate product.
• We believe that the LUA, CIP and resulting calculated Maximum Impact Fees were developed fairly and
equitably with a balance for what is defensible to both the developer community and our residences and
businesses in Southlake.
• We therefore, file these written comments as a part of the final stage of this very public process as the
Council hears from us as their advisory committee, from the Study Team as the authors of the reports and
as any member of the pubic comes forward to voice an opinion. It is our understanding that these technical
reports will be available to the public at least 30 days in advance of the public hearing. We conclude that
this has been an open process, since all of our meetings have been posted and available to any member of
the public. And for the record, the minutes of all our meetings have been supplied to you as part of the
documentation for this process.
Submitted By:
04�;�K
Ann Creighton, air
Capital Improvethents Advis C mittee
APPROVED BY a majority vote of the Capital Improvements Advisory Committee taken on the /,3'kf