Impact Fees and Colorado’s Water and Wastewater Utilities

Presented by:Jason Mumm, Sr. Consultant, Integrated Utilities Group

Carol Malesky, Sr. Consultant, Integrated Utilities Group

WWW.IUG.COM

Agenda

• What are “Impact Fees”

• 2 Significant Legal Developments– Krupps v. Breckenridge San. Dist.– Senate Bill 15

• Major Concepts & Methodologies

• Aligning Policy with Methods

What is an Impact Fee?

• Different Names – Same Purpose

• Legal and Technical Definitions

• The Simple Version

• Capital vs. Revenue

Different Names – Same Purpose

• System Development Charges• System Development Fees• Tap Fees• Impact Fees• Construction Fees• Improvement Fees• Buy In Fees• Plant Investment Fees• Others?

The Legal Definition

• Colorado Revised Statutes 29-20 says impact fees meet the following criteria:– Legislatively adopted– Generally applicable to a broad class of property– Intended to defray the projected impacts on capital

facilities caused by proposed development

A Technical DefinitionFrom AWWA

“…a contribution of capital toward existing or planned future back-up plant facilities necessary to meet the service needs of new customers to which such fees apply…”

The Simple Version

• One time capital charge,

• Assessed to new connections to the water and/or sewer system,

• Aimed at recovering costs associated with providing facilities/infrastructure

Capital vs. Revenue

• Reported as contributed capital and NOT as operating or extraordinary revenue

Recent Legal Developments

• Colorado Supreme Court (Krupps v. Breckenridge San. Dist.)

• Senate Bill 15 (CRS 29-20)

Krupps v. Breckenridge

• Impact fee must be:– “reasonably related…” to the costs of providing

facilities– “…fairly calculated and rationally based…”– And, must demonstrate a “reasonable…and

consistent” application

• Impact fee that meets these criteria does not constitute a “takings” under Nollan/Dolan

Krupps v. BreckenridgeOther Notes

• District had codified policy: “growth pays for the full costs of growth”– Noted by the Court

– Importance related to the method used to calculate the fee

• Breckenridge case is expected to serve as legal precedent in neighboring jurisdictions– California

– Oregon

Senate Bill 15 (CRS 29-20)

• Amends Title 29 of the Colorado Constitution– Expressly allows municipalities under Title 29 to

assess an impact fee– First time authority has been expressly granted– However, this is also the first time limitations on

impact fees have been expressly given by Colorado legislature

Limitations and Ambiguities of CRS 29-20

• Impact fees are limited in order to: • Prevent double-charging on a single project

• Protect low income projects

• Protect projects already in progress

• Ambiguities are an invitation to court challenges. Some examples:

• Can capital equipment be included?

• Is the issue truly of statewide concern?

General Recommendations • There is no true “grandfather clause.”

• Existing impact fees are allowed.• However, they must be made to comply with CRS 29-20’s

criteria and should be carefully examined.

• Special Districts may be impacted in the near future with similar legislation amending Title 32.

• While the bill does grant permission to the use of impact fees, it also places new constraints on them.

Major Methodologies

• The Buy-In Method

• The Replacement Method

• The Market-Based Method

The Buy-In Method

NewCustomers

Existing Facilities

New Facilities

The Full Costs of Growth

Buy-In Method

Fee

Reimbursement Fee

Function

Existing Infrastructure

ImprovementFee

Capital Costs Assoc. With Growth

Buy-In Method

Existing Equivalent

TapsExisting Equity

Reimbursement Fee

Buy-In Method

Total Growth-Related Capital Improvements Planned

Improvement Fee

Projected No. of Equivalent Taps at CIP Build Out

Buy-In MethodResults

• New customers pay reimbursement fee, which brings their investment in the system on par with other customers.

• New customers finance ALL capital improvements required to serve them with no additional contributions from existing customers.

• Result: new customers pay the full cost of growth – but have relatively more equity in the system on an equivalent tap basis.

The Replacement Method

• Examines the cost required to reconstruct the entire system– To serve all existing customers, and– All new customers (ie. Growth)

• Divide the cost of the reconstruction by total equivalent taps served in the “new” system

Replacement MethodResults

• New customers pay a fee that equates their relative level of capitalization with that of existing customers– Measured in current dollars– Without allowances for actual depreciation

• At the end of the build-out period, new customer equity per equivalent tap is on par with that of the existing customers’

The Market-Based Method

• Compares tap fees of neighboring or other similar utilities

• Not generally recommended because– Is not consistent with Breckenridge guidelines– Inconsistent with CRS 29-20

• Only used when NO financial or system data is available for analysis

Market-Based MethodResults

• A fee is established, but– No correlation to actual costs– Lack of rational basis makes it difficult to defend

• Possible applications– Economic incentives?– Affordable housing?

Aligning Methods to Match the Policy

Major Policy Objectives

• Growth pays for the full costs of growth

• Equity

• Economic development

• Affordable housing

• Compliance with applicable law

Methods Match Policies

Method Econom

ic D

evel

opmen

t

Afford

able

Housi

ng

Equity

Growth

Pay

s fo

r Gro

wth

Legal

ly D

efen

sible

Buy-In

Replacement

Market-Based

General Observations

• There is no preferred method, but– Of the three, the Buy-in and Replacement Methods

are the most acceptable general approaches– The Market-Based Method is to be avoided

• Selection of method is dependent on larger policy objectives

• Matching the method to the policy is important in establishing a proper fee

General Observations (cont.)

• Legal challenges to impact fees continue to be a concern/issue nationwide, but particularly in the growing population centers in the western U.S.

• Municipalities and Special Districts should closely examine existing and proposed impact fees for legal compliance.

Questions and Answers

Integrated Utilities Group, Inc5200 DTC Parkway, Suite 530Greenwood Village, CO 80111(303) 267-0200 | www.iug.com