In the months leading up to April, we will be discussing the pros and cons of implementing system-capacity impact fees for the water and wastewater systems in College Station. These fees would help pay the capital costs for expanding the capacity of the utility systems, shifting a portion of this capital cost away from the utility rate payers and onto the entity that created the need – the new development. The economics of this proposal are debatable but to get a constructive exchange of opinions, we must have a solid understanding what impact fees are and how they work.
How are utility capital projects funded?
When the water or wastewater systems must be expanded to meet increasing demands, the resulting capital projects are funded with utility revenues. About 25 percent of revenues are dedicated to paying the debt service from bond issues that were used to build our utility infrastructure. Both the water and wastewater funds are called enterprise funds, because they rely solely on revenue paid by customers on their utility bills. None of the money from property tax, sales tax or hotel occupancy tax goes to enterprise funds – they are completely self-supporting.
What causes utility rates to increase?
When our operating costs increase, or we have a large capital improvement program, the only way to meet these requirements is through a rate increase. For example, when the cost goes up for commodities we must purchase — such as chemicals, fuel, parts, equipment, etc. — we have no choice but to pay the bills, and that added cost must be passed along to the rate payers. In addition, when we are required to incur large capital costs before older debts are retired, an additional rate increase may be required so that we can issue the bonds to pay for the capital projects.
What happens if a rate increase request is reduced or denied?
As part of our budget preparation, we project operational costs and bonding capacity for the capital projects. If these items require a rate increase and the city council decides to reduce the amount of increase, then capital projects would be deferred, if possible. But if a rate increase is denied completely, that means the operational cost increase, like the electricity costs in the previous example, would have to be absorbed in the water or wastewater budget. The result would be a diminished level of service to the customers. In the extreme case, a lack of revenue to fund capital projects to increase system capacities would eventually result in a denial of development requests as the city must have adequate utility capacity to enable growth to occur. When we must drill new water wells or make large-scale upgrades to the treatment plants, these projects are too expensive to be paid for by any one development.
How would impact fees change this situation?
Revenue from impact fees is used directly to help pay for increasing the capacity of the water and wastewater systems so that growth and new developments can occur. They do not pay the full cost, but when they are all collected they will fund from 50 to 66 percent of the capital cost for increased system capacities. This means that impact fees can mitigate rate increases and by keeping the increases low, make them more likely to be approved by future councils. The net effect of the impact fees would be to make new developments pay a larger share of the capital costs necessitated by that development, thereby removing that cost from the rate payers.
How would the impact fees be collected?
State law dictates that impact fees must be collected at the time the building permit is issued inside the city’s water or wastewater service area. For College Station, impact fees will not apply in the extra-territorial jurisdiction (ETJ) because our water and wastewater service areas don’t extend past the city limits. But since the fees are collected with the building permit, this means the city might have to wait several years for the revenue to be realized. When a development plat is approved, the impact fees in effect at that time are permanently locked in for every lot in that development, regardless of when the building permit is pulled. Please note that a plat is simply a map showing how property will be sub-divided for a particular development.
How is the amount of an impact fee determined?
State law dictates the process for determining what the maximum impact fees can be, then the city council can establish fees from zero to the maximum. Fees can be phased in over time and can be different for various zones in the city, but they cannot exceed the calculated maximum. The process to calculate the maximum fees has two basic phases — technical and policy.
The technical phase looks at projected land uses, growth patterns, capacity of the utility systems and the capital projects that will be required over the next 10 years to meet the growth requirements. The cost of the capital projects is divided by the number of projected Living Unit Equivalents (LUE) and that determines the capital cost portion. These data are summarized in a document called the Technical Memorandum, which we have recently completed. The estimated maximum fees per LUE are approximately $2,500 for water and $1,700 for wastewater.
The policy phase takes the Technical Memo and applies certain rate credits to determine the maximum fees that can be established. With that information, any policy considerations staff believes are relevant are added and the recommendations of the Planning and Zoning Commission are compiled. All this information makes up the Impact Fee Report, which is presented to council as a draft for them to make changes as they see fit. Council then makes the final decision whether or not to implement the impact fees and if so, at what amounts.
Where are we and what happens next?
We are now at the end of the Technical Phase (click here for the complete timeline). We will conduct the first public hearing, for technical issues, at 4 p.m. on Tuesday, Jan. 11 at city hall. If council approves the Technical Memo at this meeting, we plan to have the final draft of the Impact Fee Report complete by the end of January for the Planning and Zoning Commission to review before it goes to council. We expect the second public hearing to be held at the council meeting scheduled for March 24. An ordinance to enact impact fees could be in effect by April 7 at its second reading. Of course, this schedule is completely dependent on the Planning and Zoning Commission and the city council’s action.
How would fees be assessed to commercial buildings?
State law requires the impact fees be calculated based on Living Unit Equivalent (LUE), which means a single-family residence using a ¾-inch water meter. Since the size of the water meter determines how much demand will be placed on the water and wastewater systems, the state dictates that the fees be pegged to the size of the water meter. For example, an apartment building with a 3-inch water meter would be charged for 10.67 LUEs, since a 3-inch meter is capable of using 10.67 times more water than the standard ¾-inch meter. Other meter sizes have similar equivalents.
Doesn’t the city already have some impact fees?
The city has designated five particular utility lines as impact fee lines, and developers pay a fee to connect to these specific lines. This system has worked well, but these fees are very limited and do not contribute to expanding plant capacities. If system-capacity impact fees are enacted, staff will recommend that council zero-out the existing impact fees. This would mean that plats approved before the effective date of the system-capacity fees would be under the existing fees, and plats approved afterward would only have the system-capacity fee applied.
Are existing plats grandfathered?
Plats that were approved before the system-capacity impact fees are enacted are not subject to the system-capacity fees as long as the building permits are pulled within one year. After one year, they are subject to the system-capacity impact fees. We do have some legal questions regarding potential time limits on how this grandfathering will work for plats that are subject to the existing impact fees for specific lines, but we will get those answered as soon as possible.
What are other cities in Texas doing with impact fees?
Many cities in the Metroplex and the I-35 corridor have enacted impact fees. Please note that the Wellborn water system has enacted an impact fee to pay for their new surface water treatment plant, and they charge approximately $2,200 for each new LUE on their water system.
Have you received feedback from the development community?
We have met with the Home Builders Association and it has several concerns regarding impact fees. Their concerns seem to be:
- The new Comprehensive Plan’s land use assumptions place too much emphasis on in-fill development, which skews the results of the Technical Memo.
- Many development fees have been added in recent years, totaling more than $9,000 per acre.
- The timing of this proposal is bad because the economy is not yet strong enough.
- These impact fees will drive development away from College Station.
- Development already pays for itself in two years.
The city does not fully agree with all aspects of these concerns, but the HBA’s concerns are obviously legitimate and will be discussed at future Planning and Zoning Commission and council meetings.
How would system-capacity impact fees affect the cost of new homes?
There is no definitive answer to this question but clearly some combination of these four impacts would result:
- The land owners would get less money for their property when it develops.
- The developers would reduce their profit margin and/or pass along higher costs.
- The builders would reduce their profit margin and/or pass along higher costs.
- The home buyers would reduce the size of their home and/or pay more.
What will staff recommend to the city council?
It’s too early in the process to know exactly, but staff’s recommendation will attempt to strike a balance among many factors, including: (a) Fairness to the existing rate payers; (b) The city’s ability to facilitate growth and new development; and (c) Not pricing new home buyers out of the College Station market.
This will continue to be a difficult issue over the coming months but I hope this blog will help increase understanding and promote a healthy dialogue. If you have any questions, please leave your comment in the space at the end of this blog and we’ll try to get prompt answers for you.
Director of Water Services