SB 1525 and Municipal
Development Fees:
Responding to the 2011 Reforms
Originally Presented June 23, 2011
Revised October 21, 2011
Andrew J. McGuire
Gust Rosenfeld, PLC
Peter W. Culp
Squire, Sanders & Dempsey LLP
Overview: Part I
• Purpose of Session/Review of Handouts
• Major Provisions of SB 1525 (Peter Culp)
– Disclaimer
– Changes to Development Fee Programs and Procedures
– Service Units/Service Areas
– New IIP/Fee Study; Required Components
– Time Limits on Development Fees
– “Necessary Public Services” – What’s in and What’s Out
– New Credit and Offset Rules
– Grandfathering and Refund Provisions
Overview: Part II
•
Implementing SB 1525 (Andrew McGuire)
– Converting Existing Fee Schedules
– Treatment of Collected Fees and Fees Pledged to Debt Service
– Adopting a New Fee Ordinance
– Developing/Adopting a New Fee Program and Fee Study
– Procedural Changes and Advisory Committee/Audit Requirement
– Changes to Reporting and Publication Requirements
– Suggestions for Tracking Grandfathering and Refunds, Fee Timelines
– Review of Critical Dates
•
Uniform Ordinance Development
•
Questions and Answers
Purpose of this Session
• Purpose of this session
– Describe major provisions of SB 1525
– Address issues related to implementation
• Critically important to ensure effective and universal implementation of SB
1525 “reforms”
• Handouts
– SB 1525
– Governor’s Signing Letter
– List of Key Provisions
– Presentation
Part I:
Major Provisions of SB 1525
Disclaimer
•
SB 1525 originated as cut-and-paste from Nevada, New Mexico, and Texas
provisions (version that passed Senate)
– Internally inconsistent and highly problematic
– Attempts to redraft bill from scratch rejected; had to proceed as amendments to
original bill
– Result: legislation not drafted as a coherent whole; negotiations addressed many,
but not all, internal inconsistencies
• Significant potential for unintended consequences
• Significant potential for interpretive license and litigation
•
This is essentially a complete rewrite of Arizona’s development fee statute;
only two subparagraphs were not amended (offsets in community facilities
districts and definition of “final approval”)
– Sections that follow represent “best guess” at interpretation of statutory provisions
– Underlines importance of developing uniform ordinance to interpret and
implement provisions
Abandoning Existing Fee Programs
• Statute requires all existing fee programs to be replaced with fees
adopted under the new statute by August 1, 2014 §9-463.05(K)
– Will require new fee ordinance, adoption of new procedures, and
development and adoption of new plans and fee studies by virtually all
Arizona municipalities
– Municipality cannot collect development fees after 2014 deadline until a
compliant program is adopted
– Cannot adopt a development moratorium to “buy time” to implement
development fees §(L)
• After January 1, 2012, also cannot charge or collect fees for
categories of NPS that would not be allowed under the new statute
§(K)
– Limited grandfathering of development fees where fees have already
been pledged to the repayment of debt service
New Fee Program Structure
• New development fee programs will revolve primarily
around the municipal infrastructure improvements plan
– Under the structure imposed by SB 1525, IIP will serve as the
central document for the planning and imposition of development
fees
• Disclosure of existing infrastructure, available capacity, and costs
• Planning of infrastructure and services required by new
development
– Identification of service areas for each “necessary public service”
– Breakdown of development fees among development types and
categories based on uniform service units §(E)
New Adoption Procedures
• Consistent with focus on the infrastructure improvements
plan, new statute requires changes to a series of
infrastructure planning, development planning, and
development fee planning/adoption procedures
– New timelines for public review and approval of IIP and
development fees based on the IIP §§(C),(D)
– Requirement for advisory committee to provide comments on
land use assumptions, infrastructure improvements plans, and
other items (or optional biennial audit) §(G)(1),(2)
– More detailed annual reporting requirements on development
fees §(N)
Service Units and Service Areas
• SB 1525 explicitly adopts constitutional “proportionality”
requirements (which were required under existing case law) and
expands on them by requiring fees to be related to service units
– Development fees limited to the proportional share of cost of new
infrastructure attributable to new development, based on service units
(standardized measure applied across development types) §(B)(3)
• Also establishes strict “service area” requirement
– Development fees must be assessed in service areas within which there
is a “substantial nexus” between the necessary public service and the
demands of new growth §(T)(9)
– Development fees must be based upon the same “level of service” as
provided to existing residents in the service area §(B)(4)
The New Unified IIP/Fee Study
• IIP and “fee study” are now intended to be developed as an
interrelated document, resulting in a fee schedule
– IIP: Written plan identifying the necessary public services that are the
subject of development fees; can be the municipality’s CIP §(T)(6)
– Must demonstrate the “substantial nexus” between NPS and new
development §(T)(9)
– IIP must be built off of approved land use assumptions §(D)
– Essentially every element of the IIP must be prepared by “qualified
professionals” licensed in the State of Arizona (if they are in a licensed
profession) §§(E)(1)-(3);(T)(8)
– Good for a maximum of five years without review §(D)(3)
• A development fee cannot be charged for ANY necessary public
service unless it is identified and justified in the IIP §(B)(5)(a)
Essential Components of the IIP/Fee Study
•
IIP must contain the following for each identified service area §(E)(1)-(7)
– Description of existing infrastructure/NPS in the service area
• Must include identification of any changes/upgrades/replacements that will be needed
to serve existing needs and/or meet new regulatory requirements, and costs of same
– Evaluation of total capacity, current usage, and commitments for usage of
capacity of existing infrastructure/NPS
– Description of new infrastructure/NPS that will be required as a result of new
development, and costs of same
• Must contain a table identifying the specific level of use of NPS by each service unit,
and identifying the ratio of each service unit to various land use types including
residential, commercial, and industrial
• Total number of service units attributable to new development
• Projected demand for NPS required by new service units for a period not to exceed 10
years
– Forecast of revenues generated by new service units for purposes of calculating
offsets
Time Limitations on Fee Collections
• As part of the IIP, municipality must define the time period within
which infrastructure will be completed and/or service will be
provided within each service area (using the development fees that
are going to be collected) §(B)(7)(a)
– Cannot exceed 10 years
– 15 years for water infrastructure §(H)(3)
• Municipality can reserve capacity in IIP to serve a future
development (can also do so in development agreement) §(B)(7)(b)
– Where a municipality intends to reserve capacity in infrastructure for a
specific development (pursuant to development approvals, development
agreement, or other arrangement), this should be disclosed in the IIP
“Necessary Public Services” – What’s In
• SB 1525 explicitly defines “necessary public services” and thereby
limits the types of infrastructure/activities that can be funded by
development fees §(T)(5)
• What’s in:
– “Core infrastructure” items
– Associated “hard” capital costs
• All facilities must have a life expectancy of 3 or more years
– Facilities must be owned or operated by or on behalf of the municipality
– Associated professional services costs, including fee study/planning
costs §(A)
– Projected financing costs
• Projected interest charges and financing costs can only be included in fees to
the extent they represent P&I on the portion of bonds/debt that are used to
finance facilities in the IIP §(B)(8)
NPS – What’s Out
• What’s out:
– General government facilities and costs, administrative costs of
municipality §(B)(5)(e)
– Repairs, operation and maintenance costs of any infrastructure (new or
existing) §(B)(5)(b)
– “Exotic” facilities; solid waste collection
– Some police/fire, parks and library infrastructure §(T)(5)(d),(f),(g)
– “Soft capital” items
– Upgrades of infrastructure/services to serve existing development to
provide a higher level of service or to meet stricter regulatory standards
§(B)(5)(c),(d)
The New NPS “List”
• Water and wastewater facilities/appurtenances §(T)(5)(a),(b)
• Stormwater, drainage, and flood control facilities/appurtenances
§(T)(5)(c)
• Streets and street improvements/appurtenances §(T)(5)(e)
• Fire and police facilities/appurtenances, including vehicles §(T)(5)(f)
– No administrative facilities, helicopters/planes, or regional training
facilities
• Library facilities (up to 10,000 square feet of a facility) §(T)(5)(d)
– No equipment/appurtenances (e.g. books)
• “Stripped down” parks §(T)(5)(g)
Rules for Parks
• Neighborhood parks and recreational facilities up to 30 acres in size
• Larger parks only where “direct benefit” to development is
demonstrated
– “Direct benefit” imposes stricter test for relationship between benefit to
development and park service (stronger than “substantial nexus”)
• Fees for park facilities are substantially limited, cannot include costs
related to any of the following facilities within a park:
– Amusement parks, aquariums, aquatic centers, auditoriums, arenas,
arts and cultural facilities, bandstands, bathhouses, boathouses, club
houses, community centers over 3000 square feet, environmental
education, equestrian facilities, golf courses, greenhouses, lakes,
museums, theme parks, water reclamation or riparian areas, wetlands,
zoos, or “similar recreational facilities”
– Can include swimming pools
Differential Charges in Fee Categories
• Statute replaces old requirement that fees be “non-discriminatory”
with express requirements on fee collections across development
categories
• If development fees are assessed, MUST be assessed against
commercial, industrial AND residential development §(B)(13)
– May continue to charge different fees across categories based on the
relative burdens imposed and differential cost of providing NPS to those
categories of development
– If a waiver is provided for any development fees, the municipality must
reimburse the relevant development fee accounts for the amount of any
waiver
• Notice of waivers must be provided to the advisory committee
New Credit Requirements
•
Credits continue to be due wherever a developer provides
infrastructure/NPS that was included in the IIP §(B)(10)
– Failure to provide a credit violates proportionality requirements
– Providing a credit for facilities not in the IIP also violates proportionality
requirements
•
Reimbursement agreements continue to be permitted (allowing developers
to receive reimbursement for oversized NPS from fees paid by other
developers) §(B)(7)(c)
– Credits/reimbursements can be freely transferable between developments for the
same category of necessary public services in same service area §(B)(7)(c)(iii)
•
Where a municipality requires a developer to provide infrastructure/NPS as
a condition of development approval:
– IF the infrastructure/NPS will “substitute for or otherwise reduce the need” for
other infrastructure/NPS that was the subject of a development fee
– THEN the municipality must amend the IIP to include the infrastructure/NPS and
provide a credit §(B)(11)
Offset Requirements
• Offset requirements remain the same
§(B)(12)
– Important to note that there remain numerous examples of noncompliance that were heavily debated during 2011 negotiations
• To be clear, municipality must:
– Forecast revenues from taxes, fees, assessments or other revenue
sources attributable to new development that will contribute to capital
costs of NPS
– Offset the amount of its development fees by the amount of those
contributions
– Failure to provide offsets violates both statute and constitutional
requirements of “proportionality”
• Statute introduces new rules for offset of transaction privilege taxes
Transaction Privilege Tax Rules
• On and after August 1, 2014:
– Offset must be provided for construction contracting or similar excise
taxes to the extent that it exceeds the regular TPT rate
• Intended to provide offset for “discriminatory” TPTs that target construction
– Determining regular TPT rate: rate imposed on “majority of other
business tax classifications” §(B)(12)
• On and after June 30, 2011:
– A municipality may not adopt an increase in construction contracting or
similar excise taxes that will increase such taxes above the regular TPT
rate
• Existing “discriminatory” TPTs targeting construction are grandfathered
– Moratorium on discriminatory increases remains in place through July
31, 2014 Sess.L. §(3)
Grandfathering Changes
•
Statute changes the recently-introduced “grandfathering” rules that freeze
development fees for 24 months after development approval §(F)
– New fees or the increased portion of modified fees cannot be assessed during
grandfathering period
– If changes are made that increase the number of service units, new or increased
fees can be assessed against the additional service units
– If fees are decreased, grandfathered developments are entitled to the benefit of
the reduced fee
– Automatic fee indexing now prohibited; can instead include expected inflation in
fee calculations
•
Grandfathering period
– For commercial, industrial, and multifamily developments, fees are grandfathered
for 24 months from final development approval (site plan or final subdivision plat)
– For residential developments, 24 months after the date that the first building
permit is issued under an approved site plan or subdivision plat
Refunds
•
Refunds may be required to be paid against development fees collected
after July 31, 2014 §(H)
– Paid to current record owner of real property who makes written request
– Must include any interest actually earned on the fee monies
•
§(J)
Conditions for refund:
– Service is available but is not provided
§(H)(1)
• Statute entitles a development which has paid a fee to the use/benefit of necessary
public services; entitled to immediate service from any existing facility with available
capacity (unless already pledged/reserved to another development in connection with
the financing of the facility) §(B)(6)
– Service is unavailable, and municipality fails to complete infrastructure within the
time period identified in the IIP §(H)(2)
– Municipality fails to spend any part of a development fee within 10 years; 15 years
for water and wastewater facilities §(H)(3)
– Actual construction costs for infrastructure are less than projected/estimated by
more than 10%; refund for the difference in fee had correct figures been used
§(I)
Part II:
Implementing SB 1525
Converting Existing Fee Schedules
• Starting January 1, 2012, fees can no longer be collected for
unauthorized fee categories §(K)
– General government fees, administrative buildings, larger library/park
facilities, arts & cultural fees, police/fire training centers, solid waste
collection/disposal, etc.
• Each municipality should immediately review its current fee program
and fee study to carve out unauthorized fees
– By January 1, 2012, work from revised fee schedule with unauthorized
fees deleted/reduced out of existing schedule
– Municipalities should treat as a purely administrative change; should not
require new fee study, hearings, or similar procedure
• Not a “new” or “modified” fee - simply complying with statutory requirement
that some fees can no longer be collected
Treatment of Previously-Collected Fees
• Where development fees have been collected and accumulated for
a purpose that will no longer be permitted under the amended
statute:
– Accumulated fees are “grandfathered” and can continue to be expended
for the purpose for which they were collected through January 1, 2012;
§(K)
• Alternatively, must be spent in the same “category” of necessary
public service §(K)(1)
– Example: fee collected for police training facility could be spent on other
police facilities
• If accumulated fees are not expended by January 1, 2020, must be
distributed equally among remaining fee categories (likely
unconstitutional – we don’t recommend this one) §(K)(2)
Treatment of Fees Pledged to Debt Service
• “Grandfathering” of dedicated fees for debt service:
– Where an existing fee (adopted prior to January 1, 2012) was pledged
to debt service of facility financed prior to June 1, 2011:
• The development fee may continue to be collected as necessary to meet
those debt service obligations – even if the fee is no longer within an
authorized category under SB 1525 §(R), Sess.L.§(4)
• After August 1, 2014, can only be used to pay P&I on that debt service
– Until August 1, 2014, any existing fee (i.e., fee adopted prior to January
1, 2012) can be pledged to debt service if it is a fee within an authorized
category and it was included in an IIP adopted before June 1, 2011
• The existing fee can continue to be collected after August 1, 2014 (i.e., after
the adoption of a new fee schedule) if it meets these requirements §(S)
Adopting a New Development Fee Ordinance
•
Extensive changes to development fee statute will likely require changes to
development fee ordinances in many or most municipalities
– New procedures, timelines, advisory committee formation/role, etc.
•
Up to municipalities to avoid inconsistent interpretation/implementation
– To promote uniformity in fee development and implementation, League has
proposed development of a uniform development fee ordinance during fall of
2011
•
As of January 1, 2012, the existing moratorium on development fees will be
lifted to allow adoption of new fee programs pursuant to the amended
statute Sess.L.§(2)
– Proposed uniform ordinance should be available for review and adoption in time
to allow municipalities to begin adoption of new fees once the current
development fee freeze and moratorium is lifted
Developing a New Fee Program
• All existing fee programs must be replaced before
August 1, 2014 §(K)
– If not replaced by this deadline, fees cannot be collected by the
municipality until a compliant program is adopted
– Development moratorium cannot be enacted in order to “buy
time” to adopt or update development fees §(L)
• Limited available capacity among fee consultants
– Critical to identify consultant and get on the calendar NOW
– Pay attention to requirements related to use of “qualified
professionals” §(T)(8)
• Some consultants may not qualify under new statutory requirements
Development Fee Adoption Procedures
•
Procedural requirements poorly drafted and difficult to interpret;
conservative interpretation requires two-step public hearing process
•
First public hearing: IIP/land use assumptions
– Publication of IIP and supporting documents, including land use assumptions,
released at least 60 days before a public hearing on the IIP §(D)
– Advisory committee submits comments at least 5 days before hearing §(D)(7)
– Approval/disapproval within 60 days of hearing, and at least 30 days before
second public hearing §(D)(1)
•
Second public hearing: Development fee
– At least 30 days before second public hearing (could be same day as IIP
approval), municipality issues public notice and publishes fee schedule with
written report on land use assumptions/IIP that supports the fees §(C)
– Final action to adopt/disapprove fees 30 days after the 2nd hearing §(C);§(D)(1)
– Fees effective not earlier than 75 days after formal action; cannot be adopted as
emergency measure §(C);§(D)(1),(6)
Advisory Committee Requirement
•
“Infrastructure Improvements Advisory Committee” must be appointed (and
procedural rules for same adopted) prior to the time that municipality
adopts:
– Proposed or updated land use assumptions
– an Infrastructure improvements plan, AND/OR
– New or modified development fees §(G)(1)
•
Composed of at least five members §(G)(1)(a)
– Requirement to include fifty percent representation from real estate,
development, or building industries
• At least one of these must be a homebuilder
– No municipal employees may serve on committee
•
Duties: Advise municipality on land use assumptions, review and comment
on IIP, monitor implementation and need for updates, and file written reports
on IIP implementation and fee collections/expenditures §(G)(1)(b)(i)-(v)
Biennial Audit Alternative
• In lieu of advisory committee, municipality may provide
for an independent, biennial certified audit of land use
assumptions, IIP, and development fees §(G)(2)
– Must be conducted by “qualified professionals”
– Cannot use same consultants that prepared the IIP/fee study
documents
– Must be posted and reviewed at public hearing within 60 days
When an IIP Has to Be Amended
•
IIP does not need to be amended for any change to planned infrastructure
that
– Addresses only infrastructure elements in the existing IIP AND
• Changes will not, individually or cumulatively with other amendments, increase the level
of service in the service area OR
• Cause an increase in the development fee of greater than 5 percent when a new or
modified fee is assessed as a result of the changes to the IIP
– Notice of these amendments must be published at least 30 days before adoption;
advisory committee must be informed §(D)(10)
•
Regardless, IIP and land use assumptions underlying the IIP must be
reviewed and/or updated a minimum of once every 5 years §(D)(3)
– If update necessary, municipality must prepare update before 5 year expiration;
hearing must be scheduled and notice provided within 60 days of completion of
proposed update §(D)(4)
– If update determined to be unnecessary, municipality must provide notice of this
determination and provide process for objectors to file written objections §(D)(8)
Changes to Publication Requirements
• SB 1525 requires nearly all notices, reports, and
documentation related to development fees to be
published on municipal websites
– If no municipal website, can publish on website of a city/town
association (e.g. League of Arizona Cities and Towns)
Changes to Annual Reporting Requirements
• Annual report requirements expanded as follows:
– Must address each service area
– Must address debt service obligations for any facility for which
development fees are a source of funding (and the timeframe to
repay those obligations)
– Must address funds advanced by the municipality that will be
repaid from development fees in greater detail (source of funds,
terms of repayment) §(N)
Tracking Development Fee Expenditures and
Refund Requirements
•
Critical to carefully track fee collections and expenditures to maintain
compliance with required time-frames and avoid refunds
– IIP should identify realistic, conservative time-frames for completion of
infrastructure items against which development fees are charged
• IIP amendments should track and reflect any delays or changes in construction
schedules or required infrastructure
– Maximum of 10 years for most NPS infrastructure; 15 years for water/wastewater
– Document financing agreements and reservations of capacity to avoid running
afoul of new “entitlements” to immediate service
• Consider more extensive use of development agreements, and disclose relevant
agreement provisions in the IIP
•
Tie fees and fee collections to infrastructure in a manner that limits the
potential for and scale of future refunds
– Remember that refunds only have to be paid against fees collected AFTER July
31, 2014; will have limited near-term effects
Tracking Grandfathering Rules
• Put in place procedures to track new grandfathering rules
– Indexing rules are no longer effective or permitted; all fees must
incorporate projected cost inflation in the originally adopted fee
– Developments are entitled to pay under fixed/frozen fee schedule for 24
months after grandfathering trigger
• Suggest implementing procedure to issue written “frozen” fee
schedule to developers at the time of the fee grandfathering trigger
(with identified 2-year expiration date)
– Commercial, industrial, multifamily: final site plan or subdivision
approval
– Single-family residential: initial building permit
Review of Critical Dates
• January 1, 2012
– Development fee moratorium lifted; new fee programs can be adopted
– Unauthorized fees must be dropped from all existing fee schedules
– Add commercial and industrial?
• July 31, 2014
– Last date that collected development fees will not be subject to refund
requirements
• August 1, 2014
– New fee programs must be in place; municipalities can no longer collect
existing fees unless grandfathered
• January 1, 2020
– All accumulated existing fees must be expended within fee category;
remaining fees distributed
Uniform Ordinance Development Process
• League has undertaken development of uniform fee
ordinance for benefit of interested Arizona cities/towns
– Encourage membership to adopt unified approach to
implementation to limit risk of renewed impact fee “reform” efforts
– Provide for uniform implementation of amended development fee
statute and limit potential for litigation
– Address internal inconsistencies and drafting issues through
uniform interpretation to avoid divergent approaches
• The draft ordinance was distributed by the League two
weeks ago. A final version should be available soon.
Questions?