A Guide to Conservation-Oriented Wate r Impact Fees

October 25, 2018

2018 Growth Infrastructure Consortium Conference

Agenda

• Colorado water law and statute requirements

• Guide to designing conservation-oriented water impact fees

• Methodology and calculation overview• Assessment schedules and examples

from Colorado communities• Considerations and conclusions

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Colorado Water Rights Law

• Not tied to land or different from riparian water rights common in most other states

• Historical beneficial use dictates seniority› E.g., 1890 sustained beneficial use is senior to 1990 beneficial

use translates to “use it or lose it”› Senior rights fulfilled fully before junior rights and are

therefore more valuable• Commodity that is traded so long as beneficial use is

maintained› Water leases are common and local governments purchase

rights from agriculture, industry and “ditch companies”• Water rights price increasing as growth continues

› Colorado Big Thompson Water $30,000 per unit or roughly $40,000 per acre foot

– Excludes reservoirs, treatment, infrastructure, storage

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Legal considerations• State Laws and Regulations• Rational Nexus—relationship between the price and

cost incurred• Connection be established between new

development and the new or expanded facility to accommodate such development

• Identification of the cost of those new or expanded facilities needed to accommodate development

• Appropriate apportionment of cost to new development in relationship to benefits reasonably received

• Reasonable relationship to the burden imposed to provide capacity

• Reasonable relationship does not mean mathematically exact

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Colorado Revised Statutes29-20 -104.5• Fees must be generally applicable to a broad class

of property (e.g. residential, commercial, etc.);• Intended to defray the projected impacts on capital

facilities caused by proposed development;• Fee is directly related to service that a local

government is authorized to provide;• Has an estimated useful life of five years or longer;• Is required by the charter or general policy of a

local government pursuant to a resolution or ordinance.

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Colorado Legal Case Example• Krupp v. Breckenridge Sanitation District, CO 99 SC

491 (2001)› Claimant asserted that the plant investment fee

assessed was unconstitutional taking of property› Fee schedule was based on single family equivalent

(SFE). One SFE contributes a maximum of 300 gallons per day. Duplex and single family were 1.0 SFE. Other multifamily was 1.8 SFE

› Developer paid higher SFE for triplex but argued that because the sizes of the duplexes and triplexes were the same, they should all be charged based on 1.0 SFE

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Colorado Legal Case Example (cont.)• Krupp v. Breckenridge Sanitation District, CO 99 SC

491 (2001)› Studies showed that multifamily short-term dwelling

had higher demands than single family units› Court concluded that PIF was not excessive in relation to

impact of the project. › “Mathematical exactitude is not required, however, and

the particular mode adopted by the governmental entity in assessing the fee is generally a matter of legislative discretion.” -Excerpt from Krupp v. Breckenridge Sanitation District Supreme Court Ruling

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Common Impact Fee Objectives• Equity between existing and new customers -

Development pay its own way • Funding source for system expansion• Minimize debt • Diversify revenue sources• Lowering water rates through additional capital

funding• Recoup previous expansion costs funded by existing

ratepayers› Restricted more directly in Arizona unless there is debt

or future capital

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Considerations when setting impact fees• State and local legal and statutory requirements

• Legal precedents from other jurisdictions

• Identify financial objectives of the utility

• Use generally accepted utility industry financing and pricing practices

• Methodologies based on industry-accepted practices (i.e. proven approaches)

• Evaluate the important criteria that are driving the need for a Impact Fee analysis

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Guide Highlighting Conservation -Oriented Impact Fee Practices

• Collaborative effort between Western Resource Advocates and Raftelis (1)

› https://westernresourceadvocates.org/projects/water-system-development-charges/

• Intended to promote innovative and emerging approaches to developing scalable and variable impact fees for future developments

• Financial incentives reflected by the impact fee assessed may promote more efficient economic choices by developers reducing long-term water demands and requirements

› Once built, it is much more difficult to modify existing development

10(1) Funded through a grant from the Gates Family Foundation

Guide Conclusions1. Conservation-oriented impact fees are a new

tool, but one that is a logical extension of more traditional impact fee calculation methods

2. Conservation-oriented impact fees can be appealing to developers and several pricing and non-price incentives exist› Landscaping ordinances may be more effective, but not

always viable in every community

3. Conservation-oriented impact fees can benefit utilities and customers by improving equity among customers and reducing water demands and expansionary capital requirements

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Guide Conclusions4. Conservation-oriented impact fees require more

time, expertise, and stakeholder engagement during the design, adoption and administration phases

5. Ensuring the longevity of water savings over time can be achieved through conservation-oriented rate structures, administrative solutions, customer education, and tracking water-use patterns of new developments over time

6. Provides economic incentive and more choice for new development that is more variable than stepped fees by meter size

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Water Impact Fee Calculation

Building blocks for developing impact fees• Determine cost or value of facilities and associated

capacity available (or new capacity)• Apply adjustments?

› Outstanding principal, grants, contributions› Future interest expense› Dedicated assessment or tax-based revenue funding

requirements• Estimate new customer demand requirements• Calculate unit cost, for example

› Value per mgd › Value per equivalent residential unit

• Apply unit cost to assessment schedule

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Impact Fee data requirements• Line item asset listing

› Facility type› Acquisition date› Purchase price› Accounting life› Accumulated depreciation› Identification of assets funded by contributions, grants,

or loans

• Engineering News Record Construction Cost Index (ENR CCI) or similar index for construction costs –to evaluate replacement cost value of assets

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Impact Fee data requirements (cont.)• Planning documents

› Master plans› Comprehensive plans› Facility use plans

• Long-range capital improvement program› Each project identified as growth/capacity-related or

non-growth

• Policy objectives

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Developing Level of Service to Improve Accuracy• Planning documents contain level of service

demand requirements• Can be stated in peak day or average day• Serves as the measure of capacity required by

service unit• Level of service should recognize changes in active

and passive water demand savings programs• Levels of service may vary by type of facility (e.g.

treatment, storage, pumping, etc.)

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Calculation Approaches

• Backward-looking• Facility capacity to serve current and

future development• Unit cost of capacity for new development

Buy-in

• Forward-looking• Future facilities that add capacity for new

developmentIncremental

• Backward and forward-looking• Current and future facilities• Combined facilities to serve current and

future developmentHybrid

Buy inExisting capacity available for growth

Past Present Future

System Capacity

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Capacity Available for Growth

Number of Accounts

IncrementalNo existing capacity available for growth

Past Present Future

System Capacity

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Capacity Required

Number of Accounts

HybridSome existing capacity available for growth with long term capacity needs

Past Present Future

System CapacityAvailable Capacity

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Capacity Required

Number of Accounts

Buy in methodology

• Applies to utilities with available capacity for growth

• The new customer (development) “buys into” the system – but does not “own” anything

• Multiple methods to value existing assets• Potential credits

• Outstanding liabilities used to finance existing facilities (if paid exclusively through user charges or dedicated revenue source)

• Contributed facilities recovered through impact fees• Grants

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Buy in methodology – What to do with outstanding debt?• Debt issued to fund an expansion is paid back over

time: › Through rates after a customer connects to the system › Through impact fees when expansionary debt is separated› Through non-rate sources (e.g., tax-based)

• When rates or other dedicated sources are used to repay debt service, an outstanding principal credit may be applied to avoid double charging for the facilities through the impact fee and rates

• When impact fees are used to repay debt service to expand facilities and is proportionally recognized, an outstanding principal credit may not be needed since impact fees repay expansionary debt service and present value of future interest could be appropriate 23

Incremental methodology• Applies to utilities with little to no available

capacity to serve growth

• New customer pays for next increment of future capacity required to serve them

• Capital plan planning horizon is important for determining future capacity units (e.g., how many future units will additional capacity serve)

• Determine which projects and/or portion of project costs are growth-related

• May be able to include present value of interest cost of future debt in impact fee cost

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Hybrid methodology

• Used by utilities with available capacity and planned future capacity

• Combines the buy-in and incremental cost approach

• Weighted average of the buy-in and incremental costs – not a simple sum of the unit costs!

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Assessment schedule options• Lot size - $ per square foot of lot size• Number of units (multifamily) - $ per unit• Units + retail floor area (mixed use)• Gross floor area (commercial)• Demands – annual, peak• Plumbing fixtures• Irrigable area (irrigation)• Other fixtures – barstools, restaurant seats,

number of laundry machines, employees

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Lot Size Based Impact Fee exampleusing historical billing data

• What’s needed› Historical detailed billing data› Average winter consumption (indoor use)› Irrigable area› Application rate in gallons per square foot

• Estimate total demand for each› Annual indoor use› Allowable outdoor use based on application rate and

irrigable › Use regression analysis to determine water use by lot

size

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Developing the fee schedule

• Regression analysis equation› 52,000 + 12 (gallons per sq ft) x Lot Size (1,000 sq ft) =

Total Demand (gallons)

• Calculate indoor› 52,000/365 * $29.77 gpd = $4,243

• Calculate outdoor› (12 *1000 (sq ft))/365 * $29.77 = $981 per 1,000 sq ft

• Summarized single family fee› Indoor or base charge: $4,243 per lot› Outdoor charge: $0.981 per sq ft

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Unit Cost of Capacity

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Water Impact Fee Assessment Options

Impact Fee Assessment Examples• Meter size based assessment• Assessment per dwelling unit with different schedules for types of

residential› Incentive based fees for reduced use› Fees by lot size

• Fees per dwelling unit for different types of residential developments

• Indoor and outdoor uses separately assessed› Example A

– Indoor using meter size – Outdoor based on lot size

› Example B– Indoor using number of bathrooms– Outdoor based on lot size

• Residential equivalents• Fixture units• Individualized fees (typically reserved for large users)

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Impact Fee Assessment Examples – Meter Size Applicable to All Developments (1)

Meter Size

Meter Capacity (GPM)

Equivalency Ratio

Water Impact Fee

5/8 x ¾-inch 10 1.0 $6,330¾-inch 15 1.5 9,4951-inch 25 2.5 15,825

1 ½-inch 50 5.0 31,6502-inch 80 8.0 50,640Larger Individual

calculation

31(1) Town of Berthoud Water system plant investment fee. Excludes water rights requirements and a separate raw water system investment fee.

Impact Fee Assessment Example –Incentive for Less Demand

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(1) Town of Castle Rock Residential Water Impact Fees.(2) Provides additional 2 gpm reduction on estimated 26 gpm facilities as

incentive.

Meter Size GPMMeter

Eq. Ratio

Water Impact

Fee

Water Resource

Impact Fee

Total Meter Size

Based 5/8 x ¾-inch 20 0.67 $2,220 $10,216 $12,436

¾-inch 24 (2) 1.00 2,658 12,229 14,8873/4-inch 30 1.00 3,314 15,248 18,562

Impact Fee Assessment Example –Scalable Impact Fees

33(1) Little Thompson Water District

• Demand per residential user› Standard tap based on 228,000 gallons per year

– $11,000 for water system impact fee– Water rights tied to 228,000 gallons per year– No surcharge through water use above 228,000

gallons› Urban tap based on 114,000 gallons per year based on

water use analysis– $7,000 for water system impact fee– Water rights for 114,000 gallons per year– Use over 114,000 is surcharged through water rates

Impact Fee for SFR by Gross Lot Size (1)

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Single FamilyLot Size

(ft2)

Annual Allotment

(Gallons) (2)

Required Raw Water Contribution (AF)Impact FeeC-BT or North Poudre

Irrigation CompanyJackson Ditch Company, et al

1-2,999 85,000 0.3653 0.3913 $4,9033,000 - 4,999 114,000 0.4899 0.5249 $6,5765,000 - 6,999 132,000 0.5672 0.6077 $7,6147,000 - 8,999 150,000 0.6446 0.6906 $8,652

9,000 - 10,999 168,000 0.7219 0.7735 $9,69111,000 - 12,999 186,000 0.7993 0.8564 $10,72913,000 - 14,999 204,000 0.8776 0.9392 $11,76715,000 - 16,999 222,000 0.954 1.0221 $12,80617,000 - 18,999 241,000 1.0356 1.1096 $13,90219,000 - 20,999 259,000 1.113 1.1924 $14,94021,000 - 22,999 277,000 1.1903 1.2753 $15,978

over 23,000 296,000 1.2719 1.3628 $17,074

(1) East Larimer County Water District single-family residential example. (2) Water rate surcharge is applied once annual water use exceeds allotment.

Impact Fee Assessment Examples –Per Residential Dwelling Unit (1)

Residential Development Type

Water System (2)

Water Resource (3)

Combined Water

Single Family Detached

$9,115 $15,565 $24,770

Duplex 5,443 10,609 16,052Manufactured

Home4,101 8,857 12,958

Multifamily Ind. Meter (4)

2,615 6,561 9,176

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(1) City of Thornton residential water connection fees assessed per dwelling unit. Multi-family master metered by meter size.

(2) Irrigation month water use per dwelling unit(3) Annual water use per dwelling unit.(4) Irrigation-only meter typically serves common areas assessed separately.

Impact Fee Assessment Examples –Indoor and Outdoor Components Separate A (1) (2)

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(1) City of Longmont Single-family residential water system development fees. Multi-family assessed per dwelling unit using different schedule.

(2) Small commercial / mixed use are assessed by meter size through 3-inch. 4-inch and greater are based on the demands of the individual development.

Meter SizeWater

SDF

Windy Gap

SurchargeTotal Meter Size Based Outdoor

5/8 x ¾-inch $3,670 $1,320 $4,990 $0.56 per square feet

of lot size ¾-inch 5,500 1,980 7,4801-inch 9,150 3,300 12,450

Impact Fee Assessment Examples –Indoor and Outdoor Components Separate B (1) (2)

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(1) Aurora Water, residential water connection fees. A single half bath will be excluded from SFD bathroom basis for fee.

(2) Exclude Xeric options for outdoor connection fee(3) SFA excludes outdoor use for common areas to be served by a irrigation-only

connection and assessed under separate fee schedule.(4) MFR outdoor use to be served by irrigation-only connection and assessed

under separate fee schedule.

Type Basis Indoor OutdoorSFD 1-2 Bath $5,699 $0.973 per

square feet of lot size

SFD 3-4 Bath 9,207SFD 5+ Bath 15,956SFA Per Unit 9,118

N/A (3) (4)MFR Per Unit 9,118

Impact Fee Assessment Examples –Residential Equivalents (1)

38(1) Town of Superior Metropolitan District Potable Water Development Fee.

• Residential fee per equivalent residential unit for potable water system connection is $20,991

› Applies per EQR for all residential developments› 1 EQR is a single family homes, individually metered mobile

homes and/or mobile homes on permanent lots› MF EQR

– 1BR / 1BA = 0.50 EQR– 2BR / 2BA = 0.75 EQR– 3BR / 2.5BA = 0.90 EQR– Any larger unit is 1.00 EQR

› All other developments– Equivalency schedules provides EQR basis for each based

on different components

Impact Fee Assessment Examples –Plumbing Fixture Units (1)

39(1) City of Steamboat Springs water system and water resource development fees.

• Total water fee is $72.76 per fixture unit› Water system fee is $30.89 per fixture unit› Water resource fee is $41.87 per fixture unit

• Fixture unit or points assigned for elements for each development to total all fixture units

› Square feet› Fixture using devices: Examples include toilets, sinks,

shower, washing machines, dishwashers, outdoor spigot› Outdoor using devices: Examples include outdoor spigot,

non-residential components› Atypical items included

Impact Fee Assessment Conclusion• Meter size based assessment is still the most common

in Colorado, but…• Becoming more individualized as developments

become less similar› New assessment categories (like small houses and accessory

dwelling units to be discussed later)› Water use is changing and it varies by community

– Historical patterns may not apply to new development– New development may use more (bigger homes, larger

lots)– New development may use less (smaller lots, newer

appliances which are more efficient)• Be careful who is an exception as pretty soon no one

will be “average”

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Contacts: Andrew Rheem 303 305 1137 / arheem@raftelis.comTodd Cristiano 303 305 1138 / tcristiano@raftelis.com