SB 1525 and Municipal Development Fees:

Responding to the 2011 Reforms

Andrew J. McGuire

Gust Rosenfeld, PLC

Peter W. Culp

Squire, Sanders & Dempsey LLP

June 23, 2011

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 non-compliance 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

• 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 will be undertaking 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

• If you are interested in participating in the development of the uniform fee ordinance, please contact us or see us after this presentation

Questions?