Report Prepared by: Kim Espinosa, Planning Manager, Development Services Dept
Title
SUBJECT: Report and Public Meeting on Update of the City’s Public Facilities Financing Plan and Impact Fee Program
REPORT IN BRIEF
The City Council will receive a report on the Update of the City’s Public Facilities Financing Plan and Impact Fee Program and hold a public meeting in advance of the public hearing on the same item scheduled for February 7, 2022.
RECOMMENDATION
The City Council should provide direction regarding any additions or changes to the Public Facilities Financing Plan and Impact Fee Program so staff can prepare the draft Ordinance for a public hearing and possible introduction on February 7, 2022.
Body
ALTERNATIVES
1. Provide direction to staff on the preparation of the Draft Ordinance; or,
2. Continue the matter to a future Council meeting (date and time to be specified in motion).
AUTHORITY
Government Code 66106 through 66018 (AB 1600) established procedures for adoption or modification of development impact fees by local jurisdictions. Merced Municipal Code Section 17.62 (Public Facilities Impact Fees) and Administrative Policy A-32 spell out the implementation of the City’s Impact Fee program.
CITY COUNCIL PRIORITIES
Public Facilities Fee Program Update was mentioned in the FY 2020-21 City Council goals and priorities but was not mentioned in the FY 2021-22 version although many projects listed such as the police station, fire stations, park upgrades, etc., can be partially financed through the Public Facilities Impact Fees.
DISCUSSION
Status of Public Facilities Financing Plan and Impact Fee Program Update
Background
The City’s Public Facilities Financing Plan and associated Public Facilities Impact Fee Program were first adopted in 1998; revised in 2003, 2004, 2006, 2009, and 2010; and comprehensively updated in 2012. The impact fees are used to fund capital facilities and infrastructure generated by new development over the next 20 years, with service levels as outlined in the City’s General Plan. Per State Law (AB 1600), these fees can only be used on capital projects, not for maintenance or staffing. AB 1600 also mandates that there must be a clear “nexus” or correlation between the amount of fees charged to new development and the impact that new development generates. In other words, impact fees cannot be used to fix existing problems or “deficiencies” not created by new development. A history of the City’s Public Facilities Impact Fee levels can be seen at Attachment 1, including the most recent 2022 annual increase which was effective on January 1, 2022.
Fee Update
In 2019, the City hired Economic Planning Systems (EPS) to prepare a comprehensive update of the Fee Program. Working with City Department Heads and other City staff, EPS updated the population and growth projections, updated the project list and costs, added projects that were previously deleted from the 2012 project list that were deemed at the time to be outside the 20-year time frame based on growth projections, and added projects that weren’t previously included in the Impact Fee program. These new projects include neighborhood parks (the Public Facilities Impact Fees would replace the existing City Park Fees or “Quimby Act Fees” that are currently used to acquire park land for neighborhood parks), a new Corporation Yard for Public Works, and Smart City Technology Infrastructure for City facilities.
In Fall 2020, EPS completed an administrative draft of the fees for City staff review. If adopted as drafted, the impact fees would increase above 2022 fee levels across all land use categories. However, the City Council has the option of adopting fee levels below the maximum justified fee. In all previous updates of the Impact Fees, the City had formed a citizen task force or focus group made up of citizens, developers, builders, and business owners as well as representatives from the Planning Commission and City Council. Because of COVID, this community and stakeholder engagement process was delayed.
On March 1, 2021, the City Council received a status report on the Fee Update and directed staff to move forward with the stakeholder engagement process to include members of the City Council Planning/Housing Subcommittee.
Stakeholder Meetings
Subsequently, three virtual stakeholder teleconferences were held on June 17, August 26, and September 30, 2021, with an invitation list including over 45 representatives from local developers, local businesses, local realtors, the Building Industry Association, other interested citizens, along with the Chairpersons of the Planning Commission and Parks & Recreation Commission and the three members of the City Council Planning/Housing Subcommittee (Boyle, Ornelas, and Perez).
At the June 17, 2021, stakeholder teleconference, EPS went over the assumptions used in the study, the list of projects and cost estimates, how the fees are calculated, possible implementation measures, the preliminary draft fees for each land use category, and a fee survey of comparable cities in the region. (This fee survey was done in June 2021 based on a previous draft of the fees and has not been updated to reflect the latest draft fee.) A copy of the draft fees and background materials were then provided to all the stakeholders via email whether or not they were able to attend the teleconference.
At the August 26, 2021, stakeholder teleconference, the stakeholders were able to ask questions about the draft fees and give feedback. Based on questions raised regarding the Police and Fire fees and road and bridge projects, EPS and City staff went back and modified the project costs and growth allocations for Police and Fire projects and modified the fee calculations to send out to the stakeholders prior to the September 30 teleconference. Modifications to the road and bridge project list were also made to present to the stakeholders on September 30.
At the September 30, 2021, stakeholder teleconference, EPS and City staff went over the modifications to the Police, Fire, and Transportation fee calculations along with information about pending changes to the Administrative Policy and possible future changes to the Policy. The stakeholders had some minor requests for information which will be addressed in the draft Nexus Report.
Recent City Council Action
On October 18, 2021, the City Council adopted an amendment to EPS’ contract to finish the project and adopted Resolution #2021-93 amending Administrative Policy A-32 extending the time line for fee exemptions for demolished buildings from 5 years to 15 years; expanding the eligibility for fee deferrals from non-residential projects only to allow multi-family projects to qualify as well; and allowing alternate security mechanisms for such fee deferrals to be approved by the Finance Officer to give developers more options.
Draft Nexus Report and Maximum Justified Fee
In December 2021, EPS completed the Draft Nexus Report required under State Law to justify the fee program and was distributed to the Stakeholders for comment. The Draft Nexus Report can be seen at Attachment 2. The Nexus Report outlines the methodology and key assumptions used; demographic and land use assumptions (population, employment, density, etc.); outlines the calculations for calculating each fee for each facility type (transportation, fire, police, parks, public works, and information technology); the Nexus findings required under State Law; and Fee Program implementation and administration.
Based on the nexus study, the maximum justified fees for each land use category are presented in the following table. However, the City Council may elect to adopt less than the maximum justified fee, phase the increase in over time, or other options as determined by Council.
|
Land Use Category |
Max. Justified Fees |
Current Fees (Jan. 2022) |
Unit of Growth |
|
Single Family Residential |
$11,671 |
$5,938 |
Dwelling unit |
|
Multi-Family Residential |
$8,520 |
$4,107 |
Dwelling unit |
|
Institutional |
n/a |
$4,079 |
1,000 sq. ft. |
|
Retail - Less Than 50,000 SF |
$13,940 |
$11,927 |
1,000 sq. ft. |
|
Retail - More Than 50,000 SF |
$13,940 |
$8,996 |
1,000 sq. ft. |
|
Office Commercial |
$12,420 |
$7,810 |
1,000 sq. ft. |
|
Industrial |
$5,400 |
$2,233 |
1,000 sq. ft. |
|
Lodging |
$3,293 |
$4,107/Room (60% of Rooms Only) |
Room |
These fee increases would represent increases of 96 to 107 percent for single-family and multi-family residential, 17 to 59 percent for commercial uses, and 141 percent for industrial uses over 2022 level fees. (The fee for lodging would actually decrease by 19 percent but would be charged for each room instead of just 60 percent of the average occupied rooms as it is today.) The number of land use types would be reduced by eliminating the institutional type (data is hard to find on these types of uses so projecting growth for churches, hospitals, etc., is problematic and should be done on a case-by-case basis), merging the two retail commercial types into one, and adding the lodging category. [Please note that as of January 1, 2022, the City’s Public Facilities Impact Fees were adjusted per the current ordinance by 7.3% based on the Construction Cost Index of the Engineering News Record, but the comparison information in the report is based on 2021 fees.]
The Ordinance would modify the Public Facilities Impact Fees along with repealing the City’s existing Park Fees and Park Dedication Ordinance, which have been folded into the new Impact Fees. The current Public Facilities Fee Ordinance (Chapter 17.62 of the Merced Municipal Code) is presented at Attachment 3 along with the Parks and Recreation Facilities Fee (Chapter 17.38 of the Merced Municipal Code) and Park Dedication (Chapter 18.40 of the Merced Municipal Code). The Ordinance and Administrative Policy will need to be modified based on the Nexus Report and any direction provided by City Council at tonight’s meeting.
Possible Council Options
The Nexus Report shows the maximum justified impact fee by facility category and land use type, but the City Council may elect to implement the fees at lower rates than the maximum justified rate. Several options are available, including the following (other options may be available as well):
• Approve the maximum justified fees for all categories
• Phase in the fee increases over a specified time period
• Phase in fees by fee category
• Approve a fee less than the maximum justified fee
• Approve a fee at a lesser rate for land uses within a fee category
The City Council should provide direction to staff on the fee levels and any phasing of the increases desired.
In addition to the above options, through the approval of the Administrative Policy, the City could offer reduced fees for different types of projects, such as for affordable housing, in-fill development, and/or smaller home sizes. [Per the City’s current Accessory Dwelling Unit (ADU) Ordinance, ADUs already pay a fee proportional to the size of the primary dwelling.] EPS and City Staff had the following suggestions to address those developments, but the City Council should feel free to provide other suggestions:
• Offer a reduced fee by 50 to 75 percent for in-fill development (previously defined in the City’s fee Ordinance in 2010 as the area south of Bear Creek, east of Hwy 99/X St/West Ave, north of Childs Ave, and west of Delong/Glen Ave) based on their lower need for new facilities;
• Determine the fees for affordable housing projects on a case-by-case basis depending on the level of affordability, number of affordable units, etc. (These projects are too complex for a one-size-fits-all approach.)
• Offer a reduced fee for homes smaller than the City’s average home size (1,920 square feet in 2021) to address the upcoming requirements of AB 602 (effective after July 1, 2022). Staff is recommending that a lower fee be established for a range of smaller home sizes that are at least 10 to 20 percent below the average home size.
Direction to Staff on Draft Ordinance and Administrative Policy
At tonight’s meeting, the City Council should provide direction to staff on the options above so the draft Ordinance and Administrative Policy can be prepared for the public hearing.
After tonight’s public meeting, the public hearing is tentatively scheduled for the Monday, February 7, 2022, City Council meeting. After the public hearing on Feb 7, the City Council will consider introduction of the Ordinance. If introduced, it would have a 2nd reading and adoption on February 22, 2022, and would be effective 30 days later on or about March 22, 2022. However, as noted above, the City Council may choose a later date for the fees to be effective. The Administrative Policy will be adopted by Resolution and will become effective that same night.
IMPACT ON CITY RESOURCES
The City’s Public Facilities Impact Fee Program provides funding to assist in building new infrastructure projects and capital facilities in the City of Merced, including fire stations, police stations, roads, bridges, traffic signals, parks and recreation facilities, etc. As such, it is an important revenue source for the City for capital projects.
ATTACHMENTS
1. History of City’s Public Facilities Impact Fee Levels (1998-2022)
2. Draft Nexus Report (December 2021)
3. Current Public Facilities Impact Fee Ordinance (MMC 17.62), Parks & Recreation Fee Ordinance (MMC 17.38), and Park Dedication Ordinance (MMC 18.40)
4. Presentation