Engineering and planning aspects and the identification and evaluation of financing mechanisms must come together to develop and implement a successful capital funding plan. Photos: City of Kingman
Impact fees are a means of assigning the cost of growth to new development. Equating impact fees with a no-growth policy is a common misconception.
Identifying Viable Funding Sources

One consideration in identifying funding sources is the social economic viewpoint, the cultural and economic aspects of a community such as the ability to pay, and what economists refer to as “Pareto Criterion.” In general terms, this concept involves assessing whether an economic activity can increase the overall benefits to society. In economic terms, this amounts to achieving a “socially superior state.” For example, allocating the costs of growth according to who benefits from growth would achieve a socially superior state as long as the total benefits exceed the total costs. To an extent, a municipality's history and economic values would be a critical factor in the assessment process, driven by the involvement of community representatives.

The most important aspect of this approach is to consider the most influential decision-making criteria when matching a CIP with funding mechanisms. This process can be useful in bringing the alternatives to the forefront through an intuitively communicated process. Perhaps the most valuable result of completing an exercise involving the public and government leaders is the realization that there are no perfect matches or distinct funding sources for specific services. However, preferred funding approaches likely will surface, and using a blend of funding sources may be the best solution in a community that has diverse preferences for taxes, user charges, and impact fees.

A Case for Impact Fees

Many people equate impact fees with a no-growth policy. Impact fees, however, are actually a means of assigning the cost of growth to new development. While impact fees shift the cost burden associated with new facilities to new residents or new businesses, developers frequently argue that such a shift increases their costs. In the case of residential development, they can increase the cost to the home buyer. When assessing impact fees, a careful accounting of costs is required to ensure that a developer is not paying twice for the infrastructure associated with a new development. Once costs are accurately identified, supply and demand can determine how much of the impact fee is passed on from the developer to the new property owner. Other funding sources do not have as clear a case. For example, sales taxes are not easily tracked from the source to the facilities and services they eventually fund.

There are many reasons why a community might opt for impact fees. “Recurring revenues are useful in paying for recurring expenses, whereas one-time capital expenditures induced by growth are better funded with a one-time fee that adequately reflects the costs for the capital projects,” said Coral Loyd, financial services director of Kingman, Ariz.

Jack Kramer, the city's public works director, and Loyd recently teamed up to complete a comprehensive revenue study to address the city's rapid growth. Kramer sees the logic as straightforward. “Without impact fees, the people moving to your community use the capacity of the existing infrastructure without paying their fair share, and existing residents pay for new capacity as well,” he said. “Impact fees require the new residents to pay for their share of growth-related costs.”

Although there are many who oppose impact fees under the premise that they limit or restrict growth and economic development, there is little empirical or quantitative evidence to support this conclusion. In fact, there is some evidence that impact fees can act as an impetus to growth, especially if implemented appropriately.

Discerning what community characteristics lead to growth is not simple. An annual report produced by the Milken Institute, a publicly supported think tank in Santa Monica, Calif., ranks the fastest growing cities and metropolitan areas. The report considers economic activity such as job creation, wage and salary levels, educational institutions, and technology as an impetus to growth.

There is little evidence that impact fees significantly influence an entity's decision of where to locate. This is consistent with a recently published report by the Brookings Institute, a Washington D.C.-based think tank, which found that impact fees may serve as a catalyst for growth. No quantitative evidence can be found that suggests impact fees deter growth.

With careful planning, impact fees can provide the funding needed to maintain service levels in a growing community while enabling other revenue sources to sustain adequate service levels. As such, impact fees can represent an affordable one-time entrance fee into a desirable place to live and to conduct business.

A funding plan that omits impact fees because of the concern that they will deter growth may backfire and result in the infrastructure and associated services being compromised in quality. Growth may be squelched by the perception that a municipality cannot provide an infrastructure that meets basic needs. With proper preparation, public works and finance managers can deliver this message and gain the funding needed to maintain the intended level of service.

Theis, senior consultant, and Giardina, vice president, are with Red Oak Consulting, Aurora, Colo.