City backs away from fee plan

Impact of proposed change on city capital projects like the
sports park unclear
GILROY – A homebuilders association’s challenge of Gilroy’s impact fees could change the way the city charges the fees – although it’s still unclear whether it will threaten funding of major projects like the new police and fire stations that are currently on tap.

After reviewing a challenge by the Home Builders Association of Northern California in more detail, city staff told City Council Monday night that Gilroy should revamp the way it charges the fees – and improve its explanation of the underlying assumptions by which they are set.

If the council concurs, whether the actions would delay major civic projects like the city’s new police, fire station and sports park – all heavily funded by the impact fees – is still unclear.

“That’s the $64,000 question,” City Manager Jay Baksa said in an interview Tuesday.

The council will talk more about the proposals and its strategy on the fees at its retreat Friday.

The city and the HBA have been at loggerheads over the impact fees, which are extracted from developers to pay for public infrastructure.

With several major projects on tap in coming years, Gilroy’s fees are forecast to nearly triple by 2007, with developers paying more than $60,000 a unit compared to roughly $24,000 now.

But the HBA maintains those increases are “seriously flawed” and up to 100 percent more than what’s legally allowable. Talk of lawsuits, a delay – or possible moratorium – in residential development, and threats to city projects like the new police and fire stations have resulted.

After weeks of analyzing different scenarios for the fees and how they’d affect the city’s budget, Baksa admitted Monday that the way the city charges the fees is “expensive” and “unfair,” and said Gilroy also needs to do a better job of explaining how they relate to development projects.

By changing the methodology the city uses to charge the fees, Baksa said the city could reduce them significantly – at least in the short-term – while still advancing projects like the fire station that are already far along in the planning stages.

Gilroy’s current process of administering impact fees is based on cash flow, with the city charging different amounts each year according to what funding needs are at that particular time. The city collects fees to pay for current projects and more for future projects, so it doesn’t have to go into debt.

The problem is that current generations end up paying for projects that won’t be built for years, Baksa said.

“It’s a very expensive model,” he said. “We’ve been successfully persuaded the model we’ve had the last few years isn’t fair.”

Under Baksa’s new proposal, the city would in a sense return partially to its old system. The city would go into debt to build new facilities and charge a set impact fee over a period of time to pay off the debt. Once the debt is paid and the fund balance is zero, the city would have to go into debt again in order to pursue new facilities.

By waiting to fundraise until future projects are needed, the system would reduce the amount of fees being charged every year – with the per-unit charges forecast for 2007 dropping from $60,000 to as low as roughly $36,000. Projects on tap like the $19 million police station and $2.3 million fire station would continue because they’re already built into the reduced fees, Baksa said.

“When you take away that second payment you lower that fee today,” Baksa said. “It doesn’t mean it will wind up lower in 15 years when that second generation (of projects) is needed, but the developer today doesn’t have to pay for that second generation of development.”

But how solid the underlying assumptions behind the fees are proven could still be an issue.

Under state law, cities are supposed to conduct a so-called “nexus” analysis with their fees that details the specific needs for projects, how they are tied to residential development – and what fees are justified under that relationship.

Projects like the $19 million police station, an equally expensive sports park, a $2.3 million third fire station, and $4 million of the costs for a new library rely heavily on impact fee revenues. If the city can’t prove a strong enough relationship between the projects and new development, it could be left searching for some of the funding.

Baksa said Monday that the city can do a better job clarifying its explanation of those assumptions – although he did not go so far as to say the assumptions themselves are incorrect or vulnerable.

“We haven’t done a very good job of articulating our (assumptions),” Baksa said Monday. “We admit we haven’t done that.”

HBA spokeswoman Jennifer Cloonan said Tuesday that although the methodology change needs further examination, the assumptions behind the fees are still the key in the association’s mind.

“The most important thing from our perspective remains the nexus question,” Cloonan said. “The city and staff both indicated and recognized they have a nexus problem, and they’re going to hire a consultant. That’s a positive step for all parties involved.”

The council is likely to take Baksa’s advice, Mayor Tom Springer said in an interview Tuesday.

Although Springer said the assumptions behind the city’s fees are already spelled out through needs assessments linked to the city’s master plans for roads, sewers and other capital projects, he said clarifying them could help diffuse the current conflict.

“Legally, we already have the nexus document,” he said. “But the way it’s presented is apparently confusing to some people. By revising and simplifying it, we can eliminate the threat of a lawsuit by putting it in terms (challengers) can understand.”

However, Springer said the city would have less political flexibility – and more risk, if the economy goes sour – by adopting the recommended changes in calculating the impact fees.

“Basically, you’re borrowing a fixed amount up front, on a given schedule, and committing to build projects exactly when they get booked,” Springer said. “I don’t have a problem with it as long as everyone knows that our flexibility to move projects around – advance parks, road improvements – is going to be limited.”

It’s unclear how the city’s projects would fare if the council decides to adopt the changes. There could be short-term delays while the city assembles the documentation to justify projects like the police and fire station. And there’s still potential for deeper problems if that study turns out to show that the city is overcharging with the fees – as the HBA asserts.

The city will be working with a consultant to solidify its nexus analyses as it updates the master plans, Baksa said. Some work has already begun.

“Council could take a conservative stance that nothing will happen until all of the development fees have been looked at,” Baksa said. “Then again, certain fees are pretty clear, like sewers and water.

“There may be some fees where we’re able to cut loose, and those that need more scrutiny. That’s what we’ll talk about Friday.”

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