BACKGROUND:
During the 2020 Cathedral City (City) City Council goal-setting session, the Council directed staff to conduct a User Fee Study (USF), Cost Allocation Plan (CAP), and Development Impact Fee (DIF) study. These studies evaluate the City’s true cost of providing City services to new developments and voluntarily requested city services.
When the cost of providing City services is not fully recovered from new developments, the unreimbursed City service costs are deducted from the General Fund. Using General Funds to cover the costs incurred by new development decreases funds available to serve existing residents.
Development Impact Fees are one-time fees charged to new development. DIF fees are intended to pay for backbone infrastructure and capital facilities required to serve the new developments and new residents. Municipalities are prohibited from using DIF fees to fund ongoing operations, maintenance, or to make up for existing service deficiencies. DIF fees must be accounted for, set aside, and saved until the municipality has the required funding to build the needed facilities. This study analyzed the following fees to provide: (i) Parks, (ii) Transportation, (iii) General Government Facilities, (iv) Fire Facilities, and (v) Police Facilities.
In Q3 2021, the City reviewed, analyzed, and implemented an updated USF and CAP.
With the updated USF and CAP as a foundation, City staff issued a DIF request for proposal. After receiving and reviewing multiple qualified responses, the City selected the Clearsource Financial/Harris and Associates team. The collective team (City, Clearsource, and Harris and Associates) began work in Q2 2022.
In October 2022, Harris and Associates updated the City Council on the progress made to date and remaining steps.
During the June 28, 2023, Study Session, Council reviewed the first draft of the A.B. 1600 Fee Justification Nexus Study (Nexus Study). Harris and Associates provided a detailed overview of the Nexus Study, contrasting allowable new development impact fees with current fees and comparing proposed development impact fees with fees charged by surrounding jurisdictions.
Since the June 28, 2023, Study Session, Staff received a comment letter from the Desert Valley Builder’s Association (DVBA). A copy of the July 7, 2023, letter is attached. The Nexus Study has been updated to address DVBA’s comments. The Nexus Study was also updated to reflect current General Government, Police, and Fire Department vehicle inventories as well as additional details on future Fire Department facility needs.
Cathedral City adopted the current A.B. 1600 Nexus Study in January 2006.
Construction costs between 2006 and 2023 have significantly increased. Due to this sizable construction cost increase, the Nexus Study supports an equally sizable increase in future DIF fees.
The August 9, 2023, Study Session is an opportunity for the Council to (i) ask any additional questions on the Nexus Study, (ii) discuss any stakeholder group comments, and (iii) provide direction to staff on implementation of the fees. A copy of the updated Nexus Study was emailed to the DVBA, Building Industry Association, Southern California Gas Company, and Southern California Edison.
DISCUSSION:
On July 7, 2023, the DVBA provided a four-page comment letter. The July 7, 2023, letter outlined the following four areas of concern: (i) on-going DIF program administration fees being charged as a percentage of collected fees versus a flat fee; (ii) future fee adjustment procedures; (iii) development impact fees being used to correct existing deficiencies; and (iv) adequacy of current general government, police, and fire facilities to accommodate future service population growth. (i) On-going DIF program administration fees being charged as a percentage of collected fees: The Mitigation Fee Act allows municipalities to charge a separate fee for the administration of the overall DIF fee program. DIF fee program administration includes tasks such as collecting, analyzing, engaging consultants, conducting studies, and reporting on both collected and expended funds. These tasks are technical and time-consuming to administer. Administrative fees may be charged on a flat fee basis or a percentage basis. The majority of municipalities Harris and Associates work with charge administrative fees on a percentage basis. Industry- standard administrative fees range from 3% to 6%. Charging on a percentage basis better equips municipalities to keep up with rising administration costs. Harris and Associates and City Staff recommend charging administrative fees on a percentage basis. The Nexus Study recommends a 5% administrative fee. Additional details may be found on page 5 of the Nexus Study.
(ii) Future fee adjustment procedures and updates: The DVBA believes there are no provisions for automatic fee updates based on Consumer Price Index (CPI) or Construction Cost Index (CCI) increases. City staff will conduct a public hearing whenever there is a proposed fee increase. (iii) Development impact fees being used to correct existing deficiencies: The DVBA points out a bright line distinction on the collection and usage of development impact fees for the construction of new facilities required to service future development. Development impact fees may not be used to correct existing facility deficiencies. In the revised Nexus Study, Harris and Associates explain that given the corrective steps the City is taking to correct existing deficiencies, State law allows the City to charge the development impact fees recommended in the Nexus Study. These corrective steps include adopting the three (3) acres of parkland per 1,000 residents level of service in both the General Plan and Municipal Code (Section 9.106.040). Additionally, even though the City suspended the Parks and Recreation Department in 2003 due to budget constraints, the City has maintained an active five-member citizen-based Parks and Community Events Commission (PCEC). PCEC assesses the
community’s recreational services and facilities needs and advises the City Council on funding, recreational programing, park facilities maintenance and usage, and other opportunities to improve utilization, quality, and quantity of parks within the City. The City continues to proactively evaluate opportunities and implement changes to improve pedestrian and bikeways throughout the City. Recently, the City Council voted to utilize a California State grant to add a Class IV bike path along both sides of Perez Road between Cathedral Canyon and Date Palm Drive. The City continues to proactively pursue parkland grant opportunities to supplement General Fund contributions for new park construction. The recently completed Cathedral City Community Amphitheater resulted from the combination of a California State Park grant and General Fund contributions. The City recently secured a different California State Parks and Recreation grant which is making the construction of the Dream Homes eight-acre community park possible.
Park construction should begin in 2024. Finally, the City is planning to build another dog park within the Downtown area. General Funds will be used for this Downtown dog park in the event no grants are available.
Additional details may be found on pages 17-22 and 23-30 of the Nexus Study.
(iv) Adequacy of the current general government, police, and fire facilities to accommodate future service population growth: All three entities are operating at capacity within existing facilities. City staff has followed up with the DVBA and explained all three entities’ facilities are unable to accommodate future City population growth.
The last update to Cathedral City’s A.B. 1600 Nexus Study occurred in 2006.
Construction costs significantly increased between 2006 and 2023. Given increasing costs over the last seventeen years, there is a significant difference between current development impact fees and the Nexus Study’s maximum allowable development impact fees. The following table identifies currently charged DIF fees, Nexus Study proposed DIF fees, and the percentage increase/(decrease).
PROPOSED FEE INCREASE OR (DECREASE)
South of I10 North of I10
DEVELOPMENT TYPE:
Residential
Square
Foot or
Unit
Assumption
TOTAL
CURRENT DIF
+ PFS
TOTAL
PROPOSED
FEE
Percentage
Change
TOTAL
CURRENT
DIF + PFS
TOTAL
PROPOSED
FEE
Percentage
Change
Single Family (one unit) 2,000 $2,150.00 $12,860.00 498% $3,758.00 $12,860.00 242% Multi-family
(8,000 total livable square feet) 8 Units $16,000.00
$70,080.00 338%
$28,864.00
$70,080.00 143%
Non-Residential
Commercial/Retail 2,000 $814.40 $6,580.06 708% $2,501.70 $6,580.06 163% Office/Non-Retail 2,000 $612.40 $8,630.98 1309% $1,262.80 $8,630.98 583% Industrial/Non-Retail 2,000 $612.40 $1,049.50 71% $1,262.80 $1,049.50 -17% * Note: The current A.B. 1600 fee schedule bases fees on whether a project is located north of Interstate 10 or south of Interstate 10. The Nexus Study establishes one set of DIF fees irrespective of whether a future project is located north or south of Interstate 10.
While there is a marked increase in development impact fees, this increase demonstrates the City has been undercharging the amounts necessary to pay for future capital improvements and facilities needed to support new development. By not collecting sufficient impact fees now, in future years general fund monies will be required to make up the shortfall between actual costs to construct required public facilities and collected DIF fees.
The A.B. 1600 Nexus Study identifies the maximum justifiable development impact fee.
City Council has the discretion to implement or not implement updated fees and may implement updated fees over time.
Staff prepared three options for the City Council’s consideration and discussion.
Option One is to adopt the fees as proposed in the Nexus Study beginning January 1, 2024:
Development
Type Current Proposed Proposed
Increase
Percentage
Increase
Single-Family
Unit $2,150.00 $12,860.00 $10,710 498%
Multi-Family
Apartment
(8 Units)
$16,000.00 $70,080.00 $54,080 338%
Commercial/
Retail $814.40 $6,580.06 $5,766 708%
* The above table illustrates development impact fees assuming a 2,000 square foot single family detached home, an eight (8) unit multifamily project (8,000 total livable square feet), and a 2,000 square foot commercial/retail space.
In the Harris and Associates June 28, 2023, Study Session presentation, Harris illustrates the Nexus Study proposed DIF fees are in line with surrounding jurisdiction’s DIF fees. In the attached Harris and Associates June 28, 2023, PowerPoint presentation, a residential DIF fee comparison may be found on pages 23, 24, and 25.
A non-residential DIF fee comparison may be found on pages 26, 27, and 28. Harris and Associates illustrates the Nexus Study proposed increase is in line with other Coachella Valley cities.
Option Two is to adopt the fees over a two-year phase in period beginning January 1, 2024, and reaching 100% fee adoption by January 1, 2026:
Development
Type Current Proposed Proposed
Increase
Percentage
Increase
2024
Jan 1
2025
Jan 1
2026
Jan 1
Single-Family
Unit $2,150.00 $12,860.00 $10,710 498% $5,720 $9,290 $12,860 Multi-Family
Apartment
(8 Units)
$16,000.00 $70,080.00 $54,080 338% $34,027 $52,053 $70,080 Commercial/
Retail $814.40 $6,580.06 $5,766 708% $2,736 $4,658 $6,580 * The above table illustrates development impact fees assuming a 2,000 square foot single family detached home, an eight (8) unit multifamily project (8,000 total livable square feet), and a 2,000 square foot commercial/retail space.
Option Three is to adopt the fees over a three-year phase in period beginning January 1, 2024, and reaching 100% fee adoption by January 1, 2027:
Developme
nt Type Current Proposed Proposed
Increase
%
Increase
2024
Jan 1
2025
Jan 1
2026
Jan 1
2027
Jan 1
Single-
Family Unit $2,150.00 $12,860.00 $10,710 498% $4,828 $7,505 $10,183 $12,860 Multi-Family
Apartment
(8 Units)
$16,000.00 $70,080.00 $54,080 338% $29,520 $43,040 $56,560 $70,080 Commercial/
Retail $814.40 $6,580.06 $5,766 708% $2,256 $3,697 $5,139 $6,580 * The above table illustrates development impact fees assuming a 2,000 square foot single family detached home, an eight (8) unit multifamily project (8,000 total livable square feet), and a 2,000 square foot commercial/retail space.
FISCAL IMPACT:
The fiscal impact of the updated fees can be estimated once (i) all fees have been finalized and (ii) the City Council has determined which fees and over what time period will said fees be implemented. If the City Council elects to collect lower-than- recommended fees, the full amount to fund future infrastructure and facility needs may not be collected. This gap between what is collected and what is required to construct required infrastructure and/or facilities will require General Funds or grants to make up the shortfall.
FIVE-YEAR STRATEGIC PLAN:
The implementation of updated USF, CAP, and DIF studies supports the following strategic plan goals:
GOAL B: COMMUNITY INVESTMENT Objective: Cathedral City roads, gateways, public spaces, and other city infrastructure are well planned, designed, constructed, and maintained.
GOAL C: FISCAL STABILITY AND SUSTAINABILITY Objective: Cathedral City has economically prospered by facilitating the investment of private dollars in high-quality development which benefits the community. We remain financially solvent by instituting prudent fiscal policies and transparent financial practices.
Action C-9 Complete and adopt the Development Impact Fee Study