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Staff Report
City Council
Item No. 6.A
Meeting Date: September 27, 2023
From: Stone James, Economic Development Director
Title: AB 1600 Fee Justification Nexus Study
City Council
RECOMMENDATION:
To adopt the Assembly Bill (AB) 1600 Fee Justification Nexus Study findings and update the City's AB 1600 development impact fee schedule to reflect the adopted recommendations. Full implementation of the adopted fees will be effective January 1, 2024.
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 development, the unreimbursed City service costs must be covered 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. Work on updating the A.B. 1600 DIF schedule began in Q2 2022.
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In October 2022, Harris and Associates (Harris) provided a progress update to City Council and identified 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 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.
Following the June 28, 2023, Study Session, Staff received two comment letters from the Desert Valley Builder’s Association (DVBA). The Nexus Study has been modified to address DVBA’s concerns. In addition to the DVBA, t he Nexus Study was sent to the Building Industry Association, Southern California Edison, and Southern California Gas.
Only the DVBA has provided comments.
During the August 9, 2023, Study Session, City Council directed staff to , after analyzing and addressing stakeholder concerns, prepare the Nexus Study for Council adoption.
The Council also directed staff to implement 100% of the recommended fees on all qualified new development beginning January 1, 2024.
DISCUSSION:
The current A.B. 1600 Development Impact Fee schedule was adopted in January 2006. Construction costs have significantly increased since 2006. Given increased costs over the last seventeen years, there is a material shortfall between current development impact fees and what it will cost to build the municipal facilities required to serve future residents.
The following table identifies currently charged DIF fees, Nexus Study -proposed DIF fees, and the percentage increase or (decrease).
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** 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 amount s necessary to pay for future capital improvements and facilities needed to support new development . By not collecting sufficient impact fees now, 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.
Using 2022 permit activity, the following table examines the impact fees collected under the current 2006 AB 1600 schedule and what would have been collected had this Nexus Study been implemented.
LOST REVENUE ANALYSIS
DEVELOPMENT TYPE:
Residential
Number of
Permits
Issued in
2022 by
Product
Type
TOTAL
COLLECTED
DIF FEES
USING 2006
FEE
SCHEDULE
TOTAL DIF
FEES WHICH
WOULD
HAVE
COLLECTED IF
USING
PROPOSED
NEXUS
STUDY
REVENUES
CITY SHOULD
HAVE
COLLECTED
BUT DID NOT
COLLECT
(New DIF fee
less current
DIF fees)
Single Family $694,100.00 $575,850.00
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
Percent
Change
TOTAL
CURRENT
DIF + PFS
TOTAL
PROPOSED
FEE
Percent
Change
Single Family
2,000
$2,150.00
$12,620.00 487% $3,758.00
$12,620.00 236%
Multi-family 8 Units
$16,000.00
$68,720.00 330%
$28,864.00
$68,720.00 138%
Non-Residential
Commercial/Retail
2,000
$814.40
$6,450.42 692% $2,501.70
$6,450.42 158%
Office/Non-Retail
2,000
$612.40
$8,457.10 1281% $1,262.80
$8,457.10 570%
Industrial/Non-Retail
2,000
$612.40
$1,028.54 68% $1,262.80
$1,028.54 -19%
* 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.
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55 $118,250.00
Multi-family
2 $32,000.00 $137,440.00 $105,440.00
Non-Residential
Commercial/Retail
2 $1,628.80 $12,900.84
$11,272.04
Office/Non-Retail
- - - - Industrial/Non-Retail
- - - - Total DIF Fees
$151,878.80 $844,440.84
$692,562.04
* 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.
On August 15, 2023, the City received the attached comment letter from the DVBA. This August 15th letter outlined the following four areas of concern: (i) is a five percent (5%) AB 1600 administrative fee appropriate; (ii) how can a three -acre per 1,000 resident fee be charged when the current parkland level of service for existing residents is 1.41 acres per 1,000; (iii) new development should not pay to correct existing infrastructure deficiencies; and (iv) the estimates to replace general City, Police, and Fire department vehicles seem s high. City staff worked with Harris and the City Attorney’s Office to understand and, when appropriate, address DVBA’s concerns.
(i) How is a five percent (5%) DIF program administration fee justified: 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 collecting, analyzing, engaging consultants, conducting studies, and reporting on both collected and expended funds.
These tasks are technical and time -consuming. Administrative fees may be charged on a flat fee basis or a percentage basis. Industry -standard administrative fees range from 3% to 6%. Since all city fees must reflect actual costs of services provided, Harris and the City’s Director of Finance, Kevin Biersack, analyzed the actual costs of complying with AB 1600 and AB 602 requirements. This Finance Department and Harris analysis justifies a 3. 0% administrative fee. Harris has reduced the previously proposed administrative fee from 5% to 3. 0%. More detail may be found on page 5 of the Nexus Study.
(ii) Proposed park land level of service cannot be different from the current parkland level of service: The DVBA states DIFs are to be used to construct the new facilities required to serv e new developments/residents and may not be used to correct existing parkland deficiencies. DBVA believes the future park impact fees must be based on the City’s existing service levels (1.41 acres of parkland per 1,000 residents). The City Attorney’s Office, Harris, and City staff disagree. Section 66001(g) of the
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Mitigation Fee Act states, “… (g) A fee shall not include the costs attributable to existing deficiencies in public facilities, but may include the costs attributable to the increased demand for public facilities reasonably related to the development project in order to … (2) achieve an adopted level of service that is consistent with the general plan [emphasis added]” .
The 2040 General Plan Parks and Recreation Element identifies three acres of parkland per 1,000 resident s as the City’s park planning goal (pg.
PR-16). The City Attorney’s Office, Harris, and City Staff believe s the three acres of park land per 1,000 resident standard should continue to serve as the cost basis for the Nexus Study’s Parkland DIF fee . More detail may be found on page 15 of the Nexus Study.
(iii) New development should not pay to correct existing infrastructure (roadway) deficiencies: The proposed Nexus Study estimates there will be $75,168,461.53 of future transportation improvements required to serve future development -generated trips of 582,607. This cost estimate ($75,168,461.53) divided by future generated trips (582,607) results in a total transportation fee per future trip of $129.02. This $129.02 fee does not include an estimated $34,297,853.37 of transportation improvements costs attributable to existing developments. More detail may be found on page 23 of the Nexus Study.
(iv) The replacement estimates of City, Police, and Fire vehicles seem high:
Staff has evaluated and updated the replacement costs of the vehicles identified in the August 15 th DVBA letter. More detail may be found on pages 31, 38, and 45 of the Nexus Study.
The A.B. 1600 Nexus Study identifies the maximum justifiable development impact fees.
City Council has directed staff to fully implement the Nexus Study recommended fees beginning January 1, 2024.
FISCAL IMPACT:
Using 2022 permit activity outlined above, implementing the updated Nexus Study development impact fees would have resulted in an additionally collected $ 692,562 per year. Note, DIF fees are not added to the General Fund , rather DIF funds must be separately accounted for, held in trust, and may only be used to construct the municipal facilities required to serve future residents.
FIVE-YEAR STRATEGIC PLAN:
The implementation of updated USF, CAP, and DIF studies support s 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.
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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
ATTACHMENTS:
2023.09.15 Final Cathedral City Nexus Study
2023-08-15 DVBA DIF Nexus Study Cathedral City DIF Comments August 15 2023 Cathedral City 2040 General Plan Pages 1, 3, 4, 135-154 on Parks