Finance

Are your Development Impact Fees Compliant?

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By Dima Galkin

With constraints on tax revenue growth and overwhelming pension obligations, how can cities and counties ensure they have the financial capacity to fund the capital improvements necessary to accommodate new development? One way is by imposing development impact fees (DIFs). This option does not require a public vote (a sales or transient occupancy tax increase does) but involves a series of qualifications and reporting requirements not associated with standard tax revenues. Fees can be applied to a wide range of physical infrastructure, from parks and police facilities to streets and sewers.

The guidelines for DIFs were established with the Mitigation Fee Act (MFA), passed in 1987 as AB 1600 and filed in Government Code Section 66000 et seq. As amended, the MFA reflects the requirements established by the influential US Supreme Court decisions Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994).

The fee must be “‘roughly proportional’… both in nature and extent to the impact of the proposed development.” For example, a park impact fee could only be applied to a development that increases the need for parks and in an amount that equals the cost of building that additional park space. Despite this limitation, DIFs are a critical financial resource for jurisdictions looking to match new development with new infrastructure to serve it, without impacting the availability of other City funds for ongoing public services.

The MFA requires agencies file Annual and 5-year Reports. The Annual Report cover amounts collected and spent, what projects were funded, and whether any loans were made between funds. The 5-Year Report provide continued justification for the fee amounts.

According to State Senator Jeff Stone, almost one-third of localities have not kept up with these reporting requirements. In response, Senator Stone sponsored Senate Bill 1202, passed and signed into law in 2018. Under SB 1202, agencies that fail to keep up with MFA reporting can be subjected to an independent audit at their own expense and if they fail to make findings for the fee’s necessity, agencies may be forced to pay back unused impact fees.

In addition, several pieces of pending legislation focusing on transparency and promoting housing affordability would affect DIFs.

AB 1484

This bill would require each city (including charter cities) and county to post its fee information for housing development on its website and to provide that website address to development applicants.

AB 831

Existing law requires the State’s Housing and Community Development Department (HCD) to complete a study evaluating the reasonableness of local DIFs and to make recommendations on potential amendments to the MFA to reduce fees for residential development by June 30, 2019.

AB 831 would add the following requirements for HCD:

·         Post this study on its website,

·         Complete a separate study by June 30, 2020 that identifies the category of all fees for residential development and the average amount thereof in each of the State’s 47 Councils of Governments and post on its website, and

·         Issue a report to the State Legislature by January 1, 2024 on the progress of cities and counties in adopting the recommendations made in the first study.

AB 1483 would enhance the requirements of the Annual Progress Reports to include more detailed information on permitting and development applications and would require agencies to post a schedule of fees on their websites.

This recent and pending legislation points to increased scrutiny applied to development impact fees of all kinds, but especially those that apply to residential development, as the State puts in place sticks (also carrots, but mostly sticks) to address the statewide housing crisis. This makes it more important than ever to meet the reporting requirements and be aware of new requirements as they arise.

RSG is available to help you keep up with reporting and other requirements for DIFs, as well as for housing and economic development.

Legislative Bill Spotlight: ACA 1 (lower voter approval threshold for housing and infrastructure bonds) and AB 213 (VLF to cities)

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by Julia Cogan

Assembly Constitutional Amendment (ACA) 1, also known as the Community Say for Community Needs Act, would place a measure on the 2019 ballot to amend the California constitution to lower the voter approval threshold from two-thirds to 55 percent for affordable housing and infrastructure revenue measures, namely local general obligation (GO) bonds and certain special taxes. It has been a growing concern at the state level that local governments do not have enough tools to address the housing crisis and the ever-growing local infrastructure need. A way to tackle this is to increase localities’ access to GO bonds and certain special taxes by lowering the threshold to a more easily reached 55 percent approval rate.

ACA 1 was heard in the Assembly Appropriations committee on May 16th and is expected to go the floor for final reading and vote before being sent over to the Senate. If your locality is for this legislation, submit comments to the author on the California Legislative Information site, or at the California Legislature Position Letter Portal.

AB 213, is passed, will revise the formula for allocating annual “vehicle license fee (VLF) adjustment amounts” to restore revenues to 143 cities that annexed inhabited territory after 2004 in reliance on the financial incentives that were removed by the passage of SB 89 in 2011, and are thus unable to take advantage of VLF revenues. The bill also provides this revenue source for future annexations of inhabited territory, now using the same rules applied to other cities.

Did your locality annex an area after 2004 that could now be eligible to receive VLF under the same formula as other cities? If so, you can voice your support to the author on the California Legislative Information site, or at the California Legislature Position Letter Portal. AB 213 was heard in the Assembly Appropriations committee on May 16th and is expected to go the floor for final reading and vote before being sent over to the Senate.

Up to $3 Billion in New Community Development Grant Funds Proposed by SB 5 and 15

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by Suzy Kim

The State legislature is considering two bills, Senate Bills (SB) 5 and 15, that would create up to $3 billion in one-time funding for housing, public improvements, and community revitalization projects by reallocating Educational Revenue Augmentation Funds (ERAF).  Local agencies could apply for funding on an area-wide basis through SB 5, or a project-basis through SB 15.  Both bills require matching resources (financial, land dedication, public-private funds, etc.). 

At this point, SB 5 has a broader range of eligible projects and allows bonding but comes with more restrictions.  The following table provides a brief comparison of the application process, financing, eligible process, and other requirements.  For a more detailed comparison, click here.

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Assembly Bill 147 - Increased Sales Taxes to California Cities and Counties

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As if one was even needed, there is now another reason to shop local.  Smaller and local retailers used to find themselves at a disadvantage when it came to the issue of sales tax and consumers.  While they found themselves in a position of having to charge sales and use tax on their goods, online and out of state retailers were not required to do the same.  This resulted in online and out of state retailers being able to charge less for their goods and ultimately entice more consumers to shop with them. 

Recognizing the imbalance of the situation this created for local businesses, California decided to enact legislation that will place the majority of businesses on a level playing field when it comes to the application of sales and use tax.  On April 25, 2019, California Governor Gavin Newsom signed into effect AB 147.  This bill requires all retailers who exceed $500,000 a year in sales from deliveries made to California, regardless of that retailer’s location, charge sales and use tax on consumer purchases.

This legislation is good news for cities, counties, and the state for a few reasons.  With the playing field now leveled, small businesses and local merchants may see an increase in revenue from shoppers, helping to provide a boost in local economy.  In addition to this, local and state government could see an increase in available funding for budget items including critical infrastructure.  Now in effect, it will be interesting to see the impact this legislation has on both the marketplace and local economy.  An in depth analysis of AB 147 can be found here.

Tax Credits - Income Averaging

One of the most recent changes to TCAC’s regulations is allowing income averaging. For those that are unfamiliar with this change, below is a simple breakdown. Currently, TCAC limits affordability to 30-60% of the area median income (“AMI”). The AMI restricts how much the project can rent the units for. With the new regulations, projects can include limits that exceed 60% AMI, up to 80% AMI. However, the average AMI requirement for all units has not changed. So, developers will have to compensate the higher 61%-80% AMI units, with a lower AMI on other units.

With this flexibility the developer can get creative and potentially improve their projects financial feasibility. The new change can bring in more operating income. The additional income will support more debt and help close the gap in project financing, or reduce the soft financing that the project may require from a public jurisdiction. How the developer ultimately uses this regulation change to revise the projects affordability mix is up to them. However, this appears to be a very powerful tool for proposed developments with project-based vouchers.

 

SB 711 - Providing EIFDs/CRIAs a Larger Share of Property Taxes

RSG is one of the most active consultants working on a variety of area and project based tax increment financing districts in California.  But despite the interest in EIFDs, CRIAs and other tools, many communities find these fall short of what is needed simply because their own share of the tax levy is so small – often less than 10 cents on the dollar.  What gave rise to redevelopment agencies was the restriction on how cities could raise property tax rates after Proposition 13; cities found that redevelopment allowed more taxes to be retained and invested locally for projects to grow the economic base, provide the largest source of affordable housing assistance outside of tax credits, and fund all types of infrastructure. The newer tools are less helpful because they are limited to how much a local agency may be able to muster up from its own (often small) share of property taxes.

SB 711 proposes a focused change to this tool by allowing the State’s Strategic Growth Council to decrease what a city (or county) would have otherwise lost to the Educational Revenue Augmentation Fund to provide a larger share of the property taxes for certain TIF districts.  Expanding EIFDs and CRIAs by creating a more useful revenue stream will help the state achieve GHG and VMT goals, while making local communities healthier, affordable and prosperous.  ERAF took anywhere from 25% or more of a city or county’s share of the local taxes away – permanently.  This could be a big deal if communities get behind this. Take a look at the sponsor’s SB 711 fact sheet.  The California League of Cities are seeking support from local communities. 

The Day After Thanksgiving

 

Often referred to as Black Friday, the day after Thanksgiving used to be the busiest day of the year for shopping in retail stores. It was the launching point for the critical holiday shopping season, which accounts for 30% of annual retail sales. Recent trends show decreasing store turnout for the retail market’s biggest shopping weekend – from 133 million people shopping in stores in 2014 to 102 million in 2015

Now consumers seem to be “navigating from the physical to the digital,” according to Fortune. Online shopping grew 19% from 2014 to 2015 for the holiday weekend, reaching $6.1 billion in 2015.

While huge numbers of people still shop in stores, online shopping is a trend that continues to grow faster each year. Black Friday is still a big event, but shoppers research and buy products online in ever-increasing numbers.

Will we see another large drop-off in store shopping this year? If recent trends are an indicator, shoppers will fill their mobile shopping carts, and Black Friday will just be another option. What could this mean for local sales tax revenues and the retail real estate market?

Written by Brett Poirier, an Analyst at RSG

Using Cap-and-Trade Funding to Address Homelessness

 

Homelessness is a growing concern. California has 20 percent of the country's homeless population, almost 114,000 people. Most of California's homeless people are in Los Angeles County, which has more than three times the homeless population of the Bay Area. L.A.'s chronically homeless population has grown 55%, to 12,536, since 2013. Almost two-thirds of California’s homeless people sleep outside with no shelter.

Cap-and-Trade funds can help address homelessness and affordable housing. Los Angeles was awarded $64.6 million in grants in zero-and low- interest loans from the state’s cap-and-trade fund to build eco-friendly affordable housing projects near job centers and transit in order to reduce car trips. The projects include four homeless housing developments totaling 348 units, and two developments with a combined 205 units that will be offered at affordable or below-market rates.

Does a homeless shelter create net benefits for the community? To learn more about how your local agency can access cap-and-trade funds, contact the staff at RSG today.

Written by Alexa Smittle, a Principal at RSG, and Jeff Khau, a Senior Analyst at RSG

The Future Of Cap-And-Trade

On January 7, 2016, Governor Jerry Brown presented a cap-and-trade expenditure plan for Fiscal Year 2016-17, totaling $3.1 billion. Because the carbon market appears to be underperforming, some legislators question whether the program should extend beyond its sunset in 2020.

The cap-and-trade program in California is contentious in many ways. While many can agree on the end goal of reducing carbon emissions, there is a financial problem when the carbon market is generating inadequate revenue. The most recent auction in May was expected to yield $150 million in revenue, but generated $2.5 million after only 11% of the available credits were purchased.    

As a result, big plans to spend cap-and-trade revenue were scrapped. The California High-Speed Rail Authority, which receives 25% of carbon sales proceeds, is the largest beneficiary of cap-and-trade dollars and relies on auction proceeds to fund rail construction. Without these funds, high-speed rail’s future looks bleak.

Local governments are affected as well, because a percentage of carbon proceeds helps fund grants for affordable housing (20%) and intercity rail projects (10%). Cities looking to build affordable housing or break ground must pay for the projects themselves or seek other funding sources.

Supporters of cap-and-trade and high-speed rail say the blip in May does not mean dismal failure. They believe that the lack of demand for carbon credits is proof that the program is actually successful. The cap-and-trade law, signed in 2006, proposed to reduce greenhouse gas emissions to 1990 levels by 2020. Less carbon credits on the market means less carbon is emitted, and carbon emissions in California have been falling at a high rate.

Opponents of the program claim that the program will fail as a surplus of carbon credits reduces their value. Because market forces determine the price of each carbon credit, numerous market failures can bring prices to an artificially low point. Other critics call the program unconstitutional, because it functions as a tax, which requires a two-thirds vote by the Legislature to be approved.

The program does not sunset until 2020, but today’s successes and challenges of the program will dictate whether the law will extend past 2020.

Written by Jeff Khau, a Senior Analyst at RSG

Dissecting Brown’s Budget

Image courtesy of http://calbudgetcenter.org/

Image courtesy of http://calbudgetcenter.org/

Governor Brown and the California legislature approved a $122.5 billion budget to fund state operations for 2016-17. The budget allocates $400 million for affordable housing construction, increases preschool/child care funding by $500 million, increases reserves by $2 billion, invests $200 million in college readiness programs, and redirects $2 billion in Proposition 63 mental health funds to provide housing for mentally ill homeless people.


Putting an extra $2 billion into the rainy day fund suggests that state lawmakers are weary about a looming recession. There was a notable focus on alleviating poverty and income inequality in this year’s budget process. Brown and lawmakers failed to agree on a spending plan from the state’s greenhouse gas reduction fund, also known as the cap-and-trade fund, and failed to reach a deal on funding to fix crumbling roads and highways, which they have labeled as a top priority for several years.


To learn more about how the state budget impacts your local community and how you can make the most of it, contact RSG.


Written by Jeff Khau, a Senior Analyst at RSG