Impact Fees and Affordable Housing

Impact Fees and Affordable Housing
By Paul Parisi

Before 1992, development impact fees were not allowed in Arizona. That year the legislature passed a bill that enabled cities and towns to enact these fees. The 1999 Growing Smarter legislation enabled counties the ability to impose development impact fees.
Before the 1990s, growth in Arizona actually paid for itself. This is evidenced by the fact that property taxes were low, home prices were affordable compared to most other states and local, county and state governments were providing all necessary services. Affordable housing encouraged companies of all sizes to locate in Arizona where their employees could experience the American dream of home ownership. Job growth provided a healthy sales tax base that allowed government to pay for public safety, roads, parks, sewer treatment, water and other amenities.
Since the introduction of development impact fees, the size and cost of government have grown disproportionably to the increase in population. Government entities have spent a considerable portion of impact fee revenue for expensive studies to justify escalating fee increases. Additional government staff has been hired to administer the complex formulas to distribute funds for projects within the impact fee boundaries. Bureaucrats and politicians have developed an insatiable appetite for projects that far exceed revenues. Most importantly, affordable housing for the common working person has diminished.
Everyone knows that impact fees are not paid for by the developers and home builders. We the consumers pay these fees in the form of higher housing costs. When this occurs, fewer individuals qualify for mortgages, fewer new homes are built, fewer workers are hired in the construction and related industries, fewer commissions are paid to real estate agents and fewer taxes are paid to the government. Just look at our state and local government budget deficit that has a direct correlation to the decline of the housing industry. Higher housing costs contribute to higher mortgages that contribute to higher default rates that contribute to higher unemployment that lower the sales tax revenue and the cycle goes on and on.
There are solutions that could curtail escalating increases in impact fees and encourage developers to provide more infrastructures such as parks and arterial roads, thus paying for growth. This can be accomplished through credits and offsets to developers. Some municipalities have adopted these practices with great success. Let’s look at what the Town of Marana did in one development to provide a park.
Through impact fees, the park would have cost the town $2 million to build. By allowing the developer to build the park during the grading phase of development, the same park was built by the developer for only $1 million. The town credited the developer the $2 million it would have cost the town towards the development impact fees. This is certainly a win for the town, the developer and the residents that will utilize the park. By the way, Marana has the highest impact fees in the region, if not for credits and offsets, development would not be happening at the rate it is in Marana.
Another method to finance infrastructure is for the municipalities to utilize the practice of Community Facilities Districts. CFDs fund infrastructure by the government issuing bonds, which are repaid through revenues collected on special assessments on all developed property in the district. CFD bonds are tax-exempt, but are not always guaranteed by the municipality. Developers must often guarantee the bonds and limitations are often imposed on how debt can be issued. Developers and municipalities benefit by lower housing costs and complete infrastructure funding. Lower costs for housing more than offset the additional assessment to repay the bonds. Many cities in Arizona have the mechanism for CFDs; however, political pressure from no-growth advocates often discourage elected officials from utilizing this tried and proven method for funding infrastructure in both new developments and blighted economic-development areas.
Recently the City of Tucson entertained the notion that adding a voluntary Real Estate Transfer tax could be used to pay for lower-income people to buy homes. The Tucson Metropolitan Chamber of Commerce, Tucson Association of Realtors and the Southern Arizona Home Builders Association, Arizona Builders Alliance, Metropolitan Pima Alliance and other advocacy groups strongly opposed such an approach to affordable housing. Like development impact fees, a transfer tax will contribute proportionally to the increased cost of housing by causing sellers to raise the sale price to pay for this ill-conceived tax scheme. Voters overwhelmingly passed Proposition 100 banning such transfer taxes. Curious how Tucson City plans to circumvent the State Constitution that now prohibits a Real Estate Transfer Tax.
Pima County has backed off, at least for now, to double the County’s impact fees. TMCC President and CEO Jack Camper issued a press release that illustrated the impact such an increase would do to decrease the ability for Pima County residents to afford a new home. Camper said ”With the county proposing an increase from $4,000 to more than $8,000 in impact fees per unit built, it would mean that more than 4,000 households could no longer afford a home.” This statistic is backed by several case studies.
Last legislative session, home builders and other stakeholders drafted legislation that would have grandfathered impact-fee increases for two years and addressed credits and offsets, got it passed through both the House and Senate, only to have the bill vetoed by Governor Napolitano. This year there may be legislation that promotes fairness in regards to impact fees and methods to reduce the cost of housing caused by excessive fees. Affordable housing is of most importance to us, our families, our employees and future generations.