Navigating the Changing Landscape of Development Impact Fees
Thursday, September 26, 2024
Executive Summary: The CSMFO North Coast Chapter meeting on August 9, 2024, in Lakeport provided critical insights into the evolving legal and legislative landscape of Development Impact Fees (DIFs). Featuring presentations by Andrea Roess of DTA and Lutfi Kharuf of Best Best & Krieger LLP (BBK), the session explored the implications of the U.S. Supreme Court's Sheetz v. County of El Dorado decision, the impact of California's AB 1600 and related legislative updates, and best practices for public agencies to ensure compliance and defend their DIF programs. This article summarizes the key points from the meeting and offers practical guidance for public finance professionals in California communities.
Understanding the Legal Framework: Traditionally, the Mitigation Fee Act (also known as AB 1600 and set forth in Government Code § 66000 et seq.) governed the imposition of DIFs in California. The Mitigation Fee Act mandates that local agencies imposing fees to mitigate the impacts of new development (i.e. development impact fees, or DIFs) demonstrate a reasonable relationship between the DIFs imposed on development projects and the public facilities related to those projects (both in terms of nature and cost). However, the landscape shifted a bit after the U.S. Supreme Court's decision in Sheetz v. County of El Dorado, which now requires that all DIFs, regardless of whether they are imposed legislatively or administratively, be evaluated under the Nollan/Dolan Test. This test demands that there is an "essential nexus" between the government's interest and the permit condition and that there is "rough proportionality" between the impact of the development and the required mitigation or fee amount.
Implications of the Sheetz Decision: The Sheetz decision introduces some uncertainty for public agencies now, and perhaps more in the future. DIFs in California were previously thought not to be subject to the Nollan/Dolan Test as a result of the Mitigation Fee Act. This ruling challenges agencies to ensure that their DIF programs are defensible under this new scrutiny, raising the stakes for compliance and legal defensibility. The practical impacts of this decision are as yet unknown, however. The Supreme Court pushed the issue back down to the lower courts to examine the DIFs in light of the Nollan/Dolan test, meaning that future case law will help to explain how application of the Nollan/Dolan test will change imposition of DIFs in California, if at all.
AB 1600 and Legislative Updates: The presenters emphasized the importance of complying with the strict reporting requirements in the Mitigation Fee Act. Agencies are required to provide detailed annual and five-year reports, including the identification of fee categories, beginning and ending fund balances, and the specific public improvements funded by these fees. Failure to do so may result in costly audits, fee reductions, and in some instances, refunds of all unexpended DIF proceeds. Further, recent legislative changes, including AB 516, AB 602, and AB 2536, expand these requirements. AB 516, effective January 1, 2024, adds new obligations for tracking public improvements, responding to audit requests, and providing transparency in how fees are collected and used. Agencies must be diligent in maintaining accurate records and ensuring that their nexus studies are up to date, as these are critical in demonstrating compliance and avoiding potential refunds for non-compliance.
Best Practices for Agencies:
In light of recent judicial and legislative changes, California agencies should adopt several best practices to safeguard their DIF programs. While the full extent of Sheetz’s impacts will not be known until future cases interpret its holdings, agencies should still proceed with caution and consider the following strategies to ensure compliance and legal defensibility:
- Nexus Studies: Ensure that all DIF programs are supported by comprehensive nexus studies, which must be updated at least every eight years as mandated by law. These studies should clearly demonstrate that DIFs not only meet the substantive requirements of the Mitigation Fee Act, but also show an essential nexus and rough proportionality between the DIF and the impacts to be mitigated.
- Documentation and Transparency: Meticulously document the rationale behind fee calculations, including how the fees relate to the impacts of specific projects. Create and maintain capital planning documents, and spend the capital in a timely manner. Transparent communication with stakeholders, including developers, is essential to maintaining trust and avoiding legal challenges. The emphasis on documentation and transparency remains a best practice that reinforces the defensibility of these programs regardless of the impacts of Sheetz.
- Annual and Five-Year Reporting: Stay up to date with the stringent reporting requirements under AB 1600. This includes providing detailed annual reports and comprehensive five-year reports that cover the identification of fee categories, fund balances, and planned public improvements. Regular and accurate reporting is essential to maintaining compliance and avoiding potential penalties or refunds. The Sheetz decision does not fundamentally change these requirements, but it does underscore the importance of rigorous reporting as a way to demonstrate compliance with both state law and new judicial interpretations.
- Proactive Legal Involvement: Engage legal counsel early in the process of updating impact fee programs to ensure that all aspects comply with the latest legal standards and that the agency is prepared for any potential litigation. Ongoing legal review and advice remain crucial to navigating any potential challenges that could arise as the decision is interpreted in future cases.
Agencies with existing, well-documented nexus studies and transparent reporting practices may already be positioned to comply with the heightened scrutiny imposed by the decision. Nonetheless, it is critical for agencies to continue following best practices, keeping their programs aligned with the evolving legal landscape to mitigate any risks and ensure the continued defensibility of their DIFs.
Case Law Considerations: The session also highlighted the implications of recent case law, such as Hamilton & High LLC v. City of Palo Alto, which reinforces the requirement that in-lieu fees be treated as DIFs under AB 1600. This means they must be included in both annual and five-year reports, and agencies must be prepared for the possibility of refunds if reporting is inadequate.
Contact Information: For further information or to discuss the topics covered in this session, you can contact the presenters:
- Andrea Roess
Email: Andrea@FinanceDTA.com
Phone: 800-969-4382
Firm: David Taussig and Associates, Inc. dba DTA
- Lutfi Kharuf
Email: Lutfi.Kharuf@bbklaw.com
Phone: 619-525-1302
Firm: Best Best & Krieger LLP
Dan Buffalo serves as the Finance Director for the City of Ukiah, California. He started with the City in July of 2016 after serving as Finance Director for the City of Lakeport, California. Dan has over 18 years of professional local government experience in finance and municipal management, including debt management, continuing disclosure, financial and managerial reporting, and budgeting. He holds degrees from the University of California, Davis and the University of Southern California, as well as certificates in governmental accounting from the University of Georgia, Carl Vinson Institute of Government, and the Advanced Government Finance Institute offered by GFOA and the University of Wisconsin, Madison, School of Business. Additionally, Dan is a Certified Public Accountant, licensed in the State of California. Since 2010, he has taught accounting and business management courses as an adjunct professor at Mendocino College. He currently serves on the CSMFO Board of Directors and chairs the North Coast Chapter. Dan and his wife Megan have three children and enjoy traveling together, spending time as a family, and watching USC and Wisconsin football. In his spare time, he enjoys sleeping. Tim Seufert is a CSMFO Board Member as well as Managing Director of NBS, a consulting firm working for local government agencies. He has over two decades of experience with local revenues and is often involved with funding and financing projects from their inception and feasibility stage to their completion. This includes significant consulting and administration for Special Financing Districts (SFDs). Tim has addressed the League of California Cities, CSDA, CSMFO and other such audiences. He has a Master of Public Administration from SFSU and a Bachelor of Science in Finance from USC and is a registered Municipal Advisor.
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