Wednesday, January 23, 2002

Local governments skirt state law with creative uses of impact fees

By SAM STALEY, Ph.D.
Georgia Public Policy Foundation

The city of Atlanta's impact fee ordinance is a prime example of why ideas that are good in theory often crumble when faced with the treacherous seas of politics and the real world.

The concept driving the impact fee is simple and surprisingly noncontroversial. New growth requires new infrastructure and public services, such as roads, water, sewer and sidewalks. Rather than having existing residents and businesses pay for these up-front capital costs, new residents and businesses can be assessed a onetime fee to cover them. About 20 counties and cities in Georgia levy impact fees [including Peachtree City, Fayetteville and Tyrone, and, for fire purposes, Fayette County].

The problems emerge when this concept is translated into practice. For one, what constitutes a "public service" is like an industrial-sized rubber band it can be expanded to include almost anything. One study identified more than 22 different categories of "public services" that have been financed by impact fees, including public art, community centers, land for city hall and low-income housing.

On the surface, Georgia's impact fee laws are not quite so charitable. At their core, however, one finds a great deal of latitude in that the laws give local governments wide discretion over what parts of their jurisdictions and which projects the fees may cover. As a result of this generous law, Atlanta designated its entire city as a district for the purpose of distributing transportation fees and decreed that projects as wide ranging as sidewalks, traffic signals and road interchanges can qualify. Consequently, impact fees in Atlanta can be used to finance improvements located nowhere near the actual project.

Atlanta estimates that it collects $3 million to $4 million per year to help finance transportation, park land and public safety services such as police and fire. The vast majority of this money is generated primarily in north Atlanta, and Buckhead in particular. A substantial portion of this money appears to be siphoned away from areas directly affected by the new development and is instead spent in crosstown neighborhoods in south and west Atlanta.

This practice, however, violates the principles of and philosophy behind impact fees. Impact fees should be used to pay the cost of new facilities built to accommodate growth, not to correct deficiencies in existing services or pay for the ongoing operations of programs located well away from the impacted area.

In fact, funding projects, programs and services that new development in a particular area does not impact seems to run contrary to the intent of the law.

Despite the creativity of Atlanta and other local governments, state law stipulates that impact fees must be used to cover "that portion of the cost of system improvements which is reasonably related to the service demands and needs of the project." In other words, the fees must go to paying for the public services affected by the project, not to subsidize services in areas the project does not directly impact.

By allowing local governments to assess impact fees for broadly defined services and in broad geographic areas, Georgia law also encourages cities to levy fees higher than they should be. After assessing policies in eight suburban cities near Chicago, for example, a study for the Heartland Institute concluded that impact fees create an opportunity for local government to "charge developers more than the real cost of development simply to increase the municipality's treasury."

Is there a way out of this fiscal morass? Yes, if Georgia's elected officials are willing to think creatively.

If the goal is to ensure that new growth pays for itself, then local officials in Atlanta and elsewhere should consider changing the way they "price" public services, particularly utilities such as water and sewer. Local governments frequently fail to factor in capital costs, such as debt service and investments in new equipment, thereby unwittingly offering a subsidy to development.

By pricing their services the same way private utilities price cable, telephone and electricity services, these subsidies can be eliminated. As long as developers are paying the full cost of development, the less precise policy of using impact fees can be avoided.

In addition, many services could be provided privately, or at least financed by the new development through private contractors. This approach would certainly be appropriate for, among other things, sidewalks and parks.

The federal lawsuit recently filed by the Greater Atlanta Homebuilders Association and National Association of Industrial and Office Properties contends that the city is using the fees as simply another way to tax local businesses and residents.

The city of Atlanta, on the other hand, argues that the impact fees are necessary to finance basic infrastructure to keep the city livable and competitive.

History and experience suggest the real estate community is correct on this issue. Local officials should strongly consider abandoning the impact fee concept as currently practiced or dramatically realigning it to conform to its basic principles.

[Sam Staley directs the Urban Futures Program for Reason Public Policy Institute, a think tank based in Los Angeles, and is a senior fellow with the Georgia Public Policy Foundation, an independent think tank based in Atlanta. A similar article by Staley was previously published in the Atlanta Journal. © 2002 Georgia Public Policy Foundation.]

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