DRAFT FINAL REPORT. City of Kalispell. Stormwater Impact Fee Study

DRAFT FINAL REPORT City of Kalispell Stormwater Impact Fee Study April 2017

April 13, 2017 Ms. Susie Turner, P.E. Public Works Director City of Kalispell 201 First Avenue East Kalispell, MT 59901 Subject: Draft Final Report Stormwater Impact Fee Report Dear Ms. Turner: Enclosed please find HDR Engineering, Inc. s (HDR) draft final report regarding the City of Kalispell s (City) stormwater impact fees. The development of this report is intended to provide to the City the basis to establish cost based impact fees. The adoption of final impact fees is a policy decision of the City Council. As a part of this study, HDR and the City worked with the City s advisory committee and the development community in an open and positive manner. In 2006, HDR developed the City s stormwater impact fees and then, in 2010, updated that analysis. This fee study reflects the current City Council policy positions (e.g., population growth, annexation policy), along with the current stormwater capital improvement plan. This study reflects the general methodology and approach used in those prior studies, updated to reflect the City s current data, information and growth policies. This report has been prepared using generally accepted financial, rate, and engineering principles. The City s financial, planning, and engineering data were the primary sources for much of the information contained in this report. HDR would recommend that the City have the fees, developed as a part of this study, reviewed by their legal counsel to determine compliance with Montana State law. HDR appreciates the opportunity to assist the City in this matter. assistance you provided to us during the development of this study. Thank you for the Sincerely yours, HDR Engineering, Inc. Tom Gould Vice President/HDR Business Leader for Finance and Rates hdrinc.com 700 SW Higgins Avenue, Suite 200, Missoula, MT 59803-1489 (406) 532-2200

Table of Contents Executive Summary Introduction... 1 Present Stormwater Impact Fee..... 1 Overview of the City s Stormwater System... 2 Calculation of the City s Stormwater Impact Fee... 2 Net Allowable Stormwater Impact Fee... 4 Annual Adjustments to the Stormwater Impact Fee... 6 Stormwater Impact Fee Credits (Offsets)... 6 Advisory Committee Review... 6 Consultant s Recommendations... 7 Summary... 7 1 Introduction and Overview 1.1 Introduction... 8 1.2 Overview of the Study... 8 1.3 Disclaimer... 9 1.4 Summary... 9 2 Overview of Impact Fees 2.1 Introduction... 10 2.2 Defining Impact Fees....10 2.3 Economic Theory and Impact Fees... 10 2.4 Impact Fee Criteria... 11 2.5 Overview of the Impact Fee Methodology... 13 2.6 Summary... 14 3 Legal Considerations in Establishing Impact Fees 3.1 Introduction... 15 3.2 Requirements Under Montana State Law... 15 3.3 Summary... 17 4 Development of the City s Stormwater Impact Fee 4.1 Introduction... 18 4.2 Overview of the City s Stormwater System... 18 4.3 Present Stormwater Impact Fees... 19 4.4 Calculation of the City s Stormwater Impact Fees... 20 4.4.1 System Planning Criteria... 20 4.4.2 Equivalent Residential Units... 21 4.4.3 Calculation of the Stormwater Impact Fees... 21 4.5 Net Allowable Stormwater Impact Fee... 23 Table of Contents City of Kalispell Stormwater Impact Fee Report i

4.6 Annual Adjustments to the Stormwater Impact Fee... 25 4.7 Stormwater Impact Fee Credits (Offsets)... 25 4.8 Key Assumptions... 25 4.9 Consultant s Recommendations... 26 4.10 Advisory Committee Review... 26 4.11 Summary... 26 Technical Appendix A Stormwater Impact Fees Technical Appendix B Montana Code Impact Fees Development of the Stormwater Impact fees ii City of Kalispell Stormwater Impact Fee Report

Executive Summary Introduction The purpose of stormwater impact fees is to bring equity between existing customers and new customers connecting to the City s stormwater utility system. The objective of an impact fee study is to calculate cost based fees for new customers connecting to, or requesting additional capacity to, the City s stormwater system. By establishing cost based impact fees, the City attempts to have growth pay for growth and existing utility customers will, for the most part, be sheltered from the financial impacts of growth. HDR was retained by City to review and update the City s stormwater impact fees. The City s impact fees need to be reviewed and updated every five years as required under Montana Code 7 6 1601 to 7 6 1604, the Montana impact fee legislation. In addition the City growth policy has changed and annexation has occurred since the adoption of the 2008 Stormwater Facility Plan Update. Given these changes and the legal requirements, it is prudent for the City to review and update their stormwater impact fees. Present Stormwater Impact Fee The City currently has a stormwater impact fee and is based on the 2006 impact fee study. The impact fee utilizes an equivalent residential unit approach. Presented below in Table ES 1 is an overview of the present stormwater impact fee. Table ES-1 Present Stormwater Impact Fee Impact Fee Per Equivalent Residential Unit[1] Type of Use # of ERUs (1) Impact Fee Single Family 1.0 $1,121 Duplex or Multi Family.75 ERUs Per Living Unit $841/Unit Commercial Calculated on Impervious Area; 2,400 sq. ft./eru or a maximum of six (6) ERU s per acre if meeting current detention standards $1,121 / 2,400 s.f. up to $6,726/acre [1] Streets and highways are exempt from impact fees. Stormwater fees for single family, duplex, and multifamily are for each additional ERU or percentage of ERU. Commercial is calculated based on impervious area at 2,400 square foot per ERU or a maximum of six ERU s per acre if meeting current detention standards. Executive Summary 1 City of Kalispell Stormwater Impact Fee Report

Apartments are calculated as commercial. The use of an ERU/impervious surface approach is a generally accepted and common method for determining stormwater impact fees for specific parcels. Streets and highways are exempt from impact fees. Overview of the City s Stormwater System The City has a stormwater utility and it is responsible for managing stormwater run off within its boundaries. To provide a better understanding of the complexity of this utility, along with its regulatory requirements and challenges, the following brief overview is provided. The City is legally required to manage both the quantity and the quality of the City s stormwater run off. Stormwater runoff can collect pollutants from urbanized areas, which can add to or create problems in local lakes and streams. Federal and state regulations require action by the City of Kalispell to minimize pollution carried by stormwater runoff. At a federal level, the City is subject to the federal regulations related to the National Pollutant Discharge Elimination System (NPDES). The City is required to implement a Stormwater Management Program (SWMP) which consists of Best Management Practices (BMPs), involving six minimum control measures, to control pollutants in stormwater to the maximum extent practical. However, the City does require certain infrastructure (facilities) to manage stormwater quantity. These facilities are needed for purposes of conveyance, detention and discharge. More specifically, these facilities can include ponds, pipes, catch basins, ditches, curbs and gutters. While management of stormwater is related to quantity, it is also related to water quality. Finally, it is important to note that growth, in and of itself, creates additional impacts and requires additional resources. This is true for all aspects of the City s services, and holds true for the stormwater utility and its facilities. To determine the City s facility requirements for the stormwater utility, a Stormwater Facility Plan is developed. In summary, the City s approach to stormwater quantity management is two fold; implementation of measures to manage runoff from new development to historic levels, and provide adequate facilities downstream to convey, detain and discharge stormwater. Under this approach, new development will typically make on site improvements to manage runoff, but also benefit from downstream facilities. It is the investment in downstream facilities which are the basis for the City s impact fees. The City s 2008 Stormwater Facility Plan Update also provides, in part, the basis for the development of the City s cost based stormwater impact fees. Calculation of the City s Stormwater Impact Fees The process of calculating impact fees is based upon a four step process. In summary form, these steps are as follows: Determination of system planning criteria Determination of Equivalent Residential Units (ERUs) Calculation of the impact fee for system component costs Development of the Stormwater Impact fees 2 City of Kalispell Stormwater Impact Fee Report

Determination of any impact fee credits System Planning Criteria System planning criteria are used to establish the capacity needs of an equivalent residential unit. The City s 2008 Stormwater Facility Plan Update did not directly specify the number of ERUs to be served at the end of the planning period. The Facility Plan Update focused on population served and area (acres). Given that limitation of the study, the impact fee study needed to determine the current ERUs being served and the potential ERUs at buildout. The existing 2015 ERUs shown in this report were based on planning policy, City annexation maps, and dwelling land use designations per zoning. At the present time, the total acres included within the planning area is 4,971 acres which equates to 21,298 ERUs. A more detailed discussion of the determination of the total current ERUs can be found in subsection 4.4.1. Residential Units - The planning horizon of this analysis was from 2015 to 2035. Based on Kalispell growth policy, a 2% annual growth rate was assumed for the planning period. A summary of the ERUs for 2015 and 2035 are presented below in Table ES 2. Table ES-2 Stormwater System Equivalent Residential Units Description Calculated ERUs Equivalent Residential Units 2015 21,298 Equivalent Residential Units 2035 31,648 Additional Units from 2015 to 2035 10,350 Calculation of the Stormwater Impact Fee The next step of the analysis is to review existing services and planned future improvements and determine the impact fee for each component. For the stormwater system, given the limited assets, all assets were included in a single group. These assets were subsequently increased from their original cost to current cost based on the Engineering News Record (ENR) Construction Cost Index (CCI) for the 20 City average. This amount was reduced by the percent that was contributed by developers or grants. Those stormwater improvements that were funded through tax increment financing (TIF), grants and special improvement districts (SID) were also excluded from the analysis. The value of the existing assets (net of contributions, grants, etc.) was divided by the total ERUs at buildout (31,648). The City also has future planned capital projects which are contained in the Stormwater Facility Plan. These future capital projects were reviewed by staff along with incorporating the City s current working capital improvement plan for a 2035 time period horizon of the planning study. Total Capital Improvement Projects (CIP) from 2016 to 2035 amounted to $18.9 million. Of this amount, the total committed CIP, eligible for impact fees was $9.5 million. This total amount is primarily related to two extension projects; Conveyance Outlet Pipe (COP) 124 and COP 118. These two projects are growth dependent. Project COP 124 (Pipe conveyance from detention Executive Summary 3 City of Kalispell Stormwater Impact Fee Report

pond 124 in West Stillwater Drainage) for $3.4 million and COP 118 (Pipe conveyance from detention pond 118 to Stillwater/N. Kalispell drainage area) for $4.1 million are detailed separately for review purposes. Exhibit 4 of Technical Appendix A, along with Exhibit 2, contains the details of the capital improvement projects and the impact fee eligible portion of the fee. The future components are divided by the future ERUs of 10,350. Under Montana statute, an impact fee may include a fee for the administration of the impact fee not to exceed 5% of the impact fee collected. In calculating the City s stormwater impact fee, an administrative component of 5% was added to the impact fee. The final step in calculating the stormwater impact fee was to determine a credit for debt service. The stormwater utility has no current outstanding debt related to any existing infrastructure. It is also presumed future projects will not be debt funded. Rather, the future projects will be funded as rate funding allows or funded from developer contributions. Given that assumption, the stormwater impact fee does not contain a debt service credit. Net Allowable Stormwater Impact Fee Based on the sum of the component costs calculated above, the net allowable stormwater impact fee can be determined. Net refers to the gross impact fee, minus any debt service credits. Allowable refers to the concept that the calculated impact fee shown in Table ES 3 is the City s cost based impact fee. The City, as a matter of policy, may charge any amount up to the allowable impact fee, but not over that amount. Development of the Stormwater Impact fees 4 City of Kalispell Stormwater Impact Fee Report

Table ES-3 Calculated Combined Stormwater Impact Fee ($/ERU) Impact Fee Component Existing Future Total Fee with Future Projects Only Stormwater Facilities $264 $182 $446 5% Administrative Charge 13 9 22 Subtotal $277 $191 $468 Fee with COP 124 Extension Stormwater Facilities $0 $333 $333 5% Administrative Charge 0 17 17 Subtotal $0 $350 $350 Fee with COP 118 Extension Stormwater Facilities $0 $398 $398 5% Administrative Charge 0 20 20 Subtotal $0 $418 $418 Net Allowable Impact Fee $277 $959 $1,236 Fee with Future + COP 124 & 118 Projects Existing Future + COP 124 + COP 188 Total Stormwater Facilities $264 $913 $1,177 Administrative Charge 13 46 59 Net Allowable Impact Fee $277 $959 $1,236 For ease of administration and customer understanding, the impact fee is shown rounded to $1,236 per ERU. This total includes future projects COP 124 ($333/ERU) and COP 118 ($398/ERU) which can be seen in detail in Exhibits 2 and 4 of Technical Appendix A. Provided below in Table ES 4 is a summary of the net allowable stormwater impact fee by customer type. Executive Summary 5 City of Kalispell Stormwater Impact Fee Report

Table ES-4 Net Allowable Stormwater Impact Fee Impact Fee Per Equivalent Residential Unit[1] Type of Use # of ERUs (1) Impact Fee Single Family 1.0 $1,236 Duplex or Multi Family.75 ERUs Per Living Unit $927/Unit Commercial [2] Calculated on Impervious Area; 2,400 sq. ft./eru or a maximum of six (6) ERU s per acre if meeting current detention standards $1,236 / 2,400 s.f. up to $7,416/acre [1] Streets and highways are exempt from impact fees. [2] Apartments are calculated as commercial As noted previously, the current stormwater impact fee is $1,121/ERU. The calculated fee shown above is $1,236/ERU or an increase of $115/ERU. No change in assessment methodology is proposed. Details of the analysis and key documents relied upon for this study are provided within the Technical Appendix. Annual Adjustments to the Stormwater Impact Fee The methodology used to calculate the impact fees takes into account the cost of money or interest charges and inflation. Therefore, HDR recommends the City adjust the impact fees each year by an escalation factor to reflect the cost of interest and inflation. This method of escalating the City s impact fee should be used for no more than a four year period. After this time period, as required by Montana law, the City should update the fees based on the actual cost of infrastructure and any new planned facilities contained in an updated master plan, capital improvement plan or rate study. Stormwater Impact Fee Credits (Offsets) Credits or offsets against a stormwater impact fee may be appropriate under certain conditions. A credit or offset against the stormwater impact fees are a policy decision of the City. Any credits or offsets against stormwater impact fees would need to be determined on a case by case basis. The City s ordinance No. 1656 allows for credits or offsets as outlined under Montana law (7 6 1604). Advisory Committee Review Under Montana law (7 6 1604), the proposed impact fees must be reviewed by an impact fee advisory committee. The City has convened an impact fee advisory committee for this specific purpose. The role of the advisory committee is to serve in an advisory capacity to the City Development of the Stormwater Impact fees 6 City of Kalispell Stormwater Impact Fee Report

Council. The advisory committee reviews and monitors the process of calculating, assessing and spending impact fees. Ultimately, the City Council is the governing body responsible for determination of and adoption of the final stormwater impact fees. Consultant s Recommendations Based on our review and analysis of the City s stormwater system, HDR recommends the City adopt stormwater impact fees at or below the net allowable impact fees as set forth in this report ($1,236/ERU). As a matter of policy, the City may adopt a stormwater impact fee which is less than the calculated fee as shown in this report, but in doing so, the City will be sharing some portion of development impact costs with the existing stormwater utility ratepayers. Summary The impact fees developed and presented in this report are based on the planning and engineering design criteria of the City s stormwater system, the value of the existing assets, past financing of the system and nationally recognized ratemaking principles. The impact fees will provide multiple benefits to the City and will continue the City s practice of establishing equitable and cost based impact fees for new development benefitting from the City s stormwater system. Executive Summary 7 City of Kalispell Stormwater Impact Fee Report

1. Introduction and Overview 1.1 Introduction HDR Engineering Inc. (HDR) was retained by the City of Kalispell; Montana (City) to update the City s current stormwater impact fees. The development of this study and the resulting stormwater impact fees are intended to provide an equitable and cost based method to establish these impact fees while complying with the legal requirements of Montana Code 7 6 1601 through 7 6 1604. This report discusses and documents the development of the City s stormwater impact fee study. Impact fees are a one time assessment on new or expanded development to pay for the cost of infrastructure required to provide service (i.e., accommodate development). Impact fees provide the means of balancing the cost requirements for new utility infrastructure between existing customers and new customers impacting the City s stormwater system. The portion of existing system and future capital improvements that will provide service (capacity) to new customers is included in the impact fees. In contrast to this, the City has future Capital Improvement Projects (CIP) that are related to renewal and replacement of existing systems in service. These infrastructure costs are included within the rates charged to the City s stormwater customers, and are not included within the impact fee. The primary purpose of stormwater systems and associated stormwater management policies is to control runoff in ways that minimize hazards to life and property, and minimize inconvenience to the general public. The objectives in managing stormwater and establishing a stormwater utility are varied. Arthur C. Nelson, a national expert in impact fees notes: Stormwater runoff usually occurs during or immediately after rainfall, but can sometimes involve groundwater flow and snowmelt. The primary purpose of stormwater systems and associated stormwater management policies is to control runoff in ways that minimize hazards to life and property, and minimize inconvenience to the general public. Urban development increases the frequency and severity of flooding by removing vegetation, filling natural water storage areas, covering floodplains and watersheds with pavement, and reducing the size of the natural channel available for flood flows. 1 1.2 Overview of the Study The development of a cost based stormwater impact fee requires a detailed technical analysis. 1 Arthur C. Nelson, System Development Charges for Water, Wastewater and Stormwater Facilities (Boca Raton: Lewis Publishers, 1995) p. 137. Introduction and Overview 8 City of Kalispell Stormwater Impact Fee Study

To better understand the approach and methodology used, along with the development of the City s stormwater impact fee, this report has been divided into a number of sections (chapters) to discuss and document the process used to establish the fees and reach our final conclusions and recommendations. This report is organized in the following manner: Section 2 Review methodologies and practices related to impact fees Section 3 Overview of the legal requirements for impact fees under Montana law Section 4 Review of the development of the cost based stormwater impact fees 1.3 Disclaimer HDR, in its determination of the stormwater impact fees presented in this report, has relied upon data and information provided by the City. At the same time, HDR has used generally accepted engineering, accounting and ratemaking principles in the development of the costbased stormwater impact fee. This should not be construed as a legal opinion with respect to Montana law. HDR recommends the City have its legal counsel review the methodology, as discussed herein, to ensure compliance with Montana law. 1.4 Summary This section of the report has provided an introduction and overview of the stormwater impact fee report developed for the City. This report provides the basis for the establishment of a cost based stormwater impact fee by the City. The next section of the report will provide an overview of impact fees and the methodologies and practices used by utilities to establish the fees. Introduction 9 City of Kalispell Stormwater Impact Fee Report

2. Overview of Impact Fees 2.1 Introduction An important starting point in establishing impact fees is to have a basic understanding of the purpose of these fees, along with the criteria and general methodology used to establish costbased impact fees. This section of the report presents an overview of impact fees and the methodologies commonly used to develop cost based impact fees. It should be noted, the City has historically used these same methodologies to establish their utility impact fees. 2.2 Defining Impact Fees The first step in establishing cost based impact fees is to gain a better understanding of the definition of an impact fee or, as it may also be referred to, a system development charge. For the purposes of this report, an impact fee is defined as follows: [Impact fees]... are one time charges paid by new development to finance construction of public facilities needed to serve them. 2... impact fees are a contribution of capital to either reimburse existing customers for the available capacity in the existing system, and/or help finance planned future growth-related capacity improvements. Simply stated, impact fees are a contribution of capital to either reimburse existing customers for the available capacity in the existing system, and/or help finance planned future growthrelated capacity improvements. At other utilities, impact fees may be referred to as system development fees, capacity fees, impact fees, capacity reserve charges, infrastructure investment fees, etc. Regardless of the label used to identify them, their objective is the same. That is, these charges or fees are intended to provide funds to the utility to finance all or a part of the capital improvements needed to serve and accommodate new customer growth. Absent those fees, many utilities would likely be unwilling and unable to build growthrelated facilities which could burden existing rate payers with costs of growth related capacity expansions. 2.3 Economic Theory and Impact Fees Impact fees are generally imposed as a condition of service. The objective of impact fees is not to generate money for a utility, but to create equity between existing customers and new customers so that all customers seeking to connect to the utility s system bear an equitable share of the cost of capacity that is invested in both the existing and any future growth related expansions. Through the implementation of equitable impact fees, existing customers will not 2 Arthur C. Nelson, System Development Charges for Water, Sewer, and Stormwater Facilities, Lewis Publishers, New York, 1995, p. 1. Overview of Impact Fees 10 City of Kalispell Stormwater Impact Fee Study

be unduly burdened with the cost of new development. By updating the City s current stormwater impact fees, the City continues an important step in providing adequate infrastructure to meet growth related needs while providing this infrastructure to new customers in a cost based, fair, and equitable manner. 2.4 Impact Fee Criteria In determining impact fees, a number of different criteria are utilized. The criteria most often used by utilities to establish impact fees include the following: State/local laws System planning criteria Financing criteria Customer understanding Many states and local communities have enacted laws governing the calculation and imposition of impact fees. These laws must be followed in the development of impact fees. Most states require a reasonable relationship between the fee imposed and the cost associated with providing service (capacity) to the customer. The charges do not need to be mathematically exact, but must bear a reasonable relationship to the cost burden imposed. The utilization of the planning criteria, the actual costs of construction and the planned costs of construction provide the nexus for the reasonable relationship requirement. The use of system planning criteria is one of the more important aspects in the determination of the impact fees. System planning criteria provides the rational nexus between the amount of infrastructure necessary to provide service and the charge to the customer. In general terms, the rational nexus test requires a connection (nexus) established between new development and the new or System planning criteria expanded facilities required to accommodate new provides the rational development, and a reasonably appropriate apportionment of the cost to the new development in relation to benefits received. An example of using system planning criteria is the planning assumptions on post development land use and impervious area contained within the City s stormwater facility plan update. This provides a direct connection nexus between the amount of infrastructure necessary to provide service and the charge to the customer. between the fees charged and the assumed (planned) level of development (impervious area). A rational nexus test is used to evaluate the reasonable relationship between the impact fee and the infrastructure necessary to accommodate the new development. A rational nexus test typically contemplates the following: 1. A connection be established between new development and the new or expanded facilities required to accommodate such development. This establishes the rational basis of public policy. 2. Identification of the cost of these new or expanded facilities needed to accommodate Overview of Impact Fees 11 City of Kalispell Stormwater Impact Fee Study

new development. This establishes the burden to the public of providing new facilities to new development and the rational basis on which to hold new development accountable for such costs. This may be determined using the so called Banberry factors. [Banberry Development Company v. South Jordan County (631 P.2d 899, Utah 1981)]. 3. Appropriate apportionment of that cost to new development in relation to benefits it reasonably receives. This establishes the nexus between the fees being paid to finance facilities that accommodate new development and the benefit new development receives from such new facilities. 3 The first bullet of the rational nexus test requires the establishment of a rational basis of public policy. This implies the planning and capital improvement studies used to establish the need for new facilities to accommodate growth. Adopted master plans or facility plans should firmly meet this first test since these plans assess existing facilities and capacity, project future capacity requirements, and determine the future capital infrastructure needed to accommodate growth. The second portion of the rational nexus test discusses the Banberry Factors. In summary form, consideration must be given to seven factors to determine the proportionate share of costs to be borne by new development: 1. The cost of existing facilities 2. The means by which existing facilities have been financed 3. The extent to which new development has already contributed to the cost of providing existing excess capacity 4. The extent to which existing development will, in the future, contribute to the cost of providing existing facilities used community wide or non occupants of new development 5. The extent to which new development should receive credit for providing at its cost facilities the community has provided in the past without charge to other development in the service area. 6. Extraordinary costs incurred in serving new development 7. The time price differential inherent in fair comparisons of amount of money paid at different times. 4 The final portion of the rational nexus test is the reasonable apportionment of the cost to new development in relation to benefits it reasonably receives. This is accomplished in the methodology to establish the impact fee, which is discussed in more detail within this section. Impact fees are typically established as a means of having new customers pay an equitable share of the cost of their required capacity (infrastructure). The financing criteria for establishing impact fees relates to the method used to finance infrastructure on the system and assures customers are not paying twice for infrastructure once through the impact fees and 3 Ibid, p. 16 and 17. 4 Ibid, P. 18 and 19. Overview of Impact Fees 12 City of Kalispell Stormwater Impact Fee Study

again through rates. The double payment can come in through the imposition of an impact fee and then the requirement to pay debt service within a customer s rates. The financing criteria also reviews the basis under which facilities were built and funded such that the customer is not charged for infrastructure that was provided (contributed) by developers (i.e., customer contributions, contributions in aid of construction, etc.). The component of customer understanding implies that the fee is easy to understand. This criterion has implications for the way the fee is implemented and assessed to the customer. For a stormwater system, the fee is based upon an Equivalent Residential Unit or ERU. The ERU is equal to the impervious area of a typical or average residential customer. In the case of the City, one (1) ERU is currently assumed to be 2,400 square feet. For non residential customers, the number of ERUs are calculated or determined by the City using the same definition of an ERU. The other implication of this criterion is that the methodology is clear and concise in its calculation of the amount of infrastructure necessary to provide service. 2.5 Overview of the Impact Fee Methodology As a part of the cost based methodology, there are four steps commonly undertaken. These steps are as follows: 1. Determination of system planning criteria 2. Determination of equivalent residential units (ERU) 3. Calculation of system component costs 4. Determination of any credits The first step in establishing impact fees is the determination of the system planning criteria. For a stormwater system, total impervious area can be divided by the average impervious square footage of a residential lot to determine total system ERUs. These are very important calculations since it provides the linkage between the amounts of infrastructure necessary to provide service to a set number of customers. This implies that if the system is designed to provide service for demands up to the year 2035, then the infrastructure costs are divided by the ERUs in 2035 to determine the cost per ERU. Once the total number of equivalent units has been determined, an impact fee stated in $/ERU is calculated. The calculation of the impact fee typically includes both historical (existing) assets and planned future assets (i.e., capacity additions). The cost per equivalent unit is the gross impact fee. The gross impact fee is calculated before any credits for debt service. The last step in the calculation of the impact fee is the determination of any credits. This is generally a calculation to prevent customers from paying twice for an asset, once through the value of the asset included within the impact fee, and then again through any debt service associated with that same asset and included within the utility rates. A similar crediting mechanism is also utilized if general obligation (G.O.) bonds or tax revenue has been used to finance the infrastructure. Overview of Impact Fees 13 City of Kalispell Stormwater Impact Fee Study

The final impact fee is determined by taking the gross impact fee and subtracting any credits. This results in a net impact fee stated in $/ERU. The general basis of this calculation for stormwater system is the assumption that an equivalent unit is equivalent to the impervious area and run off from a typical or average residential customer. Other types of dwellings or businesses are then assigned ERUs based on total impervious area divided by 1 ERU to determine total ERUs 5. 2.6 Summary This section of the report has provided an overview of stormwater impact fees. This has included a discussion of the basis for establishing the fees, considerations in establishing an impact fee, and the connection (nexus) which must be established between new development and the fee being imposed. The next section of the report will provide a brief discussion of the legal considerations associated with impact fees. 5 The City uses a similar approach but caps the maximum per acre assessment for non residential properties based upon the City s current land use planning. Overview of Impact Fees 14 City of Kalispell Stormwater Impact Fee Study

3. Legal Considerations in Establishing Impact Fees 3.1 Introduction An important consideration in establishing any impact fee is review and consideration of any legal requirements at the state or local level. The legal requirements often establish the methodology around which the impact fees must be calculated or how the funds must be used. Therefore, it is important for the City to understand these legal requirements. This section of the report provides an overview of the legal requirements for establishing impact fees under Montana State law. This summary represents HDR s understanding of the relevant Montana State law as it relates to establishing impact fees. 3.2 Requirements Under Montana State Law The Montana law enabling legislation for impact fees was enacted in 2005 via Senate Bill 185. This was comprehensive legislation allowing public entities in the State of Montana to enact impact fees for various services. The legal basis for the enactment of impact fees is found in Title 7, Chapter 6, and Part 1601 to 1604 of the Montana Code. A summary of the Montana Code is provided below. A copy of the full code is provided in Appendix B. The legal basis for the enactment of impact fees is found in Title 7, Chapter 6, and Part 1601 to 1604 of the Montana Code. A summary of the requirements under Montana law is as follows: 7 6 1601. Definitions. As used in this part, the following definitions apply: 5) (a) "Impact fee" means any charge imposed upon development by a governmental entity as part of the development approval process to fund the additional service capacity required by the development from which it is collected. An impact fee may include a fee for the administration of the impact fee not to exceed 5% of the total impact fee collected. (b) The term does not include: (i) a charge or fee to pay for administration, plan review, or inspection costs associated with a permit required for development; (ii) a connection charge; (iii) any other fee authorized by law, including but not limited to user fees, special improvement district assessments, fees authorized under Title 7 for county, municipal, and consolidated government sewer and water districts and systems, and costs of ongoing maintenance; or (iv) onsite or offsite improvements necessary for new development to meet the safety, level of service, and other minimum development standards that have been adopted by the governmental entity. Legal Considerations in Establishing Impact Fees 15 City of Kalispell Stormwater Impact Fee Report

7 6 1602. Calculation of impact fees documentation required ordinance or resolution requirements for impact fees. (1) For each public facility for which an impact fee is imposed, the governmental entity shall prepare and approve a service area report. (2) The service area report is a written analysis that must: (a) describe existing conditions of the facility; (b) establish level of service standards; (c) forecast future additional needs for service for a defined period of time; (d) identify capital improvements necessary to meet future needs for service; (e) identify those capital improvements needed for continued operation and maintenance of the facility; (f) make a determination as to whether one service area or more than one service area is necessary to establish a correlation between impact fees and benefits; (g) make a determination as to whether one service area or more than one service area for transportation facilities is needed to establish a correlation between impact fees and benefits; (h) establish the methodology and time period over which the governmental entity will assign the proportionate share of capital costs for expansion of the facility to provide service to new development within each service area; (i) establish the methodology that the governmental entity will use to exclude operations and maintenance costs and correction of existing deficiencies from the impact fee; (j) establish the amount of the impact fee that will be imposed for each unit of increased service demand; and (k) have a component of the budget of the governmental entity that: (i) schedules construction of public facility capital improvements to serve projected growth; (ii) (iii) projects costs of the capital improvements; allocates collected impact fees for construction of the capital improvements; and (iv) covers at least a 5 year period and is reviewed and updated at least every 5 years. (3) The service area report is a written analysis that must contain documentation of sources and methodology used for the purposes of subsection (2) and must document how each impact fee meets the requirements of subsection (7). (7) An impact fee must meet the following requirements: (a) The amount of the impact fee must be reasonably related to and reasonably attributable to the development's share of the cost of infrastructure improvements made necessary by the new development. (b) The impact fees imposed may not exceed a proportionate share of the costs incurred or to be incurred by the governmental entity in accommodating the development. The following factors must be considered in determining a proportionate share of public facilities capital improvements costs: (i) the need for public facilities capital improvements required to serve new Legal Considerations in Establishing Impact Fees 16 City of Kalispell Stormwater Impact Fee Study

development; and (ii) consideration of payments for system improvements reasonably anticipated to be made by or as a result of the development in the form of user fees, debt service payments, taxes, and other available sources of funding the system improvements. (c) Costs for correction of existing deficiencies in a public facility may not be included in the impact fee. (d) New development may not be held to a higher level of service than existing users unless there is a mechanism in place for the existing users to make improvements to the existing system to match the higher level of service. (e) Impact fees may not include expenses for operations and maintenance of the facility. 7 6 1603. Collection and expenditure of impact fees refunds or credits mechanism for appeal required.... (3) A governmental entity may recoup costs of excess capacity in existing capital facilities, when the excess capacity has been provided in anticipation of the needs of new development, by requiring impact fees for that portion of the facilities constructed for future users. The need to recoup costs for excess capacity must have been documented pursuant to 7 6 1602 in a manner that demonstrates the need for the excess capacity. This part does not prevent a governmental entity from continuing to assess an impact fee that recoups costs for excess capacity in an existing facility. The impact fees imposed to recoup the costs to provide the excess capacity must be based on the governmental entity's actual cost of acquiring, constructing, or upgrading the facility and must be no more than a proportionate share of the costs to provide the excess capacity. The basic principle followed under Montana State law requires the fee to be based on a proportionate share of the costs of the system required to provide service and adoption of fees and accounting be in compliance with the State of Montana law. The City s stormwater planning documents provide the planning criteria and need for any future improvements. The use of the methodology discussed in this report should meet the proportional share standard and provide final proposed impact fees in compliance with Montana law. The discussion within this portion of the report is intended to provide an overview of relevant Montana law as it relates to establishing impact fees. This summary discussion does not constitute a legal interpretation of Montana State law. 3.3 Summary This section of the report reviewed the legal basis for establishing impact fees in the State of Montana and, in particular, the City. The next section of the report provides a detailed discussion of the specific calculation of the stormwater impact fee for the City. Legal Considerations in Establishing Impact Fees 17 City of Kalispell Stormwater Impact Fee Report

4. Development of the City s Stormwater Impact Fee 4.1 Introduction The City of Kalispell currently has stormwater impact fees in place. Under Montana law, impact fees need to be reviewed and updated every five years. This section of the report will discuss the development and update of the City s stormwater impact fee. The current stormwater impact fee was developed and established in 2006. In 2010, the City conducted another review and update of the fee. While the fees were reviewed in a comprehensive manner during the 2010 study, the City Council made a policy decision to not change the fees and maintained the stormwater impact fees at their current level. This study is timely, not only from a legal perspective, but also from a policy and equity perspective. Since the last study, the City s growth policy has changed and annexation has occurred. In addition, since the completion of the City s 2008 Facility Plan and the 2010 impact fee analysis, the City in 2011, shifted their planning policy (perspective) from a divided core and outside core area to an overall annexation area. This section of the report presents the key assumptions and details used in calculating the City s stormwater impact fee. The calculation of the City s stormwater impact fee is based on Cityspecific asset and planning information, along with other financial and accounting information. The City s calculated stormwater impact fee is based on the value of the available system capacity, along with the value of future or expansion related capacity projects. In summary form, the calculated buy in component and the future/incremental component are added together, including a debt credit, resulting in the total net allowable impact fee. 4.2 Overview of the City s Stormwater System The City has a stormwater utility and it is responsible for managing stormwater run off within its boundaries. To provide a better understanding of the complexity of this utility, along with its regulatory requirements and challenges, the following discussion and overview is provided. The City is legally required to manage both the quantity and the quality of the City s stormwater run off. Stormwater runoff can collect pollutants from urbanized areas, which can add to or create problems in local lakes and streams. Federal and state regulations require action by the City of Kalispell to minimize pollution carried by stormwater runoff. At a federal level, the City is subject to the federal regulations related to the National Pollutant Discharge Elimination System (NPDES). The City is required to implement a Stormwater Management Program (SWMP) which consists of Best Management Practices (BMPs), involving six minimum control measures, to control pollutants in stormwater to the maximum extent practical. However, the City does require certain infrastructure (facilities) to manage stormwater quantity. These facilities are needed for purposes of conveyance, detention and discharge. More specifically, Development of the City s Stormwater Impact Fee 18 City of Kalispell Stormwater Impact Fee Study

these facilities can include ponds, pipes, catch basins, ditches, curbs and gutters. management of stormwater is related to quantity, it is also related to water quality. While Finally, it is important to note that growth, in and of itself, creates additional impacts and requires additional resources. This is true for all aspects of the City s services, and holds true for the stormwater utility and its facilities. To determine the City s facility requirements for the stormwater utility, a Stormwater Facility Plan is developed. In summary, the City s approach to stormwater quantity management is two fold; implementation of measures to manage runoff from new development to historic levels, and provide adequate facilities downstream to convey, detain and discharge stormwater. Under this approach, new development will typically make on site improvements to manage runoff, but also benefit from downstream facilities. It is the investment in downstream facilities which are the basis for the City s impact fees. The City s 2008 Stormwater Facility Plan Update also provides, in part, the basis for the development of the City s cost based stormwater impact fees. Given this brief overview of the City s regulatory requirements to manage stormwater runoff and its stormwater program, the focus can shift to the calculation of the City s stormwater impact fees. Provided below is a more detailed discussion of the City s current stormwater impact fees and how they are determined. 4.3 Present Stormwater Impact Fees The City currently has a stormwater impact fee. The impact fee is based upon an equivalent residential unit approach. Presented below in Table 4 1 is an overview of the present stormwater impact fee. Table 4 1 Present Stormwater Impact Fee Impact Fee Per Equivalent Residential Unit[1] Type of Use # of ERUs (1) Impact Fee Single Family 1.0 $1,121 Duplex or Multi Family.75 ERUs Per Living Unit $841/Unit Commercial [2] Calculated on Impervious Area; 2,400 sq. ft./eru or a maximum of six (6) ERU s per acre if meeting current detention standards $1,121 / 2,400 s.f. up to $6,726/acre [1] Streets and highways are exempt from impact fees. [2] Apartments are calculated as commercial The use of an ERU/impervious surface approach is a generally accepted and common method Development of the Stormwater Impact fees 19 City of Kalispell Stormwater Impact Fee Report

for determining stormwater impact fees for specific parcels. As can be seen from Table 4 1, the City s current stormwater impact fee is assessed on the basis of $1,121/ERU. For single family residential properties, one (1) ERU is assessed. For duplex and multi family customers it is based upon a living unit approach. For commercial (non residential) properties, the stormwater impact fee is assessed based upon a property specific impervious surface calculation. If the commercial customer is meeting current detention standards, the parcel is assessed a maximum of six (6) ERU s per acre 6. The fee s limitation on the number of maximum ERUs for a parcel meeting current stormwater detention standards provides a financial benefit and offset to the developer for building detention facilities and meeting current development standards. It should be noted that streets and highways are not included in the City s impact fee calculation. This is a common practice of stormwater utilities and the justifications for this policy are often centered around the following possible justifications: Streets and highways are an integral part of the stormwater conveyance system. The streets are owned by the City, and thus, any charge against the City is a charge to the taxpayers Given this overview of the present stormwater impact fee, the focus can shift to the development of the calculated stormwater impact fee. In developing the calculated stormwater impact fee, the starting point is to review the City s planning document for stormwater planning. As noted previously, this is the City s 2008 Stormwater Facility Plan Update. 4.4 Calculation of the City s Stormwater Impact Fee As discussed in Section 2, the process of calculating impact fees is based upon a four step process. In summary form, these steps are as follows: Determination of system planning criteria Determination of Equivalent Residential Units (ERUs) Calculation of the impact fee for system component costs Determination of any impact fee credits Each of these steps is discussed in more detail below. 4.4.1 System Planning Criteria System planning criteria are used to establish the capacity needs of an ERU. The City s 2008 Stormwater Facility Plan Update did not directly specify the number of ERUs to be served at the end of the planning period. The Facility Plan Update focused on population served and area (acres). Given that limitation of the study, the impact fee study needed to determine the current ERUs being served and the potential ERUs at buildout. 6 An acre is equal to 43,560 square feet. If a parcel does not meet current detention standards then the parcel could be assessed up to approximately 17 ERU s (43,560 sq. ft. 2,500 sq. ft./eu = 17.4 ERUs) Development of the City s Stormwater Impact Fee 20 City of Kalispell Stormwater Impact Fee Study