Overview:
Impact fees – every city has them. The fees are intended to cover the costs of building streets, sewer systems, stormwater basins, sidewalks and a range of infrastructure that is part of new residential and commercial developments. And they are a way to upgrade old systems.

In Iowa, impact fees or tax assessments for street and sidewalk improvements have resulted in lawsuits out of Indianola and Urbandale that have been decided by the Iowa Supreme Court. In West Des Moines, the city’s efforts to create a stormwater fee district for developers in an area near the Grand Prairie Parkway interchange with Interstate 80 have resulted in a lawsuit that has stymied development in the area. University of Northern Iowa professors Arthur Cox and Richard Followill set out to find an equitable system of distributing the fees in a way that would allow government bodies to recoup their costs while avoiding taxpayer subsidies that are common in development incentive packages.

Cox said in an interview that impact fees often are assessed in an arbitrary manner. His goal was to arrive at methods for equitable distribution of the fees while avoiding public subsidies for development projects.

In the research article, Cox and Followill wrote: “Subjective methods of apportioning of fees among developers will always and rightfully arouse suspicion.”

Method:
The research tracked the history of impact fees, especially court decisions that have governed how they are assessed, as well as methods that have been used to determine the most equitable method of assessing the fees.

Cox and Followill developed four formulas for the proportional distribution of impact fees with the basic assumption of a project with a 20-year economic life, six-year development cycle and 20-year financing of a $10 million capital with a 7 percent rate of financing and 7 percent rate of return. Those variables can change, but a key element is charging a rate of return that is equal to the municipalities’ cost of financing. Formulas were adjusted to account for improvements that could have an infinite economic benefit, such as a park, the timing of the capital outlay and changes in costs and demand.

“We show how equity-neutral, proportionate share fees can be directly determined when infrastructure construction occurs before, during, or after development build out and when infrastructure enjoys an infinite economic life,” Cox and Followill wrote in their paper.

Results:
Each formula generates a different annual impact fee that would be paid per housing unit developed. To get an understanding of the formulas, we suggest reading the report. A link to the report at The Engineering Economist can be found at the end of this article.

Conclusion:
Cox and Followill wrote: “Economically efficient outcomes are much more likely when consumers must bear the true costs of their decisions.

“Therefore, land is most likely to be put to its best use when developers pass along to subsequent property owners the true marginal costs they generate. 

“In addition, because marginal cost pricing precludes established residents from having to subsidize new growth and deters developers from selling new residents infrastructure and services provided by current residents, it is generally considered to be fair and economically desirable.”

Resources:
The entire paper can be found here: http://bit.ly/1YxxVil
Cox can be reached by email at arthur.cox@uni.edu.
Followill can be reached by email at richard.followill@uni.edu.