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HomeMy WebLinkAbout05-08-06 Study SessionDUBLIN CITY COUNCIL STUDY SESSION Monday, May 8, 2006 7:00 p.m. -Council Chambers MINUTES OF MEETING Mayor Chinnici-Zuercher called the meeting to order. Present were Mayor Chinnici-Zuercher, Vice Mayor Lecklider, Mrs. Boring, Mr. Keenan, Ms. Salay, and Mr. McCash. Mr. Reiner arrived at 7:15 pm. Staff members present were Ms. Brautigam, Ms. Grigsby, Ms. Readier, Mr. Gunderman and Ms. Ott. The topics of discussion were the City's investment policy and impact fees. Investment Policv History Ms. Grigsby stated that the City has had an investment policy in place for many years. The last policy update was in 1999. The two mast significant changes that occurred with that update were: modifying the length of time permitted for an investment and identifying the use of an investment advisor. The City's investment policy conforms to Ohio Revised Code, Section 135. Dublin's policy has always been a conservative policy using the philosophy that the goal is to preserve the principle while optimizing the interest income. Maturities for investments may not extend longer than afive-year period. The City uses an approach called "laddering," wherein the City evaluates time frames in terms of cash flow needs, trying to match investment maturity dates with cash needs, thus avoiding the necessity to sell investments prior to maturity with risk of a loss. Ms. Grigsby introduced the City's investment advisor since 1999 -- Dennis Yacobozzi, President, United American Capital Corporation. This company assists in the investment of approximately two-thirds of the City's investment portfolio, approximately $65 million. The remaining one third is administered by City staff, with a significant portion maintained in the State Treasurer's Investment Pool, which is referred to as Star Ohio. That is used primarily for liquidity purposes, to ensure sufficient cash is an hand for payroll and construction contracts. It is possible for the City to access its Star Ohio account and have funds wired on a daily basis, if desired. There are no issues of maturity. Currently, those rates are higher than the six-month rate on other funds. Mr. Sova works directly with Mr. Yacobozzi to handle the City's investments. Mr. Yacobozzi was one of the founders of the Star Ohio account, which the majority of Ohio's local governments use as an investment tool. Mr. Yacobozzi then reviewed the central points of Dublin's investment policy. Investment Policv -Background The City's ability to manage its short-term cash has been very important to the City's investment property. In the years they have been managing the City's portfolio, there has never been a need to sell, which bodes well for the performance of the portfolio. Dublin City Council Study Session Monday, May 8, 2006 Page 2 Recently, the City was able to move an additional $5M plus to the portfolio, which enabled them to create a core portfolio for the City -- the City's main engine of return, enabling them to lengthen the duration of the average maturity of the portfolio in declining rate markets, or to shorten that duration, as they did prior to the Federal government's beginning its rate hike process in June 2004. The Federal government has raised rates 15 times since then. Due to the nation's strong economy with corporate profits and a national unemployment rate below 4.7°~ -- below the textbook record -- there are inflationary pressures that may cause the feds to increase the rates further. For this reason, they have adopted the strategy to keep the City's portfolio short and neutral. In today's market, they are buying substantially above 5 percent, and they believe yields will climb higher. When the Federal rate is raised again, they will also gravitate higher. Chapter 135.14 of the Ohio Revised Code specifically defines the types of investments the City may purchase, and Dublin's investment policy, established in 1999, sets forth further restrictions and practices far the City's investments. They have been 100 percent invested in the Federal agency market for several years. The City's policy permits investment in the corporate securities arena, but, to date, they have elected not to do so as the return was not adequate to justify the risk involved. However, as the Federal rates increase and the yield spreads widen between governments and non governments, they may consider certain corporate investments. Methodology Mr. Yacobozzi stated that they ensure that the City's principal is protected at all times. All the assets in the City's portfolio are guaranteed including the timeliness of interest payments. Protecting the principal means diminishing the extent of unrealized losses in a rising rate market and maximizing the value of increasing assets in a declining rate market. That is accomplished by extending the portfolio longer prior to interest rates declining, and shortening the portfolio in a rising rate market. Dublin's portfolio report for the first quarter of 2006 was provided in Council's packets. Several years ago, Dublin adopted the policy of strong accountability and rate specificity. At the end of a quarter, the City's portfolio report will reveal exactly what the City owns, what was paid for the securities, settlement date, what trades occurred, what securities were purchased or sold and what the realized income was. The City's policy also separates the safekeeping function. The City has a separate safekeeping agent, a custody bank - US Bank. The policy also provides for delivery versus payment -- all securities are delivered, not paid. They do not hold cash and securities. Only the third party custodian may da so. Their company is authorized to execute transactions. They buy and sell securities through eligible broker dealers who must also adhere to the City's policy. They ensure that the price that is paid is the best price. The City's investment program is very actively managed. Dublin City Council Study Session Monday, May 8, 2006 Page 3 There is some "laddering" in the portfolio, but because they are comfortable with the City's cash management approach, they are able to be more active. For instance, they are able to move more assets in a particular area of the curve, which they would be unable to do if it were necessary to make certain that bonds matured every month. The City's ability to manage its cash has contributed to the performance of the portfolio. In the packet information there is a chart that shows that in 2001, the majority of the cases in the City's portfolio yield outpaced Star Ohio in a three-month report, but also in the two-year Treasury. Temporarily, the yield of the City's portfolio is lagging because it cannot keep pace with the rapid Federal rate increases -- the City's $60 million portfolio takes time to move up with higher yields. However, because of its short duration, the portfolio is moving quickly, and at some point it will surpass the short yields depicted in the report. Over the course of five years, the portfolio has brought in added earnings of $1.7 million. Information has been provided to Council regarding the discipline of their company. He noted that the City's account is actively managed. Not only do they trade securities, they will occasionally extend or shorten the duration. They also do "bond swaps" -- sell one security, take out extra cash and reinvest the proceeds in another security. They also move between callable and non-callable assets, based on market conditions. Mr. Yacobozzi invited Council's questions. Ms. Salay requested clarification of "short term" versus "long term." Mr. Yacobozzi responded that in today's market, the City's portfolio has an average weighted maturity of a little over one year. It is possible to have a four or five-year maturity, but they have overweighted the front of the portfolio with shorter maturities, from 2-1I2 years in. That enables them to buy the new yields much quicker. At some juncture, they will be at a point where they will recommend moving to longer maturities. That will be a difficult decision to make, but it must occur when the market turns. At that time, afour-year asset will return far more than a one or two-year security. Mr. Keenan stated that the graph shows that in 2002, there is a two to three point differential between the Star fund and the City of Dublin return. Prior to the reduction of the Federal interest rates, was the City placed in a position to exploit that differential? Mr. Yacobozzi confirmed that was correct. The issue at the time was the curve was positively sloped -the City was picking up a sufficiently higher yield for being a longer term. At the same time, there was a need for caution because the probability of a Federal rate increase was near. The City has a conservative, though actively managed program. Therefore, they did buy same longer maturities, locking in 200-300 basis points over Star. Star atone point was a .98 and bank CDs were .5 or lower, and sweep accounts were .25, while the City's portfolio was well aver 2-2-1 /2% -- a big difference. That lengthening of the term enabled them to sustain the wide spread. The City is still positive, even though yields have moved up significantly. Locking in the higher spread early provides more roam now as the Federal interest rate is increased. Dublin City Council Study Session Monday, May 8, 2006 Page 4 Every time the City enters the market, they are always higher at the moment of entrance than any other cash equivalent security. With short yields, at the moment they enter the market, they can still exceed Star Ohia. Mr. Keenan inquired if the City's investment policy prohibited equity trading of any type. Mr. Yacobozzi confirmed that was so. The City's investments operate within the highest category of quality. For instance, the City didn't wire United American Capital $50 million in 1999, as occurred with some other money managers. Money was wired to the bank. No entity other than the City can move an asset in or out. He is authorized only to execute a trade. Whatever is purchased must be wired to the City's custody account versus payment. If the dealer fails to deliver, payment is not made. When a sale occurs, they direct U.S. Bank to deliver the asset to the particular broker. When the exchange takes place, a simultaneous exchange of cash to the City's account occurs. The policy for delivery versus payment with athird-party custodian has been a mainstay of public funds accounting for many years. Mr. Keenan noted that Council has a responsibility to understand what the City's investments are, where the money is coming from and going to, and the due diligence involved. He is assured by knowing there are numerous checks and balances in place. Mr. Yacobozzi noted that not only are there custody statements that the City balances against, his company provides monthly and quarterly statements confirming the balance. When they execute a trade, they transmit a transaction advice. Before the bond is settled, the City is advised of the specifies of the transaction. Mayor Chinnici-Zuercher inquired if Mr. Yacobozzi had recommendations he would like to share. Mr. Yacobozzi responded that the City's policy was adopted in 1999 and is due for a review. There is less interest in corporate securities now than existed in the late 1990's. They have no hesitation to enter into the commercial paper markets, but they would strongly recommend an Al-P1 limitation as opposed to the Al-P2 possibilities that are there. Mr. Keenan inquired if that would require a change in the current investment policy. Mr. Yacobozzi responded that a policy change would probably occur only by ordinance. Ms. Grigsby confirmed that the policy, and any change thereto, would occur by ordinance. She noted that the custodial account is reconciled monthly against the individual trade notifications, and that is reconciled with the general ledger, which is then forwarded to Ms. Grigsby for review. Numerous persons are involved in the transaction. Internally, wire confirmations ar callback procedures are in place. The wire is initiated by one staff member, such as the Accounting/Auditing Director, but another staff person approves/confirms the wire. No one person is authorized to execute an entire transaction. Dublin City Council Study Session Monday, May 8, 2006 Page 5 Mr. Keenan inquired if, per City policy, a proposed transaction must be authorized by Ms. Grigsby, or does the decision lie with the investment broker? Mr. Yacobozzi responded that the decision is made by his firm, but electronic notification thereof is made immediately to the City. Mayor Chinnici-Zuercher thanked Mr. Yacobozzi for the information. It is essential that Council understand the City's investment policy. Council anticipates that any recommended changes be forwarded by Ms. Grigsby to Council. Impact Fees and Adequate Community Facilities Ordinance Ms. Brautigam stated that as noted earlier at Council's retreat, Council would like to ensure that the City obtains those dollars it should from development to address the impact of development. Impact fees are one source by which municipalities obtain development revenue. Where she previously worked in Colorado, impact fees became popular in the late 1980's. However, in Colorado, the primary source of municipal revenue comes from sales taxes -- not income taxes, and TIFs are very rare -limited primarily to blighted areas. She introduced Tom Pippin, BBC Research, Denver, Colorado. Tom Pippin, Partner with BBC Research stated that he heads the firm's Public Findings practice, which conducts financial analysis for state and local governments. This focuses specifically on the question, "Does growth pay its own way?" from a government perspective. That growth could be through annexation, rezonings or redevelopment. He provided a PawerPoint presentation. • Fiscal Impact Analysis Mr. Pippin clarified that fiscal impact analysis differs from fiscal impact fees -they are two different techniques. The question, "Does growth pay its own way?" is a two-part question. The first part is whether growth pays its own way in terms of governmental operations -the ongoing cost of doing City business. Fiscal impact analysis is the process of comparing the City's revenues and costs over a set period of time, normally 20 years. Analysis of whether an annexation, rezoning or redevelopment has paid its own way in terms of City operations is performed. Fiscal analysis should be conducted on a broad scale - on a comprehensive plan or subarea plan, not on a specific retail development. Every individual potential development may have a surplus or a deficit, but when incorporated with neighboring land uses, a more complete picture is achieved. Fiscal impact analysis is not about capital; it is about operations. Dublin has had a fiscal impact analysis conducted, which indicated the implication of different land uses on the City's budget. Each of those land uses raises certain questions. Usually, the most provocative questions concern fee waivers and economic development incentives or considerations. Fiscal analysis can help answer those questions. If it turns out that a particular project induces a deficit, and the City's budget will be negatively impacted, what can be done to mitigate that impact? There Dublin City Council Study Session Monday, May 8, 2006 Page 6 are a variety of techniques. To mitigate a negative rezoning, the most popular, yet controversial technique in the government planning community is linkage zoning. This practice is not favored by the development community, however, because the land uses in a large PUD, or master plan community, are tied to a ratio. If a city were to determine that a certain amount of retail or office was necessary to generate sufficient taxes to offset the number of homes, the city would stop issuing building permits at a specified plateau. That practice, however, often does not coincide with market realities. The current market may not be ready for retail or office at that time, and the developer needs to continue growing their project to achieve the offsetting land use. The second part of the question, "Does growth pay its own way?" is whether growth pays its own way in terms of capital infrastructure -government buildings, parks, water, sewer and stormwater systems. It can sometimes include large, costly capital equipment. Ohio Revised Code defines capital equipment as a large, costly item that has a useful life in excess of 10 years. An example would be a fire engine ar an expensive dispatching system. Water and sewer tap fees are actually impact fees which pay for water and sewer transmission lines, water treatment and sewage disposal. Capital projects are evaluated on a "GRUM" basis. G-growth related projects -yes; R-repair projects - no; U-upgrade projects - no; M-mixed -items related primarily to growth that may also involve repair and/or upgrade -yes. Impact fees must be justifiable on the "GRUM" basis. Mr. Keenan inquired about "double dipping" with fire and safety levies. Mr. Pippin responded that if a community has a levy in place -sales, property, ar income tax -- that is dedicated for growth-related capital, the city must either give a credit against the impact fee, or the impact fee should not be undertaken. However, many of those levies are not necessarily reserved far capital projects; in that case, the levy does not rule out an impact fee. Mr. Pippin shared the ICM definition. An impact fee does the following: (1) Is charged only against new development projects. A home or business remodeling project would not be subject to an impact fee. A project for net increase would pay impact fees. Questions arise with redevelopment projects, for instance 400 units of downtown housing are to be replaced with 420 units of upgraded, new urbanist village housing in the same area. The impact fee applies only to that increment of the project that is new - 20 units. All of a city's land use units, houses or commercial, have already paid for their current level of service, and they cannot equitably be charged again for initiation of that service. Therefore, impact fees can be used for redevelopment, but only for the increment that is new. (2} Supports infrastructure. Consistent with the ORC, it is limited to buildings, land, or systems with a usual life exceeding 10 years. The money must be escrowed in an account separate from the general fund. The only "soft" purpose an impact fee can be used for is the cost of having the study conducted. Dublin City Council Study Session Monday, May 8, 2006 Page 7 Mrs. Boring inquired if impact fees can be used for a city to acquire public art. Mr. Pippin responded affirmatively. He will address that shortly. (3} Proportionate share. The theory is that every local government has a certain level of service, such as: a certain number of police officers per thousand residents; or maximum response time 90°~ of the time for fire/rescue services is four minutes; 20 acres parkland per thousand residents; a certain percent investment in public art. Impact fees can only be used to ensure that level of service is maintained as growth occurs. If a city is unhappy with its level of service, that is the responsibility of all the citizens, not new development. Mr. Reiner inquired if his firm conducts analyses of whether the quality of life of a community is improving or regressing with new development. If the city's traffic flow has been negatively impacted by development, can that type of issue be addressed through impact fees? Mr. Pippin responded that it can be addressed by impact fees, but not after the fact. If the development and the resulting negative impact have already occurred, it cannot be addressed by impact fees on new development. It is important to adopt the impact fees early in the growth cycle. He provided the example of the small community of Gilbert, Arizona, a suburb of Phoenix, experiencing rapid growth where impact fees could be used only to maintain a level of service throughout growth. Once impact fees are adopted, they are typically updated every 3-5 years with abuilt-in escalator in the ordinance, which adopts an inflation factor determined according to the national cost index. A fee of $1,000 per unit could increase by 3-5% annually. Every 3-5 years the assumptions are re-examined. If a city has done something to catch up with its level of service during the 3-5 intervening years, the fees can be increased because the city has reinvested in the level of service. For that reason, Gilbert, AZ is not fated to always have low fees for a low level of service. • Development Impact Advisory Committee The Ohio Revised Code does not require this body, but he would advise having an ad hoc committee. It is important never to "spring" fees on the development community. If a community wants to adapt impact fees, it would be for a legitimate reason, i.e., concern about their level of service declining. Given that legitimate, public policy concern, it is important to inform the development community of what the city is contemplating. The city may not follow all their methodological assumptions, but it is important to keep them posted throughout. • Implementation Recommendations How do you administer impact fees and how do you determine who receives credits, rebates or credits? If an attractive economic development opportunity presents itself, what responsibility does Council have to ensure the fee system stays whole versus Dublin City Council Study Session Monday, May 8, 2006 Page 8 trying to attract the development? The fundamental goal throughout is to ensure that the impact fee fund is kept whole. Council can choose to reduce or waive fees for any particular land use, but if the impact fee fund is not reimbursed, the integrity of the fee system would break down. It would mean that people who did not get a waiver are paying for a level of service that the impact fee fund will not be able to afford. Loveland, Colorado annually budgets a line item in the general fund to provide City Council a "war chest," whereby they can waive fees for economic development. If they do not use all of the funds, it rolls over to the following year. Mr. Reiner inquired how the impact fee fund could be reimbursed. Mr. Pippin responded that it is typically achieved with incremental sales, property or income tax from that development. Presumably, Council would not induce a development unless it would be fiscally advantageous to the city. If Council is confident that a development has a surplus, and then decides to waive fees, part of the surplus could be earmarked to reimburse the impact fee fund. Mr. Reiner inquired who determines which developments have surpluses. Does his firm do that? Mr. Pippin responded that Dublin has already conducted this study. Its comprehensive plan looks at the fiscal balance of different types of land uses. When the comprehensive plan is updated, he would assume that analysis would also be updated. Mr. Pippin stated that Ohio differs from western states, as income tax is very important here. West of the Mississippi, sales and property tax are more typical revenues for municipal government financing. So the best way to financially operate a city west of the Mississippi is to have a small number of very expensive houses ringed by retail that imports sales tax from all its neighbors. Mr. Reiner stated that Dublin has not done that, and does not have much retail business. Mayor Chinnici-Zuercher stated that if that were the case here, Dublin would have developed in a different manner. Vice Mayor Lecklider inquired how the City would withstand a legal challenge when it has waived impact fees for one development and another developer comes and asks for the same type of waiver. Mr. Pippin responded that, typically, the ordinance provides a list of minimum criteria or thresholds to satisfy. After those are met, Council would have the discretion of granting a waiver. Some criteria could be: (1 }The open space dedication requirement is not simply met; it is exceeded; (2) The wages paid by the establishment are above average; (3} The wages paid by the establishment are also augmented by benefits; (4} It is in certain S.I.C. codes that are desirable -technological, not industrial. Vice Mayor Lecklider inquired if the minimum threshold of requirements is met, is there Dublin City Council Study Session Monday, May 8, 2006 Page 9 still discretion? Mr. Pippin responded affirmatively. Council could still deny a waiver. For instance, if a community already has a Home Depot and Lowe's wants to come in, this would result in having two marginal big box retailers versus one successful retail store. The city would continue to have discretion after the minimum thresholds are met. • Legal Considerations Mr. Pippin stated that Ohio law is consistent with most state laws, but it is unique in that it specifically allows the inclusion of large capital equipment. Some state laws restrict impact fees to pay for land or buildings only. Two significant US Supreme Court cases have established afour-part test for impact fees: authority, specificity, proportionality and accountability. Because of its state law, any municipality in Ohio is well poised to meet all of these tests. In Ohio, districts are empowered to collect impact fees. That is interesting because, typically, districts do not have land use power. In Ohio, it is possible to have intergovernmental agreements, collecting a fee on behalf of a district and transferring it to them. Ms. Brautigam noted that when Mr. Pippin spoke earlier with staff, Chief Woo was invited to attend the discussion, as Mr. Pippin had indicated that townships also have authority to levy impact fees. Mrs. Boring inquired if schools could levy impact fees. Mr. Pippin responded that unlike most other states, including Colorado, Ohio school districts may levy impact fees. Mrs. Boring stated that Dublin has looked at impact fees previously and decided against them. Why is Dublin considering this now? Mayor Chinnici-Zuercher responded that because many other communities are using impact fees as a financial resource, Dublin wants to remain informed on the issue. Mrs. Boring stated that the school district has considered impact fees in the past. Have state regulations changed in some way that has encouraged renewed interest? Ms. Brautigam responded they have not. To date, staff has been successful in negotiating with developers for needed infrastructure -primarily water, sewer and transportation. There are many other things, however, that could be obtained at the expense of new development -- such as a new municipal building. Mr. Reiner stated that the City has tried to move towards codifying a type of zoning where a developer would be more comfortable in knowing exactly what the requirements are. Mr. Pippin agreed. For the "in" communities -- metro Denver, metro Salt Lake City, and metro Phoenix, where there is a track record of impact fees, developers are not happy to pay them, but prefer them over negotiated exactions. It facilitates the financial application process for the developer. The pro forma in their loan application contains the certainty of a fee schedule versus a question mark for City exactions. Dublin City Council Study Session Monday, May 8, 2006 Page 10 • Calculation of Fees Mr. Pippin stated that there are two ways to calculate impact fees. Impact fees are determined simply by mathematical division. Method #1: The capital improvement plan approach -- the growth-related portion of the City's CIP is divided by who is moving into the community. Method #2: The current service standard approach -- the equity, or replacement value of what the City owns, is divided by those here today. To simplify, it is dividing new needs among those coming in or dividing what is owned by who is served. Ohio requires Method #1. Therefore, a city must have a CIP, and from that, the growth-related projects are identified. That growth-related project list is divided by who is moving in. The only states that do not require Method #1 are Colorado and Arizona, which permit either method. He prefers to calculate fees both ways because method #2 provides a double check on method #1. Example: Using method #2, the City divides what it owns in parks by who it serves and determines that there is an investment in Dublin of $1,000 per unit in parks -the current service standard. Then, by method #1, all the new parks are divided by who is coming, and the City determines a cost of $2,000 per unit. That would be cause for concern. An impact fee of $2,000 is double the current investment of $1,000 per unit and would violate the proportionality standard. New growth would be charged for too much. • Impact Fee Scope of Work 1. Project initiation 2. Analysis of current conditions, current financing systems, infrastructure requirements and new system options. 3. Analysis of current and future land use. 4. Calculation of preliminary impact fees. 5. Impact fee system final design and documentation. Mr. Pippin noted that the above is all division. For instance, #2 gathers what is owned or what will be bought. Item #3 gathers who lives here today or who is coming, and in items #4 and #5, the division occurs. • Impact Fee Policy Issues What is capital infrastructure? Conflicts with General Fund objectives Ability to waive fees, exempt areas of the local government or set fees below requirements. Impact on affordable housing Non-resident use of facilities Simplicity versus accuracy Application to public institutions and hospitals Conflicts with existing subdivision exactions Dublin City Council Study Session Monday, May 8, 2006 Page 11 Standards for geographic specificity Applicability to open space, public housing, stadiums and airports Tax credit Change of land use Loss of institutional memory in the local government Mr. Pippin noted that he had already covered the first three policy issues. In many communities the impact of impact fees on affordable housing is a significant issue. Most states have a waiver provision, whereby projects below a certain price level can be exempted. In regard to simplicity versus accuracy, his view is that anytime an assumption is made, it is a potential source of error. He prefers to make fewer, rather than more, assumptions. He does not believe impact fee studies need to consist of 200 pages with many interwoven assumptions. He prefers a study that is simple and intuitive to document the assumptions with few fee categories. Most communities have a fee for single family homes, apartments, and a fee "per square foot" for retail, office, industrial and institutional. It is possible to divvy up a fee based on the size of the house or the type of retail structure, and some communities adopt by ordinance the ITE trip generation manual that is extremely detailed per type of land uses. In his opinion, local governments are not well served by going to that level of detail. He stated that conflicts with existing subdivision exactions could be an issue for Dublin. Because it is important to avoid "double dipping" at all costs, it would be important for Dublin to decide what they want to continue exacting on a negotiated basis. If it is parks, then the City would not have impact fees for parks. Some do not charge a fee for streets. They simply require developers to build two lanes of a contiguous street. Whatever is exacted is not included in the fee calculations. • Impact Fee Trends - "Quality of Life" Fees In the western U.S., local governments are beginning to use impact fees to help finance non-traditional types of public infrastructure that can benefit the community's quality of life, such as: public art {Mesa, Arizona}, performing arts complexes {Goodyear, Arizona}, affordable housing {Boulder and Aspen, Colorado), and air quality {Aspen, Colorado). Ohio's impact fee statute appears to authorize similar fees if they help fund capital facilities that are "serving a lawful purpose of a county, township or city..." There can be several challenges in adopting these types of quality of life impact fees. For example: opposition from the development community, determining the local government's existing level of service, and financing the non-growth related part of the capital facility. Mr. Pippin noted that in Ohio, an affordable housing project may need to be conducted through a housing authority. With deed-restricted ownership units, the buyer can only realize one percent appreciation per year -far below the market appreciation. This Dublin City Council Study Session Monday, May 8, 2006 Page 12 public sector restriction keeps the housing affordable. Ms. Brautigam stated that in Loveland, if the buyer of an affordable housing unit stays in the unit for five years, they are permitted to sell the unit far whatever price they can achieve. She noted that Davidson, North Carolina also has a joint housing authority that is building affordable housing for the community. Mr. Pippin stated that if Dublin is interested in financing its future public art acquisitions with impact fees, it is possible. However, impact fees cannot raise a municipality's level of service, they can only maintain it as growth occurs. So it would be necessary for Dublin to evaluate its current level of public art and arrive at a replacement value for it. It must determine what investment the City made in its public art and what gifts were received to acquire it -and break that amount down to a per unit or per square feet basis. Once that figure has been arrived at, the future impact fee can be tied to maintaining that level. In order to keep the impact fee as defensible as possible, it is important to take a snapshot of the City's 2006 level of service. If the snapshot level of service in June 2006 is a certain amount of investment in public art spread over the businesses and residents of Dublin, that would provide the necessary calculation. It would be challenged, if the City were to use the level of service at the time of installation of the pubic art unit. Mr. McCash inquired the City's position if the public art were financed by the City's hoteUmotel tax revenues. Mr. Pippin stated that if the public art or public facilities are 100 percent paid for, with no outstanding debt service, it can be included in the level of service. If the funding for the City's equity came from an unusual source, like a grant or a hotel/motel tax, it does not matter. Once it is paid for and under the City's ownership, it can be counted in the level of service. For instance, the Bill and Melinda Gates Foundation has invested heavily in technology for libraries. His firm has worked with some of those communities to establish library impact fees. The shell of a library may not have cost the community much to build, perhaps $200/square foot, but the library has $0.5 million in special wiring and technology that has a useful life exceeding 10 years - a gift from the Gates Foundation. Once the city received the grant and took possession of the equity, the library is part of the city's level of service. Mrs. Boring inquired if it would be acceptable for a city to acquire several public art pieces to increase its level of service prior to passing the impact fee for public art. Mr. Pippin stated that many communities "front end load" their infrastructure investments sa that when the impact fee study is conducted, they have made a measurable decision to boost their level of service. However, there can be a problem if the money has only been appropriated, not spent. In doing an impact study it is necessary to define the date from which the city's level of service is calculated. Dublin City Council Study Session Monday, May 8, 2006 Page 13 Mr. Reiner inquired if a municipal lease purchase agreement could be included. Mr. Pippin responded that only the equity of the purchase as of that date could be counted. • Adequate Community Facility (ACF) Ordinances Mr. Pippin stated that ACF or APF (adequate public facility) ordinances are often used in conjunction with impact fees. The first step is to determine the city's existing level of service (LOS}. An ACF ordinance is typically developed in conjunction with a community's Comprehensive Land Use Plan, which specifies the community's current and desired LOS. Examples are: park acreage/thousand residents; fire incident response time; traffic level of service "C", etc. An ACF ordinance codifies what the city's current level of service is and what the desired level of service is. Once adopted, the ACF ordinance can guide the city's CIP, and from there, the impact fee schedule. ACF ordinances help identify the growth-related portion of the CIP, and ensure equitable impact fee calculations. This will make the GRUM analysis easier. It is not necessary to have an ACF ordinance to adopt impact fees. However, doing it makes the impact fee study easier. Some communities that are not interested in impact fees because they are concerned about the impact on economic development or the hostility of the development community will rely on negotiated exactions. An ACF ordinance can be used to provide guidelines for the negotiations. It is one-half step towards having an impact fee. It mandates that to obtain zoning, annexation or redevelopment approval, the developer has to bring the city to the ACF level. In place of the impact fee is exactions --the developer has to build the road, donate the land, or buy the municipality a fire engine. In those situations, elected officials sometimes deny land use applications because the ACF was not met. Chandler, Colorado has denied an annexation application from a pocket infill area of the county unless they provide a fire engine to maintain the ACF level. Longmont, Colorado has an ACF ordinance that says they will not entertain any rezonings. They have a lot of industrial space that developers are trying to rezone to master plan residential subdivisions. City Council has stipulated that unless it can be demonstrated that the rezoning will not negatively impact the schools in term of classroom size, the application will be denied. Salt Lake City required that enclaves of Salt Lake County requesting annexation determine how to finance the sidewalks that would be required for those areas as a condition of annexation. An ACF ordinance would alleviate some of the pressure on staff to achieve the city's exactions, as the negotiation expectations are codified. Ms. Salay stated that the school district and city are two separate political entities. What is the process for achieving an impact fee on behalf of a school district? Mr. Pippin responded that in most cases where he has seen an ACF ordinance apply to schools or the local government collect impact fees on behalf of the school district, the school district initiates the request to the municipality. Because impact fees are assessed at the time of the building permit application, an IGA (intergovernmental Dublin City Council Study Session Monday, May 8, 2006 Page 14 agreement) is necessary. School superintendents may attend Planning and Zoning Commission meetings to request that the City not approve the application for a particular land use because the school district cannot accommodate more students. The alternatives discussed tonight would be a proactive alternative to that. Ms. Salay responded that the school district's position in Dublin seems to be that whatever zonings are approved by the City, they have to deal with the outcome. Mr. Pippin noted that Ohio school districts are more empowered than those in many other states. Mr. Reiner inquired if there would be a conflict between a City's appearance code, requiring certain aesthetics of development plans, and impact fees - or would those be two separate issues? Mr. Pippin responded that it would be two separate issues. An appearance code is typically part of the subdivision regulations, not dissimilar from requirements for fire hydrants and street lighting. For example, Scottsdale, Arizona requires that tiles be used for roofs. Ms. Salay inquired if impact fees could be limited to a certain section of the community. Mr. Pippin responded that they can. Salt Lake City is almost entirely built out except for its northwest quadrant, where there is swamp and mud flat. However, that land is developable, and there are plans in place to drain the water from the northwest quadrant, bring in fill, and create a huge master plan subdivision. Street fee impact fees were designed just to pay for the construction of new streets in the northwest quadrant. This is very common and is also allowed by the Ohio Revised Code. City Council could determine that there is an existing part of Dublin that is currently well served by police, fire and parks, and the current level of service is in balance. Impact fees could be assessed for the new growth area to maintain that level. The issue can be less simple when there is redevelopment or when there are "onesies" and "twosies" infill lots in existing areas. Does the City want to exempt them, and is there a basis for doing so? It is necessary to ensure equity for infill development and redevelopment. Ms. Salay stated that there is currently a law that requires cities to account for their entire infrastructure. How much accounting preparation would be involved for Dublin to do something like this, or would it be a fairly simple matter? Mr. Pippin responded that Ms. Grigsby could respond to that in regard to Dublin. However, the law that is referred to, GASB 34, has actually helped pave the way for the calculation of impact fees. When local governments "have a good handle" on their capital assets, that step is easier. Ms. Grigsby concurred. GASB 34 has required the City to specifically account for things the last few years that had not been previously required -roadways and stormwater infrastructure. Those items were previously included in another account Dublin City Council Study Session Monday, May 8, 2006 Page 15 group. The City's records account for land owned and all the development on any of the parks and roadways that has occurred. The City's records are in good shape and could be utilized for this type of analysis. Mr. Keenan inquired if the balance sheet includes depreciation. Ms. Grigsby responded that the City does not use the depreciation method; the modified approach is used, which considers required maintenance. Working with Engineering, certain levels of maintenance have been established. As part of the CAFR each year, that type of evaluation occurs. Mr. Pippin noted that from the impact fee standpoint, the original or acquisition cost is not used, but the replacement value today. The price of acquiring all the parkland that Dublin owns versus the cost of replacing it today is vastly different. Impact fee math allows the replacement value of the current level of service to be used. Ms. Grigsby noted that each year for the City's insurance, the Risk Management Office uses the City's infrastructure records to calculate replacement values. Mr. Pippin responded that Risk Management is often a good source for calculation of impact fees. Mr. Reiner inquired if the cost of maintenance of the City's parkland could be used in the calculation. Mr. Pippin responded that impact fees cannot be used for that purpose. However, a large mower that has a usual life exceeding ten years could be included in capital equipment. Mr. Reiner inquired how cities with large budgets for mowing public greenspace incorporate that factor in the "quality of life" growth scenario. Mr. Pippin responded that is addressed in the fiscal impact analysis -does growth pay its own way? In this case -- are the land uses Dublin is permitting generating enough surpluses for the City to maintain that level of maintenance? Ms. Grigsby noted that Dublin is in a good position due to the level of commercial development and the fact that Dublin has a local income tax. The Community Plan looks at what the City has as a net surplus for 1,000 square foot of commercial development versus industrial development and then at the cost of a housing unit. Mr. McCash inquired if a city had an ordinance that requires the dedication of a minimum amount of parkland for every residential development, would that development then be removed from the equation. Mr. Pippin responded that it would be removed if the city preferred to continue to exact that dedication. Either the impact fee would be limited to regional parks or recreation centers or the dedication requirement would be removed from the subdivision regulations. Mr. McCash noted that including it in the impact fee would better position the City when Dublin City Council Study Session Monday, May 8, 2006 Page 16 looking at parkland that would cost $35,OOOlacre. Ms. Salay inquired if this cost is eventually passed on to the home buyer or the end user, as are all other development fees. Mr. Pippin responded that he could not answer the question in regard to Ohio, as he has not studied it empirically for Central Ohio, but he has looked at it empirically for Denver, Salt Lake City and Phoenix. All those markets were very similar. In those cases, they found that for every dollar of impact fee paid by either an individual builder or a master builder, it became athree-way incidence: {1) 60°~ of the fee impacts the seller of the land --they must accept a lower price from the developer. {2) 20% of the fee impacts the builder or developer's profit margin. Commercial construction and development is not a high margin enterprise. For publicly traded homebuilders, the average net income is 4.8%. {3) 20°~ is reflected in higher home prices or leases for tenants. The impact is certainly not dollar-for-dollar. If Dublin were to adopt a $3,000 per unit impact fee to pay for police, fire or parks, that does not mean that all new homes will subsequently cost $3,000 more. Mr. McCash inquired how many small residential developers thrive in areas where there are impact fees. Can only the large production builders survive? Mr. Pippin responded that he has not seen the composition of residential builders shift. In most communities, the small builders are doing custom work -- more expensive niches. They probably have more capacity to bear that impact on their balance sheet. In some cases, it is a joint venture between the land owner and the builder. Mrs. Boring stated that Council often hears from the developer that because of the cost of land, they cannot make a profit on a project unless Council permits a higher density or a smaller footprint, etc. Wouldn't an impact fee create more demands of the builder for higher density, etc.? Mr. Pippin stated that before the City entertains the application from a builder or developer, the City of Dublin's financial situation should be evaluated to determine if it would be hurt or benefited by development. Just because a city does not have impact fees does not mean it does not face costs. Without impact fees, if the city is not exacting everything it needs, every existing business and residence is subsidizing growth. That is an inequity and could lead to a lower level of service. Before the City entertains whether a businessman can make his pro forma work, it should address its fiduciary responsibility to hold itself harmless. Mrs. Boring stated that would be a strong argument for the ACF ordinance. Mr. Pippin responded that there are many benefits to an ACF ordinance, regardless of whether a city does impact fees. If the city continues with negotiated exactions, which many communities do, it provides the certainty that builders and developers desire. Dublin City Council Study Session Monday, May 8, 2006 Page 17 Mr. Reiner stated that he believes the primary responsibility of a City Council member is to ensure that equity and the quality of life are maintained -everything else is of less importance. He found it interesting that an impact fee does not result in a dollar-far- dollarexchange. There have been some misconceptions. Developers have indicated that impact fees would negatively impact the community. Mr. Pippin stated that impact fees can certainly affect economic development, especially large retailers or offices. A big box retail development can pay a significant impact fee. Regardless of that consequence, impact fees usually correlate with communities that are growing faster. The reason communities consider impact fees is that they are experiencing growth, and the reason they are growing is that the market favors them. It may be their physical location -- the scarcity of land around them. The market has designated growing communities as desirable. When impact fees are adopted, they permit the community to continue to offer quality of life characteristics. In the 16 years he has been doing this, he has never seen impact fees stop growth. Mr. McCash inquired if any of the communities he has designed impact fees for are similar to Dublin from the aspect that Dublin is one of several small suburbs of the greater city of Columbus. If Dublin were to adopt impact fees and the other suburbs did not, would growth likely move to another suburb? Mr. Pippin stated that in the western U.S., he has seen communities initially lose some retail. Communities try to steal retail generators from one another to increase their sales tax revenue. However, he has never seen a community that adopted impact fees lose residential development to another neighboring community without impact fees. Typically, the community that is growing is desirable, even though it has a fee. Mr. McCash inquired whether in those areas the school district boundaries were coterminous with the city boundaries, or was the school district the draw to the community? Mr. Pippin responded that is often the case, and a desirable school district will continue to drive the residential decision -- even when impact fees are enacted. Typically, the school district factor trumps other factors. Mr. McCash stated that he is concerned about the impact on the school district. Density within the City is 2.0 dwelling unitslacre; outside the City, it is 5.0 du/acre. Residential developers tend to seek areas allowing a higher density. If there is no impact fee outside the City but there is within, that could drive more residential development to other communities. The additional development within the school district would impact the school, and the additional traffic would diminish Dublin's quality of life status. However, the City would not receive impact fees to offset that. Mr. Pippin responded that the school district should have an IGA with the township as well as the City, so that the school district could collect revenue from both. Quite often Dublin City Council Study Session Monday, May 8, 2006 Page 18 when the neighboring jurisdictions see one community pass an impact fee, the other jurisdictions follow suit Mrs. Boring stated that if impact fees are adopted for the purpose of maintaining the city's current level of service and quality of life in the growth areas, then residential development should not slow down. If the City continues to provide the same quality of life that initially attracted growth to the area, it would continue to attract growth. Mr. Pippin stated that impact fees are not a planning tool, not agrowth-control tool. Those tools are the community plan, zoning, or the ACF ordinance. Some communities have said they wanted impact fees as a means to stop growth, but that is not the right tool. Impact fees are a finance tool. Usually, impact fees are adopted in the most desirable areas, and the market absorbs the slight increase. Ms. Salay inquired Ms. Grigsby's perspective on impact fees. Ms. Grigsby responded that it could be an option to evaluate. This City has already done many things that have placed it in a better financial position than mast other cities, but perhaps there would be an opportunity to finance park development or public art. Vice Mayor Lecklider stated that the Law Director has previously noted that the City's required parkland dedication is in essence a type of impact fee. Wouldn't that need to sacrificed? Mr. Pippin responded that it would not need to be sacrificed. The parkland dedication requirement could be left in place, and the impact fee could be based upon the improvements to the parks and the recreation center, or the City could eliminate the parkland dedication and incorporate that into the impact fee. The way most communities make that distinction is by defining parkland as: (1 }neighborhood parks, pocket parks, and tot lots -these are within the boundaries of the subdivision, and will be exacted as part of the land use requirements; and (2} regional park facilities such as trails, sports fields, and the recreation center -these serve more than one subdivision so the impact fee could be utilized. Mr. Pippin stated that there is one downside to impact fees, with which Ms. Grigsby would probably have concerns. Impact fees obligate a City to complete its CIP. In regard to the GRUM determination, there are many projects that are mixed. The City may be repaving atwo-lane road, while also expanding it to four lanes. Part of that project would be eligible for impact fee financing and part would not. The General Fund, band money, or other must finance the remainder of the project. That places the burden of a commitment on the City's ongoing finances. The City cannot just use the impact fees to pay for the CIP; it would mean overcharging new development. It does not necessarily mean that every year Council must pass an ordinance to move five percent of the General Fund to the Capital Improvements Fund, but the test should be made: Is the City making good on its commitment to transfer general taxes to capital Dublin City Council Study Session Monday, May 8, 2006 Page 19 projects to be combined with impact fees? If that does not occur, developers would have a legitimate grievance that the capital spending of the City is done at their expense. Mr. McCash inquired if it would limit the City's current ability to manipulate its CIP on a year-to-year basis should an opportunity such as the Innovation Center come along. Ms. Salay stated that Council recently deferred some large CIP projects to take advantage of the Innovation Center opportunity -- the municipal building and the Tuttle Crossing Boulevard, which Council does not want to reschedule any time soon. If Council had collected an impact fee, would it have been committed to proceeding as originally scheduled? Mr. Pippin responded that it would become a legal question. If impact fees were predicated on building a municipal building -total funds to be part impact fee, part General Fund, and Council then decided not to build it, there would be two ways to resolve the issue: {1) spend the revenue on like facilities to give the same level of service, or {2} adjust the impact fee the next time the CIP is revised. In his opinion, the money would not need to be escrowed and refunded. Mr. McCash clarified that the project was scheduled more than five years out when Council deferred it. Mr. Pippin responded that in year two, after Council decided to defer it, the impact fees should be revised to reflect the fact that the project was no longer scheduled. Mayor Chinnici-Zuercher thanked Mr. Pippin for an informative presentation on a subject he is very knowledgeable about. It would seem the next step would be for Ms. Grigsby and Ms. Readier to brainstorm on the subject in view of how the City currently operates, the flexibility that is very important to the way Council does business, and how an impact fee would impact that. Council would not want to eliminate that flexibility. It has enabled the City to thrive over the last 20 years, responding to unanticipated opportunities when they occurred. It would be a legal question of whether an impact fee could be constructed to preserve that flexibility. Personally, she is seeking to understand why the City would want to consider impact fees. She understands the academic justification, but she does not see a reason for Dublin to move that direction at this point in time. Mayor Chinnici-Zuercher inquired if there were further questions or comments. Ms. Salay stated that as the Community Plan is updated, it should consider how the land use component and the fiscal component fit together and the potential use of the impact fee. Mrs. Boring stated that at this time, she would be more interested in pursuing an ACF ordinance than an impact fee to guarantee a level of service. Dublin City Council Study Session Monday, May 8, 2006 Page 20 The meeting was adjourned at 9:00 p.m. Clerk of Council