Impact Fees — Local Government Do’s and Don’ts
Photo of modern fire station courtesy of the author
The cost of providing infrastructure, facilities, and services can be expensive and local governments are always on the lookout for useful revenue sources. Impact fees are one financing option that can be used to help pay for new capital facilities needed to serve new development, but there are many steps to be taken by a community before impact fees can be collected. This blog is meant to provide an overview of those steps.
What Are Impact Fees?
Impact fees are one-time charges assessed by a local government against a new development project to help pay for new or expanded public facilities that will directly address the increased demand created by that development. They cannot be used to pay for operations and maintenance (O&M) costs related to those facilities or for background studies that would identify the need for such facilities.
Washington State’s Growth Management Act, or GMA, authorizes counties, cities, and towns planning under the GMA to impose impact fees (RCW 82.02.090 and RCW 82.02.050-.110) for the following types of public facilities:
- Public streets and roads;
- Publicly owned parks, open space, and recreation facilities;
- School facilities; and
- Fire protection facilities.
The collection and use of impact fees is voluntary, with local governments able to select as many or as few from the four categories listed above as is locally desired.
In Washington State impact fee programs are most commonly used to collect revenues for transportation-related projects (although MRSC also receives a fair number of questions about school impact fees). Local governments, however, are increasingly looking into how impact fees can be applied to other types of capital projects.
There is an interesting “twist” regarding the statutory authority for transportation impact fees. A separate state law (the Local Transportation Act, chapter 39.92 RCW) was enacted two years prior to passage of the GMA. This state law authorizes all counties, cities, towns, and transportation benefit districts across the state, including those not planning under the GMA, to impose transportation impact fees. While this option appears to be less common, some jurisdictions may have adopted transportation impact fees under chapter 39.92 RCW. For example, Lacey Municipal Code Ch. 14.21 imposes transportation mitigation fees under this statute.
Impact Fees Do's and Don'ts
Here are a few key principles about the use of impact fees authorized by the GMA.
For Capital Facilities Only: Impact fees may only be collected to pay for public capital facilities and not for O&M costs. For example, impact fees could be used to help pay for a new school building but not to fund teacher salaries or classroom supplies.
Only for Improvements Reasonably Related to Impacts Caused by New Development: Impact fees may only be used to pay for new or expanded facilities needed as a result of a specific new development and may not be used to correct existing deficiencies. For example, a school district may use the impact fees a local government collects from a residential development to pay for construction of new classrooms at a specific school(s) to accommodate the increased enrollment expected from that specific housing development. In addition, any capital facility improvements using impact fees would need to “reasonably benefit” the new development paying those fees. Using the previous example, school impact fees are typically not assessed on new commercial development, because such development literally does not “impact” school capacity and would not directly benefit from any school improvements.
Need to Use More than One Funding Source: Local governments must have additional funding sources for a capital project and may not rely solely on impact fees to fund the improvements (RCW 82.050.050). While state law does not specify the split between impact fee and non-impact fee funds, the cost of an eligible capital project or improvement cannot be 100% paid for with impact fee monies. It should also be noted that dedication in lieu of fees or credit can occur when developers build the capital facility themselves.
Must be Included in Your Comprehensive Plan: Impact fees may be used only for capital facilities that are addressed within a Comprehensive Plan’s capital facilities element that has been adopted by a local government under the GMA (RCW 82.02.050(4) and RCW 82.02.090(7)).
Pay Attention to the Deadline for Spending Collected Funds: Impact fees must be expended or encumbered within 10 years of receipt unless there is a written finding of an “extraordinary and compelling reason” for fees to be held longer (RCW 82.02.070). Unused fees must be refunded to the current owner of the property on which an impact fee has been paid (RCW 82.02.080).
Impact Fee Reductions or Waivers
While there are benefits to local governments’ coffers, impact fees do add to the cost of new development. Impact fees are usually paid by developers and builders, but those additional costs are ultimately passed onto the “consumers” of the newly developed property (in the form of a higher purchase price or rental rate). For communities wanting to encourage designated types of new development, the question about whether to reduce or waive impact fees comes up.
The most direct way to reduce or waive impact fees is to provide information showing that the impacts caused by a desired type of development will not place a significant burden on the existing public facilities covered by your impact fee program. For example, if local school enrollment statistics can show that the average Accessory Dwelling Unit (ADU) household has fewer school-aged children than the average single-family household, then a lower impact fee amount can be imposed for a new ADU.
However, state law does allow for another option to provide exemptions, waivers, or reductions for the following developments:
- Low-income housing as defined in RCW 82.02.060(2);
- Early learning facilities (as defined in RCW 43.31.565) with exempted fees being paid following RCW 82.02.060(2), fee amounts restricted by RCW 82.02.060(3), or partial exemptions based on standards outlined in RCW 82.02.060(4);
- Development activities with “broad public purposes” (RCW 82.02.060); and
- Construction or expansion of a building that is not defined as a “development activity,” such as buildings constructed by a regional transit authority (defined in RCW 81.112) or those constructed as emergency homeless or domestic violence shelters as defined in RCW 70.123.020 and RCW 82.02.090(1)(b).
Please note that while reductions or waivers of impact fees for low-income housing, early learning facilities, and developments with a “broad public purpose” are permitted, impact fees for such development activity must still be paid for from public funds other than impact fee accounts, per RCW 82.02.060(2).
State law (RCW 82.02.060(4)) does allow local governments to grant a partial exemption without requiring those exempted impact fees be paid by another public source under certain circumstances, such as for early learning facilities or when a developer builds a certain percentage of affordable units and records a covenant that the property will be permanently used for low-income housing. A full waiver for low-income housing will require that only 20% of the total impact fee amount would need to be paid from public funds, while a full exemption without a payback requirement may be granted for early learning facilities if certain conditions are met.
Since use of impact fees is a voluntary option, a local government can always make the decision to not enact an impact fee program, but this may mean that development permit approval is delayed until the local government can otherwise fund the needed improvements to support such new development.
Impact fees are a potential revenue source available in Washington State to help pay for infrastructure costs caused by new development.
There are some complexities related to setting up an impact fee program, including those described above, which is why some eligible local governments have chosen not to impose them. If the local decision is made to establish or expand an impact fee system, however, it is important that the necessary steps are taken and that locally adopted impact fees are imposed fairly and in accordance with state law.
This blog is meant to provide a summary about impact fees. More details about calculating, collecting, and using impact fees may be found on MRSC's Impact Fee webpage.
MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.