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Home My WebLink About33 - 05-07-2007_Water Impact Fee Draft Report Transmittal_33 Report compiled on May 2, 2007 Commission Memorandum REPORT TO: Honorable Mayor and City Commission FROM: Andrew Epple, Planning Director Chris Kukulski, City Manager SUBJECT: Transmittal of Water Impact Fee Study Update MEETING DATE: Monday, May 14, 2007 RECOMMENDATION: None at this time, recommendation will be provided with the May 14, 2007 packets BACKGROUND: The City adopted an impact fee program in 1996. The Legislature passed a law specifically authorizing impact fees and establishing criteria and guidelines for their development and utilization. The City has recently completed and adopted a Wastewater Facility Plan examining the current and future needs for sanitary sewer infrastructure. The City Commission directed an update to the impact fee studies to take into account changed conditions since the initial program adoption. A public hearing has been scheduled and advertised for May 14, 2007 to consider the draft fee study and the recommendations forwarded by the Impact Fee Advisory Committee (IFAC). The IFAC will be deciding upon their recommendation on May 3, 2007. The draft document is being forwarded to you one week early so the Commission may have time to consider the issue before the public hearing. The recommendations, minutes, and public comment will be forwarded to you in the May 14th packet. UNRESOLVED ISSUES: None with this transmittal, items may be identified with the May 14, 2007 packet. FISCAL EFFECTS: Impact fees affect the City’s ability to finance infrastructure and continue to support growth and public safety. ALTERNATIVES: As suggested by the City Commission. CONTACT: Please feel free to email Chris Saunders at csaunders@bozeman.net if you have questions prior to the public hearing on May 14th. Respectfully submitted, Andrew Epple, Planning Director Chris Kukulski, City Manager Attachments: Revised Draft Water Impact Fee Study Special calculation option for large size meters 505 City of Bozeman Revised Draft Report Impact Fees for the Water System April 2007 Prepared by HDR Engineering, Inc. 506 April 18, 2007 Mr. Chris Saunders City of Bozeman 20 E Olive Street Bozeman, MT 59715 Subject: Impact Fees for the Water System Dear Mr. Saunders: HDR Engineering Inc. was retained by the City of Bozeman (City) to develop recommended impact fees for the water and wastewater systems for new development. While the City currently has impact fees or system development charges for the water and wastewater systems, these fees need to be updated and assure compliance with Montana law. To that end, please find attached our draft report detailing the findings, conclusions and recommendations of the review undertaken by HDR Engineering for the determination of cost based impact fee for the City’s water system. Please review this draft report. Any appropriate comments and changes will be incorporated into the final report. HDR Engineering, Inc. recommends that the City have the charges set forth in this report reviewed by its legal counsel to assure compliance with Montana law. We appreciate the opportunity to provide this technical report to the City. Should you have any questions about this report, please call. It has been a pleasure working with you on this project. We look forward to the opportunity to continue to provide assistance to the City. Sincerely yours, HDR ENGINEERING INC. Randall P. Goff Project Principal Attachments 507 Table of Contents i City of Bozeman, Montana Contents 1 Introduction and Overview of the Study 1.1 Introduction..........................................................................................................1-1 1.2 Overview of the Study.........................................................................................1-1 1.3 Disclaimer............................................................................................................1-1 1.4 Summary..............................................................................................................1-2 2 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2.1 Introduction..........................................................................................................2-1 2.2 Defining Impact Fees...........................................................................................2-1 2.3 Historical Perspective..........................................................................................2-1 2.4 Impact Fees and “Generally Accepted” Practices ...............................................2-3 2.5 Financial Objectives of Impact Fees....................................................................2-5 2.6 Relationship of Impact Fees and New Construction Activity .............................2-6 2.7 Summary..............................................................................................................2-7 3 Overview of Impact Fee Methodologies 3.1 Introduction..........................................................................................................3-1 3.2 Impact Fee Criteria ..............................................................................................3-1 3.3 Overview of the Impact Fee Methodology..........................................................3-2 3.4 Summary..............................................................................................................3-4 4 Legal Considerations in Establishing Impact Fees for the City 4.1 Introduction..........................................................................................................4-1 4.2 Requirements under Montana Law......................................................................4-1 4.3 Summary..............................................................................................................4-3 5 Determination of the City Water Impact Fees 5.1 Introduction..........................................................................................................5-1 5.2 Overview of the City’s Water System.................................................................5-1 5.3 Present Water Impact Fees...................................................................................5-1 5.4 Calculation of the City’s Water Impact Fees.......................................................5-2 5.5 Net Allowable Water Impact Fee ........................................................................5-5 5.6 Key Assumptions.................................................................................................5-6 5.7 Implementation of the Impact Fees......................................................................5-6 5.8 Consultant Recommendation...............................................................................5-7 5.9 Summary..............................................................................................................5-7 508 Table of Contents ii City of Bozeman, Montana Tables 5-1 Present Water Impact Fees...................................................................................5-1 5-2 Water System Planning Criteria...........................................................................5-2 5-3 Water System Equivalent Residential Units........................................................5-3 5-4 Allowable Water Impact Fees..............................................................................5-5 5-5 Allowable Water System Impact Fees.................................................................5-6 Figures 2-1 Overview of the Three-Interrelated Analyses to Review Rates...........................2-3 2-2 Overview of the “Cash-Basis” Approach to Establishing Revenue Requirements........................................................................................2-4 Appendix A – Water Impact Fees A-1 Development of Level of Service and EDUs A-2 Source of Supply A-3 Distribution Storage A-4 Transmission/Distribution Mains A-5 Debt Service Credit A-6 Summary Appendix B – Montana Code for Impact Fees 509 Introduction and Overview of the Study 1-1 City of Bozeman, Montana “The objective of this report is to properly place in context the purpose of impact fees, and to determine cost based impact fees for the water system that complies with Montana law.” Section 1 Introduction and Overview of the Study 1.1 Introduction HDR Engineering, Inc. was retained by the City of Bozeman; Montana (City) to update and develop recommended cost based impact fees for the City’s water system that comply with Montana Code 7-6-1601 to 7-6-1604. This report provides details of the development of cost based impact fees for the City’s water system. Impact fees are a one-time assessment against new development to pay for the cost of infrastructure required to provide service. Impact fees provide the means of balancing the cost requirements for new utility infrastructure between existing customers and new customers. The portion of existing plant 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 that are related to renewal and replacement of existing facilities in service. These infrastructure costs are typically included within the rates charged to the City’s customers, and are not included within the impact fee. Impact fees and rates exclude those portions of infrastructure directly related to individual development projects. By establishing cost-based impact fees, the City will assure that “growth pays for growth” and existing utility customers will be sheltered from the financial impacts of growth. The City formally adopted the policy of having beneficiaries of services pay for the services in 1983. The policy has remained in effect ever since and is reflected in many aspects of the City financial structure. 1.2 Overview of the Study This report is divided into five distinct components. The next section of the report, Section 2, provides a review of “generally accepted” utility industry practices as they relate to impact fees. At the same time, it also discusses the financial objectives of impact fees and the practices of other utilities in relation to this fee. Section 3 provides an overview of the criteria and methodologies used in the development of cost-based impact fees and Section 4 provides a summary of the legal requirements for the enactment of impact fees under Montana law. The cost based impact fee calculation for the City’s water system is provided in Section 5. The study relies upon the adopted water facility plan and other standards established by the City. These additional materials are cited to but not directly included in this study. 510 Introduction and Overview of the Study 1-2 City of Bozeman, Montana 1.3 Disclaimer HDR Engineering, Inc., in its determination of impact fees presented in this report, has used “generally accepted” engineering, accounting and ratemaking principles. This should not be construed as a legal opinion with respect to Montana law. Prior to adoption of this study, the City conducted a legal analysis of its impact fee program, including this study, and concluded that the program conforms to all legal requirements. 1.4 Summary This section of the report has provided an overview of the report developed for the City concerning water impact fees. The next section of the report will discuss the “generally accepted” utility industry practices as they relate to impact fees. 511 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-1 City of Bozeman, Montana “Impact fees are capital recovery fees that are generally established as one-time charges assessed against developers or new water customers as a way to recover a part or all of the cost of system capacity constructed for their use. Section 2 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2.1 Introduction An important starting point in discussing the City’s continued implementation of water impact fees is an understanding of the purpose and concept of impact fees and the financial objective of those fees. This section of the report will discuss the concept of impact fees and the “generally accepted” practices of the industry. 2.2 Defining Impact Fees One must first define an “impact fee” before beginning an assessment and review of the fees. Impact fees are also often called system development charges (SDC’s), capacity charges, buy-in fees, facility expansion charges, plant investment fees, etc. Regardless of the name applied to the fee, the concept is still the same. Simply stated, impact fees “are capital recovery fees that are generally established as one-time charges assessed against developers or new water customers as a way to recover a part or all of the cost of system capacity constructed for their use. Their application has generally occurred in areas that are experiencing extensive new residential and/or commercial development.”1 The main objective of an impact fee is to assess against the benefiting party, their proportionate share of the cost of infrastructure required to provide them service. Stated another way, impact fees imply that new development creates new or additional costs on the system, and the impact fee assesses that cost in an equitable manner to those customers creating the additional cost. 1 George A. Raftelis, 2nd Edition, Comprehensive Guide to Water and Wastewater Finance and Pricing (Boca Raton: Lewis Publishers, 1993), p. 73. 512 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-2 City of Bozeman, Montana 2.3 Historical Perspective Governments are established to protect the health and safety of the public. Provision of infrastructure, such as wastewater collection and treatment systems, directly advance this purpose by avoiding disease. Due to its importance, provision of adequate infrastructure to deliver adequate service has long been a concern of local, state, and federal governments. Historically, the financing of infrastructure was typically paid for via long-term debt and “pay as you go” rates. However, over the last twenty years, the use of impact fees as a method of financing growth and infrastructure has risen sharply. According to recent national surveys, about 60 percent of all cities with over 25,000 residents and almost 40 percent of all metropolitan counties use some form of impact fees. In California and Florida, the extent of cities and counties using impact fees is at 90 and 83 percent, respectively. Since1987, 26 states have passed impact fee enabling acts. Most of these states are located in the western United States, Great Lakes region, and on the Atlantic coast. Unfortunately, many of these acts are as prohibitive as they are permissive.2 At this time, the State of Montana has very specific legislation related to impact fees. This specific legislation regarding the fees provides the City specific authority to establish and collect impact fees. This authority is provided in Montana Code Section 7-6-1601 to 7-6- 1604. While many utility managers viewed impact fees as an important and alternative source of funding for new capital construction, these fees were also being rationalized from a number of different perspectives. Among these were the following:3 To shift the fiscal burdens from growth from existing development to new development To synchronize the construction of new or expanded facility capacity with the arrival of new development To ensure that new development decisions include broad and realistic cost information. To respond to locally vocal anti-growth sentiments Each of these different perspectives is discussed in more detail below. In addition, impact fees allow the continued ability to develop land by avoiding failed or insufficient infrastructure that constrains growth. Historically, existing development was often subsidized by federal or state resources. As an example, in the early 1970’s, many wastewater treatment plants in the U.S. were 90% grant funded by the Environmental Protection Agency (EPA). Today, grants are nearly extinct, replaced instead by low-interest state revolving fund (SRF) loans. City’s ability to issue bonds are constrained by state law and voter initiatives have limited the ability to increase taxes. Citizens of communities have also expressed increasing reluctance to increase their taxes and fees to provide benefits primarily to others. Therefore, as existing customers were being 2 www.impactfees.com. 3 Adapted from: Arthur C. Nelson, System Development Charges for Water, Wastewater and Stormwater Facilities (Boca Raton: Lewis Publishers, 1995) p. 6-7. 513 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-3 City of Bozeman, Montana impacted by the cost of growth, local communities searched for methods to help minimize rate and the impacts of the cost of growth. Unchecked growth and inefficient low density development is very costly on a per unit basis. In response to this dilemma, many legislative bodies created urban growth boundaries. At the same time, utilities moved towards impact fee and extension policies that assist in managing system growth in an orderly and coordinated manner. As a result, improved planning and cost-based fees have helped utilities provide necessary services, manage the costs of growth, while stabilizing rates to existing customers. Establishing the price of a commodity equal to its cost is a basic economic and market principle. In theory, consumers of a service will make “optimal” consumption decisions when the price of the commodity is set equal to its cost. By establishing cost-based impact fees, developers should be in a position to make better and more rational decisions concerning new development. At the same time, proper pricing of impact fees also encourages “right sizing” of facilities to serve new development. In other words, given the proper price signal, the developer will properly size their service facilities to meet their realistic needs (e.g. installing a ¾-inch meter and service pipeline versus a 2" meter and service pipeline). Within all communities, there is a segment of the population that wishes to maintain the status quo. Concerns over the possibility of increased taxes and service rates and decreased quality of services due to new development can be a material factor in opposition to growth. Adoption of impact fees, even if only partially cost-based, helps to constrain cost impacts and loss of service quality to existing system users. Accountability, efficiency, and transparency of government has received greater emphasis over the past two decades. The process of developing and utilizing impact fees is heavily focused on clear identification of future demand, current conditions, and equitable assignment of costs. The use of impact fees helps coordinate provision of service to needed locations in a timely manner. Impact fees therefore, when use correctly, support accountability, efficiency, and transparency in government. In summary, the use of impact fees has changed over time, as historical funding sources such as grants have been reduced or eliminated. In response, many communities have moved towards adoption of cost-based impact fees, particularly in areas of high growth. 2.4 Impact Fees and “Generally Accepted” Practices Impact fees are one input into the rate setting process. Therefore, it is important to understand how, within the context of “generally accepted” utility industry practices, impact fees may be used. In conducting a comprehensive rate study, three interrelated analyses are typically conducted. They are a revenue requirement analysis, cost of service analysis and rate design analysis. Figure 2-1 provides an overview of each of these analyses. 514 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-4 City of Bozeman, Montana Figure 2-1 Overview of the Three-Interrelated Analyses to Review Rates Impact fees are factored into the revenue requirement analysis. The revenue requirement analysis for most municipal utilities is referred to as the “cash basis” approach. Figure 2-2, shown below, provides an overview of the key components of the “cash basis” approach to developing revenue requirements. Revenue Requirement Analysis Compares the sources of funds (revenues) to the expenses of the utility to determine the overall adjustment to rates Cost of Service Analysis Allocates the total revenue requirements to the various customer classes of service in a “fair and equitable” manner Rate Design Analysis Consider both the level and the structure of the rate design to collect the appropriate and targeted level of revenue 515 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-5 City of Bozeman, Montana Figure 2-2 Overview of the “Cash-Basis” Approach to Establishing Revenue Requirements As can be seen in Figure 2-2, there are two elements to establishing the “cash basis” revenue requirements. The top or blue box shows the four basic cost components that are included within the “cash basis” revenue requirements. In contrast, the bottom or yellow box illustrates the various methods used to fund capital infrastructure projects. It should be noted in Figure 2-2 that impact fees may be used (applied) in two different ways, each having a different impact upon the utility’s revenue requirements and rates. The first possible use of impact fees is shown in the bottom or yellow box. In that particular case, the impact fees are applied directly against growth or expansion related capital projects. The effect of using the funds in this manner is that it helps to minimize long-term borrowing. For each dollar of impact fees applied in this manner, one less dollar of long-term borrowing and associated interest costs is required. + Operation and Maintenance Expenses + Taxes / Transfer Payments + Debt Service (Net of Applied Impact Fees) + Capital Improvements Funded From Rates = Total Revenue Requirements – Miscellaneous Revenues = Total Required From Rates Total Capital Improvement Projects Less: Outside Funding Sources – Capital Reserves – Impact Fees – Grants – Long-Term Debt – Other Capital Funding Sources = Total Capital Improvements Funded From Rates i + term 516 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-6 City of Bozeman, Montana “An impact fee represents a fee for service payable by all users creating additional demand on the facility. To understand this perspective, one must view new development as creating the need for new or expanded facilities.” The other potential use of impact fees is to apply the fees against growth-related debt service. As shown in Figure 2-2, debt service paid by rates is shown as net of any impact fees revenues used to pay debt service. In contrast to applying impact fees directly against the capital project, in this particular case, for every dollar applied in this manner, there is a corresponding dollar decrease in revenue requirements and the resulting rates. This is a very effective method to help minimize rates, but even better at matching the cost of growth to the way in which customer growth occurs. In other words, a utility may build or expand a facility with sufficient capacity to handle growth over the next ten to twenty years. That growth doesn’t occur in the first year, but rather, trickles in over a number of years. Therefore, applying the impact fees against the debt service associated with the project creates a better matching of the cost incurrence (debt payments) to the actual customer growth. 2.5 Financial Objectives of Impact Fees An impact fee represents a fee for service payable by all users creating additional demand on the facility. To understand this perspective, one must view new development as creating the need for new or expanded facilities. As a result, without payment of impact fees, the City would have insufficient revenues to provide the facilities, and therefore the community is unable to accommodate new development. Protection of public safety requires the provision of public infrastructure; therefore the City has adopted regulations which require its installation so that adequate service can be delivered. In some circumstances it is more effective and efficient to collect money payments. For example, rather than requiring each development to try to build a tiny part of a major water pipe Impact fees help the City achieve a number of different financial objectives. These objectives include financial equity between customers; maintaining cost effective services, avoiding costly debt, and protecting public safety. One key financial/rate objective that is achieved from impact fees is equity. Equity is achieved in two different ways. First, an impact fee establishes equity between existing (old) customers and new customers. For example, assume that a water treatment plant is expanded by 5 million gallons per day (MGD) to accommodate growth and the facility is financed over a 20-year period. Without an impact fee, new customers connect to the system and pay for the debt service on the facility via their rates. The customer that connects to the system in year one will contribute to the cost of that facility for 20 years. In contrast, the person who connects in year 10 will only pay for debt service on the facility for ten years, even though the “value” of the capacity was the same for the person connecting in year 1 or year 10. Impact fees create equity within the system by addressing the issue of timing and the “value” of the assets and the “value” of the capacity. The second way in which impact fees help to create equity is after a facility is paid for. Continuing with the example above, after the debt service is fully paid off in year 20, and 517 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-7 City of Bozeman, Montana Most commonly, impact fees are adopted in high growth areas where infrastructure expansion has strained existing financial resources. Philosophically, many utilities desire to have a policy of “growth paying for growth.” assuming that capacity is still available, a new customer connecting to the system would “in theory” receive their capacity at zero cost, because the debt service is paid in full. All the existing customers connected to the system, over the past twenty years, paid for that customer’s capacity. Therefore, an impact fee is also a form of a financial reimbursement to existing ratepayers who paid for those facilities in advance of the new customer connecting to the system. Based upon the above example, impact fees also have an equity perspective associated with the rate setting process. That is, impact fees are a form of “system buy-in.” A properly established impact fee implies that a new customer connecting to the system has bought into the system at its current cost. Therefore, from a rate setting perspective the utility does not need to have rates for “old” and “new” customers. Again, existing customers have been equitably reimbursed for their past investments. Even with the above discussion, not all communities have impact fees. Most commonly, impact fees are adopted in high growth areas where infrastructure expansion has strained existing financial resources. Philosophically, many utilities desire to have a policy of “growth paying for growth.” Impact fees comport with that philosophy, and it is achieved by applying the impact fees either directly against the capital cost of the expansion facilities or against the debt service associated with it. 2.6 Relationship of Impact Fees and New Construction Activity There are a number of misconceptions surrounding impact fees. In a very broad sense, some may argue that impact fees are bad for economic development. These arguments center around two issues. These are as follows: Development will occur on those parcels with lower or non-existent impact fees. Impact fees raise the cost of doing business and hinder development Of the research conducted on these topics, just the opposite has been found. Provided below is a brief explanation of each. Developers look at many factors before a parcel is developed. One misconception concerns the selection of parcels for development and whether impact fees are applied to the land. “The argument goes that if a developer is choosing between two parcels of land on which to build—where the first parcel is inside a city where SDC’s (System Development Charge - impact fees) are charged and the second is just outside where lower or no SDC’s (impact fees) are charged—the developer will choose the second parcel. The trouble is this means that the owner of the first parcel does not make a sale. The 518 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-8 City of Bozeman, Montana “As can be seen, at least in the opinion of Nelson, impact fees do not hinder growth, but in fact may help to spur growth.” landowner must lower the land price to offset the fee in order to make a sale. However, if the landowner does not lower the price, this indicates that the value of future development may be higher on that parcel. Thus, be wary of developers who claim they will choose the second parcel. Chances are they would not have chosen the first parcel anyway. In the meantime, the land market will be holding the first parcel available for higher value development. In effect what might look like a loss in the short term may be a much higher level of development in the long-term.”4 The other argument and misconception that one commonly hears about impact fees is that they are bad for economic development. The argument against this position is as follows: “The argument goes that because SDC’s (impact fees) raise the price of doing business, they frustrate economic development. However, just the opposite is really true. First, remember that SDC’s (impact fees) will be offset by reduced land prices and by enabling the community to more easily expand the supply of buildable land relative to demand. Now, consider what economic development really looks for: skilled labor, access to markets, and land with adequate infrastructure. Competitiveness for economic development will be stimulated by the new or expanded infrastructure paid in part by SDC’s (impact fees). Besides, local governments retain the option to waive SDC’s (impact fees) for specific kinds of economic development, such as development locating in enterprise zones. In the competition for certain kinds of development, it will be able to show developers the dollar value of SDC’s (impact fees) waived as a solid demonstration of the local government’s commitment to such development.”5 As can be seen, at least in the opinion of Nelson, availability charges do not hinder growth, but in fact may help to spur growth. It must be remembered that an important concept associated with impact fees is that the fees are required to develop infrastructure concurrently with or in advance of the actual development. From the developer’s perspective, absent impact fees (i.e. a moratorium on new connections) no new development can occur. Therefore, developers are generally supportive of equitable cost-based impact fees, particularly when it provides available capacity and opportunities for development. 4 Nelson. “System Development Charges for Water, Wastewater and Stormwater Facilities” P. 55. 5 Nelson, “System Development Charges for Water, Wastewater and Stormwater Facilities” P. 56. 519 Overview of Impact Fees and “Generally Accepted” Utility Industry Practices 2-9 City of Bozeman, Montana 2.7 Summary This section of the report has provided an overview of the financial objectives associated with impact fees and some of the issues surrounding them. This section should have provided a basic understanding of the fees such that when the City is ready to have a policy discussion concerning the continued implementation of impact fees and the imposition of new impact fees, they can be placed in proper perspective. The next section of the report will provide an overview of methodologies for the imposition of impact fees. 520 Overview of Impact Fee Methodologies 3-1 City of Bozeman, Montana “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” or logical connection between the amount of infrastructure necessary to provide service and the charge to the customer.” Section 3 Overview of Impact Fee Methodologies 3.1 Introduction An important starting point in establishing impact fees is to have a basic understanding of the purpose of these charges, along with criteria and general methodology that is used to establish cost-based impact fees. Presented in the section of the report is an overview of impact fees criteria and general methodologies that are used to develop cost-based fees. 3.2 Impact fee Criteria In the determination and establishment of the impact fees, a number of different criteria are often utilized. The criteria often used by utilities to establish impact fees are as follows: Customer understanding System planning criteria Financing criteria, and State/local laws The component of customer understanding implies that the charge is easy to understand. This criterion has implications on the way that the fee is implemented, administered and assessed to the customer. Generally, for a water system, the fee is based on the size (capacity) of the meter. This makes it easy for the customer to understand the level of fee based on the size of a meter required to provide service. In some instances, larger meter sizes are calculated based on actual usage. While this is more complicated, it applies to very few customers and generally more sophisticated industrial customers. 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. The use of system planning criteria is one of the more important aspects in the determination of impact fees. System planning criteria provides the “rational nexus” or logical connection between the amount of infrastructure necessary to provide service and the charge to the customer. The rational nexus test requires that there be a connection (nexus) established between new development and the existing or expanded facilities required to accommodate new development; and appropriate apportionment of the cost to the new development in relation to benefits reasonably received. An example using system-planning criteria is the determination that a single-family residential customer requires 232 gallons of water distribution storage. The impact fee methodology then charges the customer for 232 521 Overview of Impact Fee Methodologies 3-2 City of Bozeman, Montana gallons of water distribution storage at the cost of storage. One of the driving forces behind establishing cost-based impact fees is the City’s adopted policy since 1983 that “growth pays for growth.” Therefore, 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 of the system and assures that customers are not paying twice for infrastructure – once through impact fees and again through rates. The double payment can come in through the imposition of impact fees and then the requirement to pay debt service within a customer’s rates. The financing criteria also reviews the basis under which main line extensions were provided and assures that customers are not charged for infrastructure that was provided (contributed) by developers. Many states and local communities have enacted laws which govern the calculation and imposition of impact fees. These laws must be followed in the determination of the impact fees. Most statutes require a “reasonable relationship” between the fee charged 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. As discussed above, the utilization of the planning criteria and the actual costs of construction and the planned costs of construction provide the nexus for the reasonable relationship requirement. 3.3 Overview of the Impact Fee Methodology There are “generally-accepted” methodologies that are used to establish impact fees. Within the “generally accepted” impact fee methodologies, there are a number of different steps undertaken. These steps are as follows: Determination of system planning criteria Determination of equivalent residential dwelling units (EDUs) Calculation of system component costs Determination of any credits The first step in establishing impact fees is the determination of the system planning criteria as established in the water facility plan. A common unit of capacity demand is needed in order to enable calculation of demand across many different types of users. This implies calculating the amount of water required to serve a single-family residential customer. Generally for a water system, two different criteria or common units of capacity demand are determined due to differences in planning criteria. The first common unit of capacity demand is the peak day water usage per EDU and the second is a water storage requirement per EDU. These two different common units of capacity demand are developed since a majority of the water system infrastructure is sized to meet the peak day demand, and water storage is sized to meet equalizing, emergency and fire flow requirements. Once the system planning criteria is determined, the number of EDUs able to be served by expansion of system capacity can be determined. For the water system, this is determined by utilizing the peak day water system demand and dividing it by the peak day water usage per EDU. This is a very important calculation 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 522 Overview of Impact Fee Methodologies 3-3 City of Bozeman, Montana system is designed to provide service to demands up to the year 2025, then the infrastructure costs are divided by the EDUs in 2025 or added EDUs to 2025 to determine the cost per EDU. Once the number of EDUs has been determined, a component by component (e.g. source of supply, treatment, storage, etc.) analysis is undertaken to determine the component impact fee in $ per EDU. Individual plant components are analyzed separately for the water system given that the planning criteria for the design of the various system components differ. The calculation of the component impact fee includes both historical assets and planned future assets. Historical assets can be valued in a number of different ways. These include original cost plus interest, replacement cost and depreciated replacement costs. Costs are limited to those providing capacity expansion beyond that required for minimum local service needs, such as the local distribution system. As shown in Exhibit 4, these costs are not included in the impact fee calculation. The original cost plus interest method includes the actual cost of the asset plus ten (10) years worth of interest. This calculation is done to reflect the fact that existing customers have provided for excess capacity in the system and hence need to be reimbursed for not only their initial investment, but also the “carrying cost” on that investment. The reimbursement to existing customers is accomplished by the fact that without an impact fee, rates would otherwise be higher than they would be without impact fees. The replacement cost method values existing assets based on the cost to replace the assets in today’s dollars. This is done by escalating the original cost by the Engineering News Record Construction Cost (ENR) index. The theoretical basis for the use of replacement cost is that customers are indifferent since they would have to pay replacement cost if the infrastructure was built today to serve their needs. The use of depreciated replacement cost reflects the fact that the assets have been used and hence their value to the new customer is less that the replacement cost. Caution needs to be exercised in the use of depreciated replacement cost, since the book or accounting lives used by many utilities are not reflective of the actual life of the asset and may result in the assets being undervalued. An example is using a useful life for a storage reservoir of 40 years, when in reality, with maintenance, the actual life maybe between 60 to 80 years. Each of these three (3) methods are used in the industry and the appropriate method selected by the City should be based on the method that best reflects the cost of providing capacity in the systems. HDR Engineering, Inc. recommends the use of the original cost with interest method, since it will reflect the actual cost of the City’s system. The City’s system is developed to serve future development through existing capacity and planned future capacity additions. This has been accomplished by the City building excess capacity and using borrowing to finance this capacity and the by City building future capacity. Therefore, the use of the original cost with interest method will reflect the actual costs that have been incurred or will be incurred by the City in providing capacity to new development. This is also the most commonly used method to value capacity in water and wastewater systems. This method also appears to comply with the requirements under Montana law wherein in the “actual cost” of infrastructure is required. 523 Overview of Impact Fee Methodologies 3-4 City of Bozeman, Montana Once the total cost of the capital infrastructure is determined, it is then divided by the appropriate number of equivalent dwelling units the infrastructure will serve to develop the cost per EDU for the specific plant component. After each plant component is analyzed and a cost per EDU is determined, the cost per EDU for each of the plant components is added together to determine 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 assure that customers are not paying twice − once through impact fees and again through debt service included within the water rates. A crediting mechanism is also utilized if general obligation or tax revenue has been used to finance the infrastructure. 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 $ per EDU. The general basis of this calculation for a water system is the assumption that an EDU is equivalent to 20 gpm flow rate. Larger meter sizes are then assigned fees based on the number of EDUs for a given meter size based on operating capacity. The number of EDUs per meter size is generally based on the safe operating capacity of the meter. The theory for this approach is that larger meter sizes create greater flows on the water system and hence impose additional costs on the water system. In order to maintain the necessary proportionality in cost to service benefits the impact fees need to be periodically updated. Updates should examine both increased costs of construction and changes in the number and type of infrastructure to be constructed. 3.4 Summary This section has provided a discussion of the criteria typically used in the determination of impact fees. In addition, an overview of the “generally accepted” methodology used in the calculation of the impact fees has been provided. Given this background, the next section of the report discusses any specific legal criteria that must be used by the City in the establishment of its impact fees. 524 Legal Considerations in Establishing Capacity Charges for the City 4-1 City of Bozeman, Montana “The laws for the enactment of impact fees in Montana are found in 7-6-1601 to 7-6-1604 of the Montana Code. Section 4 Legal Considerations in Establishing Impact Fees for the City 4.1 Introduction An important consideration in establishing impact fees is 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. Given that, 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 law. The discussion within this section of the report is intended to be a summary of our understanding of the relevant Montana law as it relates to establishing impact fee. It in no way constitutes a legal interpretation of Montana law by HDR Engineering, Inc. 4.2 Requirements under Montana Law In establishing impact fees, an important requirement is that they be developed and implemented in conformance with local laws. In particular, many states have established specific laws regarding the establishment, calculation and implementation of capacity fees. The main objective of most state laws is to assure that these charges are established in such a manner that they are fair, equitable and cost-based. In other cases, state legislation may have been needed to provide the legislative powers to the utility to establish the charges. In general, the power to impose exactions must either be expressly granted by statute, or be reasonably inferred from express statutory provision. Montana Subdivision statutes authorize monetary exactions in separate sections of the Montana Code. Mont. Code Ann. § 76-3-510 provides that, as a condition of subdivision approval, the City may require that a development pay or guarantee payment for part or all of the costs of extending capital facilities related to the public health and safety, including but not limited to public roads, sewer lines, water supply lines, and storm drains to a subdivision. Mont. Code Ann. § 76-3-621 requires that subdividers dedicate a portion of a proposed subdivision for use as parks or open space. Alternatively, the statute authorizes the City to require the subdivider to pay the cash equivalent to the fair market value of the required portion that would have otherwise been utilized as a park. These statutes apply only to subdivisions. The Montana Supreme Court has also recognized a city’s authority to impose development fees in other circumstances. In Lechner v. City of Billings, (Mont. 1990) 797 P.2d 191, the Court concluded that if a statutory framework authorizing the operation of an improvement or system 525 Legal Considerations in Establishing Capacity Charges for the City 4-2 City of Bozeman, Montana of improvements existed (e.g., sewer or water system), and a provision allowing for charge of a fee for the service or the improvement existed, then it is a reasonable extension of the city’s express statutory authority to accumulate fees to pay for the implementation of that authority. Cities and counties, prior to 2005, enacted impact fees through the authority of these and other statutes and powers. The Montana law enabling legislation for impact fees was enacted in 2005 via Senate Bill 185. This was comprehensive legislation specifically 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 as Appendix C. 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. 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 documentation that: (a) describes existing conditions of the facility; (b) establishes level of service standards; (c) forecasts future additional needs for service for a defined period of time; (d) identifies capital improvements necessary to meet future needs for service; (e) identifies those capital improvements needed for continued operation and maintenance of the facility; (f) makes 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; 526 Legal Considerations in Establishing Capacity Charges for the City 4-3 City of Bozeman, Montana (g) makes 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) establishes 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) establishes the methodology that the governmental entity will use to exclude operations and maintenance costs and correction of existing deficiencies from the impact fee; (j) establishes the amount of the impact fee that will be imposed for each unit of increased service demand; and (k) has a component of the budget of the governmental entity that: (i) schedules construction of public facility capital improvements to serve projected growth; (ii) projects costs of the capital improvements; (iii) 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 2 years. ….5) 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 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 527 Legal Considerations in Establishing Capacity Charges for the City 4-4 City of Bozeman, Montana 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 use of the methodology discussed in Section 3, is designed to assure that the proportional share standard is met and the impact fees are in compliance with Montana law. 4.3 Summary This section of the report has reviewed the legal basis for establishing impact fees in Montana. HDR concludes that the City has the authority to establish cost-based impact fees and the methodology used is designed to assure compliance with Montana law. 528 Determination of the City’s Water Impact Fees 5-1 City of Bozeman, Montana Section 5 Determination of the City’s Water Impact Fees 5.1 Introduction This section of the report presents the development of the water impact fee. The calculation of the water impact fee presented in this section are based on the City’s fixed asset records, future capital improvements as identified in the City's Capital Improvement Plan, and planning criteria from the facility plan entitled, City of Bozeman Water Facility Plan, prepared by Allied Engineering Services, Inc. and Robert Peccia and Associates, dated ____, 2006 (the water facility plan). To the extent that the cost and timing of future capital improvements change, then the impact fee presented in this section should be updated to reflect the cost of these adjustments. 5.2 Overview of the City’s Water System The City obtains its water supply from the Hyalite/Sourdough water treatment facility and the Lyman Creek System. The City also has three (3) distribution storage reservoirs for a total capacity of 11.3 million gallons. The capital improvement plan calls for expansion of the Hyalite/Sourdough water treatment plant to 22 MGD, permitting and design for the Sourdough Dam for raw water storage, the construction of a new 5.3 million gallon storage reservoir and for improvements to the transmission and distribution system to serve growth. 5.3 Present Water Impact Fees The City currently assesses an impact fee (currently called system connection charges) for connection to the water system. The current water impact fees are shown in Table 5-1. Table 5-1 City Bozeman, Montana Present Water System Connection Charges (Impact Fees) Meter Size EDU Factor Charge ¾" 1.00 $2,792.64 1” 2.50 6,981.59 1-1/4" 3.50 9,774.23 1-1/2" 5.00 13,963.19 2" 8.00 22,341.10 3" 16.00 44,682.20 4" 25.00 69,815.93 6" 50.00 139,631.86 8" 80.00 223,410.96 529 Determination of the City’s Water Impact Fees 5-2 City of Bozeman, Montana 5.4 Service Areas Pursuant to MCA 7-6-1602(1) (f), the following must be considered: “makes 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;” The City operates the water system as a single integrated utility. This allows all the water facilities to serve all customers. Based on these factors and a knowledge of the water system, the City determined that for the purpose of calculating and imposing Water Impact Fees, that the entire City would be treated as a single service area pursuant to MCA 7-6-1602(1) (f). 5.5 Calculation of the City’s Water Impact Fees As was discussed in Section 3, the process of calculating impact fees is based upon a four-step process. In summary form, these steps were as follows: Determination of system planning criteria Determination of equivalent dwelling units (EDU) Calculation of the impact fee for system component costs Determination of any impact fee credits Each of these areas is discussed in more detail below. 5.5.1 System Planning Criteria The number of equivalent dwelling units (EDUs) was determined based on the planning criteria from the water facility plan. The water facility plan used an equivalent dwelling unit usage of 190.99 gallons per EDU average flow which includes the actual loss factor incurred by the City and a peaking factor of 2.30 to develop a peak day flow of 439.28 gallons per day per EDU. The storage capacity was developed based on the required storage in 2025, as identified in the water facility plan, divided by the total number of EDUs in 2025. A summary of the EDU conversion factors is presented in Table 5-3. 530 Determination of the City’s Water Impact Fees 5-3 City of Bozeman, Montana Table 5-2 City of Bozeman, Montana Water System Planning Criteria Average Usage Residential 1 83.04 gallons per capita day Average Usage Residential with losses 2 93.59 gallon per capita day Number of Persons per Household 3 2.3 Average Day Flow 4 190.99 Gallons/Day/EDU Peak Day Flow 5 439.28 Gallons/Day/EDU EDU Storage Capacity 6 201.63 Gallons/EDU 1 - See page 14 Section 3.B of the Water Facility Plan. 2 - At 12.7% See page 11 Section 3.B- of the Water Facility Plan. 3 - See page 3 of Section 4.A of the Water Facility Plan. 4 - Average Usage Residential times number of persons per Household. 5 - Average Day Usage times a peaking factor of 2.30 - See page 3 of Section 4.A of the Water Facility Plan. 6 - Total storage requirement in 2025 divided by 2025 EDUs - See page 26 Section 5.B of the Water Facility Plan. As discussed previously, certain facilities may be planned and sized around different planning criteria. Therefore, the system planning criteria shown above will be used for different plant components to determine the cost per EDU for that specific plant component. 5.5.2 Calculation of Equivalent Dwelling Units The planning horizon of this impact fee study was 2005 – 2025. This is the same planning horizon used in the water facility plan for which the City’s existing water system and future improvements will provide service to an expanded area As a part of this impact fee study, a projection of the number of new/additional EDUs per year must be determined, along with the total number of EDUs at 2025. The City’s total number of EDUs for each year was determined by dividing the peak day usage factor per EDU into total peak day demand. The number of EDUs added during each year of the study period was forecast based on a growth rate of 5% as used in the water facility plan (page 3, Section 4.A). A summary of the EDUs for 2005 and 2025 are presented in Table 5-3. Details of the determination of EDUs are provided in Exhibit 1 of the Technical Appendix. 531 Determination of the City’s Water Impact Fees 5-4 City of Bozeman, Montana Table 5-3 City of Bozeman, Montana Water System Equivalent Dwelling Units Equivalent Dwelling Units – 2005 25,843 Equivalent Dwelling Units – 2025 78,947 After the determination of the total future water EDUs for each year of the planning period, the focus can shift to the calculation of the impact fee for each plant component. This aspect of the analysis is discussed in detail below. 5.5.3 Calculation of the Impact Fee for the Major System Components The next step of the analysis is to review each major functional component as identified in the water facility plan (see Section 5.B) of plant in service and determine the impact fee for that component. In calculating the water impact fee for the City, both existing plant assets with excess capacity, along with planned future capacity expanding projects were included within the calculation. Only existing and future assets with a useful life of 10 years or greater were included in the impact fee calculation. The major components of the City’s water system that were reviewed for purposes of calculating impact fee were as follows: Raw Water Storage Treatment Plant Distribution Storage Transmission and Distribution Mains A brief discussion of the impact fee calculated for each of the functional plant components is provided below. RAW WATER STORAGE – In order for the City to provide adequate raw water during the peak season, it will be necessary to build raw water storage. The City’s capital improvement plan has identified the need to start permitting and design on the Sourdough Creek Dam. Included in the impact fee calculation is an amount equal to twenty percent of the estimated construction cost for the dam. These costs are included in the impact fee for source of supply and treatment shown in Exhibit 2. TREATMENT PLANT – The City’s source of supply is provided by the Sourdough and Lyman treatment plants. The City intends to replace the Sourdough treatment plant with a new membrane plant to a initial capacity of 22 mgd which will replace the current 15 mgd plant. The cost of the existing assets that will provide service to the new plant were taken from the City’s fixed asset records and include up to ten years worth of interest. These were allocated to new development based on the amount of increased capacity to total capacity (7/22 mgd) that will serve new development. The estimated costs in the water facility plan were 2005 dollars. To 532 Determination of the City’s Water Impact Fees 5-5 City of Bozeman, Montana more accurately reflect probable future costs the facility plan estimates were increased to 2007 dollars based on the rate of inflation. These costs were also allocated to new development based on the amount of increased capacity to total capacity. The total cost was then divided by the new capacity to determine a cost per gallon of $2.31. This was then multiplied by the peak day usage per EDU. Based on the costs and capacity of the sources of supply for the City, the impact fee for treatment plant is $1,015.95 per EDU. Details of the calculations are provided in Exhibit 2 of Technical Appendix. DISTRIBUTION STORAGE – The City currently has three (3) storage reservoirs with a total storage capacity of 10.3 million gallons (MG). The City’s capital improvement plan also calls for construction of an additional 5.3 MG Storage Reservoir. The cost of existing Lyman reservoir and the new future reservoir were allocated to serve new development. This cost was subsequently divided by storage capacity provided by these reservoirs to determine the cost of storage per gallon of $0.95. This was then multiplied by the amount of storage required per EDU. Based on the cost and capacity of distribution storage for the City, the impact fee for storage is $191.06 per EDU. Details of the calculations are provided as Exhibit 3 of Technical Appendix. TRANSMISSION AND DISTRIBUTION MAINS – The City’s transmission/distribution network consists of numerous lines from 4-inches in diameter up to 30-inches in diameter. To determine the impact fee for transmission and distribution mains, an inventory of the existing system was undertaken as well as those planned improvements as identified in the water facility plan. The historical investments of the City were adjusted for interest charges up to a maximum of ten years. Distribution and transmission mains greater than 8-inches and less than 75 year old were assumed to serve both existing and future development and were allocated to new development based on the ratio of new EDUs to total EDUs in 2025. These were subsequently divided by the number of new EDUs in added from 2007 to 2025 to determine the cost per EDU. This approach provides that new development only pays its proportional share to the cost of existing assets providing service. Costs for future capital improvements that were identified in the water facility plan to serve new development for the planning horizon from 2007 to 2025 were divided by the number of new EDUs added over the planning horizon. Only those improvements that would provide new capacity were allocated to the impact fee. Those improvements required for current fire flow were excluded, and redundancy improvements were allocated based on new EDUs to total EDUs and assumes that development will contribute the first 8 inches of pipe. In the calculation of the impact fee for transmission and distribution plant, a number of items were excluded. First, all existing mains that were contributed by developers, financed through improvement districts or contributed by grants were excluded from the analysis. For future transmission and distribution plant, an item-by-item analysis was done to determine the percentage cost of these facilities that would not serve new development. Water main replacements which did not create additional capacity were excluded since these are not growth related and should be paid for through rates. For extensions to the system, it was assumed that new development would be required to pay for a pipe size up to 8-inches. This size is the smallest main allowed by the City’s Design Standards and Specifications Policy. In some circumstances an individual project may require more than 533 Determination of the City’s Water Impact Fees 5-6 City of Bozeman, Montana the 8 inch water main to service its specific needs. Over-sizing beyond the minimum size of pipe may be paid for by the City through impact fees in compliance with the procedures for expending impact fee funds. Based on the costs incurred by the City, the impact fee for existing transmission and distribution mains is $698.18 per EDU. For future transmission and distribution mains, the impact fee is $1,096.79 per EDU. This results in a total impact fee of $1,794.97 per EDU for transmission and distribution mains. Details of the calculation are provided in Exhibit 4 of Technical Appendix. ADMINISTRATIVE CHARGE – Under Montana statute, an impact fee may include a fee for the administration of the impact fee program not to exceed 5% of the impact fee collected. The City will implement the allowed 5%. The City has included a water administrative charge of $150.10 per EDU. 5.5.4 Debt Service Credits The final step in calculating the water impact fees was to determine if a credit for payment on debt service for the City’s outstanding bonds. The City currently has an outstanding water revenue bond for the rehabilitation of the Lyman Creek plant which is not related to capacity expansion. The City does not plan on issuing new debt to pay for future water system improvements. Therefore, no debt service credit is applicable. 5.6 Net Allowable Water Impact Fees Based on the sum of the component costs calculated above, the net allowable water impact fee can be determined. “Net” refers to the “gross” impact fee, less any debt service credits. “Allowable” refers to the concept that the calculated impact fee as shown in Table 5-4 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. Charging an amount greater than the allowable impact fee would not meet the nexus test of a cost-based impact fee. A summary of the calculated net allowable water impact fee for the City is shown in the Table 5-4. Table 5-4 City of Bozeman, Montana Allowable Water Impact Fees Plant Component Impact Fee Calculation Results Source of Supply $1,015.95 Distribution Storage 191.06 Transmission and Distribution Mains 1,794.97 Administrative Charge 150.10 Debt Service Credit for Bonds 0.00 Total $3,152.08 The total impact fee as shown for an EDU is $3,152.08 per EDU. The details of the net allowable impact fee are shown on Exhibit 5 of the Technical Appendix. 534 Determination of the City’s Water Impact Fees 5-7 City of Bozeman, Montana For ease of administration, the recommended maximum allowable charge for an EDU is $3,150. Based on the impact fee for “1 EDU”, the charges for the various sized service lines would result in the following impact fees as shown in Table 5-5. Other meter sizes are then weighted based on the City’s AWWA capacity flow ratings. Table 5-5 City of Bozeman, Montana Allowable Water System Impact Fees Meter Size EDU Factor Maximum Allowable Charge ¾" 1.00 $3,150 1" 2.50 7,875 1-1/2" 5.00 15,750 2" 8.00 25,200 3" 16.00 50,400 4" 25.00 78,750 6" 50.00 157,500 8" 80.00 252,000 In Table 5-5 the impact fees for the larger meter sizes are determined by multiplying the impact fees for an EDU by the weighting factors. The weighting factors reflect the increased capacity that the customer can impose on the system and hence the increased cost required to provide capacity to the customer. 5.7 Key Assumptions In the development of the impact fees for the City’s water system, a number of key assumptions were utilized. These are as follows: The City’s asset records were used to determine the nature and value of existing water treatment, storage and distribution assets. The interest rate used for calculating interest on existing investments was 5.0%. 10 years worth of interest were included in the cost of existing plant. The findings required under MCA 7-6-1602 were provided in the water facility plan and this report 5.8 Implementation of the Impact Fees The methodology used to calculate the impact fees takes into account the cost of money or interest charges and inflation. Therefore, HDR Engineering, Inc. would recommend that the City adjust the impact fees each year by an escalation factor to reflect the cost of interest and inflation. The most frequently used source to escalate impact fees is the ENR index which tracks changes in construction costs for municipal utility projects. This method of escalating the City’s impact fee should be used for no more than a two-year period. After this time period, as required by Montana law, the City should update the charges based on the actual cost of infrastructure and 535 Determination of the City’s Water Impact Fees 5-8 City of Bozeman, Montana any new planned facilities that would be contained in an updated facility plan or capital improvement plan. 5.9 Consultant Recommendations Based on our review and analysis of the City’s water system, HDR Engineering, Inc. makes the following recommendations: The City should implement impact fees for new and expanded connections to the water system that are no greater than the impact fees as set forth in this report. The City should update the impact fee calculations as required by State law and City ordinance. 5.10 Summary The water impact fees developed and presented in this section of the report are based on the engineering design criteria of the City’s water system, the value of the existing assets, future capital improvements and “generally accepted” impact fee calculation principles. Adoption of the proposed impact fees will provide multiple benefits to the system users as well as the City and create equitable and cost-based charges for new customers connecting to the City’s water system. 536 TECHNICAL APPENDIX A WATER IMPACT FEES 537 Water Impact Fees – Calculation Basis Exhibit 1 – Determination of LOS and Equivalent Dwelling Units Average Usage per EDU = Average Residential Usage (gpcd) * Persons per Household * loss factor. Peak Usage per EDU = Average Usage per EDU * peaking factor Storage Usage = Total Storage Requirement (million gallons) / EDUs in year of Storage Requirement EDUs = Peak Day Flow / Peak Day Usage per EDU Exhibit 2 – Source of Supply and Water Treatment Plant Impact Fee Source of Supply and Water Treatment Plant Impact Fee = Impact Fee Costs / Plant Capacity * Peak Usage per EDU Exhibit 3 – Distribution Storage Plant Impact Fee Distribution Storage Plant Impact Fee = Impact Fee Costs / Plant Capacity * Storage Usage per EDU Exhibit 4 – Distribution System Impact Fee Distribution System Impact Fee = Impact Fee Costs / Number New EDUs Served by Improvements (per Facility Plan) Exhibit 5 – Water Impact Fee Administrative Impact Fee = (Treatment Plant Impact Fee + Distribution Storage Impact Fee + Distribution System Impact Fee) * .05 Water Impact Fee = Treatment Plant Impact Fee + Distribution Storage Impact Fee +Distribution System Impact Fee + Administrative Impact Fee 538 City of Bozeman, Montana Impact Fees for the Water System Determination of LOS and Equivalent Dwelling Units Exhibit 1 Average Usage Residential 1 83.04 gpcd Average Usage Residential with losses 2 93.59 Number of Persons per Household 3 2.3 Average Usage 4 190.99 per EDU Peak Day Usage 5 439.28 per EDU Storage Usage 6 201.63 per EDU 1 - See page 14 Section 3.B of the Water Facility Plan. 2 - At 12.7% See page 11 Section 3.B- of the Water Facility Plan. 3 - See page 3 of Section 4.A of the Water Facility Plan. 4 - Average Usage Residential times number of persons per Household. 5 - Average Day Usage times a peaking factor of 2.30 - See page 3 of Section 4.A of the Water Facility Plan. 6 - Total storage requirement in 2025 divided by 2025 EDUs - See page 26 Section 5.B of the Water Facility Plan. 1 4/18/2007 539 City of Bozeman, Montana Impact Fees for the Water System Determination of LOS and Equivalent Dwelling Units Exhibit 1 Peak Day Equivalent Additional Year Demand 1 Dwelling Units 2 EDUs 2005 13.08 29,776 2006 13.74 31,267 1,491 2007 14.42 32,833 1,566 2008 15.15 34,477 1,644 2009 15.90 36,204 1,727 2010 16.70 38,017 1,813 2011 17.53 39,916 1,899 2012 18.41 41,910 1,994 2013 19.33 44,004 2,094 2014 20.30 46,203 2,199 2015 21.31 48,511 2,308 2016 22.37 50,926 2,415 2017 23.48 53,462 2,535 2018 24.65 56,123 2,662 2019 25.88 58,918 2,794 2020 27.17 61,851 2,933 2021 28.53 64,945 3,094 2022 29.96 68,193 3,249 2023 31.45 71,604 3,411 2024 33.03 75,186 3,582 2025 34.68 78,947 3,761 1 - See page 3 Section 4.A of the Water Facility Plan. 2 - Peak day demand divided by Peak Day EDU Usage Factor. 2 4/18/2007 540 City of Bozeman, Montana Impact Fees for the Water System Source of Supply and Treatment Exhibit 2 Original Impact Fee Cost Year Equipment List Cost Related 3 $2007 1,2 Existing Assets 1 2003 BIO-CAP ON PONDS 13,229$ 32% 5,146$ 1990 BOZEMAN CREEK 86,756 32% 45,221 1990 BOZEMAN CREEK HOUSE 45,322 32% 23,624 1990 BOZEMAN CREEK INTAKE MAIN 117,721 32% 61,362 1990 BOZEMAN CREEK OTHER 26,419 32% 13,771 1990 BOZEMAN CREEK WATER SUPPLY 433,589 32% 226,007 2000 CORROSION CONTROL BUILDING 155,487 32% 70,011 1990 LYMAN CREEK INTAKE 50,362 0% - 2003 PORTABLE CABIN 26,723 32% 10,394 1990 PRESEDIMENT BASIN 122,782 0% - 1990 RESERVOIR SUPPLY MAIN 467,936 32% 243,910 2000 CREEK SUPPLY 84,079 32% 37,858 1990 SOUTH BASIN 214,101 32% 111,599 1990 WATER PLANT 101,539 0% - 1990 WATER PLANT EXPANSION 756,712 0% - 1990 WATER TREATMENT PLANT 260,522 0% - 1990 WATER TREATMENT PLANT 2,880,746 0% - Total Existing Assets 848,903$ Future Construction Projects 2 2008 LYMAN - GROUNDWATER COLLECTION 699,758 100% 742,373 2011 WATER PLANT DESIGN 200,000 32% 67,898 2012 WATER PLANT DESIGN 300,000 32% 101,846 After 2012 22 MGD MEMBRANE WATER TREATMENT PLANT 30,000,000 32% 10,184,640 After 2012 SOURDOUGH CREEK DAM CONSTRUCTION 4 4,000,000 100% 4,243,600 Total Future Construction Projects 15,340,357$ Total Source of Supply and Treatment 16,189,260$ Plant Capacity (MGD) 3 7.00 Cost per Gallon 2.31$ Requirement per EDU 439.28 Impact Fee Source of Supply and Treatment per EDU 1,015.95$ 1 - Existing plant is increased by interest charges from the date of construction up to 10 years. 2 - Future plant is increased from 2005 construction costs by the rate of inflation. 3 - New membrane water treatment plant capacity allocated to new development. Based on current plant capacity of 15 MDG to new capacity (22 MGD). 4 - Includes only permitting and design. 4/18/2007 541 City of Bozeman, Montana Impact Fees for the Water System Distibution Storage Exhibit 3 Original Impact Fee Cost Year Equipment List Cost Related 3 $2007 1,2 Existing Assets 1 1957 4 MG SOURDOUGH TANK 431,644$ 0% -$ 1985 2 MG HILLTOP TANK (STEEL) 826,421 0% - 1989 5.3 MG LYMAN RESERVOIR (CONCRETE) 2,539,683 100% 4,136,875 Total Existing Assets 4,136,875$ After 2012 5.3 MG STORAGE RESERVIOR 5,300,000$ 100% 5,622,770$ Total Distrubution Storage 9,759,645$ Plant Capacity (MGD)10.30 Cost per Gallon 0.95$ Requirement per EDU 201.63 Impact Fee Distribution Storage per EDU 191.06$ 1 - Existing plant is increased by interest charges from the date of construction up to 10 years. 2 - Future plant is increased from 2005 construction costs by the rate of inflation. 3- Both the Lyman and new reservior are available to serve new development. 4/18/2007 542 City of Bozeman, Montana Impact Fees for the Water System Transmission/Distribution Mains Exhibit 4 Original Impact Fee Cost Year Equipment List Cost Related 3 $2007 1,2 Existing Assets 1 1910 1910 4" 28,378$ 0.00% -$ 1910 6" 219,237 0.00% - 1910 8" 37,098 0.00% - 1910 10" 23,514 0.00% - 1910 12" 38,965 0.00% - 1910 14" 52,604 0.00% - 1910 16" - 0.00% - 1910 18" 185,927 0.00% - 1910 20" - 0.00% - 1910 24" - 0.00% - 1910 30" - 0.00% - 1920 1920 4" 91,425$ 0.00% -$ 6" 367,726 0.00% - 8" 32,465 0.00% - 10" 43,259 0.00% - 12" 46,738 0.00% - 14" 37,033 0.00% - 16" 54,720 0.00% - 18" 292,024 0.00% - 20" - 0.00% - 24" - 0.00% - 30" - 0.00% - 1930 1930 4" 90,032$ 0.00% -$ 6" 139,736 0.00% - 8" 7,348 0.00% - 10" - 0.00% - 12" - 0.00% - 14" - 0.00% - 16" - 0.00% - 18" - 0.00% - 20" - 0.00% - 24" - 0.00% - 30" - 0.00% - 1940 1940 4" 37,858$ 0.00% -$ 6" 164,835 0.00% - 8" - 0.00% - 10" - 58.41% - 12" - 58.41% - 14" - 58.41% - 16" - 58.41% - 18" - 58.41% - 20" - 58.41% - 24" - 58.41% - 30" - 58.41% - 1950 1950 4" 49,058$ 0.00% -$ 6" 214,442 0.00% - 8" 64,513 0.00% - 10" 225,423 58.41% 214,482 12" 38,259 58.41% 36,402 14" 322,807 58.41% 307,139 16" - 58.41% - 18" - 58.41% - 20" - 58.41% - 24" 695,286 58.41% 661,539 30" - 58.41% - 1 4/18/2007 543 City of Bozeman, Montana Impact Fees for the Water System Transmission/Distribution Mains Exhibit 4 Original Impact Fee Cost Year Equipment List Cost Related 3 $2007 1,2 1960 1960 4" -$ 0.00% -$ 6" 940,152 0.00% - 8" 336,859 0.00% - 10" 107,445 58.41% 102,230 12" 42,881 58.41% 40,800 14" 83,499 58.41% 79,446 16" - 58.41% - 18" - 58.41% - 20" - 58.41% - 24" - 58.41% - 30" - 58.41% - 1970 1970 4" 57,266$ 0.00% -$ 6" 1,583,458 0.00% - 8" 1,232,305 0.00% - 10" 768,899 58.41% 731,580 12" 821,434 58.41% 781,564 14" 301,728 58.41% 287,083 16" - 58.41% - 18" - 58.41% - 20" - 58.41% - 24" 140,402 58.41% 133,587 30" - 58.41% - 1980 1980 4" 160,885$ 0.00% -$ 6" 2,296,590 0.00% - 8" 1,225,596 0.00% - 10" 1,722,195 58.41% 1,638,605 12" 1,062,913 58.41% 1,011,323 14" 374,141 58.41% 355,982 16" - 58.41% - 18" 36,028 58.41% 34,279 20" 134,255 58.41% 127,739 24" 507,479 58.41% 482,848 30" 2,805,243 58.41% 2,669,087 1990 1990 4" 333,459$ 0.00% -$ 6" 7,933,609 0.00% - 8" 11,846,645 0.00% - 10" 4,809,170 58.41% 4,575,750 12" 6,357,085 58.41% 6,048,534 14" 692,617 58.41% 659,000 16" 705,443 58.41% 671,203 2 4/18/2007 544 City of Bozeman, Montana Impact Fees for the Water System Transmission/Distribution Mains Exhibit 4 Original Impact Fee Cost Year Equipment List Cost Related 3 $2007 1,2 18" 155,384 58.41% 147,843 20" - 58.41% - 24" 755,379 58.41% 718,716 30" - 58.41% - 2000 2000 4" 116,617$ 0.00% -$ 6" 91,366 0.00% - 8" 24,837,024 0.00% - 10" 1,528,730 58.41% 1,454,530 12" 8,280,156 58.41% 7,878,267 14" 151,169 58.41% 143,832 16" - 58.41% - 18" - 58.41% - 20" - 58.41% - 24" 122,108 58.41% 116,181 30" 90,890 58.41% 86,479 Total Existing Assets 32,196,048$ EDUs added 2007 to 2025 46,114 Total Existing Transmission/Distribution Impact Fee per EDU 698.18$ Future Construction Projects 2 2008 SHOPS COMPLEX - PHASE 1 4,995,000$ 19.82% 990,009$ 2007-2037 REDUNDANCY - 10 inch 4, 5 296,438 21.03% 66,132 2007-2037 REDUNDANCY - 12 inch 4, 5 2,855,651 32.45% 983,119 2007-2037 REDUNDANCY - 14 inch 4, 5 1,629,291 39.34% 679,971 2007-2037 REDUNDANCY - 16 inch 4, 5 2,303,886 43.81% 1,070,769 2007-2037 REDUNDANCY - 24 inch 4, 5 1,101,716 51.92% 606,863 2007-2037 REDUNDANCY - 36 inch 4, 6 3,481,785 17.85% 659,274 2007-2038 REDUNDANCY - 48 inch 4, 6 16,187,712 35.59% 6,112,849 2007-2038 FUTURE TRANSMISSION - 8 inch 5 187,746 0.00% - 2007-2038 FUTURE TRANSMISSION - 10 inch 5 4,939,960 36.00% 1,886,689 2007-2038 FUTURE TRANSMISSION - 12 inch 5 12,973,987 55.56% 7,646,724 2007-2038 FUTURE TRANSMISSION - 16 inch 5 5,531,134 75.00% 4,400,985 2007-2038 FUTURE TRANSMISSION - 18 inch 5 6,983,839 80.25% 5,945,618 2007-2038 FUTURE TRANSMISSION - 20 inch 5 2,357,129 84.00% 2,100,570 2007-2038 FUTURE TRANSMISSION - 24 inch 5 9,969,779 88.89% 9,401,723 2007-2038 FUTURE TRANSMISSION - 36 inch 5 3,545,692 95.06% 3,575,865 2007-2038 FUTURE TRANSMISSION - 42 inch 5 4,353,045 96.37% 4,450,594 Total Future Construction Projects 50,577,754$ EDUs added 2007 to 2025 46,114 Total Future Transmission/Distribution Impact Fee per EDU 1,096.79$ Total Transmission/Distribution Impact Fee per EDU 1,794.97$ 1 - Existing plant is increased by interest charges from the date of construction up to 10 years. 2 - Future plant is increased from 2005 construction costs by the rate of inflation. 3- All 4", 6" and 8" lines excluded and pipe greater that 75 years old. Allocation for existing plant based on new EDUs/total EDUs in 2025. Future plant allocation based on Water Facility plan. 4 - See Table 5.B.3 in the Water Facility Plan. Allocated based on new EDUs/total EDUs in 2025. 5 - See Table 5.B.5 in the Water Facility Plan. All 8" line assumed to be built by development. 6 - All water treament plant redundency greater than 30" excluded from the impact fee calculation. 3 4/18/2007 545 City of Bozeman, Montana Impact Fees for the Water System Summary Exhibit 5 Source of Supply $ 1,015.95 Storage 191.06 Distribution 1,794.97 Debt Service Credit - Total $3,001.98 Plus: Maximum Allowable of 5% 150.10 $3,152.08 Impact Fees by Meter Size (inches) Meter Size Weighting Factor 1 Impact Fee 3/4" 1.00 $3,150 1 2.50 7,875 1 1/2 5.00 15,750 2 8.00 25,200 3 16.00 50,400 4 25.00 78,750 6 50.00 157,500 8 80.00 252,000 10 115.00 362,250 1 - Weighting factor based on AWWA meter capacity ratings Water Impact Fee Calculation Results Proposed Water Impact Fee per EDU 4/18/2007] 546 TECHNICAL APPENDIX B MONTANA CODE 547 7-6-1601. Definitions. As used in this part, the following definitions apply: (1) (a) "Capital improvements" means improvements, land, and equipment with a useful life of 10 years or more that increase or improve the service capacity of a public facility. (b) The term does not include consumable supplies. (2) "Connection charge" means the actual cost of connecting a property to a public utility system and is limited to the labor, materials, and overhead involved in making connections and installing meters. (3) "Development" means construction, renovation, or installation of a building or structure, a change in use of a building or structure, or a change in the use of land when the construction, installation, or other action creates additional demand for public facilities. (4) "Governmental entity" means a county, city, town, or consolidated government. (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. (6) "Proportionate share" means that portion of the cost of capital system improvements that reasonably relates to the service demands and needs of the project. A proportionate share must take into account the limitations provided in 7-6-1602. (7) "Public facilities" means: (a) a water supply production, treatment, storage, or distribution facility; (b) a wastewater collection, treatment, or disposal facility; (c) a transportation facility, including roads, streets, bridges, rights-of-way, traffic signals, and landscaping; (d) a storm water collection, retention, detention, treatment, or disposal facility or a flood control facility; (e) a police, emergency medical rescue, or fire protection facility; and (f) other facilities for which documentation is prepared as provided in 7-6-1602 that have been approved as part of an impact fee ordinance or resolution by: (i) a two-thirds majority of the governing body of an incorporated city, town, or consolidated local government; or (ii) a unanimous vote of the board of county commissioners of a county government. History: En. Sec. 1, Ch. 299, L. 2005. Page 1 of 17-6-1601. Definitions. 1/4/2006http://data.opi.state.mt.us/bills/mca/7/6/7-6-1601.htm 548 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 documentation that: (a) describes existing conditions of the facility; (b) establishes level of service standards; (c) forecasts future additional needs for service for a defined period of time; (d) identifies capital improvements necessary to meet future needs for service; (e) identifies those capital improvements needed for continued operation and maintenance of the facility; (f) makes 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) makes 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) establishes 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) establishes the methodology that the governmental entity will use to exclude operations and maintenance costs and correction of existing deficiencies from the impact fee; (j) establishes the amount of the impact fee that will be imposed for each unit of increased service demand; and (k) has a component of the budget of the governmental entity that: (i) schedules construction of public facility capital improvements to serve projected growth; (ii) projects costs of the capital improvements; (iii) 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 2 years. (2) The data sources and methodology supporting adoption and calculation of an impact fee must be available to the public upon request. (3) The amount of each impact fee imposed must be based upon the actual cost of public facility expansion or improvements or reasonable estimates of the cost to be incurred by the governmental entity as a result of new development. The calculation of each impact fee must be in accordance with generally accepted accounting principles. (4) The ordinance or resolution adopting the impact fee must include a time schedule for periodically updating the documentation required under subsection (1). (5) 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 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. History: En. Sec. 2, Ch. 299, L. 2005. Page 1 of 17-6-1602. Calculation of impact fees -- documentation required -- ordinance or resolution -- requirement... 1/4/2006http://data.opi.state.mt.us/bills/mca/7/6/7-6-1602.htm 549 7-6-1603. Collection and expenditure of impact fees -- refunds or credits -- mechanism for appeal required. (1) The collection and expenditure of impact fees must comply with this part. The collection and expenditure of impact fees must be reasonably related to the benefits accruing to the development paying the impact fees. The ordinance or resolution adopted by the governmental entity must include the following requirements: (a) Upon collection, impact fees must be deposited in a special proprietary fund, which must be invested with all interest accruing to the fund. (b) A governmental entity may impose impact fees on behalf of local districts. (c) If the impact fees are not collected or spent in accordance with the impact fee ordinance or resolution or in accordance with 7-6-1602, any impact fees that were collected must be refunded to the person who owned the property at the time that the refund was due. (2) All impact fees imposed pursuant to the authority granted in this part must be paid no earlier than the date of issuance of a building permit if a building permit is required for the development or no earlier than the time of wastewater or water service connection or well or septic permitting. (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. (4) Governmental entities may accept the dedication of land or the construction of public facilities in lieu of payment of impact fees if: (a) the need for the dedication or construction is clearly documented pursuant to 7-6-1602; (b) the land proposed for dedication for the public facilities to be constructed is determined to be appropriate for the proposed use by the governmental entity; (c) formulas or procedures for determining the worth of proposed dedications or constructions are established as part of the impact fee ordinance or resolution; and (d) a means to establish credits against future impact fee revenue has been created as part of the adopting ordinance or resolution if the dedication of land or construction of public facilities is of worth in excess of the impact fee due from an individual development. (5) Impact fees may not be imposed for remodeling, rehabilitation, or other improvements to an existing structure or for rebuilding a damaged structure unless there is an increase in units that increase service demand as described in 7-6- 1602(1)(j). If impact fees are imposed for remodeling, rehabilitation, or other improvements to an existing structure or use, only the net increase between the old and new demand may be imposed. (6) This part does not prevent a governmental entity from granting refunds or credits: (a) that it considers appropriate and that are consistent with the provisions of 7-6-1602 and this chapter; or (b) in accordance with a voluntary agreement, consistent with the provisions of 7-6-1602 and this chapter, between the governmental entity and the individual or entity being assessed the impact fees. (7) An impact fee represents a fee for service payable by all users creating additional demand on the facility. (8) An impact fee ordinance or resolution must include a mechanism whereby a person charged an impact fee may appeal the charge if the person believes an error has been made. History: En. Sec. 3, Ch. 299, L. 2005. Page 1 of 17-6-1603. Collection and expenditure of impact fees -- refunds or credits -- mechanism for appeal requir... 1/4/2006http://data.opi.state.mt.us/bills/mca/7/6/7-6-1603.htm 550 7-6-1604. Impact fee advisory committee. (1) A governmental entity that intends to propose an impact fee ordinance or resolution shall establish an impact fee advisory committee. (2) An impact fee advisory committee must include at least one representative of the development community and one certified public accountant. The committee shall review and monitor the process of calculating, assessing, and spending impact fees. (3) The impact fee advisory committee shall serve in an advisory capacity to the governing body of the governmental entity. History: En. Sec. 4, Ch. 299, L. 2005. Page 1 of 17-6-1604. Impact fee advisory committee. 1/4/2006http://data.opi.state.mt.us/bills/mca/7/6/7-6-1604.htm 551 Page 1 Calculation Method for Large Service Line Sizes - Water Net Impact Fee Once all the components have been calculated for the impact fee, the net impact fee can be determined. The net impact fee is merely the sum of the various impact fee elements. This charge is calculated on an equivalent residential unit basis. The cost for varying service line sizes is calculated based on the equivalent weighting factor for these service line sizes. Table 1 provides a summary of the calculation of the net impact fee. Table 1 Allowable Water Impact Fee Description Impact Fee Source of Supply and Treatment $1,015.95 Distribution Storage 191.06 Distribution Main 1,794.97 Debt Service Credit 0.00 Administrative Charge 150.10 Total $3,152.08 Meter Size Weighting Factor Charge 3/4” 1.00 3,150 1" 2.50 7,875 1 1/2" 5.00 15,750 2” 8.00 25,200 3” 16.00 50,400 4 25.00 78,750 6 50.00 157,500 8 80.00 252,000 The use of weighting factors can result in an under collection of the impact fee for larger industrial customers who utilize the system in a manner far different from the average user. This is due to the fact that in the determination of the impact fees, average system usage is used as the design criteria. The design criteria as shown in Table 2, has been utilized in the calculation of the impact fees. 552 Page 2 Table 2 Impact Fee Design Criteria Peak Day Flow 439.28 gallons/day/EDU Average Day Flow 190.99 gallons/day/EDU Storage Requirements 201.63 gallons/day/EDU To the extent that a customer takes water service different from the system average, a large shortfall in impact fee revenue can result. This is especially true for large service line sizes used by industrial customers. An example is an industrial customer with an 8” service. This type of line can allow a flow of 1,600 gallons per minute or approximately 2.3 mgd. If the large industrial customer were going to utilize the system such that the valve is opened up to its maximum flow capacity 365 days per year, it would be necessary for the City to construct approximately 2.3 mgd of source capacity. Based on current costs of $2.31 per gallon, it would cost approximately $5,300,000 just to construct 2.3 mgd in source capacity. This compares to an impact fee charge using weighting factors for an 8” service line of $252,000. This is only a comparison of source of supply cost to the total impact fee using weighting factors and does not include the other impact fee components. This large difference is due to the fact that the average customer only uses approximately 2% of the water on the peak day, which could actually flow through the service line. Given the ability of large customers to impose far greater costs on the system it is recommended that impact fees for meter sizes over 3 inches be calculated based on the actual or anticipated EDU’s. This assures that the utility collects funds through the impact fees equal to the cost of providing the service and at the same time not impose a large administrative burden on the utilities staff associated with calculation of impact fees. For meter sizes greater than three (3) inches, the customer’s usage would be calculated based on storage use and peak day use. From these criteria, the number of EDUs for peak day use and storage use would be determined. These equivalent dwelling units would then be multiplied by the charge per EDU as specified under the impact fee charges to determine the total impact fee charge. Two components are calculated due to the fact that peak day usage is used as the design criteria for the majority of the utilities; however, the amount of storage requirement is based on a separate design criteria. Provided in Table 3 are the details of calculation of EDUs for peak day use and storage use. 553 Page 3 Table 3 Determination of EDUs Peak Day EDUs = Peak Day Usage (gpd)/439.28 (gpd/EDU) Storage EDUs = (Average Day Usage x 1.06) (gpd)/201.63 (gpd/EDU) The storage requirement is determined by multiplying average use by 1.06 (201.63/190.99). These factors would then be multiplied by the peak day impact fee per EDU and the storage cost per EDU. These are detailed in Table 4. Table 4 Impact Fee Charges Peak Day Impact Fee Cost = $2,959 /peak day EDU Total Storage Impact Fee Cost = $191 /storage EDU The resultant product of the EDUs and impact fee costs would be the total impact fee charged. The charge would not depend on the meter size for customers greater than 3 inches, but on the customers usage. 554 Page 4 Sample Resolution Language Section 3(b): The impact fee is calculated for a 3/4”service line. The impact fee for meter sizes up to 3” is determined by multiplying the impact fee for a meter by a weighting factor. The impact fee for meter sizes up to 3 inches is: Meter Size Weighting Factor (EDUs) Charge 3/4” 1.00 $3,150 1” 2.50 7,875 1-1/2” 5.00 15,750 2” 8.00 25,200 3” 16.00 50,400 Section 3(c): For service lines over 3”, the impact fee shall be determined based on the customers anticipated water usage. Anticipated peak day water usage will be divided by the peak day system design flow of 439.28 gallons per day per EDU to determined peak day EDUs. Anticipated average daily water usage will be multiplied by 1.06 and then divided by 201.63 gallons per day per EDU to determine storage EDUs. Peak day impact fee cost is: $2,959 per peak day EDU Storage impact fee cost is: $ 191 per storage EDU The impact fee shall be the sum of the peak day impact fee cost per EDU multiplied by the peak day EDUs and the storage impact fee cost per EDU multiplied by the storage EDUs. Section 3(d): The impact fee paid for service lines larger than 3 inches as of the effective date of this resolution may be adjusted based on actual usage. If usage is greater than 110% of anticipated volume during a 12 month period of time, an additional impact fee may be charged, using the same techniques for calculating peak day and storage EDUs and multiplying by the peak day impact fee cost per EDU and the storage impact fee cost per EDU then in effect. 555