Uses of Fees or Alternatives to Fund Transit (2008)

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4 have enacted impact fee legislation that, by virtue of broad authorizing language, would permit the use of impact fees for transit purposes, but authorizing legis- lation that expressly includes transit or public trans- portation as a public facility or capital purpose eligible for impact fee expenditures is relatively rare. Arguably, municipalities in about 20 states have the necessary legislative authority or case law support for the enact- ment of impact fees for transit purposes. Impact fees collected cannot generally be used for the operation, maintenance, repair, alteration, or re- placement of capital facilities.9 There are, however, cer- tain exceptions, such as in California and Florida, where authorizing legislation does not limit the use of impact fees to capital purposes only, and transit impact fee programs have been established that use transit impact fees for operating costs. Impact fees for transit, while enacted in California and Florida, are rarely used in the rest of the country. In fact, the San Francisco Transit Impact Development Fee Ordinance, enacted in 1981, was unique in the country for more than 20 years as the only developer fee devoted entirely to public transit capital and opera- tions.10 Practical and policy considerations, which will be discussed in greater detail herein, that may inhibit the imposition of impact fees for transit include: • State law limitations on the use of impact fees for capital purposes only, while the largest costs in transit are on the operating side. • The high level of federal subsidy (80 percent of capital costs) for capital investment in transit and the relatively low level of federal subsidy for transit operat- ing costs. • State law restrictions requiring the use of devel- opment impact fees solely for capital related to growth, making the unfunded local portion for capital even smaller. • Impact fees are not a feasible alternative in areas that are experiencing declining growth or that have sufficient infrastructure to provide for growth. • Potential for disconnect between mandatory placement of transit amenities in the districts where fees are collected and the operating needs of the transit system. Structurally, the use of development impact fees for transit is complicated by the division typically found in municipalities between the entity responsible for the regulation of development and the entity responsible for transit services. Municipalities most commonly impose impact fees as a condition for receiving final planning 9 Carmen Carrion & Lawrence W. Libby, Development Im- pact Fees: A Primer, Ohio State University (2004), available at http://www-agecon.ag.ohio- state.edu/programs/Swank/pdfs/dif.pdf. 10 San Francisco Planning Department, prepared by Nel- son/Nygaard Consulting Associates, Transit Impact Develop- ment Fee Analysis: Final Report, May 2001, at 1-1. and zoning approval to fund capital improvements typi- cally thought of as municipal functions, such as road improvements, water and sewer, parks, public safety buildings, and libraries. Public transportation often functions under the auspices of a third-party state or local agency or authority that receives a certain level of appropriations at the local, state, and federal levels. In addition, transportation planning may not be a well- developed practice as part of the municipal planning process. The validity of statutes and ordinances providing for transit impact fees may be subject to claims that they violate a constitutional bar to uncompensated takings, equal protection and due process claims, claims of im- permissible taxation, and claims of unreasonableness. Other legal challenges may include whether a particu- lar transit impact fee ordinance was valid in the ab- sence of state enabling legislation or whether it failed to comply with the requirements of applicable legislation. Finally, there may be a perception that impact fees increase the cost of, and thus discourage, development. There is literature to support the view that this is not necessarily the case. Nevertheless, as the case studies discussed herein demonstrate, development impact fees for transit may be successfully used as a financial tool for municipalities looking to address shortfalls in tran- sit capital expenses. B. Financing Alternatives While this report will focus primarily on the use of development impact fees for transit, it is worth noting that in several jurisdictions where impact fees are not utilized, funding alternatives, including tax increment financing and tax allocation districts, have been imple- mented to fund transit infrastructure. II. USE OF IMPACT FEES FOR TRANSIT To determine the nature and extent of the current use of impact fees and other developer exactions for transit purposes, a questionnaire (a copy of which is attached hereto as Appendix A) was circulated among approximately 300 public transportation providers. Un- fortunately, the survey elicited very little useful mate- rial. Of 28 responses received, none indicated the use of impact fees for transit. The Massachusetts Bay Trans- portation Authority responded that in 2006 the legisla- ture authorized infrastructure assessments for Boston’s Northpoint Development District, and the Metropolitan Atlanta Rapid Transit Authority (MARTA) responded that it was aware of at least two tax allocation districts (TADs) that allow revenues to be used for transit in Georgia, as well as multiple community improvement districts that utilize assessment revenue for various purposes, including transit. A summary of the survey responses is attached hereto as Appendix B. The general consensus of professionals in this area is that impact fees for transit are relatively rare. The rea- sons cited include a number of practical and legal con- straints that may make the use of impact fees for tran-

5 sit impractical or impossible. The reasons most often cited for the lack of the use of impact fees for transit are that 1) impact fee authorization is typically limited to capital expenditures and capital investment in transit is relatively well subsidized by the federal government; and 2) the municipal entity responsible for land-use regulation and the imposition of impact fees is often different from the entity responsible for the provision of transit services. A. Impact of Federal Subsidy for Capital The limitations of impact fees for capital projects in Teton County, Wyoming, have been described as fol- lows: Impact fees are one-time system improvements, not oper- ating costs, which is the major cost component for public transit. Also, transit impact fees are limited to the local government’s share of infrastructure costs. As stated in the Jackson/Teton County Transit Development Plan, capital needs are eligible for federal funding through the Federal Transit Administration at a cost participation ra- tio of 80% federal, 20% local. Due to these limitations, transit impact fees tend to be relatively minor in com- parison to other types of impact fees. Therefore, transit impact fees will not “solve” transit’s funding problem in Teton County, but will provide a source of dedicated revenue to augment other funding.11 Capital investment in transit increased by nearly 70 percent across the country between 1996 and 2005, while inflation rose 21.4 percent. The role of the federal government accounted for, on average, approximately 39 percent of all capital invested in transit. Federal capital funds account for approximately 70 percent in small urbanized areas, while local capital funds make up 17.9 percent and state funds account for 11.5 per- cent. In medium urbanized areas, federal capital funds constitute 60.5 percent of the funding applied to capital projects, local capital funds account for 25 percent, and state funding for 16.7 percent. Large urbanized areas rely less heavily on federal funds (37 percent), directly levy taxes to pay for capital projects at the local level (48.4 percent), and receive approximately 14 percent of funding from the state.12 In comparison, federal funds constituted 7.8 percent of operating funds nationally in 2005.13 This funding imbalance may lead local govern- ments to conclude that it may be easier and more cost effective to take advantage of traditional or other alter- native funding mechanisms. Further, the availability of funding for additional capital may be irrelevant if suffi- cient funding is not foreseeable for the operating costs relating to expanded infrastructure. 11 Tischler & Associates, Inc., Transit Impact Fees: Teton County, WY, July 5, 2002, available at http://www.tetonwyo.org/plan/docs/SpecialReports/TransitImpa ctFeeStudy.pdf. 12 National Transit Database, 2005 National Transit Sum- maries and Trends at 23–24, available at http://www.ntdprogram.com/ntdprogram/pubs/NTST/2005/HT ML/2005_NTST.htm. 13 Id. at 24. Nevertheless, impact fees imposed for transit pur- poses have been used successfully to make up all or a portion of the local match in federally-funded projects. For example, while the transit portion makes up only approximately 6 percent of Washington County, Ore- gon’s, $17 million per year Traffic Impact Fee program, approximately $5.6 million from the transit set-aside was used to fund the local match required for the Tri- County Metropolitan Transportation District of Ore- gon’s (TriMet) Washington County/Wilsonville to Bea- verton Commuter Rail line.14 TriMet is also constructing new light rail transit under the Federal New Starts Program known as the South Corridor I-205/Portland Mall LRT. The total project cost under the full funding grant agreement is $575.70 million. The Section 5309 New Starts funding share is $345.40 million.15 Of the City of Portland’s $45.33 million commitment to the I- 205/Portland Mall LRT Project, only $1.33 million is from the city’s impact fee program known as System Development Charges.16 In addition, given the competition nationally and re- gionally for federal funds, there may not be enough fed- eral money to fund all of an agency’s proposed capital projects. When looking at growth areas nationally, and particularly the success San Francisco has had with its Transit Impact Development Fee, it seems logical to assume that the imposition of impact fees for transit could generate substantial revenue for capital over time. B. Statutory Limits The structure of a state’s statutory scheme itself may discourage or facilitate the use of transit impact fees by municipal entities. As discussed below, several states implicitly prohibit the use of impact fees for transit capital purposes by exclusion of this purpose from ap- plicable statutory authority. Nevertheless, alternative statutory authority, such as environmental mitigation, may be found to serve the same end. In the case of Seat- tle, Washington, state law does not authorize the use of impact fees for transit. However, a successful multimo- dal impact fee has been implemented in four develop- ment districts of the city using the state’s Environ- 14 Source: Washington County, Or., Planning Division. Washington County, Or., voters approved a Traffic Impact Fee Program in 1990 that provides for a certain amount of the fee to be reserved for extra capacity transit improvement projects that are either located in the jurisdiction in which the fee was collected or that directly benefit the jurisdiction. See Washing- ton County Code § 3.17.010 et seq. 15 FED. TRANSIT ADMIN., U.S. DEP’T OF TRANSP., ANNUAL REPORT ON FUNDING RECOMMENDATIONS, PROPOSED ALLOCATIONS OF FUNDS FOR FISCAL YEAR 2009; REPORT OF THE SECRETARY OF TRANSPORTATION TO THE UNITED STATES CONGRESS PURSUANT TO 49 USC 5309(K)(1): NEW STARTS, ALTERNATIVE TRANSPORTATION IN PARKS AND PUBLIC LANDS, 2008, Appendix A–NS 2009, at A-47–48, available at http://www.fta.dot.gov/publications/reports/reports_to_congress /planning_environment_7754.html. 16 Source: TriMet.

6 mental Policy Act. (See “Case Studies—Seattle, Wash- ington: Multimodal Approaches to Impact Mitigation,” Section VI.A. herein.) Examples of statutes that limit the use of impact fees to offsetting the costs of capital include the Arkan- sas Development Impact Fees Act (“No development impact fee shall be assessed for or expended upon the operation or maintenance of any public facility or for the construction or improvement of public facilities that does not create additional capacity”);17 the laws of Ha- waii (“Public facility capital improvement costs do not include expenditures for required affordable housing, routine and periodic maintenance, personnel, training or other operating costs”);18 the New Mexico Develop- ment Fees Act (“Impact fees shall not be imposed or used to pay for repair, operation or maintenance of ex- isting or new capital improvements or facility expan- sions”);19 and Vermont (“The fee shall be equal to or less than the portion of the capital cost of a capital project which will benefit or is attributable to the development and shall not include costs attributable to the operation, administration or maintenance of a capital project”).20 C. Nexus Between Impact Fees and System Improvements A second factor related to the small local share of capital funding for transit is that impact fees may only be imposed for capital expenses necessitated by and directly attributable to the cost of system improvements needed to serve new growth and development. Three nexus tests of impact fees developed in the courts to meet constitutional challenges to impact fees include 1) the “reasonable relationship” test, which requires a rea- sonable connection between the fee charged the devel- oper and the needs generated by that development; 2) the “specifically and uniquely attributable” test that the fee charged to the developer is directly and uniquely attributable to the developer; and 3) the “rational nexus” test, which requires proportionality between the amount charged to the developer and the type and amount of facilities demand generated by the develop- ment and that there be a reasonable connection be- tween the use of fees and the benefits accruing to the development.21 The following are several statutory examples that include the standards established by case law: Colorado: “A local government shall quantify the reasonable impacts of proposed development on existing capital facilities and establish the impact fee or devel- opment charge at a level no greater than necessary to defray such impacts directly related to the proposed development.”22 17 ARK. CODE ANN. § 14-56-103(c). 18 HAW. REV. STAT. § 46-141. 19 N.M. STAT. § 5-8-5(B). 20 24 VT. STAT. ANN. § 5203(b). 21 Carrion & Libby, supra note 9, at 6–7. 22 COLO. REV. STAT. ANN. § 29-20-104.5(2). Hawaii: Collection and expenditure of impact fees assessed, im- posed, levied and collected for development shall be ra- tionally related to the benefits accruing to the develop- ment….Collection and expenditure shall be localized to provide a reasonable benefit to the development….Impact fees shall be expended for public facilities of the type for which they are collected and of reasonable benefit to the development.23 Rhode Island: An impact fee must meet the following requirements: 1) The amount of the fee must be reasonably related to or reasonably attributable to the development’s share of the cost of infrastructure improvements made necessary by the development; and 2) The impact fees imposed must not exceed a proportionate share of the costs incurred or to be incurred by the governmental entity in accommodat- ing the development.24 The issue for impact fee use is that the relatively small local portion of capital expenditures is made even smaller by the requirement that impact fees be imposed solely for the capital facilities directly related to growth. Similarly, impact fees typically may not be used to pay for existing system deficiencies. To the extent impact fees are being used to fund development-related defi- ciencies, the costs of existing deficiencies must be met with traditional resources. For example, Colorado’s Lo- cal Government Land Use Control Enabling Act prohib- its the imposition of development charges “to remedy any deficiency in capital facilities that exists without regard to the proposed development.”25 In Wisconsin, impact fees imposed by an ordinance in accordance with state law may not include amounts necessary to ad- dress existing deficiencies in public facilities.26 D. Coordination of Land Use and Development With Operating System Needs The Broward County, Florida, experience with using impact fees for transit calls into question the opera- tional feasibility of providing bus service in all areas of growth and development that are subject to the transit impact fees. Broward County essentially overlaid a transit impact fee program on a Florida road impact fee program structure. The fee is assessed in 10 transit concurrency districts and is based on the size of the development at the permit stage and the number of anticipated transit trips. Service must be spread throughout the 10 districts using the county’s service standard of providing bus trips every half hour. Unfor- tunately, the scheme does not perfectly match the demographics of the entire transit concurrency area. The fee structure does not help very dense routes that need more than 30 minute service, especially at week- day peak hours, and mandates equivalent service in areas with little demand. The issue now for Broward 23 HAW. REV. STAT. § 46-142(2)(b). 24 R.I. GEN. LAWS § 45-22.4-4(d). 25 COLO. REV. STAT. ANN. § 29-20-104.5(2). 26 WIS. STAT. § 66.0617(6)(f).

7 County is how to justify providing greater capital and operating funding through impact fees for heavily trav- eled corridors. Jonathan Roberson of Broward County cautions governmental entities seeking to use impact fees for transit to establish close connections among planners, development managers, and transit operators to avoid miscalculation of service demands and possibly underestimating other long-term costs. E. Developer Response to Impact Fee Programs Finally, a major concern of local governments when considering the adoption of an impact fee ordinance may be the fear of developer response. Growth areas may be reluctant to impose fees because developers will take their business elsewhere. Anecdotally, this has not been the experience of Broward County. Development impact fees may only be used to address growth. The extent to which the county continues to collect substan- tial fee revenues indicates that the fees have not dis- couraged growth in Broward County, an area that is facing build out. Developers prefer the fee because it indirectly reduces a developer’s project development costs as well as alleviates development approval restric- tions relating to the lack of public services.27 Neither is this fear supported in the literature.28 Several observations include: • Impact fees increase the cost of new housing and existing housing at the same rate through the capitali- zation of the benefits that impact fees provide through infrastructure improvements. • New development contributes to the tax base, add- ing revenue at the same rate, while impact fee revenue is added to the revenues stream, with a net result of a lower tax rate for existing as well as new development. • Impact fees make possible the improvement of eco- nomic efficiency in the provision of infrastructure; im- pact fees appear to reduce the uncertainty and risk of development through the funding and implementation of planned capital improvements and the ability of local 27 Interview with Jonathan Roberson, Senior Planner for Broward County Transit. 28 See Henderson, Young & Company, Effects of System De- velopment Charges on the Amount of Development, March 20, 2007, available at http://www.portlandonline.com/shared/cfm/image.cfm?id=1800 90. The study focused on four studies considered representative that had been conducted since 2002—Keith R. Ihlanfeldt & Timothy M. Shaughnessy, An Empirical Investigation of the Effects of Impact Fees on Housing and Land Markets (Lincoln Institute of Land Policy, Working Paper, 2002); Arthur C. Nel- son & Mitch Moody, Paying for Prosperity: Impact Fees and Job Growth (The Brookings Institution Center on Urban and Metropolitan Policy, 2003); Vicki Been, Impact Fees and Hous- ing Affordability, 2004, available at http://furmancenter.nyu.edu/publications/documents/impact_fe es_cityscapes.pdf; and Gregory Burge & Keith Ihlanfeldt, Im- pact Fees and Single Family Home Construction, J. OF URBAN ECONOMICS, Elsevier, vol. 60(2), 284–306 (2006). governments to leverage impact fee revenues to expand public facilities. • For areas experiencing growth and the demand for additional infrastructure, impact fees can enhance job growth by allowing for an increase in the buildable land supply (or in the case of transit, facilitating public transportation to employment centers). • Impact fees may increase the demand for housing as home buyers realize the potential for a reduction in future property tax liabilities. The value of public transportation is an amenity funded by impact fees. “This increase does not necessar- ily make the housing unaffordable if the amenity re- ceived is of value to the consumer. For example, if ac- cess to public transportation is an amenity of impact fees the additional housing cost may be offset by a de- crease in a family’s transportation costs.”29 In the case of Portland, Oregon, state law permits a 90-day window for challenges to an impact fee method- ology. The city committed itself to doing the ground- work to obtain stakeholder buy-in before the system development charge was acted on by the City Council. Property owners, bankers, and businesses were all asked to make suggestions. A citizen advisory commit- tee began the project with a series of confidential inter- views with key stakeholders for feedback regarding the transportation system, the economy, and stakeholder needs. Responses were synthesized into broad themes and shared with local officials. When the technical work for the project and the findings of the citizen advisory committee were presented to the City Council, not a single voice was raised in opposition. The ordinance was passed unanimously.30 F. Structural Considerations The structural dichotomy between land-use regula- tion and the provision of transit services may constitute an obstacle for the implementation of transit impact fees. It is often the case that the municipal entity au- thorized to implement zoning and conduct land-use re- view is not authorized to provide the transportation services for the municipality or the region. Unlike Bro- ward County, which regulates the growth of develop- ment of the county through impact fees and operates and maintains the county’s transit services, municipali- ties such as New York City and Portland, Oregon, regu- late land use but do not operate transportation systems. According to Tri-Met, a regional transportation pro- vider, to benefit from transit impact fees, it must coor- dinate the adoption of ordinances for that purpose 29 Id. Survey notes the rarity of impact fees for transit and goes on to discuss the two impact fee studies in California that include transit, that of San Francisco’s Transit Impact Devel- opment Fee and the San Jose Traffic Impact Fee with a public transportation component, both of which are discussed at greater length in this digest. 30 Randy Young of Henderson, Young & Company advised of the importance of a strong community outreach effort.

8 among multiple cities and three counties to collect a single fee. In the State of New Jersey, municipalities regulate land use, but the state, through NJ Transit, operates the transit system. Nevertheless, municipal entities may be able to support transit services through the use of impact fees for rights-of-way, bus pullouts, and shelters. G. The New Jersey Experience In many ways, the State of New Jersey’s experience with transit impact fees exemplifies many of the issues discussed above. In 1989, New Jersey adopted the Transportation Development District Act of 1989 (the “TDD Act”).31 The legislature recognized that “growth corridors” and “growth districts” were heavily depend- ent on the state’s transportation system for current and future development, yet placed enormous burdens on the existing transportation infrastructure contiguous to new development and elsewhere. The legislature de- termined that it would be “appropriate for the State to make special provisions for the financing of needed transportation improvements in these areas, including the creation of special financing districts and the as- sessment of special fees on those developments which are responsible for the added burdens on the transpor- tation system.”32 The legislature recognized certain lim- its on the statutory scheme of assessment, including the following: (1) The fees supplement, but do not replace the public in- vestment needed in the transportation system; (2) The costs of remedying existing problems cannot be charged to new development; (3) The fee charged to any particular development must be reasonably related, within the context of a practicable scheme for assessing fees within a district, to the added burden attributable to that development; and (4) The maximum amount of fees charged to any devel- opment by the State or county or municipality for offsite transportation improvements pursuant to this act or any other law shall not exceed the property owner’s fair share of such improvement costs.33 The TDD Act authorizes the governing body of any county to apply to the state transportation commis- sioner for the designation of a transportation develop- ment district (TDD). Following any such designation, a county must initiate a joint planning process for the TDD with opportunity for participation by the state, all affected counties and municipalities, and private repre- sentatives. The purpose of the joint planning process is to produce a draft district transportation improvement plan, which shall establish goals and priorities for all modes of transportation within the TDD and contain a program of transportation projects that addresses transportation needs arising from rapid growth condi- tions. The draft plan is required to provide for the as- 31 N.J. STAT. ANN. § 27:1C-1 et seq. 32 N.J. STAT. ANN. § 27:1C-2(c). 33 N.J. STAT. ANN. § 27:1C-2(d). sessment of development fees based upon the applicable formula established by the commissioner of transporta- tion. The county may adopt the district transportation plan, which shall not be effective until approved by the commissioner. After the effective date of the district transportation plan, a county may provide, by ordinance or resolution, for the assessment and collection of development fees within the TDD. The fee is to be assessed on a develop- ment at the time that the development receives pre- liminary approval from the municipal approval author- ity, or, where the municipality has not enacted an ordinance requiring approval of the development, at the time that a construction permit is issued. The fee may be paid in a lump sum or in a series of periodic pay- ments over a period not to exceed 20 years. Payment of the fee shall be enforceable by the county as a lien. The ordinance shall also establish a TDD trust fund. Any fees not committed to a transportation project within 10 years shall be refunded to the developer. Every transportation project funded in whole or in part from a TDD trust fund shall be subject to a project agreement to which the commissioner is a party. A “transportation project” is broadly defined to include “public highways and public transportation projects, any equipment, facility or property useful or related to the provision of any ground, waterborne or air trans- portation for the movement of people or goods.” 34 By July 2000, only four New Jersey counties had en- gaged in a TDD planning process under the TDD Act. They include Mercer County, which had a TDD plan approved in 1992 that is operational; Atlantic County, which had two former transportation improvement dis- tricts grandfathered under the TDD Act; and Hunter- don County and Union County, which had TDD applica- tions approved in the 1990s, but had no approved TDD plan and the TDDs are not operational.35 The New Jersey legislature was concerned about the underutilization of the TDD Act and, in November 1998, created the Regional Intergovernmental Trans- portation Coordinating Study Commission (RITCSC) making recommendations for modifications to the TDD Act “which would encourage regional and intergovern- mental transportation concerning transportation plan- ning decisions.”36 The RITCSC made certain key find- ings and recommendations, which are applicable for purposes of this report as follows: • Coordination and cooperation between municipali- ties, counties, the New Jersey Department of Transpor- tation (DOT), NJ Transit, and the private sector during the statutorily required TDD joint planning process has been the most consistently valuable component of TDD 34 N.J. STAT. ANN. § 27:1C-3(j). 35 The Transportation Policy Institute, Regional Intergov- ernmental Transportation Coordinating Study Commission (RITSC): Interim Report, July 13, 2000, available at http://www.njleg.state.nj.us/legislativepub/reports/ritcsc.pdf. 36 New Jersey, Pub. L. No. 1998, JR7 (AJR 21 1 R).