Impact Fees: What’s the Impact OF That?

by David Klein

Adopting and implementing water and wastewater impact fees can be a very useful (and in some instances critical) tool for a municipality or water district (“District”) to generate the needed revenues to pay for the rising costs for certain new water and wastewater facilities.

According to the 2022 State Water Plan, “Texas’ population is projected to increase by more than 70% during the [50 year] planning horizon, from 29.7 million in 2020 to nearly 51.5 million in 2070.” With such striking amount of growth to come in our great State, it naturally follows that there also will be a significant increase in the need for water and wastewater services. Consequently, our Texas cities and water districts will need to have the water and wastewater facilities necessary to meet the demands for utility services from such new residents.

How can and will those cities and Districts pay for such facilities? Traditionally, such entities generate revenue through one or two ways: (1) water and wastewater rates, and (2) levying an ad valorem tax (for those entities that have such authority) on landowners within the jurisdictional boundaries of such cities and Districts. Impact fees, however, can offer a third source of revenue, generated solely from the new customers, not the existing residents/rate base, through the initial payment of a one-time fee.

While there certainly are unique factors and laws to be taken into consideration, impact fees, generally speaking, are fees paid by new customers to pay for the costs of the new central facilities needed to serve those new customers. The exact manner in which impact fees are calculated, assessed, collected, and used are subject to a strict set of laws, found in Texas Local Government Code (“TLGC”) Chapter 395. Such laws allow certain water districts, such as special utility districts, to adopt impact fees by filing an application at the Texas Commission on Environmental Quality. However, many districts and all municipalities adopt water and wastewater impact fees independently, following the strict procedural and substantive requirements of Chapter 395 of the TLGC.

Under Chapter 395, the municipality/political subdivision must first adopt land use assumptions and a capital improvements plan (“CIP”). Then, based upon those assumptions and CIP, the entity must determine the maximum allowable impact fee amount and the actual amount that it wants to charge the regulated community. Under Texas law, “land use assumptions” consist of a description of the impact fee service area and the projected changes in land uses, densities, intensities, and population over at least a
10-year period. Simply put, these assumptions provide the entity’s expected growth for the next decade. A CIP is a plan identifying capital improvements/expansions that will be needed to meet anticipated growth in the upcoming 10 years. A CIP must be prepared by a qualified engineer licensed in the state of Texas to provide engineering services, and the Texas Legislature has set the parameters in TLGC §§ 395.012-395.014 for the facilities that an engineer can and cannot include in a CIP.

To summarize those laws, subject to certain exceptions, the allowable capital improvements/facility expansion costs in a CIP are for the construction, surveying, engineering, and projected interest charges for new facilities that will be used to serve new customers. Repairing, updating, or upgrading existing facilities to serve existing customers are not eligible to be included in the CIP for the purposes of calculating the impact fee.

Once the land use assumptions and CIP are approved, then the governing body of the entity will calculate the maximum allowable impact fee and set the desired impact fee amount. An entity must be careful to ensure that there is no double recovery of the CIP costs through the rates, taxes (if levied), and impact fees. Otherwise, the validity of the impact fee could be at risk. When considering how much of the maximum allowable impact fee should be charged through the adopted impact fee, the governing body will be faced with balancing the placement of costs of new facilities on new customers with the potential for stifling growth. To assist with that issue, the municipality/District also needs to establish an Impact Fee Advisory Committee (“IFAC”), where the IFAC will review the proposed land use assumptions, CIP, and maximum allowable impact fee, and provide the governing body with its recommendations. An IFAC is composed of not less than five members, appointed by a majority vote of the governing body; and, not less than 40% of the membership of the advisory committee must be representatives of the real estate, development, or building industries who are not employees or officials of a political subdivision or governmental entity.

Once the CIP is prepared, it should take about 6 months to adopt land use assumptions, the CIP, and impact fees. Texas law requires that the governing body publish (and potentially mail) notice and hold a public hearing for adopting the land use assumptions and the CIP, and then perform those same notice/hearing steps again for adopting the impact fee.

Last, as to the implementation of the impact fees, the municipality/District is statutorily required to place those funds in a separate account, which can only be used to pay for the costs of the projects contemplated in the CIP.

There are a number of potential pitfalls for entities when going through this process and then assessing, collecting, and using such funds, and those entities should rely upon their experts (staff, demographers, engineers, rate/fee consultants, and attorneys) to ensure that those pitfalls are avoided. Regardless, while these steps may at first glance seem onerous, the potential benefits of taking the burden of paying for new, expensive water and wastewater treatment plants off of an existing community through rates and taxes, and onto those new customers that will actually utilize those facilities through a one-time fee, can certainly justify the need to undertake this important process.

David Klein is a Principal in the Firm’s Districts and Water Practice Groups. If you would like additional information or have questions related to this article or other matters, please contact David at 512.322.5818 or dklein@lglawfirm.com.

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