Problems with Exactions and Impact Fees

Exactions and impact fees have been useful tools for local government to help finance services as demand for services increases with growth.  While impact fees may be exacted for any type of impact (air pollution, park use, expanded fire protection, etc.), the most common application of impact fees is to levy them for increased road and water/sewer demand that accompanies new development.  Despite their usefulness in generating revenue, the administration of exactions and user fees contains some critical flaws that diminishes the overall utility of this tool.

The main problem with user fees is that they do not fully account for the life-cycle and replacement costs of the infrastructure that they create.  While they are often designed to give municipalities initial capital funds or at least enough financing to procure a bond (thus allowing city officials to say yes to developers and grant them the permits they are requesting), exactions and user fees don't account for the  life-cycle costs of the infrastructure that they finance, and eventually, cities must tap into their general tax revenue to pay for the expansion in infrastructure.  For areas with higher service delivery costs (i.e. far away from existing infrastructure), this can turn into an expensive proposition.

A second problem is the "nexus" legal framework that asserts that there must be a reasonable connection between infrastructure need and new growth.  In practice, this has prohibited cities from using impact fee revenue for projects that may have more benefit to their municipalities, and instead must be used for expenses related to the new growth.  Towns looking to revitalize infrastructure in other neighborhoods or fund items like expanded public transit with impact fee revenue will be unable to meet the "nexus" legal test and have these efforts stymied, as the funds must be spent on the new growth.  The "nexus" framework helps to drive the growth machine by taking away cities' ability to choose which projects get funded, and only must fund the new projects with impact fee revenue (thus, the older infrastructure in out-of-fashion neighborhoods takes longer to receive attention or gets neglected entirely, reinforcing reinforcing the logic of the vicious circle of greenfield growth and old-neighborhood abandonment).

The cost and supply of new services for growing communities is not fully accounted for by impact fees and exactions.  Cities must maximize the effects of density and find ways to more effectively incentivize infill and denser development, so that they can enjoy the efficiencies that come from agglomeration.  The "nexus" test makes generating this type of momentum more difficult, but a concerted effort by policymakers (regional government entities, such as Minnesota's Metropolitan Council, could play a critical role) towards greater density will help us rein in our infrastructure expenses and make for more efficient local governments.