New report examines effectiveness of impact fee deferral programs
November 8, 2021
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Cities, counties and towns planning under the Growth Management Act (GMA) are allowed to charge impact fees on new developments by RCW 82.02.050. Impact fees are one-time charges assessed by local governments to help fund public facilities (for example, schools, parks, and road improvements) that will serve the new development.
Impact fees are collected from applicants upon issuance of the building permit. Applicants who do not defer impact fees typically finance them with a construction loan or pay them out of pocket. If the applicants finance the costs, they must pay interest on the loan until the property is sold. Deferring impact fees allows applicants to delay paying impact fees in advance, which can save money by reducing finance costs.
A September 2021 Report of the Washington Joint Legislative Audit and Review Committee (JLARC) provides an analysis of the use and effectiveness of impact fee deferral programs. The report covers two main requirements:
- The 2015 requirement (ESB 5923) for counties, towns and villages that charge impact fees for new single-family residential construction to adopt a fee deferral process, which allows applicants to pay impact fees towards the end of the process. construction rather than at the beginning; and
- The obligation for JLARC to collect data on the use and cost of impact fee deferral programs and to review the implementation of such deferrals.
This blog will highlight the main takeaways from this preliminary JLARC report.
The JLARC report includes four key findings: 1) the impact of deferral programs varied, 2) deferral use was infrequent and concentrated among five local governments, 3) 99.9% of deferred charges were reimbursed on time, and 4) several factors influence the decision to defer impact fees. More information on these results is included below.
Impact fee deferral programs vary, as permitted by state law
JLARC staff identified 107 local governments that charge impact fees and are required to have deferral programs. Of these, 98 implemented deferral programs and nine did not. The law allows local governments to decide when to collect deferred impact fees, whether to impose reasonable administrative fees, and whether to limit carry-over to the first 20 building permits per applicant per year. Local governments have implemented programs using different combinations of these three factors and therefore deferral programs vary among them. Additionally, the administrative fees of the 60 local governments that charge them range from $ 50 to $ 1,200 per single-family home, with a median fee of $ 200.
The use of deferral was infrequent and concentrated in five local governments
Applicants requested and received 3,741 deferrals from 22 of the 98 local governments that proposed them. Five local governments – Redmond, The Center, Ridgefield, Ferndale, and Kitsap County – issued 91% of all deferrals. These deferral programs have several things in common, including the fact that they do not require a lien and do not charge administrative fees.
The data indicate that the use of deferral was infrequent and unrelated to permit activity. The applicants requested deferrals on 1,284 permits, which represents less than 5% of permits issued for single-family homes by the 98 local governments with carry-over programs. In addition, of the five jurisdictions that issued the most building permits for single-family homes, only one granted deferrals. The five local governments that issued the most deferrals issued only 8% of building permits for single-family homes.
Local governments say 99.9% of deferred charges were reimbursed on time
Jurisdictions reported few problems with unpaid deferrals. In 2018 and 2019, claimants deferred $ 11 million of $ 323 million in impact costs. All but $ 13,000 were repaid on time. By law, local governments must require applicants to register a lien on the property up to the deferred impact fee. Courts have noted that the privilege requirement was intended to protect their interests, but may be problematic or unnecessary, as it may discourage claimants from seeking deferrals. They also noted that other controls, such as the suspension of the final inspection, are available to them.
The five local governments with the most deferrals do not require privileges primarily because jurisdictions that established programs before the 2015 legislation are exempt from this requirement.
Builders said several factors influence their decision to defer impact fees
JLARC staff modeled the financial benefit of deferral of fees in the 98 local governments with deferral programs. The model indicated that deferrals offer greater savings to applicants if impact fee amounts and interest rates are high and deferral periods are long. In today’s housing market, however, interest rates are low and deferral periods are short. Therefore, the models estimate the current cost savings at a maximum of $ 1,500 per single-family residence. However, builders and other stakeholders are signaling that impact fee deferrals can be a valuable tool in the future, especially if interest rates rise and homes don’t sell as quickly.
In addition to the above findings, it was noted that law requires the Washington State Department of Commerce (Commerce) to report the number of deferrals requested, issued and unpaid. JLARC observed that the Commerce Department will need to collect information that is not currently required by law if the Washington state legislature requires information on the future development of deferral use and costs. Since carryovers are currently not widely used and there have been few problems for local governments, ongoing monitoring may be unnecessary.
In this preliminary report, the legislative auditor made three recommendations to improve the effectiveness and accountability of impact charge deferral programs:
- Cities without an existing deferral program should pass an ordinance to adopt and maintain an impact deferral program for single-family residential construction, as required by law.
- Legislators should consider whether liens are a necessary tool to ensure that deferred charges are paid.
- The legislature should either repeal the Commerce data collection requirement or identify metrics the agency should collect for ongoing monitoring of the program.
The MRSC Impact Fee webpage includes sample code provisions and deferral forms. In 2018, Thurston County passed Order # 15340 regarding the deferral of impact charges for attached and detached single-family residential construction.
Local government staff should review the full JLARC report and its methodology in more detail to better understand the issues and potential improvements related to impact charge deferral programs. Responses from the agencies on the most recent state of implementation of the recommendations in this report are expected next year.
MRSC is a private, non-profit organization serving local governments in Washington State. Eligible Washington State government agencies can use our free, one-on-one Ask MRSC service to get answers to legal, political, or financial questions.