Residential Annexation and impact fees 8/11/13

Local annexation for residential development has been on hold for since the housing collapse 0f 07-08 and the DHL fiasco. As the economy improves we should take a look at the down side of restarting the practice without certain adjustments.

The basic question is: Should current residents of the city subsidize developer profits?

Every new street, every new student and every new demand on city services has a cost. New tax revenue may help pay for a teacher but not for a new classroom; a new sewer worker but not a new sewer plant; a new street worker but not a new snow plow. “In place” property owners and tax payer would have to pay a portion of the new costs without receiving any new benefits.

From Ohio State University community fact sheet.

Virtually all of the studies show that for residential land, the cost of community service (COCS) ratio is substantially above 1. That is, residential land is a net drain on local government budgets. The average estimate ranges from about 1.15 to 1.50, which means that for every dollar collected in taxes and non-tax revenue, between $1.15 and $1.50 gets returned in the form of services by the local government and school district.

Some local government and schools have turned to the imposition of fees paid by the developer and often passed on to the home buyer. These fees are called impact fees.

From the OSU fact sheet:

Development impact fees are one-time charges applied to offset the additional public-service costs of new development. They are usually applied at the time a building permit is issued and are dedicated to provision of additional services, such as water and sewer systems, roads, schools, libraries, and parks and recreation facilities, made necessary by the presence of new residents in the area. The funds collected cannot be used for operation, maintenance, repair, alteration, or replacement of existing capital facilities and cannot just be added to general revenue. They are essentially user fees levied in anticipation of use, expanding the capacity of existing services to handle additional demand. The amount of the fee must be clearly linked to the added service cost.

It's worth noting that industrial and commercial development have a positive effect on the COCS because the source of revenue is much higher per acre and the service needs are more concentrated as well.

Paul Hunter