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UPDATE ON AUTHORITY TO CHARGE WATER SYSTEM DEVELOPMENT FEES
Jeff HughesLecturer and Director of
Environmental Finance CenterSchool of [email protected]
919.843.4956www.efc.sog.unc.edu
Kara MillonziProfessor of Public LawSchool of [email protected]
919.962.0051www.sog.unc.edu
UPDATE ON AUTHORITY TO CHARGE WATER SYSTEM DEVELOPMENT FEES
August 17, 2017
How you pay for it matters
Supporting the fair, effective, and financially sustainable delivery of environmental programs through:• Applied Research• Teaching and Outreach• Program Design and Evaluation
A member of the US Environmental Protection Agency Supported Environmental Finance Center Network
Agenda
Legal Overview of the basics of HB 436 System Development Fee Analysis Questions
Water and Wastewater System Development Fees
Lawful Upfront Charges for Water and Sewer:New System Development Fee Law
Fees “for the use of or services furnished by”Not Allowed?????????????????
AllowedIMPACT FEE:
• Automatically assessed on developer as condition of development; AND/OR
• Calculated to fund future capital costs of water/sewer system
*Unless unit has local act authority
1. Assessed on developer as condition of development (before there is a contract to connect to water/sewer system); OR
2. Assessed when propertyconnects (or contracts to connect) to water/sewer system; Calculated solely to cover future expansion costs
No Water/Sewer ContractExpansion Method
Water/Sewer ContractSolely for Future Expansion
1. Assessed when propertyconnects (or contracts to connect) to water/sewer system; Calculated to cover some measure of reserved capacity in system (combined or hybrid approach—includes both existing and planned capacity); OR
2. Assessed when propertyconnects (or contracts to connect) to water/sewer system; Calculated to cover unknown future maintenance / upgrade costs of system
Water/Sewer ContractHybrid Method
Water/Sewer ContractUnknown Future
Maintenance/ Upgrade Costs
1. Assessed when property connects (or contracts to connect) to water/sewer system; Calculated by equity or system buy-in method as reimbursement for past investments in system; OR
2. Assessed when property connects (or contracts to connect) to water/sewer system; Calculated to cover known or predictable future maintenance / upgrade costs necessary to provide service to property
Water/Sewer ContractBuy-in Method
Water/Sewer ContractKnown Necessary Future Maintenance/ Upgrade
Costs
CONTRACTUAL CHARGE:
• Assessed on developer or property owner pursuant to development agreement or other contractual agreement;
• Calculated to cover direct and indirect costs of expanding / extending public infrastructure to serve property(ies)
TAP/CONNECTION FEE:
• Assessed on developer or property owner when property connects to water or sewer system;
• Calculated to cover direct and indirect costs of connecting property to system
USER FEE:
• Assessed on water/sewer customer (after property connected);
• Calculated to cover past, current, and future costs necessary to serve property;
• May include profit component
Upfront Charges As of October 1, 2017
New Development WithinTerritorial Jurisdiction
Existing Development Within Territorial Jurisdiction
New or Existing Development Outside Territorial Jurisdiction
System Development Fee (GS 162A, Art. 8)
May charge fees for ”services to be furnished”
May charge fees for “services to be furnished”
May adopt different fee schedules than for ”inside” properties
Regulatory Fees Regulatory Fees Regulatory Fees
Tap/Hookup Fees Tap/Hookup Fees Tap/Hookup Fees
Contractual Charges Contractual Charges Contractual Charges
Availability Fee (if applicable) Availability Fee (if applicable)
Questions
• What government entities are affected?
• Who can be assessed (aka what is new development)?
• How is the fee calculated?
• When may the fee be imposed?• What may be funded with the fee?• What is the process for adopting the fee?
• What other fees are allowed?• WHAT NOW?
Who Has to Comply?
Government Water / Sewer
Services
Municipalities
Counties
County Water and Sewer
Districts
Joint Agencies (City/County
Utility Commission)
Water and Sewer
AuthoritiesSanitary Districts
Metropolitan Water
Districts
Metropolitan Sewerage Districts
Metropolitan Water and Sewerage Districts
Fayetteville PWC /
Greenville Utilities
Commission
Who Can Be Assessed?
New DevelopmentChange Made to
Land/Structure(s) Timing of Change• Subdivision of Land
• Construction, or any change to existing structure, that causes increase in need for service
• Any use or extension of use of land that increases need for service
• After fee adopted by board; OR
• After written analysis of fee calculation begins, as long as within one year prior to fee adoption
Only deals with Who may be assessed, not When fee is assessed
When Can Fee Be Assessed?
• When plat recorded; OR• When local unit commits to provide
water/wastewater service to the development
Subdivision of Land
• When property owner applies for connection of individual unit of development; OR
• When increased capacity triggered
Changes to structures or land
that increase number of service units
Process to Adopt Fee Schedule
1 • Professional Analysis
2 • Public Input
3 • Professional Analysis Reconsidered
4 • Public Hearing
5 • Adopt Resolution or Ordinance
6 • Notice of System Development Fee Schedule
7 • Periodic Updates
How to Calculate Fee Schedule
Detailed Analysis Choose Methodology
• Incremental/Marginal Cost• Buy-in• Combined
Service Unit Rate Revenue or Valuation Credits Equivalency or Conversion Table (Fee
Schedule) Planning Horizon of 10-20 years
Spending Proceeds
Incremental / Marginal Cost or Combined Cost Methods
• Costs of construction or expansion that were “necessitated by and attributable to” new development (construction; surveying/engineering; land acquisition; debt service; fee analysis costs)
• If no capital improvements planned for 5 years, debt service on existing “capital improvements”
Buy—in Method• Unrestricted proceeds in water or wastewater fund?
Administering Proceeds
Capital Reserve Fund (CRF)• Alternative to Fund Balance
• Adopt Ordinance or Resolution
• Specify projects to be funded with proceeds
• Must move $ to budget or project ordinance before expending
Upfront Charges As of October 1, 2017
New Development WithinTerritorial Jurisdiction
Existing Development Within Territorial Jurisdiction
New or Existing Development Outside Territorial Jurisdiction
System Development Fee (GS 162A, Art. 8)
May charge fees for ”services to be furnished”
May charge fees for “services to be furnished”
May adopt different fee schedules than for ”inside” properties
Regulatory Fees Regulatory Fees Regulatory Fees
Tap/Hookup Fees Tap/Hookup Fees Tap/Hookup Fees
Contractual Charges Contractual Charges Contractual Charges
Availability Fee (if applicable) Availability Fee (if applicable)
What if your unit has charged/is charging an unlawful fee?
10-year statute of limitations (case law)
Court may award attorneys fees and costs; must award if abuse of discretion (G.S. 6-21.7)
If assessed on new development, 6% interest per year (G.S. 160A-363(e))
What if your unit has charged/is charging an unlawful fee?
Court may award attorneys fees and costs; must award if abuse of discretion (G.S. 6-21.7)
If assessed on new development, 6% interest per year (G.S. 160A-363(e))
• 3-year statute of limitations for “the recovery of an unlawful fee, charge, or exaction collected by a county, municipality, or other unit of local government for water or sewer service or water and sewer service.” (G.S. 1-52(15))
Supporting Analysis/SDF Analysis:Terms and Concepts “Generally accepted
accounting, engineering and planning methodologies”
• Buy-in: there is existing capacity that existing customers have been carrying the cost of
• Incremental cost or marginal cost: the new development will lead to the need for new capacity
• Combined
HB 436 SDF Analysis Documentation (Report) Terms and Concepts“Reasoning, analysis, and interim calculations”“Assumptions and limiting conditions” Identifiable components of SDF
• Water system and wastewater system (less precise)• Water supply, treatment, storage, and distribution (more
precise but requires more information and assumptions)
“Final” system development fee Categories of demand – SDF customer classesEquivalency or conversion tables
HB 436 SDF Terms and Concepts
Construction/contribution Credit (All)“Actual costs” – non depreciated costs (Buy-in)“Replacement costs” (Buy-in)Debt credit (Buy-in)Grant credit (Buy-in)Revenue Credits (Incremental or Combined)
• 25% • Remaining debt balance• Present value of debt service
SDF Analysis Information Needs Inventory/list of previously completed capital
improvements/assets (Buy-in and Combined) Information on the original and/or replacement value of assets
(Incremental or Combined) 10-20 Year Capital Improvement Program (Incremental or
Combined) Total units of capacity of water and wastewater assets or asset
categories (Buy-in) Total units of capacity of growth related CIP Projects
(Incremental or Combined) Estimate of capacity needs of customers based on customer
demand categories (all)
Basic Approach Buy-in
Identify the previously completed improvements (aka assets) that have unused capacity to serve growth Quantify the total used and unused capacity of those
assets Assign a value to those assets Adjust the value based on standard practices and
language in HB436 Calculate a per unit cost of the capacity Develop conversion approach to apply to different
customer demand categories based on their capacity needs
Buy-in Example: Happyville
Happyville provides water and wastewater services Current capacity of water treatment plant is 20
Million Gallons per Day (MGD) Current capacity of wastewater treatment plant is
15 MGD During a dry year, the maximum water use is in the
month of July is 12 MGDWastewater use does not vary much during the
year – the max flows are approximately 8 MGD
Water SDF Buy-in Example: Assumptions and Limiting Conditions
Assume the capacity of the water treatment system and the water distribution network are approximately the same – major investments will be needed in both beyond 20 MGD Information on the water assets have not been kept up
during the years and there is evidence that some assets have not been included, but assets have been checked and all assets in use are included in the inventory Non-depreciable assets and facility equipment benefit
both water and wastewater systems equally and can be allocated evenly among the two services for valuation purposes.
BalanceJuly 1, 2016
Non-Depreciable Assets:
Total non-depreciable assets (land) 20,000,000
Depreciable Assets:
Water treatment and distribution 235,000,000
Sewer collection and treatment 200,000,000
Facility Equipment 20,000,000
Total depreciable assets 455,000,000
Less Accumulated Depreciation:
Water treatment and distribution -50,000,000
Sewer collection and treatment -40,000,000
Facility Equipment -10,000,000
Total accumulated depreciation -100,000,000
Notes to the Financial Statements for the Years
Ended June 30, 2016
Capital AssetsA summary of changes in capital
assets ->
water
wastewater
both water and wastewater
Water SDF Buy-in Example: Valuation of Assets
Valuation of Water Assets Original Cost minus depreciation• Original cost of water depreciable capital Improvements
$235,000,000 • Original cost of water portion of facility equipment $20,000,000/2
= $10,000,000• Original cost of facility land allocated to water
$20,000,000/2 = $10,000,000• Depreciation of facility equipment allocated to water
$10,000,000/2 = $5,000,000• Original costs – (depreciation of depreciable assets)
$235,000,0000 + $10,000,000 + $10,000,000 - $50,000,000 - $5,000,000 = $ 200,000,000
• Debt credit - $40,000,000 (balance of existing debt)• Grant credit - $10,000,000 (e.g. CDBG, USDA, DWI)• Value of Capacity: $200,000,000 – $40,000,000 - $10,000,000 = $150,000,000
Note: this formula has been corrected from the original that was shown and recorded during the webinar
Calculating Service Units
Assume all assets have peak total capacity of 20 MGD per day Total maximum daily capacity in the Summer is 12
MGD- plenty of Capacity Service Unit Building Block
• $150,000,000/20,000,000 per day
$7.50 per each gallon per day (gpd) or capacity Happyville can recover up to $7.50 per gpd a new
customer will use
Customer Needs
“Average” residential customer account is predicted to use 6,000 gallons per month in July or 200 gallons per day (gpd) Single family customer in detached house are
known to use 9,000 gallons per month or 300 gpdMulti-family accounts are known to use 3,000
gallons per month
Equivalency/Conversion TableResidential Conversion Table
• Option 1: Assume all Residential Customers with the same meter size use the average and charge them the same. 6,000 gallon per month 200 gallons per day
200 gpd x $7.5/gpd = $1,500
• Option 2: Use information to refine allocation. Multifamily: 100 gpd x $7.5/gpd = $750Single family: 300 gpd x $7.5 = $2,250
Equivalency/Conversion Table
Number of Bed Rooms (Coastal Communities) Square Footage of Property (OWASA) Meter size (most common but weak correlation) The higher the average fee the more argument for
being precise in allocating among different customers.
Equivalency/Conversion TableEquivalent Residential Unit (ERU)
Average Residential Unit – 6,000 gallons 200 gallons per day $1,500 per unit. Set this as the ERU. Shopping Center Needs 60,000 gallons per month (2,000
gpd)
On a gpd Basis: 2,000 gpd x $7.50/gpd = $15,000 On an ERU Basis: 10 x $1,500/ERU equals $15,000
Good billing data allows you to be precise. Meter ratios are tempting to use because of how easy it is
but they are not as precise as billing/meter data• 1 ½ inch meter allows 5 times maximum flow of a 5/8 in meter so
all 1 ½ meters can be charged 5 times ERU
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Questions?
Jeff HughesLecturer and Director of
Environmental Finance CenterSchool of [email protected]
919.843.4956www.efc.sog.unc.edu
Kara MillonziAssociate Professor of Public Law
School of [email protected]
919.962.0051www.sog.unc.edu