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Weekly UpdatesMany communities throughout the United State have experienced unprecedented growth and development, creating a need for expanding and improving existing infrastructure and acquiring new infrastructure assets to accommodate the needs of current and future residents. When evaluating these projects, public officials need to look at the long-term impact of growth and development. Comprehensive planning requires public officials to embrace a lifecycle costing model that looks not only at the costs associated with a particular asset but also at growth and development costs broadly defined. The infrastructure costs associated with a particular development may extend beyond a given project or development, and those costs have long-term effects.
Recently, some governments have used development impact fees (DIFs) to finance infrastructure associated with a particular development. Given the limitations and barriers associated with traditional methods of financing infrastructure (e.g., general obligation bonds, special assessment bonds, intergovernmental revenues, current taxes, etc.), DIFs represent a useful alternative financing source for infrastructure associated with new development, However, the additional capital and operating costs are not typically factored into the computation of DIFs, either by law, regulation, or omission. Therefore, these costs may ultimately be borne equally by all taxpayers within the government's jurisdiction, not just the people living in the newer developments (i.e., the people who made the additional costs necessary).
TYPES OF FINANCING AND INTERPERIOD EQUITY
The long-term nature of infrastructure makes interperiod equity an important consideration. In determining who will pay for these projects, public officials need to consider who will pay. The financing method affects interperiod equity--that is, whether current taxpayers are paying for something today that will provide a benefit to future taxpayers, or if current taxpayers receiving a benefit today that future taxpayers will pay for.
Traditionally. local governments have financed infrastructure through the use of general obligation bond proceeds, special assessment bond proceeds, intergovernmental revenues, and current revenues such as property taxes. Each of these methods has limitations and barriers that can prevent their use. For example, because taxpayers do not like to pay higher taxes, the amount of intergovernmental revenues (e.g., federal and state grants) available to finance infrastructure at the local government level has decreased significantly. (1) State and local laws limit the issuance of general obligation bonds, and voters must approve them. Finally. issuing special assessment debt typically requires a special assessment petition signed by a majority of the property owners that will benefit from the proposed project. For these reasons, public officials in some communities have turned to development impact fees to finance infrastructure. A development impact fee is a one-time charge assessed on a developer to pay (in full or in part) for infrastructure necessitated by new development. Development impact fees shift the cost of expanding, upgrading, or constructing new infrastructure assets to those creating the need for the infrastructure.
When choosing a method to finance infrastructure, public officials should consider whether the method chosen promotes or maintains interperiod equity, or if it undermines or impairs interperiod equity. (2) Interperiod equity is maintained when an expenditure such as current period payroll is paid from current period tax revenues, and it is impaired when the current period payroll is paid out of the proceeds from 30-year general obligation bonds. Similarly, interperiod equity is impaired if current-period tax revenues are used to purchase a building that will provide benefits over a 30-year period, and it is maintained if the building is financed by issuing 30-year general obligation bonds.
General Obligation Bonds. All revenue sources of the government, except those specifically earmarked for another purpose, are available to service general obligation debt. Using long-term general obligation debt to finance infrastructure assets is justifiable because of the long-term nature of infrastructure assets. Infrastructure assets will benefit both current and future citizens, so it is reasonable to finance infrastructure by issuing general obligation debt that will be serviced from taxes imposed over the useful life of the infrastructure.
Special Assessment Bonds. Some infrastructure projects benefit only a small group of property owners. Acting on behalf of the property owners who initiated the project, the local government arranges for the issuance of special assessment bonds, constructs or arranges for the construction of the infrastructure assets, oversees the project, and collects assessments from the property owners to make periodic interest and principal payments to the bondholders. While an infrastructure project primarily benefits a small group of properties, it is likely that it also improves the quality of the local community at large; therefore, it is justifiable for the government (i.e., current and future taxpayers) to bear a portion of the cost. Street improvements such as grading, paving and repaving; and the installation of curbs, sidewalks, street lights, storm drains, water lines, and sewage lines are some of the most common infrastructure assets financed by special assessment debt.
The primary advantage of special assessment bonds is that the cost of the infrastructure is borne by those who benefit most, and to the extent that the cost of the infrastructure is recovered via assessments lasting the useful life of the asset, interperiod equity is maintained. The primary disadvantage of this method of financing is that special assessment bonds generally bear a higher rate of interest than general obligation bonds because of the higher risk of default or late payments by the property owners responsible for periodic interest and principal payments. Another disadvantage is that the cost of the project may be allocated to properties based on the length of the property's street frontage instead of the property's value. (3)
Development Impact Fees. A development impact fee is a one-time charge assessed against a developer, typically as a condition to beginning construction. These fees attempt to recover the cost of infrastructure assets necessary to serve a development, and they are often promoted as one way to have the ultimate beneficiaries of the development (i.e., the owners and renters who live there) pay for infrastructure, thereby alleviating the burden that would otherwise fall on existing property owners. (4) Typically, a developer will embed a pro-rata share of the development impact fee into the selling price of each lot or home that is sold. In the future, the initial homeowner will embed the price originally paid for the home (which includes the original pro-rata share of the fee) into the selling price when it is sold to the second owner, and so on. In addition, each homeowner will pay property taxes based on the value of the home. The local government will use these property taxes, in part, to maintain the infrastructure originally financed with development impact fee.
Therefore, to the extent that successive homeowners are able to embed the price they paid for their home (which includes a pro-rata share of the original fee) into the selling price of the home, interperiod equity appears to be maintained. Each successive homeowner benefits from the infrastructure and pays for their pro-rata share of the original installation cost associated with the infrastructure (via purchase price) and for the maintenance of the infrastructure (via current property taxes).
INFRASTRUCTURE PLANNING
The long-term nature and high cost of infrastructure makes it important for public officials to plan for infrastructure needs far in advance. Typically, public officials combine the use of tools including comprehensive land use plans, zoning, capital improvement plans, and lifecycle cost analyses to create a comprehensive long-range planning document that will guide growth and development over a period of 5-20 years.
Comprehensive Land Use Plans and Zoning. A comprehensive land use plan provides guidance regarding the use of land within a government's jurisdiction. Certain areas might be designated commercial while other areas are designated residential, and other areas are designated for airports, bus depots, train depots, etc. These areas can then be zoned in a way that is consistent with the land use plan. Zoning is a method of codifying the spirit of the land use plan into law. Comprehensive land use plans and zoning affect infrastructure planning because the infrastructure needs for an airport will differ from the infrastructure needs for a residential development, for example.
A comprehensive plan allows public officials to anticipate growth and the increased demands growth often places on existing infrastructure. For example, existing water and wastewater treatment plants may need to be upgraded or expanded, or a new plant might need to be constructed. A newly developed area may require new roads, sidewalks, bridges, and tunnels, and existing roads near the area may need to be widened or upgraded to accommodate additional traffic. In addition, development often results in the deforestation of large tracts of land, which typically causes an increase in the amount of storm water runoff; an increase in the volume and velocity of storm water runoff can cause flooding in areas downstream of newly developed areas. A comprehensive plan that indicates the topography of the land allows public officials to anticipate potential flooding problems and proactively pass laws designed to prevent such problems. For example, developers of land that is at a higher elevation than existing homes could be required to install detention ponds and new or upgraded storm water drainage systems to reduce the likelihood of downstream flooding.
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