By The AZFPI Board
Do you know why the IRS Tax Code is approximately 2,600 pages? Because when it comes to paying taxes, the honor system just doesn’t work. And like it or not, governments use taxes (and fees) to pay for essential services such as roads, public safety, and utilities. So why then, in 2019, would former Prescott Mayor Greg Mengarelli select a commission comprised solely of developers and home builders to review Development Impact Fees?1 What could possibly go wrong in “Every Developer’s Hometown”? Answer: Plenty. Especially given Prescott’s long, torturous history with Development Impact Fees.
A Development Impact Fee (DIF) is a one-time fee charged to recover costs for certain capital improvements directly related to growth (like streets, police and fire stations). The fee is paid on new construction at the time a building permit is issued. Cities/towns must meet Arizona legal requirements, including updating fees every five years, and reporting annually on collections and expenditures. It is important to note that DIFs cannot pay for operating expenses, like police officer and firefighter salaries– even if these additional public safety staff are needed to support growth.2
Prescott began collecting utility “buy-in fees” in the 1980’s (water/wastewater).3 Although state legislation permitted cities to collect non-utility fees as far back as 1982, Prescott did not collect its first non-utility DIFs until 1995.3 Prescott then updated these non-utility DIFs in 2001 and again in 2006. It didn’t take long before a Hatfield vs. McCoy-like feud grew over an ever-increasing population and the need to increase impact fees. On the one side was the belief growth should pay for growth. Opponents disagreed, stating the fees were unfair to developers who were the drivers of Prescott’s economy. They also claimed there will be no affordable housing as fees only get passed on to buyers.4 That argument rings hollow. Keeping Prescott’s impact fees artificially low for decades has not been the panacea to encourage affordable housing; we face that very problem today.
Prescott routinely hired consultants to conduct impact fee studies, but previous councils and staff then overruled the consultant’s recommendation for legally appropriate DIF amounts. Instead, responding to developer and economic pressures, previous councils arbitrarily lowered the recommended DIF amount or deferred capital projects intended to serve growth. Even though the city council had the authority to do this, the practice of kicking the can down the road delays the inevitable. Some not-so-stellar highlights show how growth has not paid for growth:
- The non-utility DIF legally allowable increase was 154%.5 After pressure from the development community, the Prescott City Council adopted an increase of 54%.6
- 2008 -2009. For most of 2008 the council engaged in a contentious public debate about water and wastewater (utility) DIF increases.7 These fees were last updated in 1991 (conveniently missing the building boom from the 1998 “great plat rush”). New water/wastewater DIFs were eventually adopted in October 2008. Curiously, the council delayed the implementation date for six months (from January 11, 2009 to July 11, 2009).8 Then in August 2009, the Arizona Legislature approved House Bill 2008 which placed a retroactive, three-year moratorium on implementing new or increased DIFs after June 29, 2009. The Prescott City Council’s decision to delay DIF implementation resulted in the city refunding DIFs it had collected to approximately 30 developers.9 If the council had stuck with the original January 11, implementation, no refunds would have been required (you snooze you lose). In addition, approval of the 450-acre Granite Dells Ranch project was delayed from June 23, 2009 to July 14, 2009 — ensuring lower impact fees courtesy of the Legislature’s moratorium.10
- Water and wastewater rates were increased to fund necessary capital improvements, including projects attributed to growth and in part due to the loss of DIF revenues for three years because of the moratorium.11
- Arizona Senate Bill 1525 (impact fee legislation) was adopted on December 31 and became effective August 1, 2014 (remains the current impact fee law today).12
- Prescott eliminates public buildings/fleet and recreation DIFs effective January 1 to comply with new state law.13
- 2012-2013. The city hires various consultants to prepare required documents and fees to comply with the new 2011 impact fee law which must be implemented no later than August 1, 2014. Consultants include Red Oak Consulting, Carollo Engineers, Inc., and Raftelis Financial Consultants, Inc.14
- Prescott eliminates library and parks DIFs effective August 1, 2014.13 Street DIFs were eliminated in April due to a lack of growth-related projects, despite such projects being identified in prior-year DIF calculations.15 Incredibly, police and fire DIFs were eliminated temporarily in August, and then eliminated altogether in December.16 The rationale given was the city’s budget couldn’t support paying for the capital costs of building facilities, while also paying for increased operating costs such as staffing. DIFs adopted in 2014, and effective in 2015 were $5,553 LOWER than what the city charged in 2012 for a comparable home.17
In 2018, the city’s consultant, Raftelis, began work on DIF analysis for updated fee adoption in 2019. With no pending state legislation and a healthy economy, this was a golden opportunity to finally get DIF-eligible projects clearly identified and to establish impact fees reflecting the true cost of growth. Former Mayor Mengarelli’s Commission on Development Impact Fees went right to work, holding four meetings between the fall of 2018 and January of 2019.1
Given this commission was comprised entirely of development community representatives, it should come as no surprise that it pushed to reduce the 2019 impact fees calculated by the city’s consultant.19 This, despite the city council’s 2017 approval of a new 10,000-home subdivision in north Prescott.18 The 2019 city council adopted DIFs for a comparable single-family home 40 percent lower than both recommended by the consultant, and allowable by Arizona statutes.17 However, it is unclear if all council members were made aware of the commission’s efforts to reduce fees.19 The beneficiaries of the reduced fees? As in the past, developers. And once again, growth did not pay for growth. To illustrate this point further, the FY 2023 Development Impact Fee Annual Report shows a deficit for development fee collection of $24 million.20
The many years of DIF under-charging has left Mayor Goode and the current city council with the unenviable task of attempting to “true up” growth costs by identifying future growth-related projects and charging appropriate fees. If the fees recommended by the city’s consultant had been adopted in 2019, today’s proposed fee increase in 2024 for a similar size new home would be about 20 percent. Instead, the comparable 2024 DIF shows a whopping 70 percent increase is needed.17 Unfortunately, the city’s 2024 fees must be based on future projects serving growth. Nothing can be done to retroactively collect the fees passed on by prior city councils.
The real losers in all this? Long-term Prescott residents. They face skyrocketing water/sewer bills, nightmarish traffic which seems to worsen by the day, and a November ballot proposition to temporarily increase sales tax for the sole purpose of funding improved public safety services within the city. This includes the construction of sorely needed police and fire facilities to accommodate the growth in north Prescott.21 As Finance Director Mark Woodfill said in 2008, there is no way to pay for both public safety operating and capital costs with the current revenues available.16 So here we are in 2024, faced with the same dilemma, albeit with slower police and fire response times.22
Perhaps the lesson is this: growth is going to happen. And the city can no longer afford to kick the can down the road if we want adequate water, wastewater, roads, and facilities/vehicles for police and fire protection. It is past time for the Prescott City Council to use impact fees, NOT to stop growth, as many might wish, but to PAY FOR growth.
Unfortunately, one unintended consequence of increasing Prescott’s DIFs to the level they should be, is that development could move into Yavapai County, where there are no impact fees. If you care about how fast and how much the county grows, there is an upcoming election for county supervisors. History shows us one candidate running in District 1 already has a track record as Prescott Mayor of listening to developers and not the people.1 Vote wisely.
Footnotes
1In a “fox guarding the henhouse move,” Former Prescott Mayor Greg Mengarelli appointed Brian Bombardieri (B’s Contracting/YCCA), David Grounds (Dorn Homes), Dean Lyon (Lyon Engineering), Michael Taylor (Taylor Architects), Michael Yarnes (Rent Right Management Services) to advise council on the development impact fees. As Mayor, Mr. Mengarelli had the sole authority to create and appoint this commission. The Mayor’s Commission met on October 9, November 7, and November 28 of 2018, and on January 9, 2019. Minutes can be found for the first three meeting in the City’s on-line Public Records Portal. Minutes for the last meeting (January 9) where the Commission proposed cutting the consultant’s recommended DIF amounts and growth-related capital projects were only available through a public record request (and therefore the authors cannot provide a link). It is unclear if the full council were made aware of the Commission’s reductions. The commission is noted in a January 22, 2019 consultant presentation, but there is no record of the commission presenting its recommendations directly to the council.
“Update of the Development Impact Fee Process,”City Council Study Session, (p. 21)
2To charge impact fees, cities and towns must have a 10-year Infrastructure Improvements Plan (IIP) developed by a qualified professional, identify land use assumptions to project growth, calculate fees based on the cost of improvements attributed only to growth, update fees every five years, and annually report impact fee revenues and expenditures. State statutes also define what is considered a “necessary” public service for which development fees can be collected. Arizona Revised Statutes ARS 9-463.05. https://www.azleg.gov/ars/9/00463-05.htm
3 The city started collecting Development Impact Fees for the wastewater utility in 1980, the water utility in 1982, and for all other non-utility functions in 1995 (after adoption in 1994). Prescott’s non-utility development impact fees have morphed over time to comply with state law, but historically included streets, police, fire, buildings, parks, recreation, and library.
“Public Hearing on Intention to Increase Development Fees,”
Council Agenda Memo, August 14, 2018, “Award of City Contract to Raftelis Consulants” (p. 214) https://docs.prescott-az.gov/WebLink/DocView.aspx?id=33023&page=214&searchid=d9610e7f-168a-41c3-9f6f-bae84dbd1d2a
Council Agenda Memo, August 29, 2006 provides the history regarding Prescott’s Non-Utility Development Impact fees. https://docs.prescott-az.gov/WebLink/DocView.aspx?id=180568&page=44&searchid=0ffd914f-0f33-4eef-b746-4d3c1d3318a6&cr=1
4City Council Minutes August 29, 2006 (p. 14). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=40055&page=16&searchid=4ab4c6a6-62a3-44db-8c48-45ec6e11d39b
City Council Minutes September 19, 2006 (p. 10). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=40160&page=10&searchid=4ab4c6a6-62a3-44db-8c48-45ec6e11d39b
5“Impact Fees.” Cindy Barks, Prescott Daily Courier, August 30, 2006. “In each of the categories the study proposed increases in the impact fees. Overall, the study suggests a 154% increase in impact fees….Ethan Edwards, executive director of the Yavapai County Contractors Association, cautioned against raising impact fees so high that home-owners and builders would look elsewhere.” https://www.dcourier.com/news/impact-fees/article_ef3bf06e-722b-5e06-aae1-905de3ae6147.html
Public Hearing on Intention to Increase Development Fees. Council Agenda Memo, August 29, 2006. This document provides the history regarding Prescott’s Non-Utility Development Impact fees. https://docs.prescott-az.gov/WebLink/DocView.aspx?id=180568&page=44&searchid=0ffd914f-0f33-4eef-b746-4d3c1d3318a6&cr=1
6Ordinance #4557. Council Agenda Memo, September 19 and 26, 2006. Note there is confusing information in this Memo. The recommended fees compared to the current fee is shown as 54%. One must refer back to the August 2006 documents cited above which shows the increase between the current fee in 2006 and the calculated statutory allowable fee to be 154%. The September Memo contains the comparison between the existing 2006 fee and the reduction of the proposed fee.
7City Council Workshop Minutes, April 1, 2008 (p. 1). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=40556&page=1&searchid=98ff8b3f-1d81-4e36-ac2d-c7d06e1c2fed
8City Council Meeting Minutes, October 28, 2008. Approval of impact fees with 6 months delay (effective July 11, 2009 instead of January 11, 2009). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=49935&page=52&searchid=c28d08ce-3ba0-4bdd-8e7a-83b7fe0baa43
92010 Development Impact Fee Moratorium. Council Agenda Memo, March 16 and March 2023, 2010. The Agenda Memo notes a two-year moratorium period. Records from the Arizona League of Cities and Towns show a negotiated three-year moratorium period.
“State impact-fee moratorium could affect local builders.” Cindy Barks, Prescott Daily Courier, March 16, 2010.
City Council Ordinance #4721-1018 Cessation of Impact Fee Increase and Refund (p.4). March 18, 2010. https://docs.prescott-az.gov/WebLink/DocView.aspx?id=50161&page=6&searchid=43e65269-0242-42d7-99ae-5c41c0698657
10“Continuation of public hearing on Granite Dells Ranch Rezoning from June 23, 2009 to July 14, 2009. City Council Agenda Memo, June 23, 2009 (p. 35).
112010 Water and Wastewater Rate Increase. Council Agenda Memos January 26, 2010 (p.16) and August 17, 2010 (p.6).
12“Brewer signs compromise bill on impact fees,” Prescott Daily Courier, April 26, 2011. https://www.dcourier.com/news/brewer-signs-compromise-bill-on-impact-fees/article_d6882e15-4539-5561-bda4-2c909c44bacf.html
13In 2006, Prescott charged separate non-utility impact fees for Library, Parks, Recreation and Public Buildings/Fleet, Police, Fire, and Streets. Prescott’s 2019 DIF consultant Raftelis cites two instances of DIF fees being eliminated in 2011 and 2012 in their January 22, 2019 presentation materials. The consultant correctly identifies the elimination of public buildings and recreation DIFs in 2011, effective January 1, 2012. The consultant incorrectly identifies Parks and Recreation DIFs being eliminated in 2012. Parks DIFs along with Library DIFs were eliminated in 2014. Recreation was a separate DIF, previously eliminated in 2011.
Council Agenda Memo, August 29, 2006, “Public Hearing on Intention to Increase Development Fees” (p. 44). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=180568&page=44&searchid=930dcdf6-ab88-4941-b9c2-9c853cd98ccc
Prescott City Council Minutes. November 11, 2012 (p.8). Ordinance # 4812-1212.
Prescott City Council Workshop, May 15, 2014. “Library and Parks fees will end 8/1/2014” (p.26).
14Prescott City Council meeting, July 23, 2013 (p.4). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=33733&page=3&searchid=cd27510a-a189-4c04-b5e8-e0833ec28bf9
Prescott City Council meeting, October 23, 2012 (p. 72). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=50387&page=72&searchid=e8a9e654-c67c-4ff1-b8f0-0af6623a4100
Prescott City Council meeting, July 10, 2012 (p.32). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=33639&page=32&searchid=d7623c6b-bde6-4926-bd91-fded4c347bd6
15“Prescott eliminates street impact fees.” Prescott Daily Courier, February 26, 2014, Cindy Barks. https://www.dcourier.com/news/prescott-eliminates-street-impact-fees/article_dd1aebbf-8200-5b53-9dd7-a5da2f4bf196.html
Prescott City Council Minutes, Special Meeting, February 18, 2014. https://docs.prescott-az.gov/WebLink/DocView.aspx?id=37973&searchid=6d975893-4bba-4130-9bab-f640367514a0&dbid=0
16On May 13, 2014 DIFs were adopted by Resolution #4225-1434. The council opted to set police and fire DIF amounts to zero from August 1, 2014 until January 1, 2015. The Council further established a checkpoint of December 2014 for further consideration of these two fees. On December 2, 2014 Ordinance 4916-1454 eliminated police and fire impact fees for the foreseeable future (p.47). No police and fire impact fees are collected again until the 2019 impact fee update.
City Council Agenda Memo, “Adoption of Ordinance 4916-1454 repealing development impact fees for police and fire,” December 2, 2014 (p.47). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=33303&page=48&searchid=530e4eed-fba6-412e-9309-2943b258a142
Prescott City Council Minutes, Meeting May 13, 2014. Adoption of Resolution #4225-1434 approving the Impact Fee Report and adopting a Fee Schedule for Impact Fees pursuant to Arizona Revised Statutes 9-463.05. “1) Not charge police development impact fees and not charge fire and EMS development fees, which is the staff recommendation.” https://docs.prescott-az.gov/WebLink/DocView.aspx?id=39710&page=9&searchid=6d975893-4bba-4130-9bab-f640367514a0
Resolution #4225-1434 (p.162). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=33343&page=75&searchid=09ea1552-0a3f-4d0b-abd9-5f966ae40e44
17The documents listed below document DIFs going back to 2012. They also show the initial 2019 recommended DIFs, the adopted 2019 DIFs and the initial recommended 2024 DIFs. A mathematical comparison for the illustrated example calculates to a 70 percent increase between the adopted 2019 DIFs and the recommended 2024 DIFs. Had the initial consultant recommendation been adopted in 2019, the proposed increase would be 20 percent.
“Update of Development Impact Fee Process,” City of Prescott Study Session, January 22, 2019 (p. 27) shows the consultant’s initial recommended DIFs.
“Adopting Updated Development Impact Fees,” City Council Regular Meeting, May 14, 2019.
“Non-Utility DIFs and Utility DIFs,” City Council Workshop, May 14, 2024. https://prescott-az.gov/utility-billing/current-rate-study/
18City Council Regular Agenda, November 28, 2017 (p. 3), “Public Hearing for Deep Well Ranch rezoning of approximately 1,800 acres generally located at the northwest corner of the Highway 89 and 89A interchange.” https://docs.prescott-az.gov/WebLink/DocView.aspx?id=33100&page=3&searchid=3874aeba-fb2c-46e6-86e8-bb20a8f0cd9d
19It is unclear from historical minutes if the entire 2019 city council and the public were aware of the developer-requested reductions to the 2019 fees. As of this writing, minutes from the final meeting of Mengarelli’s Development Impact Fee Commission where fee reductions were discussed are not even available on the city’s Public Records Portal (see further explanation in footnote 1).
20State law requires the city to prepare an annual Development Impact Fee report. Since 2016, these reports have shown a growing deficit each year. FY 2023 Development Impact Fee Annual Report, Schedule A, Changes in Fund Balance – Budgetary Basis (prior year reports also available).
https://prescott-az.gov/wp-content/uploads/2024/01/FIN-FY23-Impact-Fee-Report.pdf
A deficit means money has been spent on growth-related projects using money obtained from water or sewer rates charged to current users or tax dollars. Typically, current users (or taxpayers) advance the money needed for capital construction projects needed for growth. Payback occurs over time through the collection of impact fees. If the amount of impact fees charged is under what is required, repayment will take a very long time and the deficit will continue to grow. Projects can be delayed, but then everyone suffers a degradation of services. For example, more traffic congestion or longer public safety response times, such as Prescott’s current situation. This document provides another description of the relationship between impact fees and rates. Council Workshop Minutes October 28, 2008 (p. 35).https://docs.prescott-az.gov/WebLink/DocView.aspx?id=49925&page=35&searchid=c10de996-8768-4e04-b61b-c8821116b759
21“Prescott voters will decide public-safety sales tax increase on Nov. 5, 2024,”Prescott Daily Courier, May 14, 2024, Cindy Barks. https://www.dcourier.com/news/prescott-voters-will-decide-public-safety-sales-tax-increase-on-nov-5-2024/article_b2444f6e-1257-11ef-b787-a7aafa8f2b2f.html
City Council Voting Meeting, Agenda Item 10A. https://prescottaz.portal.civicclerk.com/event/1251/files/agenda/3134
22”City Council Study Session, “Initial Presentation and Discussion of Fire Department Fire Strategic Plan,” February 14, 2023, (P.76). https://docs.prescott-az.gov/WebLink/DocView.aspx?id=264503&page=76&searchid=4fdc7136-0b99-429f-8abf-f44f9fe42243