UPDATE ON AUTHORITY TO CHARGE WATER SYSTEM DEVELOPMENT FEES

Jeff HughesLecturer and Director of

Environmental Finance CenterSchool of Governmentjhughes@sog.unc.edu

919.843.4956www.efc.sog.unc.edu

Kara MillonziProfessor of Public LawSchool of Governmentmillonzi@sog.unc.edu

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

Continue the Discussion

Subscribe to our Environmental Finance Blog

http://efc.web.unc.edu

Follow us on Twitter: @EFCatUNC

NC Finance Connect

www.ncfinanceconnect.com

Fees in North Carolina

http://www.efc.sog.unc.edu/reslib/item/how-much-does-it-cost-connect-water-and-wastewater-utility-north-carolina-residential

Rates and Revenue

https://efc.sog.unc.edu/reslib/item/north-carolina-water-and-wastewater-rates-dashboard#

Questions?

Jeff HughesLecturer and Director of

Environmental Finance CenterSchool of Governmentjhughes@sog.unc.edu

919.843.4956www.efc.sog.unc.edu

Kara MillonziAssociate Professor of Public Law

School of Governmentmillonzi@sog.unc.edu

919.962.0051www.sog.unc.edu