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PUBLIC HEARING: AMENDMENT TO THE FISCAL YEAR 2015-2016 FEE SCHEDULE RELATED TO COMMUNITY DEVELOPMENT PERMIT PROCESSING FEES
recommended action
RECOMMENDATION
It is recommended that the City Council adopt a resolution amending the Fiscal Year 2015-2016 Fee Schedule related to Community Development Permit Processing Fees as part of the City’s overall efforts to reform, restructure, and reduce the City’s development-related impact, permit, and processing fees.
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Summary
This amendment is the result of a comprehensive review and restructuring of the existing Community Development Department (CDD) fee schedule and is a positive response to the City’s economic development priorities as outlined by the Economic Development Strategic Plan, Urban Land Institute Downtown Revitalization Study, and Management Partners audit recommendations.
The recommended CDD permit processing fee schedule is a simplification of the existing fee schedule and reflects an adjustment to fees that more accurately correspond to the level of effort and resources required to process permits.
Approving the proposed action will:
• Restructure Building permit fees by collapsing many of the previous fees into a comprehensive valuation-based schedule
• Adjust the number of Planning fees
• Eliminate or adjust Special Fees
• Eliminate Miscellaneous Fees
• Transition from a full Departmental cost recovery fee schedule
It is estimated that recommended fee simplification and adjustments would result in an overall $1.27 million annual reduction in fees, representing a 24% overall reduction in processing fees, consistent with operational efficiencies and improvements made by the CDD.
The fees considered herein are permit processing fees that cover the cost of permit processing, review and inspection and do not include public facility fees which are collected to provide public improvements made necessary by new development.
DISCUSSION
Background
In 2012, an operational audit of the CDD was conducted. As a direct result, an Implementation Action Plan (IAP) was developed to improve customer service and organizational function in the CDD. That same year, the Urban Land Institute (ULI) Downtown Revitalization Study was released which called for a wholesale revamping of the City’s development fee system. Both reports concluded that development fees in Stockton were above market range, unwieldy in structure, and likely required a revisit of the nexus for collection of some fees. Responding to the recommendations from these reports, CDD developed a four-phase approach to review and address fees related to development in Stockton. Further, in early 2015, Council approved the City’s Economic Development Strategic Plan which called for “streamlined entitlement and permit processing” and “user friendly policies and practices for permitting of new businesses.”
The study related to this recommended action represents the second of a four-phased assessment of development fees.
Phase I, which was completed in June 2013, provided a legal and policy framework for fee simplification and reduction efforts.
Phase II, addressed fees collected for the processing of building, planning, and development engineering permits including miscellaneous and special fees collected in addition to base permit fees. For perspective, permit processing fees for a sample 2,600 square foot home represent only about 11% of the overall cost of a new residential building permit.
Phase III, will focus on Public Facilities Fees and Impact Mitigation Fees, representing about 77% of permit fees for the same new single family home. Phase III will be conducted in concert with the preparation of the new General Plan and associated Capital Improvement Program (CIP). Completion of Phase III is expected to coincide with the completion of the General Plan Update.
The remaining approximately 12% of the cost of the same single family home permit, goes toward impact pass-through fees to the County and State.
Phase IV, a time and motion study, is expected to start in the first quarter of 2016 after much of the re-engineering of the Permit Center is finalized and the new permit tracking system is fully implemented and efficiencies realized. Phase IV will further refine the fee recommendations of Phase II, and is expected to provide a more granular review of the degree to which activities within the Development Services function are allocated to permit processing versus general government activities.
The following specific Phase II Fee Study goals were accomplished as they relate to permit processing fees:
• Establish the legal framework by which fees may be charged
• Permit fee simplification and consolidation
• Align function with fees
• Transparency and repeatability
• Preliminary alignment of fees to market
Legal Framework
Part of this analysis required the City to map out the framework and show how the City of Stockton could legally charge permit processing and development fees. This was done and provided to all interested parties so everyone could begin with a clear understanding of what permit processing and development fees the city could and could not charge. Activities that fall into a category where the City cannot collect a permit processing or other development related fee are classified as “general government” fees and must be funded by means other than fee revenues, typically the City’s General Fund.
Over the last few decades, California voters have supported a number of propositions requiring that local voters be consulted on a variety of revenue-raising measures. It is useful to understand the progression of these propositions as each successive proposition to some extent modified or clarified the prior tax/fee related propositions:
• Proposition 13 (1978): 2/3 voter approval required for “special taxes” and property tax otherwise limited to 1% of assessed valuation;
• Proposition 62 (1984): majority voter approval required for “general taxes” in general law cities and counties;
• Proposition 218 (1996): majority vote approval required for “general taxes” in general law and charter cities and counties; property-owner approval required for assessments and property-related fees and charges; and
• Proposition 26 (2010): further clarified the definition of a “tax” in the State Constitution as “any levy, charge, or exaction of any kind imposed by local government” except for a limited number of exemptions that hold relevance to development fees charged by the City of Stockton.
More specifically, Proposition 26 amended Section 1 of Article XIII C of the California Constitution to define exemptions to the definition of a tax. The following exemptions illustrate fees that fall outside of the definition of a tax that may be legally charged by local agencies:
• A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.
• A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.
• A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.
• A charge imposed as a condition of property development.
Fees that may be charged as exemptions remain subject to an additional legal hurdle:
The local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.
Development fees can include the cost of preparation and administration of the City’s General Plan, Development Code, and similar development-related documents tied to the function of rulemaking as outlined within the California League of Cities’ Proposition 26 Implementation Guide (2011).
“General Government” versus “Permit Processing” Activities
Those activities performed by the Community Development Department which cannot be tied to the processing of permits or other development approval activity must be supported by non-fee sources of funding such as the General Fund, and are considered “general government” activities.
Using time tracking information, staff was able to approximate the ratio of general government to permit processing activity within the department. It is estimated that approximately 19% of CDD’s current activity is related to general government functions, making it clear that some level of funding supplemental to fee revenue should be allocated on an annual basis to cover those type of activities. That said, the percentage of general government activity allocation is expected to vary over time as the regulatory environment changes or work programs are added, eliminated, or modified. The Phase II estimates will be validated in Phase IV using a time and motion study after the revised fee schedule has been implemented and the operational reengineering has been completed.
Study Methodology & Scope
With a goal of permit fee simplification and consolidation, staff looked for opportunities to make fees easier to understand and to consolidate fees requiring a similar level of effort into fewer, or in some cases, a single category. Simplification, consolidation, and alignment of functions to fees along with improved fee descriptions, helped to achieve the goals of transparency and repeatability. Going forward, staff and the public will be better able to understand and calculate fees. Lastly, staff conducted a sampling of other agencies’ fees to assess to what extent Stockton’s fees aligned with those in the regional market.
Keeping in mind the goals of Phase II, three types of fees related to the processing of permits were evaluated: Permit Fees, Miscellaneous fees, and Special fees.
Permit Fees are the regular base fees charged to process permits such as a use permit fee or a plan check and building permit fee. Miscellaneous Fees are classified as minor add-on fees to recover associated costs related to permit processing. Special Fees can be described as fees dedicated to a specific function or program within CDD, such as Flood Plain Management or Technology.
Although the first Special Fee, the General Plan Maintenance and Implementation Fee, originated in Fiscal Year (FY) 1991/92, a majority of current Special Fees were implemented in FY 2009/10. Phase II did not include nor analyze external pass-through fees such as the San Joaquin County Facilities Fee, State Green Building Fee, or Strong Motion Program Fee.
A fee model was developed that represented the current fee structure, in addition to a second model that incorporated recommended fee adjustments and consolidation. The combined models provided the basis for comparing the revenue impacts of fee adjustment recommendations against a typical fiscal year’s activity and revenues. FY 2012/13 permit activity was analyzed for this study. FY 2012/13 was selected for this study largely because FY 2013/14 had yet to conclude at the time the Phase II study had commenced and a review of annual activity over the previous four fiscal years showed that FY 2012-13 was a fair representation of the typical activity
Fees charged under the general category of permit processing fees fall into three major categories: Permit Fees, Miscellaneous Fees, and Special Fees. Below is a discussion of how proposed adjustments to each type of fee were approached.
Permit Fees
Building Permit Fees
Out of the set of fees analyzed, Building Permit fees are the most complex. A typical building permit invoice can include permit, plan check, miscellaneous, special, hookup, public facility, state, county and COG fees. Approximately 43 separate fees are currently assessed for a typical new single family home. For the sake of this analysis, plan check fees are considered under the umbrella of permit fees. To bring Stockton in line with regional practice, staff recommended implementation of a valuation methodology and structure similar to that used by the City of Sacramento. For most permits, the valuation of a project drives permit and plan check cost. For certain over the counter permits, such as HVAC and water heaters, a flat fee per unit was proposed.
Planning Fees
Planning permit fees represent a small portion of the overall revenue stream of CDD, with much planning staff time utilized assisting citizens with non-revenue generating informational requests prior to application. Other Planning efforts are to prepare, administer and interpret rulemaking documents such as the General Plan, Development Code, Design Guidelines and the Climate Action Plan. Fees related to this function have been simplified and consolidated.
Development Engineering Fees
Development Engineering encompasses a wide array of functions from plan review and inspection of the design and construction of infrastructure associated with private sector development, to finalizing subdivision maps and reviewing traffic and transportation plans. The redesign of the Development Engineering function has not been completed at this time. The CDD and the Public Works Department are collaborating to develop a recommended model for operations going forward.
Miscellaneous Fees
Miscellaneous Fees include administrative functions such as “Permit Issuance fee” and “Land Management Update Fee.” Staff believes it is better to capture the cost of these efforts in the base permit fees we collect. Therefore, for the sake of simplification, staff has recommended elimination of these department specific miscellaneous fees.
Special Fees
There are currently eight Special Fees. These fees relate to specific programs and include General Plan Maintenance and Implementation (GPMI), Flood/Community Rating System (CRS), Development Code Maintenance, Development Oversight Commission, Climate Action Plan, Capital Preservation (Code Enforcement), Housing Element Preparation, and Technology. Below is a table of recommended changes by Special Fee.
|
Special Fee |
Modeled |
|
Capital Preservation (Code Enforcement) |
Maintain |
|
Technology Fee |
Maintain |
|
Climate Action Plan Implementation |
Eliminate |
|
Housing Element Preparation |
Eliminate |
|
Development Code Maintenance |
Eliminate |
|
Development Oversight Commission |
Reduce by 75% |
|
General Plan Maintenance & Implementation |
Reduce by 50% |
|
Flood/Community Rating System (CRS) |
Increase by 200% to cover actual cost of flood plain management mandate. |
From the overall Phase II exercise, a total of approximately 1,750 fee permutations were analyzed and consolidated into about 400 fees, representing a nearly 78% reduction in the number of possible fees.
Revenue and Permit Fee Implications
Attachment A, Proposed Revisions to FY 2015-16 Fee Schedule, reflects in detail all proposed fee adjustments and consolidation.
Attachment B, Fee Revenue Forecast, is a summary of the revenue impacts by fee category resulting from the Phase II fee study recommendations. As modeled, it is estimated that recommended fee simplification and adjustments would result in an overall $1.27 million annual reduction in fees, representing a 24% overall reduction in processing fees. Since these revenues currently support the CDD base operations, a combination of General Fund and other revenue sources would be necessary for CDD to maintain its level of service while offering the fully modeled fee reductions. The Community Development Department tracks financial activity in the Development Services Fund (048). If a portion of the existing fund balance were used to backfill the fee reductions, the infusion is expected to be short-lived as we expect that as the economy further improves, increased revenues and a regular General Fund contribution to CDD will help CDD absorb the overall recommended reductions.
Finally, Attachment C, Sample Fee Model Scenarios, reflects a series of real permits comparing overall permit fees before and after recommended adjustments are applied.
Staff requests that the effective date of the proposed fee adjustments correspond to a yet to be determined “go live” implementation date of the Department’s new permit tracking system. Since this proposed action is in advance of the live implementation, to effectuate these fee adjustments ahead of the live implementation of the permit system would require staff to program the existing complicated fee schedule into the permit tracking system only to void that effort and reprogram the new fees a matter of months later. Either effort is a substantial undertaking. This request is an attempt to avoid redundant and costly effort. If so approved, the proposed fees will be effective no earlier than 60 days from adoption pursuant to California Government Code Sec. 66017(a).
FINANCIAL SUMMARY
The proposed fee reductions will reduce development fees to a level commensurate with other local agencies fees and result in a reduction in annual permit revenue of approximately $1.27 million. The current Community Development Department budget can absorb a partial year reduction related to this phase of the fee study ($851,933) as the number of permits is increasing and the net impact to revenue is expected to cover this estimate.
Future fiscal years are expected to provide sufficient increases to the number of permits to cover a full year of these fee changes. To validate these expectations, an upcoming phase of the fee study will evaluate the full cost to determine if the City fees are sufficient to cover the cost of providing development permitting services. The City has an obligation to ensure that development fees fully support the related service activities including administrative support.
In addition, the level of General Fund subsidy necessary to cover general government activities that do not benefit development activities has been evaluated. The result is that the current annual General Fund subsidy of $1 million along with some minor revenues collected for specific activities not directly related to development services are sufficient to cover the cost of general government activities. The annual General Fund subsidy was previously authorized by City Council through FY 2016-17, however now this level of subsidy is expected to continue into the future to cover the cost of general government activities.
Further phases of the Community Development fee study should be evaluated in relation to the recovery of the Community Development Fund and any future subsidies proposed should be considered in relation to the impact on the General Fund and the impact to the Long-Range Financial Plan of the City.
No adjustment to the General Fund subsidy is necessary at this time.
Attachment A - Proposed Revisions to FY 2015-16 Fee Schedule
Attachment B - Fee Revenue Forecast
Attachment C - Sample Fee Model Scenarios