Impact fees: Funding the infrastructure for community growth

Cities, villages, and towns in Wisconsin and home rule municipalities in Illinois have the ability to charge developers impact fees to offset the capital costs for public facilities needed as a result of new development. The local units of government can charge for such improvements as transportation infrastructure, sewage and water facilities, parks and recreation, fire and police facilities, libraries, and others (specific uses are governed by the statutes in each state). Impact fees are usually based on a specified dollar amount per new residential unit and on a square foot or expected usage basis (for sewer and water improvements) for industrial or commercial properties.

While the process to create a new impact fee differs by state, generally the municipality must identify future capital expenditures and calculate a fee based on a rational or reasonable relationship between the impact fee, the new development, and the capital improvement. Once adopted, collected fees are placed in separate accounts to pay for future or to refund for past capital improvements. Each state has requirements related to the timing of spending and refunds for improvements that are not made within a reasonable period of time.

Due to the decrease in development in recent years, impact fees have not been on the forefront of municipal officials’ minds. While impact fee account balances may not be growing rapidly in these rough economic times, it is critical that municipalities monitor their existing fees to ensure compliance with spending and refund provisions and to update capital costs and fees appropriately. This is also a great time to prepare for future growth and adopt new fees to fund associated improvements.

Common reasons to consider new impact fees or conduct a review of existing fees include:

  • Capital improvements are being planned in the next ten years
  • Recently completed planning studies (Parks and Open Space Plan, Comprehensive Plan, TIF Project Plan, Water Study, etc.) call for new improvements or new development
  • Existing fees were created for improvements that have been delayed; Particularly a concern in Wisconsin where recent statute changes put in place new, complicated spend down timelines
  • Actual capital costs differ from the basis for existing fees
  • Concerns about how the impact fees affect economic or community development initiatives
  • Uncertainty about collecting fees for improvements made some time ago

Impact fees are a critical tool for funding the infrastructure associated with community growth and should not be overlooked in this period of slow economic growth. Many communities are taking advantage of this time to review community plans and capital improvements, and impact fees should be considered as a tool to achieve these objectives in the coming years.