UPDATE ON AUTHORITY TO CHARGE WATER SYSTEM DEVELOPMENT FEES

UPDATE ON AUTHORITY TO CHARGE WATER SYSTEM DEVELOPMENT FEES Jeff Hughes Lecturer and Director of Environmental Finance Center School of Government jhughes@sog.unc.edu 919.843.4956 www.efc.sog.unc.edu Kara Millonzi Professor of Public Law School of Government millonzi@sog.unc.edu 919.962.0051 www.sog.unc.edu

UPDATE ON AUTHORITY TO CHARGE WATER SYSTEM DEVELOPMENT FEES August 17, 2017

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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

Not Allowed IMPACT 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????????????????? Fees for the use of or services furnished by 1. Assessed on developer as condition of development (before there is a contract to connect to water/sewer system); OR 2. Assessed when property connects (or contracts to connect) to water/sewer system; Calculated solely to cover future expansion costs No Water/Sewer Contract Expansion Method 1. Assessed when property connects (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 property connects (or contracts to connect) to water/sewer system; Calculated to cover unknown future maintenance / upgrade costs of system Water/Sewer Contract Hybrid Method 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 Contract Buy-in Method Allowed 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 Water/Sewer Contract Solely for Future Expansion Water/Sewer Contract Unknown Future Maintenance/ Upgrade Costs Water/Sewer Contract Known Necessary Future Maintenance/ Upgrade Costs 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 Within Territorial 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? Metropolitan Water and Sewerage Districts Metropolitan Sewerage Districts Fayetteville PWC / Greenville Utilities Commission Municipalities Government Water / Sewer Services Counties County Water and Sewer Districts Joint Agencies (City/County Utility Commission) Metropolitan Water Districts Sanitary Districts Water and Sewer Authorities

Who Can Be Assessed? Change Made to Land/Structure(s) New Development Timing of Change Subdivision of Land Construction, or any change to existing structure, that causes increase in 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 Any use or extension of use of land that increases need for service Only deals with Who may be assessed, not When fee is assessed

When Can Fee Be Assessed? Subdivision of Land When plat recorded; OR When local unit commits to provide water/wastewater service to the development Changes to structures or land that increase number of service units When property owner applies for connection of individual unit of development; OR When increased capacity triggered

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

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? 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)) 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))

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 classes Equivalency 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 MGD Wastewater 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.

Water SDF Buy-in Example: Valuation of Assets Capital Assets A summary of changes in capital assets -> Non-Depreciable Assets: Balance July 1, 2016 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 water wastewater both water and wastewater Notes to the Financial Statements for the Years Ended June 30, 2016 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

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 gpd Multi-family accounts are known to use 3,000 gallons per month

Equivalency/Conversion Table Residential 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 = $750 Single 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 Table Equivalent 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

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Questions? Jeff Hughes Lecturer and Director of Environmental Finance Center School of Government jhughes@sog.unc.edu 919.843.4956 www.efc.sog.unc.edu Kara Millonzi Associate Professor of Public Law School of Government millonzi@sog.unc.edu 919.962.0051 www.sog.unc.edu