MEMORANDUM To: Edmund Sullivan, Santa Clara Valley Habitat Agency From: Robert D. Spencer, Urban Economics Date: February 28, 2018 Subject: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Chapter 9 of the Santa Clara Valley Habitat Plan (Plan) calls for an automatic inflation adjustment to the Plan s development fees. 1 These fees are a critical revenue source providing 55 percent of the Plan s total funding. The Habitat Agency makes this adjustment annually to ensure that Plan revenues from development fees keep pace with the effect of inflation on Plan costs. The original ordinance adopting the development fees incorporates this annual adjustment so this is an administrative process that does not require Governing Board or Implementation Board approval. 2 The purpose of this memorandum is to determine the amount of adjustment and provide a revised development fee schedule for FY 2018-19. This adjustment is the fifth annual adjustment since adoption of the ordinance implementing the development fees on August 15, 2013, following adoption of the Plan in May of that year. Next year in 2019 development fees will be adjusted based on the five-year periodic assessment required by the Plan and the Mitigation Act. 3 Chapter 9 of the Plan requires a periodic fee assessment to review the costs and their underlying assumptions that were developed as part of the original funding plan. The review will include comparing appropriate land sales in the study area transacted after the start of the Plan with the original land cost assumptions. The actual costs of operating, maintaining, and managing the reserve system will also be compared to the original estimates of these costs to determine the actual change in non-land costs. Automatic annual fee increases will resume following next year s periodic fee assessment and will continue until the periodic assessment five years later. Current Development s The Plan includes five development fees based on the type of permanent impact caused by the activity seeking coverage under the Plan: w Land cover fee w Serpentine fee 1 ICF International, Santa Clara Valley Habitat Plan (August 2012), pp. 9-41 to 9-42 and Table 9-12. 2 Santa Clara Valley Habitat Agency, Ordinance No. 2013-01, Section 4(A). 3 California Government Code, Section 66001(d)(1). 1135 CLARENDON CRESCENT URBAN ECONOMICS BOBINOAKLAND@GMAIL.COM OAKLAND, CALIFORNIA 94610 (510) 816-9458
Re: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Page 2 w Nitrogen deposition fee w Western Burrowing owl fee w Wetland mitigation fee Each fee has: (1) a base component to fund Plan costs during the permit period, (2) an endowment component for funding costs in perpetuity following the permit period, and (3) a plan preparation component to reimburse local agencies for the cost of preparing the Plan. The Plan also has development fees for temporary impacts from activities subject to the land cover, serpentine, wetland mitigation, and the Western Burrowing owl fees. Temporary fees are calculated based on the same fees as the fee for permanent impacts adjusted for the length of time that the impact occurs. There are no temporary impacts associated with the nitrogen deposition fee. The current FY 2017-18 fee schedule shown in Table 1 includes the amount for each of the three fee components (base, endowment, and plan preparation) and the total fee. Table 1: FY 2017-18 Development Schedule Development Unit Base Endowment Plan Preparation Total Land Cover Zone A: Ranchlands and Natural Lands per acre $18,179 $1,776 $212 $20,167 Zone B: Mostly Cultivated Agricultural Lands per acre $12,603 $1,231 $148 $13,982 Zone C: Small vacant sites between 0.5 and 10 acres surrounded by per acre $4,605 $450 $53 $5,108 urban development Serpentine per acre $59,155 $5,780 $692 $65,627 Nitrogen Deposition per new vehicle trip $4.25 $0.41 $0.04 $4.70 Burrowing Owl per acre $49,661 $5,810 $695 $56,166 Wetland Mitigation Willow Riparian Forest and Mixed Riparian per acre $136,951 $16,708 $1,918 $155,577 Central California Sycamore Woodland per acre $250,149 $30,518 $3,501 $284,168 Freshwater Marsh per acre $167,943 $20,489 $2,350 $190,782 Seasonal Wetlands per acre $367,447 $44,828 $5,144 $417,419 Pond per acre $150,296 $18,336 $2,104 $170,736 Stream per linear ft. $577.24 $69.72 $7.18 $654 Sources: Santa Clara Valley Habitat Agency website, data extracted Feb. 28, 2018.
Re: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Page 3 Adjustment Method The method used for the automatic adjustment is described in Chapter 9 of the Plan. 4 Plan implementation costs funded by development fees include a wide range of cost categories affected in varying ways by inflation. The automatic adjustment method breaks Plan costs into two primary cost categories to allow the use of a different inflation index more closely related to each category. The Plan s recommended inflation indices are from federal government sources, reported for individual metropolitan areas, and widely used to estimate inflation across various sectors of the economy. The two cost categories are: w Land acquisition costs w Operation, restoration, and maintenance costs Land acquisition costs are separated out from other Plan costs because land costs in many areas of California, including the San Francisco Bay Area, have historically increased above the average rate of inflation. The significant demand for housing in the Bay Area coupled with limited housing supply causes higher prices and increases the value of developable land. The variation in the cost of land due to site-specific factors makes it difficult to develop a land cost index and no published land cost index is available. However, given the link between the housing market, housing prices, and land costs, housing prices can provide a more accurate index for land cost inflation than other measures of inflation. Therefore the index used for the land acquisition cost portion of fees is based on the Housing Price Index (HPI) from the Federal Housing Finance Agency. The FY 2016-17 annual adjustment used the Expanded Data Index seasonally adjusted for the San Jose-Sunnyvale-Santa Clara area. Operation, restoration, and maintenance costs represent all other plan costs, including the cost of personnel, supplies, and equipment involved in managing, operating, restoring, and maintaining the reserve system established by the Plan. Given the diverse types of costs included in this category, overall cost inflation in the local economy provides a reasonable estimate of inflation. Therefore the index used for this cost category is the Consumer Price Index (CPI) from the U.S. Bureau of Labor Statistics for the San Jose-San Francisco-Oakland metropolitan area. This index is not seasonally adjusted. The two cost categories and the applicable inflation index are shown in Table 2. The Habitat Agency may decide to use other indices during Plan implementation if other indices are developed that better predict Plan costs. 4 Ibid., ICF International.
Re: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Page 4 Table 2: Plan Cost Category and Inflation Indices Cost Category Land Acquisition Costs w Direct land acquisition costs only w Excludes costs associated with land transaction, site improvements, and due diligence (e.g., pre-acquisition surveys) Operation, Restoration, and Maintenance Costs w All costs except land acquisition costs w Includes costs for program administration, wetland restoration, reserve management, maintenance, and monitoring, and the Western Burrowing Owl Conservation Strategy Inflation Index: Base Year To Current Year House Price Index (HPI) fourth quarter 2012 through third quarter 2016 (latest data available) based on the expanded dataset (estimated using enterprise, FHA, and real property county recorder data licensed from DataQuick) seasonally adjusted for San José-Sunnyvale-Santa Clara Metropolitan Statistical Area published by the Federal Housing Finance Agency Consumer Price Index (CPI) annual average index for 2012 through 2016 for all urban consumers, all items, not seasonally adjusted, for the San José- San Francisco Oakland Metropolitan Statistical Area published by the U.S. Bureau of Labor Statistics Source: ICF International, Santa Clara Valley Habitat Plan (August 2012), pp. 9-41 to 9-42 and Table 9-12. The share of each cost category funded by each development fee varies. The base fee component for the land cover, serpentine, and nitrogen deposition fees are the only fee components that fund land acquisition so only these three fee components use the HPI in the annual inflation adjustment. The allocation of costs between land acquisition and other costs for these three fee components is shown in Table 3. The cost share is used to weight the HPI and CPI to develop an overall inflation adjustment for each fee component. Table 3: Cost Category Shares For Land Cover, Serpentine, and Nitrogen Deposition s Cost Category Inflation Index Net Costs Cost / Index Share Land Acquisition HPI $257,880,000 61.62% Operation, Restoration & Maintenance CPI 160,650,000 38.38% Total $418,530,000 100.00% Source: Willdan Financial Services and Urban Economics, Santa Clara Valley Habitat Plan Development Nexus Study, June 12, 2013, Table 2.1, p. 12. The Plan, in Table 9-13 of Chapter 9, indicated that the allocation of costs should be 46 percent for land acquisition and 64 percent for operation, restoration, and maintenance. This estimate was based on total plan costs instead of costs only funded by the three fees associated with land acquisition. The cost data shown in Table 3 is based on the data used to calculate
Re: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Page 5 the land cover, serpentine, and nitrogen deposition fees in the Development Nexus Study. 5 Therefore the initial Plan estimate is updated by the results shown in Table 3. The other two fees (Western Burrowing owl and wetland mitigation fees) do not fund any land acquisition costs, only operation, restoration, and maintenance costs. Likewise the endowment and plan preparation components of all five fees are only related to operation, restoration, and maintenance costs. Therefore these fees and fee components are adjusted using only the CPI. The FY 2017-18 cumulative increase for each of the two indices since 2012 is shown in Table 4. Table 4 uses a base year of 2012 to reflect the costs, revenues, and fees presented in Chapter 9 of the Plan, and the original fee schedule adopted in FY 2013-14. In the next section we apply the cumulative increase since 2012 to the original fee schedule adopted in FY 2013-14 to calculate the new fee schedule for FY 2018-19. This approach avoids accumulating rounding errors if each annual fee adjustment is based on annual changes in each index (rather than the cumulative change) applied to the current year (rather than FY 2013-14) fee schedule. Table 4: FY 2017-18 Development Inflation Indices Housing Price Index 1 Consumer Price Index 2 Base Year Index (2012) 225.25 239.65 Most Recent Index (2017) 353.71 274.92 Cumulative Change 57.03% 14.72% Index Weight 61.62% 38.38% Cumulative Change Weighted 40.79% 1 Housing Price Index-Quarterly Expanded-Data Index for the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area, seasonally adjusted, 4th quarter 2012 to 3rd quarter 2017. 2 Consumer Price Index-Urban Consumers (all items) Index for the San Jose-San Francisco- Oakland Metropolitan Statistical Area, annual average 2012 to 2017, not seasonally adjusted. Source: Federal Housing Finance Agency (https://www.fhfa.gov/datatools/downloads/pages/house-price-index.aspx), data extracted, and U.S. Bureau of Labor Statistics (https://www.bls.gov/data/), data extracted Feb. 28, 2018; Table 3. The bottom of Table 4 shows the average inflation for both indices weighted by the cost shares shown in Table 3 for the current period (FY 2013-14 to FY 2017-18). This weighted average is used to adjust the base component for the land cover, serpentine, and nitrogen deposition fees, as explained above. The automatic inflation adjustment for each fee component to be applied to the original FY 2013-14 fee schedule is shown in Table 5. For the fee components discussed above that fund both land acquisition and operation, restoration, and maintenance costs, the applicable index is the cumulative change weighted for each index shown in the last line of Table 4. For all 5 See Table 3 for source.
Re: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Page 6 other fee components that only fund operation, restoration, and maintenance costs the applicable index is the cumulative change in the CPI shown in Table 4. Table 5: FY 2017-18 Cumulative Annual Inflation Adjustment From FY 2013-14 Development Base Endowment Plan Preparation Land Cover Zone A: Ranchlands and Natural Lands 40.79% 14.72% 14.72% Zone B: Mostly Cultivated Agricultural Lands 40.79% 14.72% 14.72% Zone C: Small vacant sites between 0.5 and 10 acres surrounded by urban development 40.79% 14.72% 14.72% Serpentine 40.79% 14.72% 14.72% Nitrogen Deposition 40.79% 14.72% 14.72% Burrowing Owl 14.72% 14.72% 14.72% Wetland Mitigation 14.72% 14.72% 14.72% Willow Riparian Forest and Mixed Riparian 14.72% 14.72% 14.72% Central California Sycamore Woodland 14.72% 14.72% 14.72% Freshwater Marsh 14.72% 14.72% 14.72% Seasonal Wetlands 14.72% 14.72% 14.72% Pond 14.72% 14.72% 14.72% Stream 14.72% 14.72% 14.72% Source: Table 4. FY 2017-18 Development Schedule The updated fee schedule for FY 2018-19 calculated to comply with the automatic inflation adjustment called for in the Plan and described in this memorandum is shown in Table 6. The fee schedule is based on each fee component from the original FY 2013-14 fee schedule (see Table A at the end of this memorandum), multiplied by the applicable inflation adjustment for that fee component shown in Table 5. As shown in the last column of the table, the three fees that fund land acquisition (land cover, serpentine, and nitrogen deposition fees) increase by 5.3 percent and the other two fees (burrowing owl and wetland mitigation) increase by 3.0 percent from FY 2017-18 levels.
Re: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Page 7 Table 6: FY 2018-19 Development Schedule Development Unit Base Endowment Plan Preparation Total Increase from FY 2017-18 Land Cover Zone A: Ranchlands and Natural Lands per acre $19,190 $1,830 $219 $21,239 5.3% Zone B: Mostly Cultivated Agricultural Lands per acre $13,305 $1,269 $151 $14,725 5.3% Zone C: Small vacant sites between 0.5 and 10 acres surrounded by per acre $4,861 $463 $55 $5,380 5.3% urban development Serpentine per acre $62,447 $5,954 $712 $69,114 5.3% Nitrogen Deposition per new vehicle trip $4.49 $0.42 $0.05 $4.96 5.3% Burrowing Owl per acre $51,161 $5,986 $716 $57,862 3.0% Wetland Mitigation Willow Riparian Forest and Mixed Riparian per acre $141,085 $17,213 $1,975 $160,273 3.0% Central California Sycamore Woodland per acre $257,698 $31,439 $3,608 $292,745 3.0% Freshwater Marsh per acre $173,012 $21,107 $2,422 $196,541 3.0% Seasonal Wetlands per acre $378,537 $46,182 $5,300 $430,019 3.0% Pond per acre $154,832 $18,890 $2,168 $175,890 3.0% Stream per linear ft. $594.25 $72.27 $8.03 $675 3.0% Note: Temporary fees are based on the amounts shown adjusted for the duration of the impact. See Chapter 9 of the Plan for details. Source: Tables 1 and 5.
Re: FY 2018-19 Habitat Agency Development s Automatic Inflation Adjustment Page 8 Table A: FY 2013-14 Development Schedule Development Unit Base Endowment Plan Preparation Total Land Cover Zone A: Ranchlands and Natural Lands per acre $13,630 $1,595 $191 $15,416 Zone B: Mostly Cultivated Agricultural per acre $9,450 $1,106 $132 $10,688 Lands Zone C: Small vacant sites between 0.5 and 10 acres surrounded per acre $3,453 $404 $48 $3,905 by urban development Serpentine per acre $44,355 $5,190 $621 $50,166 Nitrogen Deposition per new vehicle trip $3.19 $0.37 $0.04 $3.60 Burrowing Owl per acre $44,596 $5,218 $624 $50,438 Wetland Mitigation Willow Riparian Forest and Mixed Riparian per acre $122,982 $15,004 $1,722 $139,708 Central California Sycamore Woodland per acre $224,632 $27,405 $3,145 $255,182 Freshwater Marsh per acre $150,812 $18,399 $2,111 $171,322 Seasonal Wetlands per acre $329,966 $40,256 $4,620 $374,842 Pond per acre $134,965 $16,466 $1,890 $153,321 Stream per linear ft. $518 $63 $7 $588 Source: Willdan Financial Services and Urban Economics, Santa Clara Valley Habitat Plan Development Nexus Study, June 12, 2013, Table 1.1, p. 9.