2. Subdivision Annexation Cost Benefit AnalysisPLANNING FOR THE FUTURE
MEMORANDUM
To: Kalispell City Council
From: Tom Jentz, Director
Date: May 24, 2012
Planning Department
201 V Avenue East
Kalispell, MT 59901
Phone: (406) 758-7940
Fax: (406) 758-7739
www.kalispeR.com/planning
Subject: When to Annex - Council Work Session — May 29, 2012
The city council has been presented with a request for annexation by Joshua and Shelby Farnham
for a 3.5 acre piece of land on the corner of Three Mile Drive and West Spring Creek Road. The
issue at hand is the cost of services plan which shows that upon annexation, this property would
initially cost the city approximately $2,595/year in services above tax revenue received. The
council directed staff to look for alternatives that would assist in reducing or eliminating the tax to
services shortfall. In particular, council asked staff to investigate a policy and develop options
whereby an applicant could cover the financial shortfall if an annexation did not "pencil out".
Staff proposes to take a larger view of our annexation policies and practices to begin this
conversation. This report will:
• Summarizes the city's annexation policy;
• Highlight the effectiveness of using cost of services plans as a litmus test for annexation;
• Provide an update on the status of past annexations and their costs/impacts to the city; and
• Highlight the difficulties cities have in balancing community growth with community
services.
l . ANNEXATION POLICY: The city recently adopted an annexation policy which created 3
separate annexation processes depending on where the property is located in relation to the
city boundaries. As part of the policy an annexation boundary was crafted around the city of
Kalispell which served as the reference point for the particular process. Properties within the
annexation boundary would be looked upon favorably for annexation, those properties outside
would not necessarily be considered for immediate or direct annexation.
The policy states that property within the annexation boundary should be considered for direct
annexation. This procedure involves the applicant applying to the planning board; a cost of
services plan is prepared by staff, the planning board holds a hearing and assigns appropriate
zoning; and the city council reviews the record and acts on annexation and zoning. Properties
outside the annexation boundary would not have a green light for annexation but could be
considered for a "waiver of protest to annexation", could be considered for inclusion in an
annexation district or, if the request did not meet with council satisfaction, it could be denied.
The purpose of the annexation policy was to create predictability for both the city and the
development community and to provide an orderly and predictable extension of public
services.
2. COST OF SERVICES PLAN: In the annexation process, one of the key components asked
for by council was the preparation of a cost of services plan. The purpose of the plan was to
provide a general understanding of the financial costs and benefits an individual project would
have on the city. These plans are general in nature. For vacant land the plan assumes a
theoretical "typical" development scenario. Based on the proposed development scenario,
potential tax revenues and assessments are calculated. For projects which are already built
out at annexation, actual tax revenues and assessments are used. In addition, impact fees to
be paid in the future are also calculated. On the other side of the ledger, impacts to city
services are calculated and quantified. These impacts include streets; sewer; water and storm
water systems; parks; police and fire protection and general city administration. Once costs
and benefits are calculated, it is simple math to determine if the proposed project will be a tax
burden, break even, or be a tax generator for the city.
Cost of Services Plan sho aUs: The cost of services plan has value in comparing the
impacts of similar projects and is very good when used to analyze different design scenarios
on the same piece of real estate. The plans tend to become far less accurate as a tool to
predict real world costs and therefore should only be used as a general guide when reviewing
annexation requests. It should not be relied upon to predict specific costs and definitely
should not be used as a litmus test to determine the viability of any particular project. The
plans are based on average costs of service for any department and are not based on actual or
specific costs that a particular development will experience. Below is a brief summary of
some of the strengths and weaknesses of the cost of services plan:
Strengths:
® Very accurate prediction of taxes and assessments that existing development will pay.
Weaknesses:
® The state property tax system is extremely complex, and very hard to use as a planning
tool.
® The cost of services plan is only as good as the information being entered.
® For a proposed residential development, the average price of a home in Kalispell is
used to determine what the ultimate revenue stream will be for a project. Today the
average price is $165,000 and four years ago it was $240,000. The model we use
actually requires a $375,000 market value house for the model to break even. A house
value of less than $375,000 will almost always show up as a tax loser.
® When projecting road costs, the miles of road are divided by the public works budget
for road maintenance. The model does not factor in the condition of the abutting roads
or the fact that a new road will have less maintenance than an old road.
® When projecting fire costs, the fire budget is divided by the number of residential units
in the city. All residential units are treated equally. The formula does not take into
account that new residential units are built safer than older structures. The formula
does not place a greater premium for apartment or multi -family structures over single
family homes and it does not take into consideration varying response times or
distance from a station.
® For police costs, the police budget is divided by the residential population of the city.
The future residents are treated as an average of the entire city. The cost is not based
on actual police responses to a neighborhood; it does not incorporate how far the
residence is from the police station; and it does not consider the fact that dense
apartment complexes may have a greater number of police calls versus large lot single
family residential. Furthermore for commercial developments, it does not factor in
that larger discount stores have a higher number of shoplifting calls or that certain
commercial entertainment establishments require greater attention than others.
® Water and sewer lines under the cost of services plans have a standard maintenance
cost per lineal foot used throughout the city. This average cost does not consider that
new developments have newer pipes and therefore require little if any actual service
for many years.
Cost of Services Plan conclusions: As a planning and policy tool, cost of service
plans are very important. As an analytical tool to ascertain specific measurable costs or
benefits it is far too general in nature.
3. TAX IMPLICATIONS OF RECENT VACANT LAND ANNEXATIONS IN
LISPELL: As we continue to talk about the impacts of annexation and the associated tax
ramifications, staff wanted to provide you with information we developed this spring as part
of the city's growth policy update process. Staff undertook a study to determine what the
financial implications have been to the city with the significant number of large tract
annexations that recently occurred. As you know, the majority of these tracts never went
forward with development proposals. We focused on the largest annexations all of which
occurred in the 2007 — 2010 era. The 8 annexations varied in size from 80 — 640 acres and
totaled 2,198 acres. This constitutes roughly 30% of the land area of the city. The
conclusions of the report, while general in nature, shows that the cost of services rendered a
net gain of $200,000/year to the city in terms of taxes and special assessments. Please
understand that this is primarily a vacant land cost assessment. As these lands begin to
develop, the conclusions will probably change. The complete study is attached under separate
memo dated April 27, 2012 that was submitted to the planning board.
4. DIFFICULTIES CITIES HAVE IN BALANCING COMMUNITY GROWTH WITH
COMMUNITY SERVICES: Cities across the state and nation struggle with growth. In
many instances the type of growth and the design and location of the growth are easier issues
to struggle with because community plans are in place to provide guidance. The difficult issue
is weighing the question, how much weight do you place on cost effectiveness — that is should
growth pay for itself. That is easy to answer — yes it should. The trouble is in the details. Is
it practical to expect all growth to pay for itself and, if it does not pencil out, should it be
denied. Staff would like to provide a few observations in this arena.
In 2007 when we completed our last city-wide land use inventory, roughly 1/3 of all of land in
Kalispell was tax exempt property. This group can be divided into two categories: Public
lands which are totally exempt and private non -profits which pay special assessments (street
maintenance, urban forestry, street lights, etc) but not property tax. Public lands include city
parks; golf courses; the airport; streets; city buildings; utilities; county, state and federal land
and buildings; and schools. Non -profits include churches; fraternal organizations; private
schools; public subsidized housing; and portions of Kalispell Regional Medical Center
holdings. Please note that the two largest employers in the city are partially and completely
tax exempt — KRMC and School District 5. This means that the remaining 2/3 of the
properties in the city must cover the cost for the exempt 1/3.
Secondly, not all uses of land inherently pay their way when calculating taxes paid and
services demanded. Myrt Webb, during his tour as interim city manager several years ago,
quoted from a Montana State University Local Government study which showed that
residential uses demanded between $1.16 and $1.45 in services for every dollar in taxes paid.
Conversely commercial properties only demanded $.76 in services for every dollar paid and
industrial lands only demanded $.54 for every dollar in taxes paid. This is somewhat easy to
understand. Families use parks and golf courses, drive cars, place demands on streets, need
police and fire services, etc. Industry on the other hand does not ask for parks and golf
courses, tends to generate fewer vehicle trips, etc. More enlightening is the study recently
completed by staff which showed that while the average price of a house in Kalispell in 2008
was $240,000 and today is $165,000, it takes a house with a value of $375,000 to generate
enough local property tax to cover the general fund services that it demands. Again, our tax
structure is based on value and not all houses are equal.
With the information gleaned from above and coupled with a policy that all development must
pay its way in terms of services demanded, the following conclusions would seem apparent:
® Commercial and industrial development (annexations) would be favorably received.
• High end residential housing subdivisions will be favorably received.
® All public housing and private housing under $375,000/unit would not be approved.
This includes all public housing projects, mobile home parks, entry level housing,
average priced homes and almost all apartment housing.
® Churches, schools and parks would not be favorably received.
Obviously problems arise when we take a general policy and apply it to every situation. A city
that only annexed commercial and industrial lands may in the short run be fiscally sound but
would soon suffer as a desirable community to live in if the amenities that give a community
heart and soul (parks, schools, churches, trails, libraries, etc. ) are missing.
a. As a planning and policy tool, cost of service plans are very important. As an analytical
tool to ascertain specific measurable costs or benefits it is far too general in nature and
without refinement should not be used to craft a reimbursement policy for annexation
shortfalls.
b. Commercial and industrial property typically shoulders the burden of supporting local
government in a property tax environment. Communities with a significant balance of
commercial and industrial properties have a tax advantage.
c. Residentially dependent communities (bedroom and commuter communities) typically
operate in a tax deficit situation.
d. Residential development will almost never cover the full cost of services that it places
on local government. Our goal should be incorporating efficient planning and design
into residential developments and at the same time ensuring that each development
fully addresses the costs of development associated with it (upgrading adjacent streets
as development phasing demands; providing needed parks; and utilizing the most
efficient utility layouts, etc.) This is now being done.
e. Our current annexation policy of focusing on lands within the annexation boundary
that comply with our growth policy and that can be served by municipal services as
outlined in our service extension plans (water, sewer and storm water, fire and parks)
is sound.
£ When looking at annexations, it is also important to protect the future growth
opportunities of the city to ensure that the city will have viable areas to grow into the
future. Kalispell is only 120 years old. What will the next 120 years hold? Historical
patterns of county rural developed lands around the city have grossly reduced the
ability of the city to grow in a logical pattern already. Eastward growth is now
eliminated by Evergreen. Westward growth down Two Mile Drive, Highway 2 West
and the Foys Lake area is generally precluded because of rural subdivision growth.
Rural commercial strip development along Highway 93 South has hampered orderly
growth to the south causing leap-froging annexations past the Four Corners
intersection as developers jumped to find open space that could be developed. The
rapid city growth along Three Mile Drive was simply the effect of someone willing to
extend sewer out beyond county subdivisions to a point where there was open
developable land.
g. Recognize that when we do say no to future annexations on our borders, in most cases
that the development still occurs but in the county. This rural development lies
immediately adjacent to the city. It will not pay any city taxes and it will not provide
any financial support to the city. Yet, because of its location it takes advantage of city
services (parks, city streets, mutual aid fire protection, police presence, etc. Thus
denying an annexation today may not alleviate costs to the city in the fixture.
PLANNING FOR THE FUTURE
MEMORANDUM
To: Kalispell Planning Department
From: Tom Jentz, Director
Date: April 27, 2012
Planning Department
201 1" Avenue East
Kalispell, MT 59901
Phone: (406) 758-7940
Fax: (406) 758-7739
www.kalispen.eom/plannin2
Subject: Tax Impact of Recent Vacant -Land Annexations on Kalispell
Planning Staff, as part of the Growth Policy update, has undertaken a brief
study of the fiscal impacts related to the recent annexations of vacant lands
upon the city's tax base. The City of Kalispell doubled in size in the past 10
years growing from 5.6 square miles in 2000 to 11.75 square miles in 2011.
While many of the annexations in the first part of the decade were ultimately
developed, land annexations from 2007 on have lain dormant for the most part
as the economy slowed. The purpose of this brief study is to determine the
impact that the vacant lands lying within the city limits has on the city
financially and to determine what effects it has on our ability as a city to
provide any required municipal services.
In preparation of this study, staff selected the 8 largest vacant tracts of land
that were annexed between 2007-2010. These vacant tracts accounted for
2,198 acres and ranged in size from 80 acres to 640 acres. They constitute
over half of the city's physical expansion this past decade. For each tract of
land staff reviewed the taxes and assessments generated by the lands, on a
yearly basis, since annexation. At the same time staff tried to determine, in a
general sense, the actual costs of service that each of these tracts placed on the
city. While not a scientific approach because of the variables, staff does feel
that this approach helps to put into perspective the effects, both positive and
negative, that these annexations place on the city.
Each tract of land has a slightly different story as they are analyzed below. In
addition, at the end of this report is a spread sheet that summarized the
property taxes and assessments (streets, stormwater, etc) that were paid to the
city during this time frame.
KALISPELL
2007-2010
Stillwater 180 - 180 acres annexed in 2008.
Paid $4,712 in taxes in 2011 ($19,157 - past 3 years).
Development - none.
Service demands - Limited to potential police -fire response to
vacant farm land - no service calls recorded.
Valley Ranch - 80 acres annexed in 2007.
Paid $3,072 in taxes in 2011 ($10,804 - past 4 years).
Development - none.
Service demands - Limited to potential police -fire response to
vacant farm land - no service calls recorded.
Glacier Mall - 485 acres annexed in 2008.
Paid $21,776 in taxes in 2011 ($66,732 - past 4 years).
Development - none.
Service demands - Limited to potential police -fire response to
vacant farm land - One fire service call concerning burning
hay bales. The fire department responded but let the bales
burn and returned to the station.
Starling - 640 acres annexed in 2009.
Paid $9,574 in taxes in 2011 ($26,860 - past 3 years).
Development - Two farmsteads.
Service demands - Limited to potential police -fire response to
vacant farm land - no service calls recorded.
Maintenance of 2 additional miles of perimeter road (Four
Mile and West Spring Creek). Est. annual road costs are
$6,000/Year.
ill® Creek - 140 acres annexed in 2007.
Paid $8,838 in taxes in 2011 ($39,888 - past 5 years).
Development - none.
Service demands - Limited to potential police -fire response to
vacant farm land. In five years, one fire call recorded -
estimated cost of $2,000 to address small fire started by
transients. One police call to move transients on.
Siderius - 208 acres annexed in 2009.
Paid $20,590 in taxes in 2011 ($51,150 - past 3 years).
Development - none.
Service demands - Limited to potential police -fire response to
vacant farm land - no service calls recorded.
Gardner's - 140 acres annexed in 2007.
Paid $27,314 in taxes in 2011 ($81,142 - past 3 years).
Development - Primarily vacant land plus an auction barn
and truss facility.
Service demands - Limited to potential police -fire response to
vacant farm land ad two industrial buildings - no service
calls recorded.
Silverbrook 1 - 158 acres annexed in 2007.
Paid $126,724 in taxes in 2011 ($284,044 - past 3 years).
Development - Club House and 29 homes
Service demands - Internal streets, trails and parks are
currently maintained by the developer, the city does perform
some street patch work at $2,000/year. % mile of Church
Drive is maintained by city at an annual cost of $ 1,000. (The
county provides road plowing in winter. Police -fire response
to 29 homes. In five years one response to a fatality (high
speed crash into a bridge abutment) and one report of stolen
tools from the contractor.
Silverbrook 2 - 167 acres annexed in 2007.
Paid $4,188 in taxes in 2011 ($19,671 - past 5 years).
Development - Vacant
Service demands - Share % mile of Church Drive road
maintenance with phase 1 above. Potential police -fire
response to vacant farm land - no service calls recorded.
Conclusions: While this is a cursory review of the issue, it appears that
the city is realizing $227,000 in tax and assessment per year from these 8
properties. This is counter -balanced by approximately $ 1 1,000/year in service
costs which are related primarily to street maintenance on approximately 2 %
miles of rural road and sporadic fire/police service calls over the past 5 years
which average less than one/year. The net balance is over $200,000 in general
revenue to various assessment funds and the city general fund. It would
appear that at least for the short term, this annexation policy is a revenue
generator for the city and not a cost impediment.
A secondary benefit to this past annexation policy has been the ability to
master plan significant areas of land on the borders of the city which will
ultimately allow the city to grow for years without the impacts of rural
development closing or limiting the natural growth patterns of the city that
have been so prevalent for the past several decades.
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