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2. Cost Based Fee Structure for Developmentstof KafispellPublic Works Department laosi Office Box 1997, Kalispell, Montana 59903-1997 - Telephone (406)758-7720, Fax. (406)758-7831. REPORT TO: Mayor and City Council FROM: James C. Hansz, P.E., Director of Public Works SUBJECT: Cost Based Fees for Development MEETING DATE: December 13, 2004 In June City Council discussed the concept of establishing cost -based fees for development projects. The objective of the discussion was to explore ways to ensure that, through appropriate fee systems, development projects would not create a financial burden on the taxpayer and would, in effect, pay their fair share toward the cost of mitigating problems related to, but in many cases external to the boundaries of the development. With respect to roads, the previously developed memo of June 24, 2004 is attached for background information. In it were outlined the options available under current law for funding road improvements. Also included were three potential funding options that could be further explored at the direction of Council. Those three options were: 1) Bonding, with additional legislative authority needed to allow for certain types of revenue bonds secured for payment by non-traditional revenue sources, 2) Establishing a Street "Utility" that would treat the revenue requirements of managing a city street system in the same manners as currently done for the City's conventional utility systems, 3) Additional dedicated, i.e. local option gas taxes. This memo deals with further information related to the second of these three alternatives, the street utility concept. Since June we have received additional information from our Utility rate consultants for cities in Oregon. The information shows how some cities have successfully established successful revenue management systems for their roads. These systems are similar in their results to the street utility we have suggested. This information, along with other data from the Attorney General's office, has led the City Attorney to conclude that Kalispell may seriously consider establishing a cost -based system of service charges and fees. This system could fund the majority of costs related to street maintenance and the eventual upgrading of roadways that becomes necessary over time because growth consumes the available roadway capacity. This is identical in principle to the utility SDC which provides the revenue to fund capacity -related improvements necessary to replace utility system capacity consumed by growth. Staff will discuss the further development of this concept with City Council and request guidance on whether to further pursue this option with more detailed study involving our utility rate consultants. December 13, 2004 Cost Based Fees.doc City of Kalispell Public Works Department Post Office Box 1997, Kalispell, Montana 59903-1997 - Telephone (406)758-7720, Fax (406)758-7831 4 l,. MEMORANDUM 24 June 2004 To: Chris A. Kuulski, City Manager From: Charlie Harball, City Attorney, Tom Jentz, Tri-City Planning Director James C. Hansz, P.E., Director of Public Works/City Engineer Subject. Work Session on Funding Road Improvements The City Council asked for a worm session to discuss the options available to the City for funding road improvements. In support of that work session staff has performed a review of current and potential road funding options that are open or may potentially be available to assist in funding costly road improvement projects. The proposed revision of the City's Extension of Services Plan includes the following section pertaining to funding road improvements: "7. Financing the construction of new streets in a proposed development, or the upgrading of streets in an existing developed area, shall be accomplished in one, or a combination of, the following methods: • Use of private funds in connection with the development of a project. • Through the formation of a Special Improvement District (S.LD.). • Federal or State grant funds, provided said funds are available and their use for said improvements has been approved by the City Council. • State Fuel Tax monies, provided said funds are available, that their use for said purpose does not impair the normal maintenance of City streets, and further provided that the use of said funds has been approved by the City Council and is in accordance with all applicable laws of the State of Montana. • General Obligation Bond funds issued by the City for improvements having a benefit to the public beyond that related to a new project or development. " These five alternatives also are listed in the current policy. They span the range of traditional funding options that have been and are currently available to the City for improvements of this type. Examples of how these funding alternatives are presently used or could be used in the future are as follows: memoOMG04.doc Use of private funds in connection with the development of a project. Improvements funded in this manner are typically an item directly pertaining to the development of a specific project, such as the internal street system for the project. In addition, private funds may provide improvements of the existing street system when the project has a material and adverse affect on the existing system, such as the need for a right/left turn lane into a project to ensure safe access/exit after the development is complete. Other improvements that may be necessary to bring an existing adjacent street up to current City standards occasionally may be required when there is a clear connection of the need with the development. Through the formation of a Special Improvement District (S.I.D.). A Special Improvement District may occasionally be used to fund development - related road improvements. The current Kalispell Subdivision rules allow this funding for small (five lots or fewer) subdivisions. Also, when an existing roadway requires upgrading, and the need cannot be shown to be exclusively due to a proposed development, or there is a consensus of City Council that a broader community interest would be served, an S.I.D. may be created to fund roadway improvements in connection with a specific project. An S.I.D. may also be appropriate to correct roadway deficiencies that have developed over a long time as a result of small incremental of development within an area. The improvement of Sunny View Lane is the most recent example of SID funding to improve a major roadway that had become inadequate due to incremental growth over many years. Federal or State grant funds, provided said funds are available and their use for said improvements has been approved by the City Council. Federal or State grant funds, if available, could be used to fund roadway improvements. Federal CDBG funds might be appropriate for projects where a connection can be made to improved economic activity. Federal Highway funds, specially earmarked in the Federal Budget, may also be used to fund significant projects, such as the Kalispell West Side Bypass Project. Within the annual Federal Highway appropriation, Montana currently receives nearly $260 million to improve and maintain the state system of roads. Montana Department of Transportation has a long-standing program that allocates a percentage of this allocation to making improvements to the designated Federal Urban Highway System. This State program is the source of funding for the Meridian Road project. State Fuel Tax monies, provided said funds are available, that their use for said purpose does not impair the normal maintenance of City streets, and further provided that the use of said funds has been approved by the City Council and is in accordance with all applicable laws of the State of Montana. At the present time the State's annual return of fuel tax funds is the source of funds that are spent each year in the City Gas Tax budget. These funds are used for maintenance related items to repair and maintain the current City street system. Certain of these funds also are set aside to install sidewalks, and there is nothing that prevents their use for other street -related costs, including making significant improvements to the existing street system that go beyond the definition of routine maintenance. However, the funds available in any given year arriount to about $300,000.00. Therefore, a project of any significant size would require the dedication of Gas Tax funds over several years in order to complete the project. This could, effectively, greatly reduce or prevent altogether the routine maintenance of streets unless other funds were identified and dedicated to this task, hence the inclusion above of wording for the proposed policy revision that addresses this potentially problematic situation. General Obligation Bond funds issued by the City for improvements having a benefit to the public beyond that related to a new project or development. Kalispell, like other Class I cities, may issue general obligation bonds that are guaranteed by the City's taxing authority. There is substantial unused bonding capacity for the City to consider this option for costly projects. General obligation bonds were recently issued by Bozeman to address some of that city's transportation deficiencies. General Obligation Bonds require approval by the voters. The preceding five alternatives are the funding options currently available to the City through state law. We presently can see several other potential funding alternatives but some of these cannot be employed without changes to state law or the cooperation and participation of others. These other alternatives are: • Revenue Bonds/Loans. Establishing a Street Utility. • Supplemental Gas Tax. How could these potential options fit into a funding plan for City road improvements? • Revenue Bonds/.Loans. Revenue bonds are presently used by MDT to fund large highway projects. They are titled "GARVEE" Bonds referring to their structure: Grant Anticipation Revenue Bonds. MDT issues bonds secured for repayment by funds from the anticipated revenue stream of the annual Federal Highway Program. The limit on State bond financing is $150 million and all of this is presently committed toward the State's large US 93 project. In other states, cities and other levels of government have access to this funding option, and it is being pursued in Montana as a potential solution for cities to fund large road projects on their Urban Systems which exceed their capability under the present financing system. Kalispell is pursuing this option to fund the Meridian Road Project. MDT have indicated their support of the concept which would allow most of the annual Kalispell Urban System funding to be dedicated toward debt service on these bonds. There is some question whether this will be possible within the current law and the issue is being researched by the City Attorney and bond counsel with the intent of requesting an Attorney General's opinion on the concept. A similar issue of legal authority exists with the potential for conventional loans from the Montana Board of Investments which would be repaid, again, by use of memoOl 92004.doe Urban System funds passed through to the cities by MDT. MBol has indicated an interest in establishing such a loan program but the legality of the concept is uncertain because of doubt about the legal authority of cities to obligate themselves for this type of debt. Further, present MBoI loan programs do not have the funding capacity to service the large loan amounts needed for highway projects, so a new program would be required. Again, MDT has indicated support for this concept, but the question of legal authority to use this financing method may need to be reviewed by the State Attorney General. Legislative changes also may be necessary to open up this option for cities. • Establishing a Street Utility. This concept was briefly discussed during the City's recent utility rate setting effort. The idea is for cities to approach the management of their street systems in the same business -like and comprehensive way they manage their water and sewer utilities. In this concept, the street funding structure would comprise two distinct pieces: the maintenance portion, which would mimic the utility usage charges, and would generally be equivalent to the current annual maintenance assessment, and a new capacity replacement/growth related portion equivalent in its administration to the current utility system development charges. The current street maintenance assessment system would be retained and enhanced by a systematic cost -based analysis to identify all those costs related to operation, maintenance and replacement of the existing system. In short, the maintenance assessment would charge those who are using and wearing out the existing street facilities for their proportionate share of costs of upkeep and replacement -in -kind. The second and new half of the street utility funding mechanism would be a street system development charge that is similar to the utility SDC which is charged to all new water and sewer customers. New development would be charged the same type of fee for their proportionate cost to replace the existing street system capacity they will use and which was provided for their use by the current residents who developed the current street system. The new users, in effect, reimburse the system so the system's capacity can be renewed in the future. The determination of this new street SDC would involve the same comprehensive cost -based analysis that was recently done for the other utilities. This analysis would result in determination of a street SDC fee that reflects the capital costs related to replacing a residential unit of street capacity and which should be reimbursed by new development projects in order for the City to have the funds available to replace that street system capacity at some future date. The street SDC fees would be collected and kept separate, as is done with utilities, and would be used solely for making street system improvements related to replacing street capacity consumed over time by community growth. The location and timing of major capacity related improvements are typically driven by the demands of growth. Quiet residential streets seldom require more than rehabilitation to their original specifications. Arterial and collector streets, busy intersections and streets leading to and from major destinations, such as commercial centers, are more likely to require significant upgrade due to the increases in traffic caused by growth. These improvements could be substantially funded by the street SDC fees because the need for the improvement would capacity related. The ability for cities to establish this type of street funding system is uncertain. State law allows general government cities to set fees for maintaining their street systems. It also allows this funding/operational concept to be used in connection with other utilities. Further, the law permits cities to set general levies to repay G4 bonds which could be issued for street improvements. The issue then is whether these permitted options for funding streets and utilities can be seen to be appropriate when combined for funding street related improvements. • Supplemental Gas Tax. This is an option that potentially exists but at the present time lies outside the authority of Kalispell to implement as a solution to fund City road projects. At the present time this would be a county decision. As an option, it has several attractive qualities: 1) small increments of gas tax can generate fairly large revenue for road projects; 2) the taxpayers are those who are using the road system; 3) non. -residents who contribute to the road maintenance problem also would contribute to the revenue stream needed for repairs and improvement. memo0192004.doc