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
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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