(NOTE:  A 1996 Study by the Town of Flower Mound follows the Texas Municipal League's 2001 Study of a 1998 Real Estate White Paper)

Texas Town and City Magazine / October 2001 / by Frank J. Sturzl, Executive Director

(Mr. Snapper Carr, TML Legislative Associate, contributed to this article.)

 

Does residential development pay for itself?

Study Refutes a Real Estate Research Centers Report

 

          A study commissioned by the Texas municipal league reveals that residential development usually does not pay for itself and that non--residential development and other sources of revenue actually subsidize municipal services provided to residential development.

          These findings refute the conclusions reached in the 1998 report published by The Real Estate Research Center (RERC) at Texas A&M University.  That report has been cited by builders and developers to back their claims that impact fees constitute "double taxation".

          This article traces the history of the RERC report, the debate over impact fees, and the TML-commissioned a study that thoroughly rebuts the RERC findings.

 

The RERC Report

          In early 1998, The Real Estate Research Center at Texas A&M University released a report titled, "New Subdivisions Pay Their Way."  The report focused on the residential subdivisions and two cities: San Antonio and Tyler.  The report concluded that:

          1. Since each new residential household generates more general fund revenue than does the average existing household, the new household more than pays for itself and produces a "positive fiscal impact on the city's general fund account."

          2. Since each new residential household generates more revenue for the city's debt service fun than is required for capital improvements that serve the subdivision, the new household more than pays for itself and produces a net excess revenue for the city.

 

The RERC report reached these conclusions by adopting three major premises:

          1. The average existing household pays into the general fund an amount sufficient to pay for an average level of municipal services.

          2. Each new household within the city requires the same level of service.

          3. If a new household produces revenue in excess of the amount paid by an existing household,  then the new household is paying "additional" revenue to be used for "enhanced services and improvements that benefit the rest of the community."

          The RERC report's conclusions are very unusual.  Most fiscal impact literature shows that new residential development does not pay for itself, that land uses producing the greatest net revenue for a city are non-residential, and that land uses producing net deficits are residential.  That's why - as all city officials know - it is important for a city to attract an economic base with accompanying jobs and taxable property that can offset the costs generated by residential development.

          Across the state, builders and developers were thrilled with the findings of the RERC study and used to that study to attack impact fees.

 

The 1999 Impact Fee Debate

          Impact fees were clearly authorized by the Texas Legislature in 1989.  Under state law, and impact fee is defined as "a charge or assessment imposed by a political subdivision against the new development in order to generate revenue for funding or "recouping the cost of capital improvements or facility expansions necessitated by and attributable to the new development".  Fewer than 100 Texas cities impose impact fees, and not all imposed the maximum amount allowed under law.  Most of the cities that impose impact fees are rapidly growing cities that have a difficult time ensuring that the provision of municipal services keeps up with the growth of residential development.

          Although builders had supported - in fact, had initiated - the 1989 legislation that authorized impact fees, by 1999 they were persuaded that impact fees were too high, or impeding their efforts to build and sell houses, and were reducing the supply of affordable housing.

          The RERC report appeared to buttress the builders' arguments, in that the report seemed to conclude, in essence, that impact fees aren't needed at all, since new residential development more than pays for itself through existing taxes and fees, other than impact fees.

          Armed with the Re: RC report, the builders sought passage of H.B. 2045 during the 1999 legislative session.  Over the big arrest objections of TML and dozens of its member cities, the Legislature enacted H.B. 2045, which, among other things, would have required a city, when calculating an impact fee, to give it credit for taxes and fees produced by a new household or to reduce the impact fee of 50%, whichever would have been the greater.

          At the urging of TML and its members cities, then-Governor George W. Bush vetoed H.B. 2045, saying that it could have caused an increase in property taxes, forced the cost of new development on to the existing residents, and restricted the flexibility of local governments to determine how to pay for new development.

 

Getting Ready for 2001

          The League and its member cities knew that the impact fee battle would resume in 2001 and that the builders would continue to rely on the RERC report to argue that impact fees are a form of "double taxation" on new households.  In preparing for 2001, the League contracted withTischler and Associates (TA) for a thorough review and analysis of the RERC study.   TA is an economic and planning consulting firm that focuses on fiscal impact of valuations come impact fee assessments, capital improvement plans, and revenue strategies.  TA has provided a broad range of cost-of-growth services to public and private sector clients nationwide and has been commissioned to do consulting work for such diverse groups as the American Planning Association, the Government Finance Officers Association, and The National Association of Home Builders.

          TA first evaluated the RERC report and then studied the fiscal impact of residential development in the two cities analyzed in the RERC report:  San Antonio and Tyler.

 

The Flaws in the RERC Report.

          TA first noted that the RERC report assumes that property taxes and one-time fees paid by existing development are satisfactory to cover demands for all residential services and expenditures.  TA then identified the problem with drawing any conclusions based on this assumption:

          Given this premise, new residential housing that generates taxes and fees greater than the average city household is deemed to be fiscally positive.  TA has found that many of its assignments throughout the country that the cost of service for residential development is partially subsidized by non-residential development.  Implicit in the RERC methodology is the assumption that the nonresidential subsidy will continue to expand as part of his assumption that new residential development pays for itself.  This is a fundamental methodological flaw.

           TA argues that to calculate the fiscal impact of residential development, the demand for services generated by residential land uses should be ascertained.  Then, resulting cost and direct revenues should be calculated.  But the RERC report does not follow this methodology.  Instead, it assumes the general fund revenue generated by the existing household is sufficient to cover cost.  TA continues:  the author (RERC) basically divides the number of households into the revenue source allocated to residential activities, then calculates the average revenues per household.  In the case of property taxes, 58% of the total revenue from the City of San Antonio in 1995 was from residential development.  This number divided by the number of households resulted in current taxes paid of $124.25 per household.  Allocations were made to other revenue categories to derive a per household revenue amount.  

          This methodology and bottom seems that for every new housing unit, the nonresidential component will increase accordingly to maintain the same relationship of residential to nonresidential (property values).  This assumption prevents the true calculation of what the fiscal impact is of a new residential development.  Instead, it answers the question of whether new residential developer generates more than the average per household assuming the same subsidy from nonresidential prevails.  In essence, the author's (RERC's) approach assumes that the current residential revenues per household are satisfactory and reflect the full cost burden generated by residential property.  This is likely a false premise given that in most communities nonresidential development usually subsidizes residential development and existing revenues are usually not adequate to maintain the current level of surface for both operating and capital costs.  Since the author's (RERC's) approach is not evaluated for the true costs for residential development, it has not calculated the true fiscal impact of new residential development in these communities.

          In summary, TA finds that the RERC report is fundamentally flawed.

 

Fiscal Impact of Residential Development in San Antonio

 

The TA study compares cost with revenues for five different kinds of residential development:

          - R-1 - single-family residential; 6000 square-foot lot; $200,000 average taxable value.

          - R-5 - single-family residential; 5000 square-foot lot; $160,000 average taxable value.

          - R-7 - single-family residential; 4,200 square foot lot; $100,000 average taxable value.

          - R-4 - manufactured home; $60,000 average taxable value.

          - R-3 - multifamily units; $39,500 average taxable value.

          Exhibit 1 compares revenue produced by each type of household costs incurred to service each household.  The results reflect costs and revenues related to the general fund and the debt service fund; they do not include water, sewer, or solid waste funds.

 

Here is a summary of data displayed in Exhibit 1

          - four of the five residential types generate combined annual net deficits to the general fund and debt service fund.  Single-family units in the R-1 zoning district generated combined annual net revenue to the general fund and debt service fund.

          - single-family units in the R-1 and R-5 zoning districts generate annual net revenue to the general fund.  This is primarily the result of relatively high taxable values compared to the city average.

          - All five types generate net deficits to the debt service fund.

Fiscal Impact of Residential Development and Tyler

Here again, the TA study compares cost of revenues for three types of residential development:

          - R1A - single-family residential; 9000 square-foot lot; $231,550 average taxable value.

          - R1B - single-family residential; 6000 square foot lot; $181,345 average taxable value.

          - R3 - lowrise multifamily units; $31,500 average taxable value.

 

Exhibit Two compares revenues and cost for Two Funds: 

     the general fund and a half cent sales tax fund, which is used to account for acquisition and construction of major capital facilities and infrastructure in Tyler.  Here again the results do not include water, sewer, or solid waste funds.

 

The TA report summarizes the data and exhibit to as follows.

          - All three residential types generate combined annual net deficits for the general fund and half cent sales tax fund.

          - single-family units in theR1A zoning districts generate net revenue to the general fund, and single-family units in the R1B zoning district generated fiscally neutral general fun result.

          - all three types generate net deficits to the half cent sales tax fund.  These results illustrate the extent to which the city is reliant on expenditures from the nonresidential development base, as well as persons residing outside of Tyler.  This reliance on outside expenditures is not uncommon in communities that are centers for regional retail activities. 

 

Summary of Major Findings

          1. The RERC report's methodology is fundamentally flawed; it in no way proves that "new subdivisions pay their way," as the report title states.  The RERC report merely finds that new, more expensive homes generate more municipal revenue than older, less expensive homes.

          2. Almost every type of residential development study by TA produces net costs to the city in which the development takes place.

          3. The TA study illustrates the vital role that nonresidential development plays an offsetting the costs of providing facilities and services to residential developments.  Non-residential development is very important keeping tax rates affordable in most cities.

          4. Cities benefit from sales tax revenues generated by persons residing outside their city limits.  This reliance on nonresidential taxpayers is especially prevalent in cities that service centers for regional retail activities.

 

Aftermath

          The Texas Municipal League and the Texas Association of Builders ultimately negotiated and agreed to impact fee bill that was enacted by the 2001 Texas Legislature.  (That bill, W.B. 243, is fully described in the June 7, 2001 Legislative Update, which is available on the TML Website, www.tml.org).  Thus, a battle of studies - RERC v. TA - was avoided.  Nonetheless, the TA study is important, because it is an up-to-date analysis of the costs and revenues generated by new residential development in major Texas cities.