Impact Fees for Wastewater Systems

Transcription

1 2013 Impact Fees for Wastewater Systems Final Report City of Kalispell 12/13/2013

2 Contents Executive Summary Introduction... 4 Financial Objective of Impact Fees... 4 Impact Fee Criteria... 4 The Need for This Study... 5 Development and Summary of the Wastewater Impact Fee... 6 Consultant s Recommendations... 8 Impact Fee Advisory Committee (IFAC)... 8 Conclusion... 8 Section 1: Introduction and Overview Introduction Overview of the Report Disclaimer Summary Section 2: Overview of Impact Fees and Generally Accepted Industry Practices Introduction Defining Impact Fees Historical Perspective Impact Fees and Generally Accepted Practices Financial Objectives of Impact Fees Relationship of Impact Fees and New Construction Activities Summary Overview of Impact Fee Methodologies Introduction Impact Fee Criteria Growth, Risk and New Connections Overview of the Impact Fee Methodology Summary Legal Consideration in Establishing Impact Fees for the City Introduction Requirements Under Montana Law... 24

3 4.3 Summary Determination of the City s Wastewater Impact Fees Introduction Overview of the City s Wastewater System Overview of the City s Wastewater Facility Plan Present Impact Fees Calculation of the City s Impact Fees System Planning Calculation of Equivalent Residential Units Calculations of the Impact Fee for the Major System Components Administrative Charge Debt Service Credits Net Allowable Wastewater Impact Fees Key Financial Assumptions Implementation of the Impact Fees Summary References Appendix A: Growth Calculations and ERU Projections Appendix B: Sewer Capital Improvement Plan Appendix C: Montana Code Annotated Appendix D: Wastewater Recoupment Appendix E: Debt Credit Calculations Appendix F: Existing Collection System Recoupment List Appendix G: Extension to Existing System Appendix H: ERU Schedule

4 Executive Summary Introduction Impact fees are a one-time assessment against new development to pay for the cost of infrastructure required to provide service. Impact fees provide the means of balancing the cost requirements for new utility infrastructure between existing customers and new customers connecting to the City s wastewater systems. The portion of existing and future wastewater treatment plant and collection system projects that will provide service (capacity) to new customers is included in the impact fees. The current wastewater impact fee is based on the 2006 Impact Fee Final Report and on an inflation adjustment to the fees by City Council Resolution No in April Morrison Maierle, Inc (MMI) was retained by the City of Kalispell, Montana to update the current costbased impact fees for the City s wastewater systems to include compliance with Montana Code, incorporation of the facility plan adopted by the City, the change in annexation boundary, current conditions, newly projected growth rates and an updated Capital Improvement Plan (CIP). MMI completed the September 2012 Wastewater Impact Fee Update Summary and presented the results and recommendation to City staff and the Impact Fee Advisory Committee. This final report incorporates the Impact Fee Advisory Committee approved September 2012 Wastewater Impact Fee Update Summary, developed by MMI, and provides details of the development of cost-based impact fees for the City s wastewater systems. Financial Objective of Impact Fees New development creates a demand and need for new or expanded facilities. As a result, without payment of impact fees, the utility would have insufficient funds to provide the facilities, and therefore, the community is unable to accommodate new development. While on the surface it may appear as simply a means to extract revenue from new development, the reality is far more complicated. Impact fees help utilities achieve a number of different financial objectives. These objectives tend to lean more towards financial equity between customers, and the ability to accommodate new development as opposed to simply producing revenue. Impact Fee Criteria In the determination and establishment of the impact fees, a number of different criteria are often utilized. The criteria often used by utilities to establish impact fees are as follows: Customer understanding System planning criteria Financing criteria State/local laws The use of system planning criteria is one of the more important aspects in the determination of impact fees. System planning criteria provides the rational nexus between the amount of infrastructure necessary to provide service and the charge to the customer. The rational nexus test requires that there be a connection (nexus) established between new development and the existing or expanded facilities required to accommodate new development; and appropriate apportionment of the cost to the new development in relation to benefits reasonably received. 4

5 An important consideration in establishing impact fees is any legal requirements at the state or local level. The legal requirements often establish the methodology around which the impact fees must be calculated or how the funds must be used. The Montana law enabling legislation for impact fees was enacted in 2005 via Senate Bill 185. The legal basis for the enactment of impact fees is found in Title 7, Chapter 6, and Part 1601 to 1604 of the Montana Code. The Need for This Study The current wastewater impact fee is based on the 2006 Impact Fee Final Report and on an inflation adjustment to the fees by City Council Resolution No in April The City Council has directed staff to update the existing cost-based wastewater impact fee based on current conditions and according to 2011 Montana Code Annotated. This report updates the information provided in the August 2006 impact fee report with the following information: 1) Change to the Kalispell Growth Policy: On March 7, 2011, City Council adopted an annexation policy that significantly revised the previous annexation policy boundary. This report accounts for the projected wastewater improvements within the current annexation boundary. Figure 1: 2011 Annexation Boundary delineates the current annexation boundary and provides a comparison to the pre-2011 annexation boundary (original 2006 study area boundary). Figure 1: 2011 Annexation Boundary is attached to this report at the end of Section 1. 2) Current Wastewater Demands: This report uses measured historical wastewater production volumes between 2006 and 2011 as a baseline volume, and projects future volumes based on a growth rate currently applied by the Kalispell Planning Department. 3) Projected Population Growth Rate: This report uses a population growth rate of 2% as projected by the 2011 Kalispell Growth Policy Update. The reduced 2011 annexation boundary also generates a lower projected population to be served by City utilities. For reference, historic population growth rates are listed below. The ERU growth calculation is shown in Appendix A to % 2000 to % 1990 to % 1960 to % 4) Updated Capital Improvement Plan: The Kalispell Public Works Department has updated the Capital Improvement Plan to reflect the current projected capital needs for treatment and collection. The 2012/2013 Capital Improvement Plan shows projects to be completed over the next five years and future projects to be completed in approximately ten years. The updated Capital Improvement Plan is included in Appendix B. 5) Key Financial Assumptions: In developing the impact fee for the City s wastewater system, several key assumptions were used. These include the following: The City s asset records were used to determine the existing assets and the value of those assets. 5

6 6 The interest rate used for calculating interest on existing assets is the 10-year treasury note rate as reported by the US Department of the Treasury at closing on November 30th of each year. Up to fifteen years of interest is included in the cost of the existing improvements. The fifteen-year average interest rate is currently 4.25%. 6) Council Direction on Administrative Fees: Under Montana statute, an impact fee may include a fee for the administration of the impact not to exceed 5% of the impact fee collected. The City Council guided staff to use the allowable administrative charge of 5% in the impact fee analysis and is followed for this report. The administrative charge of 5% was utilized for the recently adopted 2012 water impact fee. Development and Summary of the Wastewater Impact Fee The City currently provides wastewater collection and treatment services for a population of approximately 21,000 Kalispell customers and treatment services to Evergreen Sewer District. The City s wastewater system consists of a collection system and pumps that deliver wastewater to the City s treatment plant. The City has a wastewater treatment plant with a current design capacity of 5.4 MGD. The City s capital improvement plan calls for construction of numerous upgrades to the collection system and sewer extensions. This report uses a population growth rate of 2% as projected by the 2011 Kalispell Growth Policy Update. The calculation of the wastewater impact fee was based on the City s fixed asset records, future capital improvements as identified in the City's 2012 Capital Improvement Plan, developed from the planning criteria for capital improvements from the master plan entitled, City of Kalispell Wastewater Facilities Plan Update, dated March 2008 prepared by HDR Engineering (the Wastewater Facility Plan ). On March 7, 2011 the City Council adopted an annexation policy that significantly revised the previous annexation boundary. This report uses the annexation policy boundary for the planning boundary and adjusted Capital Improvement Projects to meet the infrastructure needs in the annexation boundary service area. A number of key steps in the calculation of the wastewater impact fees included the following: Use of System Planning Criteria: The number of equivalent residential units (ERUs) was determined based on the planning criteria from the 2011 Kalispell Growth Policy which uses a projected growth rate of 2%. This planning criterion incorporated with wastewater usage data from Kalispell wastewater system establishes the average day flow for an ERU. Calculation of Equivalent Residential Units: The planning horizon for the study was The number of future (additional) wastewater ERUs was determined within this step by using the projected growth rate of 2%. Calculation of the Impact Fee For the Major Wastewater System Components: Each of the major functional components of the wastewater system (e.g. collection, treatment, etc.) are reviewed to consider the existing plant assets, along with planned future capital improvements. This provides the basis for the value of capacity and when divided by the appropriate ERUs produce a cost per ERU for each major system component. When the cost per ERU for each major component is added together, it produces a gross impact fee. Major components for this report include the Treatment Plant and Collection System. The major components are further broken into sub-components as listed below.

7 Treatment o Plant Expansion o Recoupment Collection o Recoupment o Capital Improvement Project (CIP) within the existing system o Future Extension Future Extensions: In determining the wastewater impact fees, the City also considered significant future extension improvements to the wastewater collection system. The City of Kalispell Public Works Department has projected the need for capital improvements as extensions to the existing collection system. These improvements are necessary to provide collection system infrastructure for growth in recently annexed areas. These are substantial projects that comprise a large share of the wastewater impact fee. The future extensions costs may be included in or excluded from the impact fee analysis. The extension projects and costs were provided in the summary report for discussion by the Impact Fee Advisory Committee. The IFAC reviewed the with future extensions costs and voted to recommended three committed future extensions be included in the collection portion cost for the 2013 wastewater impact fee. 1. Stillwater Road Interceptor 2. Three Mile Drive Interceptor 3. Spring Creek Interceptor Debt Service Credits: If impact fees are insufficient to pay growth-related debt service, then a debt service credit is provided against the gross wastewater impact fees. The debt service credit is designed to avoid the potential double payment of debt service (i.e. once through the payment of the impact fee and again through rates). Wastewater Treatment Plant debt service credits are necessary in this current impact fee analysis. Determination of the Net Allowable Wastewater Impact Fee: Based upon the steps noted above, a net allowable impact fee was developed. Shown in Table ES-1 is a summary of the net allowable 2012 impact fee by major component for one (1) ERU, and is compared to the existing impact fee. Wastewater impact fee for other business types are based on the type of business and number of units (i.e. seats in a restaurant, water closets, sinks) as shown in Appendix H. The City, as a matter of policy, may charge any amount up to the allowable wastewater impact fee, but not over that amount. Charging an amount greater than the allowable impact fee would not meet the nexus test of a costbased impact fee. 7

8 Table ES-1 Allowable Wastewater Cost per ERU Description Current Total Total 2013 Wastewater Treatment Plant $1,404 $2,155 Wastewater Collection System $1,013 $3,571 Debt Credit ($37) ($243) Administrative Cost at 5% $119 $274 Total Wastewater Cost per ERU $2,499 $5,757 It should be noted that in the 2006 impact fee study, the calculated wastewater impact fee was $2, The 2006 fee was adjusted in 2008 to reflect cost of inflation for construction to $2,499. Therefore, the recommended calculated fee of $5,757 within this report is $3,258 more than the current fee. Consultant s Recommendations Based on the MMI s review and analysis of the City s wastewater system, they recommend the following: The City should implement impact fees for new hookups to the wastewater system that are no greater than the impact fees as set forth in this report. Using the current philosophy in place, the wastewater impact fee would be $5,757/ERU. The City should update the actual calculations for the impact fees based on the methodology as approved by the resolution or ordinance setting forth the methodology for impact fees every two years as required by Montana law. Impact Fee Advisory Committee (IFAC) The Montana Annotated Code requires the establishment of an Impact Fee Advisory Committee (IFAC), which serves in an advisory capacity to the governing body of the City of Kalispell. The September 2012 Wastewater Impact Fee Update Summary was reviewed and discussed with the IFAC at various meetings since November At the December 17, 2013 meeting the proposed methodology and impact fee as outlined in the Update Summary was motioned and approved by the committee members with a vote of 3 for and 2 opposed. This final report incorporates components of the September 2012 Wastewater Impact Fee Update Summary, developed by MMI, and approved by the Impact Fee Advisory Committee. Conclusion This concludes the executive summary of the development of the wastewater impact fee study. A more detailed discussion of the various steps associated with the development of this fee can be found in the following Sections of this report and the appendices. 8

9 Section 1: Introduction and Overview 1.1 Introduction Morrison Maierle, Inc (MMI) was retained by the City of Kalispell; Montana (City) to update the current cost-based impact fees for the City s wastewater systems that comply with Montana Code to The update was based on the Facility Plan adopted by the City, the change in annexation boundary, current conditions, newly projected growth rates and an updated 2012/2013 Capital Improvement Plan (CIP). MMI completed the September 2012 Wastewater Impact Fee Update Summary and presented the results and recommendations to City Staff and the Impact Fee Advisory Committee. This final report incorporates the Impact Fee Advisory Committee approved September 2012 Wastewater Impact Fee Update Summary, and provides details of the development of cost-based impact fees for the City s wastewater systems. The current wastewater impact fee is based on the 2006 Impact Fee Final Report and on an inflation adjustment to the fees by City Council Resolution No in April The City Council has directed staff to update the existing cost-based wastewater impact fee based on current conditions and according to the 2011 Montana Code Annotated This report updates the information provided in the August 2006 Impact Fee Report with the following information: 1) Change to the Kalispell Growth Policy: On March 7, 2011, City Council adopted an annexation policy that significantly revised the previous annexation policy boundary. This report accounts for the projected wastewater improvements within the current annexation boundary. The current annexation boundary is attached to this report and provides a comparison to the pre annexation boundary (original study area boundary). See Figure 1: 2011 Annexation Boundary, at the end of Section 1. 2) Current Wastewater Demands: This report uses measured historical wastewater production volumes between 2006 and 2011 as a baseline volume, and projects future volumes based on a growth rate currently applied by the Kalispell Planning Department. 3) Projected Population Growth Rate: This report uses a population growth rate of 2% as projected by the 2011 Kalispell Growth Policy Update. The reduced 2011 annexation boundary also generates a lower projected population to be served by City utilities. For reference, historic population growth rates are listed below. The ERU growth calculation is shown in Appendix A to % 2000 to % 1990 to % 1960 to % 4) Updated Capital Improvement Plan: The Kalispell Public Works Department has updated the Capital Improvement Plan to reflect the current projected capital needs for treatment and collection. The 2012/2013 Capital Improvement Plan shows projects to be completed over the 9

10 next five years and future projects to be completed in approximately ten years. The updated Capital Improvement Plan is included in Appendix B. 5) Key Financial Assumptions: In developing the impact fee for the City s wastewater system, several key assumptions were used. These include the following: The City s asset records were used to determine the existing assets and the value of those assets. The interest rate used for calculating interest on existing assets is the 10-year treasury note rate as reported by the US Department of the Treasury at closing on November 30th of each year. Up to fifteen years of interest is included in the cost of the existing improvements. The fifteen-year average interest rate is currently 4.25%. 6) Council Direction on Administrative Fees: Under Montana statute, an impact fee may include a fee for the administration of the impact not to exceed 5% of the impact fee collected. The City Council guided staff to use the allowable administrative charge of 5% in the impact fee analysis and is followed for this report. The administrative charge of 5% was utilized for the recently adopted 2012 water impact fee. Impact fees are a one-time assessment on new development to pay for the cost of infrastructure required to provide service. Impact fees provide the means of balancing the cost requirements for new utility infrastructure between existing customers and new customers connecting to the City s wastewater systems. The portion of existing facilities and future capital improvements that will provide service (capacity) to new customers is included in the impact fees. In contrast to this, the City has future capital improvement projects that are related to renewal and replacement of existing facilities in service. These infrastructure costs are typically included within the rates charged to the City s customers, and are not included within the impact fee. 1.2 Overview of the Report The development of cost-based wastewater impact fees requires detailed analyses of each utility. To better understand the approach The objective of this report is to properly place in context the purpose of impact fees, and to determine cost-based impact fees for the wastewater systems that comply with Montana law. and methodology used, along with the development of the City s impact fees, this report has been divided into a number of sections (chapters). This report is organized in the following manner: Section 1 Introduction and Overview Section 2 Review of generally accepted practices related to impact fees Section 3 Overview of the criteria and methodologies used to establish the impact fees Section 4 Summary of the legal requirements for enactment of impact fees under Montana law Section 5 Review of the development of the cost-based wastewater impact fees 10

11 1.3 Disclaimer Morrison Maierle, Inc, in its determination of impact fees presented in the September 2012 Wastewater Impact Fee Update Summary, has relied upon data and information provided by the City. At the same time, Morrison Maierle, Inc used generally accepted engineering, accounting, and ratemaking principles in the development of these cost-based impact fees. This should not be construed as a legal opinion with respect to Montana law. 1.4 Summary This section of the report has provided an overview of the Wastewater Impact Fee Report developed by the City in coordination with Morrison Maierle, Inc. This report provides the basis for the establishment of cost-based impact fees by the City. The next section of the report will discuss the generally accepted utility industry practices as they relate to impact fees. 11

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13 Section 2: Overview of Impact Fees and Generally Accepted Industry Practices 2.1 Introduction An important starting point in discussing the City s continued implementation of wastewater impact fees is an understanding of the purpose and concept of impact fees and the financial objective of those fees. This section of the report will discuss the concept of impact fees and the generally accepted practices of the industry. 2.2 Defining Impact Fees One must first define an impact fee before beginning an assessment and review of the fees. Impact fees are also often called system development charges (SDCs), capacity charges, buy-in fees, facility expansion charges, plant investment fees, etc. Regardless of the name applied to the fee, the concept is still the same. Simply stated, impact fees are capital recovery fees that are generally established as onetime charges assessed on developers or new wastewater customers as a way to recover a part or all of the cost of system capacity constructed for their use. Their application has generally occurred in areas that are experiencing extensive new residential and/or commercial development. 1 The main objective of an impact fee is to assess the benefiting party, their proportionate share of the cost of infrastructure required to provide them service. Stated another way, impact fees imply that new development creates new or additional costs on the system, and the impact fee assesses that cost in an equitable manner to those customers creating the additional cost. 2.3 Historical Perspective Historically, the financing of infrastructure was typically paid for via long-term debt and pay as you go rates. However, over the last twenty years, the use of impact fees as a method of financing growth and infrastructure has risen sharply. To the best of our knowledge, no clear surveys or data exists to show this change, however, there are a number of examples within the literature that point out this phenomena. As an example, a survey of 67 Florida communities was undertaken in 1986 and The number of communities in 1986 using impact fees was 15. By 1989, the number of communities using impact fees had more than doubled to As this funding mechanism gained popularity, legislatures across the U.S. were developing legislation to provide utilities with the authority to impose impact fees. Typical legislation generally provides the approach to be used to develop the fees and requires that the fees be used only for growth-related needs and not for current O&M requirements. At this time, the State of Montana has very specific legislation related to impact fees. This specific legislation regarding the fees provides the City with the authority to establish and collect impact fees. This authority is provided in Montana Code Section to George A. Raftelis, 2 nd Edition, Comprehensive Guide to Water and Wastewater Finance and Pricing (Boca Raton: Lewis Publishers, 1993), p James C. Nicholas, Arthur C. Nelson and Julian C. Juergensmeyer, A Practitioner s Guide to Development Impact Fees (Chicago: Planners Press, 1991) p

14 While many utility managers viewed impact fees as an important and alternative source of funding for new capital construction, these fees were also being rationalized from a number of different perspectives. Among these were the following: 3 1. To shift the fiscal burdens from existing development to new development. 2. To synchronize the construction of new or expanded facility capacity with the arrival of new development. 3. To subject new development decisions to pricing discipline. Each of these different perspectives is discussed in more detail below. Historically, existing development was often subsidized by federal or state resources. As an example, in the early 1970s, many wastewater treatment plants in the U.S. were 90% grant funded by the Environmental Protection Agency (EPA). Today, grants are nearly extinct, often replaced instead by lowinterest state revolving fund (SRF) loans. Therefore, as existing customers were being impacted by the cost of growth, local communities searched for methods to help minimize rates and the impacts of the cost of growth. Unchecked growth and sprawling expansion is very costly on a per unit basis. In response to this dilemma, many legislative bodies created urban growth boundaries. At the same time, utilities moved towards impact fee and extension policies that assist in managing system growth in an orderly and coordinated manner. As a result, improved planning and cost-based fees have helped utilities manage the costs of growth, while stabilizing rates to existing customers. Establishing the price of a commodity equal to its cost is a basic economic and market principle. In theory, consumers of a service will make optimal consumption decisions when the price of the commodity is set equal to its price. By establishing cost-based impact fees, developers should be in a position to make better and more rational decisions concerning new development. At the same time, proper pricing of impact fees also encourages right sizing of facilities to serve new development. In other words, given the proper price signal, the developer will properly size their service facilities to meet their needs, e.g., installing a ¾-inch meter versus a 2 meter. In summary, the use of impact fees has evolved over time, as historical funding sources such as grants have been reduced or eliminated. In response, many communities have moved towards adoption of cost-based impact fees, particularly in areas of high growth. 2.4 Impact Fees and Generally Accepted Practices Impact fees are one input into the rate setting process. Therefore, it is important to understand how, within the context of generally accepted utility industry practices, impact fees may be used. In conducting a comprehensive wastewater rate study, three interrelated analyses are typically conducted. They are a revenue requirement analysis, cost of service analysis and rate design analysis. Figure 2-1 provides an overview of each of these analyses. 3 Adapted from: Arthur C. Nelson, System Development Charges for Water, Wastewater and Stormwater Facilities (Boca Raton: Lewis Publishers, 1995) p

15 Figure 2-1 Overview of the Three-Interrelated Analyses to Review Rates Revenue Requirement Analysis Compares the sources of funds (revenues) to the expenses of the utility to determine the overall adjustment to rates Cost of Service Analysis Allocates the total revenue requirements to the various customer classes of service in a fair and equitable manner Rate Design Analysis Considers both the level and the structure of the rate design to collect the appropriate and targeted level of revenue Impact fees are taken into account within the revenue requirement analysis. The revenue requirement analysis determines the overall funding needs of the utility, while considering prudent financial planning criteria, e.g., adequate reserves, meeting debt service coverage requirements, etc. For most municipal utilities, the methodology used to establish their revenue requirements is referred to as the cash basis approach. Figure 2-2, provides an overview of the key components of the cash basis approach to developing revenue requirements. 15

16 Figure 2-2 Overview of the Cash-Basis Approach to E As can be seen in Figure 2-2, there are two elements to establishing the cash basis revenue requirements. The top or blue box shows the four basic cost components that are included within the cash basis revenue requirements. In contrast, the bottom or yellow box illustrates the various methods used to fund capital infrastructure projects. It should be noted in Figure 2-2 that impact fees may be used (applied) in two different ways, each having a different impact upon the utility s revenue requirements and, ultimately, the utility s rates. The first possible use of impact fees is shown in the bottom or yellow box. In that particular case, the impact fees are applied directly to growth or expansion related capital projects. The effect of using the funds in this manner is it helps minimize long-term borrowing. For each dollar of impact fees applied in this manner, one less dollar of long-term borrowing is required. Typically, total capital improvements funded from rates is established and fixed in the financial planning process. Therefore, applying impact fees to capital projects typically will not have a significant impact upon the amount of capital improvements funded from rates. The other potential use of impact fees is to apply the fees toward growth-related debt service. As shown in Figure 2-2, debt service is shown as net of any impact fees. In contrast to applying impact fees directly toward the capital project, in this particular case, for every dollar applied in this manner, there is 16

17 a corresponding dollar decrease in revenue requirements and the resulting rates. This is a very effective method to help minimize rates, but even better at matching the cost of growth to the gradual way in which customer growth occurs over time. In other words, a utility may build or expand a facility with sufficient capacity to handle growth over the next ten to twenty years. That growth doesn t occur in the first year, but rather trickles in over a number of years. Therefore, applying the impact fees against the debt service associated with the project creates a better matching of the cost incurrence (debt payments) to the actual customer growth. 2.5 Financial Objectives of Impact Fees An impact fee is a regulation and not a user fee or revenue raising device. To understand this perspective, one must view new development as creating the need for new or expanded facilities. As a result, without payment of impact fees, the utility would have insufficient funds to provide the facilities, and therefore the community is unable to accommodate new development. With this said, impact fees do have certain financial objectives associated with them. While on the surface it may appear as simply a means to extract revenue from new development, the reality is far more an impact fee is also a form of a financial reimbursement to existing ratepayers who paid for those facilities in advance of the new customer connecting to the system. An impact fee is a regulation and not a user fee or revenue raising device. To understand this perspective, one must view new development as creating the need for new or expanded facilities. complex. Impact fees help utilities achieve a number of different financial objectives. These objectives tend to lean more towards financial equity between customers, as opposed to simply producing revenue. One key financial/rate objective that is achieved from impact fees is equity. Equity is achieved in two different ways. First, an impact fee establishes equity between existing (old) customers and new customers. For example, assume that a wastewater treatment plant is expanded by 5 million gallons per day (MGD) to accommodate growth and the facility is financed over a 20-year period. Without an impact fee, new customers connect to the system and pay for the debt service on the facility via their rates. The customer that connects to the system in year one will contribute to the cost of that facility for 20 years. In contrast, the person who connects in year 10 will only pay for debt service on the facility for ten years, even though the value of the capacity was the same for the person connecting in year 1 or year 10. Impact fees create equity within the system by addressing the issue of timing and the value of the assets and the value of the capacity. The second way in which impact fees help to create equity is after a facility is paid for. Continuing with the example above, after the debt service is fully paid off in year 20, and assuming that some capacity is still available, a new customer connecting to the system would in theory receive their capacity at zero cost, because the debt service is paid in full. All the existing customers connected to the system, over the past twenty years, paid for that customer s capacity. Therefore, an impact fee is also a form of a financial reimbursement to existing ratepayers who paid for those facilities in advance of the new customer connecting to the system.

18 Most commonly, impact fees are adopted in high growth areas where infrastructure expansion has strained existing financial resources. Philosophically, many utilities desire to have a policy of growth paying for growth. Based upon the above example, impact fees also have an equity perspective associated with the rate setting process. That is, impact fees are a form of system buy-in. A properly established impact fee implies that a new customer connecting to the system has bought into the system at its current cost. Therefore, from a rate setting perspective the utility does not need to have rates for old and new customers. Again, existing customers have been equitably reimbursed for their past investments. Even with the above discussion, not all communities have impact fees. Most commonly, impact fees are adopted in high growth areas where infrastructure expansion has strained existing financial resources. Philosophically, many utilities desire to have a policy of growth paying for growth. Impact fees comport with that philosophy, and it is achieved by applying the impact fees either directly against the capital cost of the expansion facilities or against the debt service associated with it. 2.6 Relationship of Impact Fees and New Construction Activities There are a number of myths surrounding impact fees. In a very broad sense, some may argue that impact fees are bad for economic development. These arguments center around two issues. These are as follows: Development will occur on those parcels with lower or non-existent impact fees. Impact fees raise the cost of doing business and hinder development. Of the research conducted on these topics, just the opposite has been found. Provided below is a brief explanation of each. Developers look at many factors before a parcel is developed. One myth concerns the selection of parcels for development and whether impact fees are applied to the land. The argument goes that if a developer is choosing between two parcels of land on which to build where the first parcel is inside a city where SDCs (impact fees) are charged and the second is just outside where lower or no SDCs (impact fees) are charged the developer will choose the second parcel. The trouble is this means that the owner of the first parcel does not make a sale. The landowner must lower the land price to offset the fee in order to make a sale. However, if the landowner does not lower the price, this indicates that the value of future development may be higher on that parcel. Thus, be wary of developers who claim they will choose the second parcel. Chances are they would not have chosen the first parcel anyway. In the meantime, the land market will be holding the first parcel available for higher value development. In effect what might look like a loss in the short term may be a much higher level of development in the long-term. 4 4 Nelson. System Development Charges for Water, Wastewater and Stormwater Facilities P

19 The other argument and myth that one commonly hears about impact fees is that they are bad for economic development. The argument against this position is as follows: The argument goes that because SDCs (impact fees) raise the price of doing business, they frustrate economic development. However, just the opposite is really true. First, remember that SDCs (impact fees) will be offset by reduced land prices and by enabling the community to more easily expand the supply of buildable land relative to demand. Now, consider what economic development really looks for: skilled labor, access to markets, and land with adequate infrastructure. Competitiveness for economic development will be stimulated by the new or expanded infrastructure paid in part by SDCs (impact fees). In the competition for certain kinds of development, it will be able to show developers the dollar value of SDCs (impact fees) waived as a solid demonstration of the local government s commitment to such development. 5 As can be seen, at least in the opinion of Nelson, SDCs (impact fees) do not hinder growth, but in fact may help to spur growth. It must be remembered that an important concept associated with impact fees is that the fees are required to develop infrastructure in advance of the actual development. From the developer s perspective, absent impact fees (i.e. a moratorium on new connections) no new development can occur. Therefore, developers are generally supportive of cost-based impact fees, particularly when it provides available capacity and opportunities for development. As can be seen, at least in the opinion of Nelson, SDCs (impact fees) do not hinder growth, but in fact may help to spur growth. 2.7 Summary This section of the report has provided an overview of the financial objectives associated with impact fees and some of the issues surrounding them. This section should have provided a basic understanding of the fees such that when the City is ready to have a policy discussion concerning the continued implementation of impact fees and the imposition of new impact fees, they can be placed in proper perspective. The next section of the report will provide an overview of methodologies for the application of impact fees. 5 Nelson, System Development Charges for Water, Wastewater and Stormwater Facilities P

20 3.0 Overview of Impact Fee Methodologies 3.1 Introduction An important starting point in establishing impact fees is to have a basic understanding of the purpose of these charges, along with criteria and general methodology that is used to establish cost-based impact fees. Presented in the section of the report is an overview of impact fee criteria and the generally accepted methodologies that are used to develop cost-based impact fees. 3.2 Impact Fee Criteria In the determination and establishment of the impact fees, a number of different criteria are often utilized. The criteria often used by utilities to establish impact fees are as follows: Customer understanding System planning criteria Financing criteria, and State/local laws The component of customer understanding implies that the charge is easy to understand. This criterion has implications on the way that the fee is implemented, administered and assessed to the customer. Generally, for a wastewater system, the charge can be based on the type of dwelling or business type being assessed. For example, a school could be assessed based on a per student basis corresponding to the sanitary sewer flow per student. The other implication of this criterion is that the methodology is clear and concise in its determination of the amount of infrastructure necessary to provide service. The use of system planning criteria is one of the more important aspects in the determination of impact fees. System planning criteria provides the rational nexus between the amount of infrastructure necessary to provide service and the charge to the customer. The rational nexus test requires that there be a connection (nexus) established between new development and the existing or expanded facilities required to accommodate new development; and appropriate apportionment of the cost to the new development in relation to benefits reasonably received. An example of using system-planning criteria is the determination The use of system planning criteria is one of the more important aspects in the determination of the impact fees. System planning criteria provides the rational nexus between the amount of infrastructure necessary to provide service and the charge to the customer. that a single-family residential customer generates 265 gallons of wastewater discharge per day. The impact fee methodology then charges the customer for daily treatment and collection capacity of 265 gallons per day. One of the driving forces behind establishing cost-based impact fees is that growth pays for growth. Therefore, impact fees are typically established as a means of having new customers pay an equitable share of the cost of their required capacity (infrastructure). The financing criteria for establishing impact fees relates to the method used to finance growth-related infrastructure of the system and assures that customers are not paying twice for growth-related infrastructure once through impact fees and again 20

21 through rates. The double payment can come in through the imposition of impact fees and then the requirement to pay debt service within a customer s rates. The financing criteria also reviews the basis under which main line and collection line extensions were provided and addresses the issue such that customers are not charged for infrastructure that was provided (contributed) by developers. Many states and local communities have enacted laws which govern the calculation and imposition of impact fees. These laws must be followed in the determination of the impact fees. Most statutes require a reasonable relationship between the fee charged and the cost associated with providing service (capacity) to the customer. The charges do not need to be mathematically exact, but must bear a reasonable relationship to the cost burden imposed. As discussed above, the utilization of the planning criteria and the actual costs of construction and the planned costs of construction provide the nexus for the reasonable relationship requirement. 3.3 Growth, Risk and New Connections One of the common phrases associated with impact fees is growth paying for growth. While this is a simple and convenient phrase to convey the concept and purpose of impact fees, the reality of the transaction is far more complicated. As the recent downturn in the economy has demonstrated, customer growth is not assured or to be taken for granted. At the same time, it must be kept in mind that it is the existing customers that bear the risk of growth-related facilities that are built. If growthrelated facilities are built in anticipation of future growth, and little or no connections occur, it will be the existing ratepayers that will bear the burden of any financial responsibility (e.g. long-term debt) associated with those growth-related facilities. Absent some form of an impact fee, existing ratepayers would likely be hesitant to fully support undertaking such risk. 3.4 Overview of the Impact Fee Methodology There are generally-accepted methodologies that are used to establish impact fees. Within the generally accepted impact fee methodologies, there are a number of different steps undertaken. These steps are as follows: Determination of system planning criteria. Determination of equivalent residential units (ERUs). Calculation of system component costs. Determination of any credits. The first step in establishing impact fees is the determination of the system planning criteria. This implies calculating the amount of wastewater required to serve a single-family residential customer. Generally for a wastewater system, average daily demand per ERU is most often used, since this total flow represents the flow, imposed by the customer. Once the system planning criteria is determined, the number of ERUs can be determined. For the wastewater system, the number of ERUs is determined by dividing the average daily metered flow by the average daily flow per ERU. This is a very important calculation since it provides the linkage between the amounts of infrastructure necessary to provide service to a set number of customers. This 21

22 implies that if the system is designed to provide service to demands up to the year 2035, then the infrastructure costs are divided by the ERUs in 2035 to determine the cost per ERU. Once the number of ERUs has been determined, a component by component analysis is undertaken to determine the component impact fee in dollars per ERU. Individual facility components are analyzed separately for the wastewater systems given that the planning criteria for the design of the various system components differ. The calculation of the component impact fee includes both historical assets and planned future assets. Historical assets can be valued in a number of different ways. These include original cost plus interest, replacement cost and depreciated replacement costs. 1. The original cost plus interest method includes original cost plus fifteen (15) years worth of interest. This calculation is done to reflect the fact that existing customers have provided for excess capacity in the system and hence need to be reimbursed for not only their initial investment, but also the carrying cost on that investment. The reimbursement to existing customers is accomplished by the fact that without an impact fee, rates would otherwise be higher than they would be without impact fees. 2. The replacement cost method values existing assets based on the cost to replace the assets in today s dollars. This is done by escalating the original cost by the Engineering News Record Construction Cost (ERN) index. The theory behind the use of replacement cost is that customers are indifferent since they would have to pay replacement cost if the infrastructure was built today to serve their needs. 3. The use of depreciated replacement cost reflects the fact that the assets have been used and hence their value to the new customer is less than the replacement cost. Caution needs to be exercised in the use of depreciated replacement cost, since the book or accounting lives used by many utilities are not reflective of the actual life of the asset and may result in the assets being undervalued. An example is using a useful life for a storage reservoir of 40 years, when in reality, with maintenance, the actual life may be between 60 to 80 years. Since the adoption of the 2006 impact fees, the City has utilized the original cost with interest method, which will reflect the actual cost of the City s system. The original cost with interest method is used to calculate the impact fee in this report. The City s system is developed to serve future development through existing capacity and planned future capacity additions. This has been accomplished by the City building excess capacity and using borrowing to finance this capacity. Therefore, the use of the original cost with interest method will reflect the actual costs that have been incurred or will be incurred by the City in providing capacity to new development. This is also the most commonly used method to value capacity in wastewater systems. This method also appears to comply with the requirements under Montana law wherein the actual cost of infrastructure is required. Once the total cost of the capital infrastructure is determined, it is then divided by the appropriate number of equivalent residential units the infrastructure will serve to develop the cost per ERU for the specific facility component. 22

23 After each plant component is analyzed and a cost per ERU is determined, the cost per ERU for each of the facility components is added together to determine the gross impact fee. The gross impact fee is calculated before any credits for debt service. The last step in the calculation of the impact fee is the determination of any debt credits. This is generally a calculation to assure that customers are not paying twice once through impact fees and again through debt service included within the wastewater rates. A crediting mechanism is also utilized if general obligation or tax revenue has been used to finance the infrastructure. The final cost-based impact fee is determined by taking the gross impact fee and subtracting any credits. This results in a net impact fee stated in dollar per ERU. The general basis of this calculation for a wastewater system is the assumption that an ERU is equivalent to a single family residential customer. 3.5 Summary This section has provided a discussion of the criteria typically used in the determination of impact fees. In addition, an overview of the generally accepted methodology used in the calculation of the wastewater impact fees has been provided. Given this background, the next section of the report discusses any specific legal criteria that must be used by the City in the establishment of its impact fees. 23

24 4.0 Legal Consideration in Establishing Impact Fees for the City 4.1 Introduction An important consideration in establishing impact fees is any legal requirements at the state or local level. The legal requirements often establish the methodology around which the impact fees must be calculated or how the funds must be used. Given that, it is important for the City to understand these legal requirements. This section of the report provides an overview of the legal requirements for establishing impact fees under Montana law. The discussion within this section of the report is intended to be a summary of our understanding of the relevant Montana law as it relates to establishing impact fee. It in no way constitutes a legal interpretation of Montana law. 4.2 Requirements Under Montana Law In establishing impact fees, an important requirement is they be developed and implemented in conformance with local laws. In particular, many states have established specific laws regarding the establishment, calculation, and implementation of capacity fees. The main objective of most state laws is to assure that these charges are established in such a manner that they are fair, equitable, and cost-based. In other cases, state legislation may have been needed to provide the legislative powers to the utility to establish the charges. The laws for the enactment of impact fees in Montana are found in to of the Montana Code. The Montana law enabling legislation for impact fees was enacted in 2005 via Senate Bill 185. This was comprehensive legislation allowing public entities in the State of Montana to enact impact fees for various services. The legal basis for the enactment of impact fees is found in Title 7, Chapter 6, and Part 1601 to 1604 of the Montana Code. A copy of the code is summarized in Appendix C. 4.3 Summary This section of the report has reviewed the legal basis for establishing impact fees in Montana. MMI concludes that the City has the authority to establish cost-based impact fees and the proposed methodology to be used within this study, in the opinion of MMI and the City, meets the requirements of Montana law. 24

25 5.0 Determination of the City s Wastewater Impact Fees 5.1 Introduction This section of the report presents the development of the City s 2013 wastewater impact fee. The calculations of the wastewater impact fee presented in this section are based on: 1. The City s fixed asset records 2. Future capital improvements as identified in the City's 2012/2013 Capital Improvement Plan (Appendix B) 3. Planning criteria projected by the 2011 Kalispell Growth Policy 5.2 Overview of the City s Wastewater System The City currently provides wastewater collection and treatment services for a population of approximately 21,000 Kalispell customers and treatment services to Evergreen Sewer District. The City s wastewater system consists of a collection system and pumps that deliver wastewater to the City s treatment plant. The City has a wastewater treatment plant with a current design capacity of 5.4 MGD. The City s Capital Improvement Plan calls for construction of numerous upgrades to the collection system and sewer extensions. This report uses a population growth rate of 2% as projected by the 2011 Kalispell Growth Policy Update. 5.3 Overview of the City s Wastewater Facility Plan The original City of Kalispell Water, Sewer, and Storm Drainage System Facility Plan, was completed in July Since completion of the 2002 report, the City has continued to experience population growth and the expansion of infrastructure; therefore, in 2008 the City updated their facility plan to analyze potential growth and effectively plan for growth while protecting water, wastewater, stormwater and environmental resources. In 2008, the city adopted an updated master plan titled City of Kalispell Wastewater Facilities Plan Update, dated March The area studied in the 2008 Wastewater Facility Plan Update is represented in Section 1, Figure 1: 2011 Annexation Boundary. The basis of planning was to determine the requirements for the next 50 years in areas that the City will have to provide wastewater service as growth continues. On March 7, 2011 the City Council adopted an annexation policy that significantly revised the previous annexation boundary. This report uses the 2011 annexation policy boundary for the planning boundary and adjusted Capital Improvement Projects to meet the infrastructure needs as defined in the annexation boundary service area. Population growth, since the adoption of the Facility Plan Update, has not been as healthy as was projected in the report. Decreased and slowing population growth also delays the need to implement identified capital projects. 5.4 Present Impact Fees The City currently assesses an impact fee for connection to the wastewater system. The current wastewater impact fees are shown in Table

26 Table 5-1 Current Wastewater Impact Fees ($/ERU) Description Treatment Collection Total Wastewater Treatment Plant $1,404 $0 $1,404 Wastewater Collection System $0 $1,013 $1,013 Debt Credit ($37) $0 ($37) Administrative Cost at 5% $68 $51 $119 Total Wastewater Cost per ERU $1,435 $1,064 $2, Calculation of the City s Impact Fees The process of calculating impact fees is based upon a four-step process. In summary form, these steps are as follows: Determination of system planning criteria Determination of equivalent residential units (ERU) Calculation of the impact fee for system component costs Determination of any impact fee debt credits Each of these areas is discussed in more detail below System Planning The number of equivalent residential units (ERUs) was determined based on the planning criteria from the 2008 Wastewater Facility Plan Update, and the 2011 Kalispell Growth Policy which uses a projected growth rate of 2%. The facility plan calculates wastewater average flow usage of 106 gallons per capita per day. An assumption of 2.5 persons per household or ERU was utilized to determine average day flows of 265 gallons per day per ERU. A summary of the ERU conversion factors is presented below in Table 5-2. Table 5-2 Wastewater System Planning Criteria Planning Criteria ERU Planning Criteria Average Day Flow per Person 106 Gallons/Day/Person Persons per Residence 2.50 Average Day Flow per ERU 265 Gallons/Day/ERU 26

27 The system planning criteria shown in Table 5-2 will be used for different facility components to determine the cost per ERU for that specific facility component Calculation of Equivalent Residential Units The planning horizon of this study was Other impact fee components were based on the number of ERUs in 2035 or additional ERUs from 2012 to As a part of this study, a projection of the number of new/additional ERUs per year must be determined, along with the total number of ERUs at 2035 for the treatment and collection system. The City s total number of residential ERUs for each year was determined by dividing the average day usage factor per ERU into the City s total metered average flow at the treatment plant. Collection ERUs subtract out Evergreen Sewer District flows. The number of ERUs added during each year of the study period was based on a 2% growth rate. The detailed ERU calculation in correspondence with the 2% growth rate for treatment and collection is located in Appendix A. A summary of 2012 ERUs, 2035 ERUs, and total additional ERUs between 2012 and 2035 are presented in Table 5-3. Table 5-3 Wastewater System Equivalent Residential Units Year Treatment ERUs Collection ERUs Equivalent Residential Units ,405 9,584 Equivalent Residential ,984 15,113 Total Additional 2012 to ,579 5,529 Given the development of the total wastewater ERUs for each year of the planning period, the focus can shift to the calculation of the impact fee for each facility component. This aspect of the analysis is discussed in detail below Calculations of the Impact Fee for the Major System Components The next step of the analysis is to review each major functional component of facility in service and determine the cost per ERU for that component. In calculating the wastewater impact fee for the City, both existing facility assets, along with planned future Capital Improvement Projects (CIP) were included within the calculation. The major components of the City s wastewater system that were reviewed for purposes of calculating impact fee are as follows: Wastewater Treatment Plant Wastewater Collection System A brief discussion of the impact fee calculated for each of the functional plant components is discussed in the following sections. 27

28 WASTEWATER TREATMENT PLANT The City of Kalispell completed an expansion to the Kalispell Wastewater Treatment Plant (WWTP) in This expansion increased the capacity of the WWTP from 3.0 million gallons per day (MGD) to 5.4 MGD. This expansion was driven by two factors: 1) the average daily flows for the years leading up to the WWTP expansion were approaching the capacity of the plant, and 2) the City had annexed several large tracts of land that would potentially be served by the WWTP. For the impact fee analysis and calculation, the wastewater treatment is divided into two components; expansion and recoupment. A description of each component is provided below, with the analysis and calculation for the cost per ERU. Treatment Expansion The expansion component of the WWTP impact fee is the portion of costs related to system improvements that are constructed to accommodate new development. For example, the expansion to the WWTP was completed to serve recently-annexed land and additional development, which could not be served by the 3.0 MGD WWTP. The cost of creating the additional capacity is included in the expansion component of the impact fee. The former WWTP had a treatment capacity of 3.0 MGD. This capacity was essentially consumed by existing residents and growth that occurred up until 2006; any subsequent growth would require additional capacity in the form of a plant expansion. The City Council provided direction in 2006 to proceed with the expansion, which became operational in While the plant expansion accommodated future growth, the construction update of the plant was not allocated entirely to new growth. A portion of the plant expansion addressed replacement needs, which costs were not attributable to growth. At the time of the WWTP construction, the City determined 22% of the construction improvements were allocated to replacement or upgrades of existing systems. The remaining 78% of the expansion improvements were allocated to growth, as shown below. ITEM 2012 COST % IMPACT FEE IMPACT FEE WWTP Expansion $23,945,848 78% $18,677,761 The 2012 WWTP Expansion cost is derived by bringing the original 2009 cost of $22,107,133 to current 2012 dollars. The 10-year Treasury note rate (closing rate on Nov. 30 of each year, as reported by the US Department of the Treasury) is used for bringing all historic costs to current costs. The 2009, 2010 and 2011 rates used for this projection are 3.21%, 2.81% and 2.08%, respectively. These interest rates bring the 2009 WWTP Expansion cost to a current 2012 cost of $23,945,848. The current expanded WWTP has the capacity to serve an additional 8,850 ERUs, regardless of development patterns. Total Impact Fee Related to Expansion Costs: $18,677,761 Total New Capacity of Plant Expansion in ERUs: 8,850 Impact Fee (WWTP Expansion) per ERU: $ 2,110 Treatment Recoupment The recoupment component of the WWTP impact fee is the portion of costs related to excess capacity in existing facilities, which have been built in anticipation of the needs of new development. An example of this type of facility would be the sludge handling equipment that was purchased prior to the 28

29 expansion. This equipment was oversized with the anticipation of serving additional development not extant at the time of purchase. This recoupment component of the wastewater impact fee has been included from the inception of Kalispell s impact fee policy and is specifically allowed by 2011 Montana Code Annotated (3). The additional 2.4 MGD (5.4 MGD minus 3.0 MGD) capacity added to the WWTP allowed the City to begin serving growth that would create flows above the then-current 3.0 MGD capacity. The proportional share of the current plant that is dedicated to future growth is 2.4 MGD or 44% of the total 5.4 MGD capacity. The remaining 3.0 MGD or 56% of capacity is used by existing residents. The calculation of these proportional shares is necessary for determining the recoupment component of the wastewater impact fee. Using the sludge handling equipment as an example: the equipment served 100% of the prior 3.0 MGD WWTP. When the 5.4 MGD WWTP became operational, the same sludge handling equipment served 100% of the new plant, or 44% of the expansion and 56% of the prior plant. Depreciating this equipment between the expansion plant and the prior plant removes a proportional share of the equipment cost from the current rate payers. Otherwise, the current rate payers are saddled with the entire cost of equipment that is also reserved for future growth. Recoupment allows for the equitable distribution of costs for equipment that is necessary in its present capacity, but that is currently under-utilized. An example was given earlier of the sludge handling equipment. This equipment was in use prior to the expansion of the WWTP, but was under-utilized. This under-utilization is not a result of incorrect planning, but rather, is the result of purchasing discretely quantified equipment; a sludge truck or gas monitor must be purchased as a single discrete unit of a specific capacity, e.g., a fraction of a truck cannot be purchased to meet exactly the current demand. The 2012 cost for the items included in the Recoupment calculation are presented in Appendix D and total $295,527. Total Impact Fee Related to Recoupment Costs: $ 295,527 Total Projected New ERUs 2012 through 2035: 6,579 Impact Fee (WWTP Recoupment) per ERU: $ 45 29

30 Treatment Plant Total Cost per ERU Planning Horizon Table 5-4 Summary Treatment Plant Cost per ERU Description 2013 Cost ERU Cost / ERU Treatment Expansions $18,677,761 8,850 1 $2,110 Treatment Recoupment $295,527 6,579 2 $45 Total Wastewater Treatment Cost per ERU $2,155 1) Total New Capacity of Plant Expansion in ERUs 2) Total Projected New ERUs 2012 through WASTEWATER COLLECTION SYSTEM For the impact fee analysis and calculation, the wastewater collection system is divided into three components: recoupment, capital improvement projects within the existing system, and committed future extensions. A description of each component is provided below, with the analysis and calculation for the per-eru cost. Collection System Recoupment The recoupment component of the impact fee is the portion of costs related to excess capacity in existing facilities, which have been built in anticipation of the needs of new development. An example of this type of facility would be the trunk lines, mains and lift stations that were constructed with excess capacity at the time of installation. The excess capacity varies throughout the collection system. The 2006 Impact Fee Final Report established the excess capacity as the proportion of the additional ERUs divided by the total future ERUs at a specific planning horizon. This report uses the 2035 planning horizon and establishes the excess capacity in the collection system as the proportion of the additional ERUs (between 2012 and 2035) divided by the total future ERUs at that 2035 planning horizon. This calculation develops a composite cost proportion of the demands from new growth on the existing collection system. The total number of new collection system ERUs projected to 2035 period is 5,529. These numbers only include additional ERUs to the Kalispell collections system, and do not include additional flows contributed directly from the Evergreen collection system. The items included in the collection system recoupment calculation are presented in Appendix F and total $4,712,497. A summary of those calculations is shown below. Collection System Recoupment Costs $4,712,497 Total Projected New ERUs 2012 through 2035: 5,529 Cost (Collection Recoupment) per ERU: $

31 Capital Projects within the Existing System The City of Kalispell Public Works Department has projected the need for future demand capital improvements within the existing collection system. These improvements are necessary to provide capacity for additional flows within the existing system. Two examples of recently completed projects in this category are the Fairway Boulevard Force Main Improvement Project and the Grandview Lift Station Improvement Project, completed in 2007 and 2010, respectively. These necessary Capital Improvement Projects developed additional capacity within the existing collection system for growth. The items included in the Capital Improvement Projects within the Existing System calculation are presented in Appendix B and total $1,502,649. A summary of those calculations is shown below. The total number of new collection system ERUs projected during the 2012 to 2035 period is 5,529. These numbers only include additional ERUs to the Kalispell collections system, and do not include additional flows contributed directly from the Evergreen Sewer District collection system. CIP within Existing System Costs: $ 1,502,649 Total Projected New ERUs 2012 through 2035: 5,529 Cost (CIP in Existing system) per ERU: $ 272 Extensions to the Existing System The City of Kalispell Public Works Department has projected the need for capital improvements as extensions to the existing collection system. These improvements are necessary to provide collection system infrastructure for growth in recently annexed areas. These are substantial projects that comprise a large share of the wastewater impact fee. This current report includes portions of these projects that are necessary to provide service to the annexation boundary in the 2011 Kalispell Growth Policy Update. The revision in annexation boundary decreases the necessary extension improvements, it also decreases the number of future ERUs over which to distribute the cost of the improvements. The projects included in the Future Extensions calculation are presented below. The 2013 cost, shown below, includes the cost of the project necessary to serve within the 2011 annexation policy boundary. Stillwater Road Interceptor $ 6,125,328 Three Mile Drive Interceptor $ 1,942,784 Spring Creek Interceptor $ 5,462,899 Total Impact Fee Related Committed Future Extension Costs $13,531,011 Total Impact Fee Related to Future Extensions: $ 13,531,011 Total Projected New ERUs 2012 through 2035: 5,529 Cost (Extension to Existing System) per ERU: $ 2,447 31

32 Collection Total Cost per ERU Planning Horizon Table 5-5 Summary Collection System Cost per ERU Description 2013 Cost ERU Cost / ERU Collection Recoupment $4,712,497 5,529 1 $852 Collection CIP within Existing System $1,502,649 5,529 1 $272 Collection Extension CIPs $13,531,011 5,529 1 $2,447 1) Total Projected New ERUs 2012 through 2035 Total Wastewater Collection Cost per ERU $3, Administrative Charge Under Montana statute, an impact fee may include a fee for the administration of the impact not to exceed 5% of the impact fee collected. The City Council guided staff to use the allowable administrative charge of 5% in the impact fee analysis and is followed for this report. Therefore, the wastewater administrative charge of $274 per ERU equal to 5% is included as a part of the collected wastewater impact fee Debt Service Credits The final step in calculating the wastewater impact fees was to determine if there is a credit for payment on debt service for the City s outstanding bonds. The City currently has a number of outstanding wastewater revenue bonds for the collection system and wastewater treatment plant expansion. In the determination of the debt service credit, it is assumed that impact fee funds would be used to pay for the growth related portion of the debt service. The remaining debt service, non-growth related, would be paid for through rates. However, due to a slowdown in growth there are sub adequate impact fee funds generated to cover the new growth portion of debt on an annual basis. This debt service that is not covered by growth was then divided by the total number of ERUs in each year to determine the debt service credit per ERU. Based on the annual debt service cost and number of ERUs for each year for which debt service payment will be made, the credit for debt service payment is $243 per ERU for Treatment Plant and zero (0) per ERU for Collection System. Details of the debt service credit calculations are show in Appendix E. 32

33 5.6 Net Allowable Wastewater Impact Fees Based on the sum of the component costs calculated above, the net allowable wastewater impact fee can be determined. Net refers to the gross impact fee, net of any debt service credits. Allowable refers to concept that the calculated impact fee as shown in Table 5-6 is the City s cost-based impact fee. The City, as a matter of policy, may charge any amount up to the allowable impact fee, but not over that amount. Charging an amount greater than the allowable impact fee would not meet the nexus test of a cost-based impact fee. A summary of the calculated net allowable wastewater impact fee for the City is shown in the Table 5-6. Table 5-6 Allowable Wastewater Impact Fees ($/ERU) Description Treatment Collection Total Wastewater Treatment Plant $2,155 $0 $2,155 Wastewater Collection System $0 $3,571 $3,571 Debt Credit ($243) $0 ($243) Administrative Cost at 5% $96 $178 $274 Total Wastewater Cost per ERU $2,008 $3,749 $5,757 The calculated capacity charge for Wastewater Treatment is $2,008 per ERU and for Wastewater Collection is $3,749 per ERU. Wastewater impact fees for industrial and business types are based on the type of business use and number of units (i.e. seats in a restaurant, water closets, sinks) as shown in Appendix H. 5.7 Key Financial Assumptions In the development of the impact fees for the City s wastewater system, a number of key assumptions were utilized. These are as follows: The City s asset records were used to determine the existing assets and the value of those assets. The interest rate used for calculating interest on existing assets is the 10-year Treasury Note Rate as reported by the US Department of the Treasury at closing on November 30th of each year. Up to fifteen years of interest is included in the cost of the existing improvements. The fifteenyear average interest rate is currently 4.25%. 5.8 Implementation of the Impact Fees 33

34 The methodology used to calculate the impact fees takes into account the cost of money or interest charges and inflation. Therefore, consultants recommend the City adjust the impact fees each year by an escalation factor to reflect the cost of interest and inflation. The most frequently used source to escalate impact fees is the ENR index which tracks changes in construction costs for municipal utility projects. This method of escalating the City s impact fee should be used for no more than a two-year period. After this time period, as required by Montana law, the City should update the charges based on the actual cost of infrastructure and any new planned facilities that would be contained in an updated master plan or capital improvement plan. 5.9 Summary The wastewater impact fees developed and presented in this report are based on the engineering design criteria of the City s wastewater system, the value of the existing assets, future capital improvements and generally accepted ratemaking principles. Adoption of the proposed impact fees will provide multiple benefits to the City and create equitable and cost-based charges for new customers connecting to the City s wastewater system. 34

35 References 1. September 2012 Wastewater Impact Fee Summary 2. Impact Fees for Water and Wastewater System August 2010 (non-adopted impact fee report) 3. City of Kalispell 2011 Growth Policy Update 35

36 36 Appendix A: Growth Calculations and ERU Projections

37 Wastewater Plant 1 Average 2 Average Collection System Day Flow Total Additional Day Flow Total Additional Year (MGD) ERUs ERUs per Year (MGD) ERUs ERUs per Year , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ) Includes Evergreen Flows 2) 2005 through 2011 Actual Flows, 2012 through 2041 are projected flows based on growth rate below 2.00% Growth Rate from Kalispell Planning Department (Growth Policy Update 05/26/2011) 265 gallons per day per ERU (from 2.5 persons per dwelling unit X 106 gallons pp/day) 37

38 38 Appendix B: Sewer Capital Improvement Plan

39 Kalispell 2012/2013 Sewer Capital Improvement Plan Orginal CCI Current CCI Multiplier Project Funding Estimated Cost Estimated Cost Estimated Cost Estimated Cost Estimated Cost Estimated Cost Number Designation Project Description FY FY FY FY FY FUTURE SEW 3 R Lift Station #14 removal $ 149, SEW 14 R 2nd Alley E. Pipe Replacement $ 170, SEW 15 R Peterson School Pipe Replacement $ 37, SEW 16 R 6th Alley E. and 14th St. Pipe Replacement $ 32, SEW 19 R 5th Alley E Slip Lining $ 83, SEW 20 R 1st Alley WN Slip Lining $ 83, SEW 30 R 3rd Alley West Slip Lining $ 111, SEW 31 I SE 1/4 Section 36 Lift Station (100% Growth) $ 351, SEW 33 R Manhole Rehabilitation & Sewer Main Replacements/Repairs $ 15, $ 25, $ 25, $ 25, $ 25, $ 125, SEW 45 D / I Whitefish Stage Road Pipe Upsize (44% growth) $ 38, SEW 46 I / R Fairway Pumping Station Upgrade (48% Growth) $ 186, SEW 47 I / R 1st Alley East North Pipe Upsize (66% Growth) $ 308, SEW 48 I Stillwater Road Interceptor $ 6,125, SEW 49 D / I Whitefish Stage Road to Rose Crossing Extension $ 4,258, SEW 51 D / I Whitefish Stage Road Interceptor (North of Rose Crossing) (100% Growth) $ 2,969, SEW 52 I Misc Sewer contract main upsize and Facility Enlargements (lift stations) $ 245, $ 45, $ 45, $ 45, $ 45, $ 225, SEW 53 R Remove L.S. #19 (Blue Heron) & L.S. #28 (Cottonwood), install main to L.S. #29 (design in-house) $ 133, SEW 54 R By-pass Pump Grandview Lift Station $ 59, SEW 55 I Three Mile Drive Interceptor (100% Growth) $ 1,942, $ 2,301, SEW 56 I Spring Creek Interceptor (100% Growth) $ 5,462, $ 5,041, SEW 57 D Foys Lake Road Interceptor (100% Growth) $ 3,004, SEW 59 R Sanitary Liquid Disposal Site $ 15, SEW 63 R Sanitary Lift Station Enclosures ($6,500 each, total of 10 to complete) $ 6, $ 19, $ 19, $ 19, SEW 64 I/R 3 Mile Drive Sanitary Enlargement (66% Growth) $ 289, Total Cost/Year $ 281, $ 665, $ 7,951, $ 367, $ 70, $24,777, Total Current Projects - FY 13 thru Future $34,113, Funding Designation R = Rates $ 1,181, I = Impact Fees $ 21,874, D = Developer / SID $ 3,004, Combination of Funds $ 8,052, $ 34,113,

40 Impact Fee Collection CIP Descriptions Percent Impact Cost Impact Fee Fee Future Existing Collection System CIP 2012 Related Eligible SEW 31 SE 1/4 Section 36 Lift Station (100% Growth) $ 351, % $ 351,095 SEW 45 Whitefish Stage Road Pipe Upsize (44% growth) 38,672 SEW 46 Fairway Pumping Station Upgrade (48% Growth) 186,408 SEW 47 1st Alley East North Pipe Upsize (66% Growth) 308,615 Misc Sewer contract main upsize and Facility Enlargements (lift SEW 52 stations) 650,000 SEW 64 Three Mile Drive Sanitary Sewer Enlargement 289,964 44% 48% 66% 100% 66% 17,016 89, , , ,376 Total Future CIP Collection System $ 1,824,754 $ 1,502,649 New ERUs 2012 to ,529 Future Collection CIP Plant Impact Fee per ERU $ 272 SEW 31: SE ¼ Section 36 Lift Station (100% Growth). The construction of this lift station is contingent on development in the Section 35/36 area and the Northwest Kalispell area. The existing lift station at Stillwater River and Hwy 93 will be the first lift station in the west side sewer interceptor system (WSI); SEW-31 lift station will likely be the next regional station that connects to the west side sewer interceptor. Flows from the lift station at 93 & Stillwater will be redirected toward lift station 31 and removed from the lift station at Grandview. SEW-31 may need to be built prior to WSI to support development in Section 35/36, but sized as a regional to accept flows from the north eventually. This project is 100% growth related. Implement when Grandview Lift Station is at 85% capacity, portion of the west side interceptor (WSI). Grandview Lift Station ( ERU estimations) o 847 ERU remaining allocated (final plat) o 321 ERUs beyond allocations (new growth) SEW 45: Whitefish Stage Road Pipe Upsize (44% Growth). This project replaces 60 of existing 12 sewer main with a 15 sewer main. This sewer main is identified as Line D in the FPU. Current excess capacity at infill of Line D with the 12 section is 1.03 MGD (1,273 ERU). When the section of pipe is upsized to a 15, Line D will have excess capacity at 2.06 MGD (2,559 ERU). SEW 46: Fairway Pumping Station Upgrade (48% Growth). This project replaces the existing pumps to increase capacity and support new growth in the northeast areas of Kalispell along Whitefish Stage Road. The total capacity of the LS is 253 GPM (451 ERU), the current existing flow usage is 223 GPM (398 ERU). The pump upsize project will increase the total LS Capacity to 1,685 GPM (944 ERUs). 40

41 SEW 47: 1 st Alley East North Pipe Upsize (66% Growth). This project replaces 1,110 ft of 8 gravity sewer main with a 12 sewer main from E Nevada St to E Washington. The pipe increase will eliminate the current surcharging and main backage created from upstream development s increased flow to the down gradient sewer conveyance system. The existing 8" gravity sewer main is downstream of the large sewage flow basin associated with the Buffalo Hill Lift Station (LS 9). The force main from LS 9 was upsized from an 8" to a 10" diameter pipe in The force main upsize allows more wastewater flow when the pumps are running. The force main outlets into the gravity conveyance system approximately 4 blocks north of the beginning of 1st Ave E Alley Sewer Replacement project. The project cost will be paid for by sewer rates and impact fees. The new 12" pipe enables 66% more wastewater flow through the upsized conveyance section. This sewer main project is identified as section of Line E in the FPU. The upsize will provide an additional 1.86 MGD (2312 ERU) for Line E. SEW 52: Misc Sewer Contract Main upsize and Facility Enlargement (100% Growth). Miscellaneous sewer contract main upsize and or facility enlargements. As defined in the City of Kalispell Extension of Services Plan; Under certain circumstances, the Kalispell City Council may determine that an upsizing of the infrastructure is needed to accommodate future development in the area and will participate in the cost associated with the upsizing (oversizing) of the system (s). SEW 64: Three Mile Drive Sanitary Sewer Enlargement (66% Growth). This project replaces an existing 1,700 feet of over capacity 8" gravity sewer main with a 12" sewer main. The existing pipe was constructed in 2004 and was sized to serve three subdivision developments; Empire Estates, Blue Heron, and Cottonwood Estates. Since 2004 new development has occurred on Three Mile Drive with the addition of three new subdivisions; Mountain Vista Estates, Triple Creek Estates, and Spring Creek Estates. The new development increased the wastewater conveyed through the existing 8" gravity main and is causing surcharging and service backups into residential houses. The capacity increase from an 8 to a 12 is 66% and would handle a new flow capacity of 1,466 GPM, with an excess capacity of 452 GPM (807 ERUs) if all lift stations operated at the same time. 41

42 42

43 43 Appendix C: Montana Code Annotated 2011

44 44

45 45

46 46

47 47

48 48

49 49

50 50

51 51 Appendix D: Wastewater Recoupment

52 Wastewater Treatment Recoupment The following items are existing components of the WWTP that have reserve capacity to serve future growth at the WWTP: The equipment served 100% of the prior 3.0 mgd WWTP. When the 5.4 mgd WWTP became operational, the same equipment served 100% of the new plant, or 44% of the expansion and 56% of the prior plant. Depreciating this equipment between the expansion plant and the prior plant removes a proportional share of the equipment cost from the current rate payers. ITEM 2012 COST % IMPACT FEE IMPACT FEE Sludge Truck 1 $150,847 44% $ 67,043 Sludge Truck 2 $169,270 44% $ 75,231 Sludge Truck 3 $154,010 44% $ 68,449 Gas Monitor/Generator $ 28,304 44% $ 12,579 WWTP Expansion PER $162,507 44% $ 72,225 Total Impact Fee Related Recoupment Costs $295,527 Total Impact Fee Related to Recoupment Costs: $ 295,527 Total Projected New ERUs 2012 through 2035: 6,579 Impact Fee (WWTP Recoupment) per ERU: $ 45 52

53 53 Appendix E: Debt Credit Calculations

54 Treatment Debt Service Credit A B C D E F G H I C=B*0.78 E=D*2,155 G=C-E H=G/F I=H*1.70% 78% Treatment 1 Total Treatment Treatment Total Treatment Treatment Additional Impact Fee Treatment Debt Service Debt Service Debt Service Treatment ERUs Year Debt Service Debt Service ERUs Revenue Credit Total Credit per ERU Credit per ERU 2013 $ 1,164,235 $ 908, $ 491,545 11,633 $ 416,558 $ $ $ 1,012,065 $ 789, $ 501,376 11,866 $ 288,035 $ $ $ 1,012,235 $ 789, $ 511,403 12,103 $ 278,140 $ $ $ 1,012,012 $ 789, $ 521,631 12,345 $ 267,738 $ $ $ 1,012,405 $ 789, $ 532,064 12,592 $ 257,612 $ $ $ 1,012,394 $ 789, $ 542,705 12,844 $ 246,962 $ $ $ 1,011,978 $ 789, $ 553,559 13,100 $ 235,783 $ $ $ 1,012,157 $ 789, $ 564,631 13,362 $ 224,852 $ $ $ 1,012,897 $ 790, $ 575,923 13,630 $ 214,136 $ $ $ 1,012,198 $ 789, $ 587,442 13,902 $ 202,073 $ $ $ 1,012,061 $ 789, $ 599,191 14,180 $ 190,217 $ $ $ 1,012,461 $ 789, $ 611,174 14,464 $ 178,545 $ $ $ 1,012,401 $ 789, $ 623,398 14,753 $ 166,275 $ $ $ 1,011,857 $ 789, $ 635,866 15,048 $ 153,383 $ $ $ 1,012,841 $ 790, $ 648,583 15,349 $ 141,433 $ 9.21 $ 7.28 Total Debt Service Credit per ERU $ Assumes Treatment Impact Fee at $2, Present dollars 4.25% interest (15-yr avg to 2011) 2.55% inflation (20-yr avg to 2011) 1.70 % net interest 54

55 Collection Debt Service Credit A B C D E F G H I C=B*0.37 E=D*2,155 G=C-E H=G/F I=H*1.70% 37% Collection 1 Total Collection Collection Collection 2 Collection Collection Additional Impact Fee Collection Debt Service Debt Service Debt Service Year Debt Service Debt Service Collection ERUs Revenue ERUs Credit Total Credit per ERU Total Credit per ERU 2013 $ 92,566 $ 33, $ 684,500 9, $ - $ $ 96,610 $ 35, $ 698,190 9, $ - $ $ 96,889 $ 35, $ 712,154 10, $ - $ $ 96,134 $ 35, $ 726,397 10, $ - $ $ 96,346 $ 35, $ 740,925 10, $ - $ $ 96,511 $ 35, $ 755,743 10, $ - $ $ 96,633 $ 35, $ 770,858 11, $ - $ $ 96,709 $ 35, $ 786,275 11, $ - $ $ 96,741 $ 35, $ 802,001 11, $ - $ $ 96,726 $ 35, $ 818,041 11, $ - $ $ 95,668 $ 35, $ 834,402 11, $ - $ $ 95,587 $ 34, $ 851,090 12, $ - $ $ 868,112 12, $ - $ $ 885,474 12, $ - $ $ 903,183 12, $ - $ - Total Debt Service Credit per ERU $ 0.00 $ Assumes Collection Impact Fee at $ 3, Present dollars 4.25% interest (15-yr avg to 2011) 2.55% inflation (20-yr avg to 2011) 1.70 % net interest 55

56 56 Appendix F: Existing Collection System Recoupment List

57 Percent 1 Impact 2 Cost $ Impact Fee Fee Year Equipment List 2012 Related Eligible $ inch $ 6,376 0% $ ,160 6 inch 135,498 0% inch 976,153 0% inch 184,647 0% inch 182,711 0% inch 157,023 0% inch 348,245 0% Cke Backhoe 32,719 37% 11, SID ,536 0% Sewer Line Additions 13,797 37% 5, Sewer Line Grout 17,854 37% 6, Sewer Line Grout 364,462 37% 133, Sid ,691 0% Anodes and Cable for Lift Station 1,772 37% Grouting 21,065 37% 7, S-1900 Vactor E-350 Camera 158,694 37% 58, N Main Extensions 49,029 37% 17, SID ,690 0% Kinshella Street 1,186 37% Monk Project - City 42,052 37% 15, Joe Radiator 5,011 37% 1, Lift Station Meters 2,489 37% Fence - Lift Station No 4 2,856 37% 1, inch Sludge Line 11,480 37% 4, Meadows 182,535 2% 3, inch 420,764 37% 153, South Meadows 33,085 37% 12, Woodland Park 206,806 9% 18, inch RCP CL II I 50,728 37% 18,558 57

58 Percent 1 Impact 2 Cost $ Impact Fee Fee Year Equipment List 2012 Related Eligible $ inch RCP CL III 83,654 37% 30, inch RCP CL IV 162,097 37% 59, inch Duct Iron % inch RCP Cl III 295,503 37% 108, inch RCP Cl IV 566,511 37% 207, inch 7,690 37% 2, inch 6,831 37% 2, inch 27,794 37% 10, inch 16,655 37% 6, (1) - Includes Evergreen Sewer District 5,969 37% 2, RCP Cl III 350,332 37% 128, inch RCP Cl III 554,190 18% 101, inch RCP Cl III 7,770 37% 2, SID ,650 0% Scoreboard 31,489 37% 11,520 (1) - Includes Flathead County Water and Sewer 1989 District #1 Evergreen 4,031 37% 1, Purdy/Remick 137,029 37% 50, E-350 Camera Trk 186,695 37% 68, Greenacres 102,445 37% 37, Generator Lift No 2 and 3 91,850 37% 33, Lift Station 1 bypass 87,851 37% 32, nd St East 33,225 37% 12, th St E and 5th Ave 140,009 7% 10, Evergreen Truck - City 80,448 37% 29, th St E 11,435 37% 4, Heritage Park 10,455 37% 3, International Vac-Con 278,172 37% 101, Courtyard Apts 14,731 37% 5, Slipline Project 184,169 37% 67,377 58

59 Percent 1 Impact 2 Cost $ Impact Fee Fee Year Equipment List 2012 Related Eligible $ th Ave SID ,424 0% Lift Station Dialog Dialers 16,013 37% 5, Sreco Sewer Camera 18,773 37% 6, Elks Lift Station No ,764 37% 200, Manhole 2nd St E between 4th and 5th 23,477 37% 8, Greenacres Sewer Engineering 13,728 37% 5, th Alley NW 166,272 37% 60, kw fuel Generator 65,335 37% 23, Hilltop Ave/Salish Court 62,681 37% 22, City Wide Sewer Improvements 643,795 2% 12, C Backhoe 94,507 37% 34, Woodland Park 29,142 37% 10, JD Loader 56,822 37% 20, nd Alley E Sewer 202,561 37% 74, Multi Angle Camera 23,946 37% 8, (2) Hydraulic By-pass pumps and power plants 23,045 37% 8, Lift Station #4 Replacement 183,233 37% 67, Main St. MH Corrosion Repair 12,721 37% 4, Building Addition 109,167 37% 39, Building Remodel 10,614 37% 3, Inspection Camera & Transporter 19,634 37% 7, Manhole Rehabilitation 33,029 0% Vac Con Sewer Truck 244,919 37% 89,602 Highway 93 South Improvements - Ashley Creek 2004 to Kalispell 1,967,064 33% 647, Golf Course Bridge Force Main 30,110 37% 11, US Highway 93 South Utilities 1,835,735 37% 671, Liberty Street Lift Station 172,430 0% Compactor 16,709 37% 6, Buffalo Golf Course Bridge Footing 28,638 37% 10,477 59

60 Percent 1 Impact 2 Cost $ Impact Fee Fee Year Equipment List 2012 Related Eligible $ 2006 Bowser Creek Lift Station Upsize 170,539 37% 62, Meridian Rd Sewer Main 185,779 37% 67, Slip Line Manhole Covers 46,955 0% Grandview Lift Station Force Main 398,389 37% 145,748 Fairway Boulevard Lift Station Number 9 & 2007 Force Main 755,360 37% 276, Wyoming Street 185,778 37% 67, Generator Lift #9, #10, & #16 158,648 37% 58, inch & Manhole 17,729 37% 6, inch & Manhole 5th Ave E. 27,699 37% 10, Spring Prairie Upsize 58,075 37% 21, Reserve Loop Extension 11,250 37% 4, Mobile Pipeline Inspection Unit 138,170 37% 50, Bobcat 12,218 37% 4, US 93 Bypass 77,544 37% 28,369 Grandview Sewage Pump Station & Parkway Dr 2011 Main Upgrade 663,171 37% 242,617 Total 17,501,219 4,712,497 Total Existing Collection Plant $ 4,712,497 New ERUs 2012 to ,529 Existing Collection Plant Impact Fee $ 852 1) Allocation for existing projects (% impact fee related) based on ERUs from 2012 to 2035 divided by total ERUs in ,529 ERU/15,113 ERU = 37% 2) Some plant cost components are excluded or reduced based on the amount of contributions from developer, grants, and or the amount which was for replacement. 60

61 61 Appendix G: Extension to Existing System

62 62