What construction fee moratoriums mean to the economy

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  • | 4:00 a.m. October 6, 2012
  • Palm Coast Observer
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The Flagler County School Board members skirted their eyes across the faces of their fellow board members and shifted in their seats.

“Do I hear a motion?” Chairwoman Janet Valentine asked.

Still, nothing. The soundless moments stretched, the room pregnant with tension. It appeared none of the board members wanted to be the first to comment on the topic of the evening: impact fees.

The board didn’t want to approve a proposed two-year moratorium on Flagler County School District’s impact fees. But after hearing the appeals of a string of home builders, real estate agents and citizens, most of whom urged them to put a stop to the fees, their reluctance to deny the public pleas was palpable.

“I just can’t see that, with a few homes, you’re going to increase employment,” said School Board Member John Fischer at last. “And when you give something away, it’s very difficult to get it back.”

The proposal dropped for lack of a motion.

The School Board rejected a stop of its impact fees the day after the Flagler County Board of County Commissioners approved a two-year moratorium on its transportation facilities impact fee and parks and recreation impact fees.

The pro-moratorium argument goes like this: Reducing or eliminating impact fees will be incentive enough for people to start building in Flagler County. When construction starts, builders hire more local businesspeople. As people in the construction industry go back to work, the benefit spreads to other sectors of the economy. Building more homes will jump-start the economy as a whole, proponents argue.

But the School Board members said they saw no evidence that reduction in impact fees had any effect on the economy. They cited Flagler County’s moratorium in conjunction with the half-cent sales tax it voted to continue for the next 20 years during the same meeting it eliminated some impact fees.

“We don’t have that power,” Board Member Colleen Conklin said. “They can give up a few thousand in impact fees, but they just gave themselves $40 million.”

In the two years in which the proposal would have eliminated the school’s impact fees, the district would have lost about $1 million for its schools, which, the board said, is more significant than reductions to transportation or parks and recreation impact fees, like the county will face.

“A million dollars is a lot for us,” Conklin said. “Come on, folks — do we need parks before we need schools?”

A national problem

Several thousand dollars is not enough to entice home buyers anyway, said Sean Snaith, a professor of economics and the director of the University of Central Florida’s Institute for Economic Competitiveness.

Construction costs are high enough that impact fees don’t shave enough from a new home’s cost for there to be much effect, he said.

“The problem isn’t supply; it’s demand,” Snaith said. “Housing demand hasn’t fully returned yet. There are some signs of a pulse in the housing market now, but it hasn’t come back to life yet.”

And even though historically, Flagler County’s construction industry has been among its largest, increasing home construction won’t fix the economy.

“I don’t think the construction industry in and of itself is the thing that’s holding back the economy,” Snaith said. “There are much larger forces at work, such as the labor market, uncertainty in the elections and national and international issues. There’s very little that a local government can do to battle these things.”

Flagler County’s moratorium will be helpful because once construction starts gaining momentum, the break in costs will spur that growth along, Snaith said. But the reduction itself won’t have an immediate impact. Flagler’s economy is a mirror of the national economy.

“Basically, all a local government can do is prepare itself so when growth in the larger economy starts to happen, it can happen more quickly,” Snaith said. “I think local governments should focus on how to do what they’re supposed to do more efficiently.”

For a county that’s experienced such a rapid decrease in its number of construction permits pulled — they’ve dropped by 90% since 2005, said homebuilder Charles Rinek — the loss in revenue Flagler County will accrue from its moratorium is not significant.

The problem: Savings from stopped impact fees aren’t significant either.

“It’s a good move,” Snaith said. “It’ll help things later without losing anything now. But it won’t do much now. ... The demand for housing has to absorb what’s already out there and there are still, I’m sure, a lot of distressed properties that have yet to go on the market. Cut down the inventory; that’s what’s going to boost the economy.”

And reducing the price of building a home by such a small percentage of its overall cost won’t be enough, Snaith said. To think otherwise would be to assume that housing demand is highly sensitive to price change. It’s not, he said.

“It’s a nice story, but is it really a few thousand dollars in impact fees that’s hampering the economy in Flagler?” Snaith said. “I wish that were the solution.”

The builders’ argument

Contrary to Snaith's argument, Eric Olsen, owner of Olsen Custom Homes in Palm Coast, said impact fees are the deciding factor that cause many would-be customers to shy away.

“I’ve been actively involved in impact fees around the state,” he said during public comment before the County Commission implemented its moratorium. “People have money, and they want to build a new home, but the problem is, when they see anywhere from $5,000 to $20,000 in impact fees, that’s stops them.”

He said that when now homes are built, the prices of new and existing homes go up and stabilize. This ultimately increases the tax base, he said.

It will spread more jobs throughout the economy, he said, because all sectors are impacted by construction.

And he wasn’t alone in his thoughts.

Debi Peterson, executive officer of the Flagler County Home Builders Association said she hoped to see Flagler County’s construction industry return to its pre-recession peak, when the county was one of the fastest growing in the nation, at the same meeting.

“When we think back to seven years ago and how busy the streets were, I can’t think of another industry that can get our economy back to where it needs to be,” she said. “You are opening a door that’s going to let a ray of light in.”

A California case study

Impact fees are used throughout the country to aid the development of cities and counties as population increases. They’ve also been stopped or reduced in attempt to bolster the economy throughout the country. But critics say reducing or eliminating impact fees yields little economic growth.

A March study released by Economic Planning Systems Inc. explored whether adjustments to impact fees did any good to localized economies in California.

Its conclusion: No.

“The weak economy,” the study reads, “coupled with the ongoing availability of distressed properties, is the primary cause of the low rate of growth and development.”

As in Florida, California has watched unemployment rates soar and housing prices plummet since the 2008 Great Recession. And, as in Florida, housing permit activity within California has all but stopped.

“Until the economy recovers and the inventory of price-discounted, distressed properties diminishes, actions to reduce or defer development impact fees will, at best, play a limited role in catalyzing new development,” the study concluded.

The study saw minimal, if any, economic stimulation in counties through California that implemented impact fee moratoriums.

While sometimes lower construction costs can increase building in an area on a short-term basis, at the same time, the increased infrastructure within a city and better amenities that impact fees provide can also attract new residents to an area, the study said.

In short, elimination of an impact fee might increase construction slightly. But so might upholding it.

A 2010 analysis by Clancy Mullen, executive vice president of Duncan Associates and James Nicolas, professor emeritus of Florida State University, similarly found that counties in Florida that issued moratoriums on their impact fees saw no correlation between the reduction and construction permits pullled.

Although builders say they’re losing customers to nearby Volusia County, which eliminated its impact fees last year, there’s no proof that the moratorium has done much to help the county as whole, Conklin said.

The Deltona-Daytona Beach-Ormond Beach area has lost 2,800 jobs to date this year, according to a report from the Center for Business Excellence. The county’s unemployment rate sat at 9.4% in July, an increase from previous months. In July 2011, the rate was 11.1%.

But builders say Volusia is still experiencing more construction and that Flagler is losing customers to Volusia.

“I have not found one single quantitative analysis that shows in any of the counties (in Florida) that putting a moratorium on impact fees or reducing those fees has impacted building permits being issued or the unemployment rate,” Conklin said. “Volusia County’s experiencing decline in student population, but we’re not. We need to have a place to put these students.”

Overall, Snaith said things are looking up. A big part of the nation’s economic turmoil comes from uncertainty, especially with the upcoming presidential election.

“Things will get better, but it will be slow,” he said. “We can’t expect a magic pill to resolve things overnight.”

Despite his feeling on the issue, he said the School Board and County Commission both acted wisely.

“People choose to move to places, in part, because of the quality of their schools,” Snaith said. “The district can’t afford to lose that money. But the county can do it to help prepare the way for growth in the future.”

Now, all eyes turn to the city of Palm Coast. Jason DeLorenzo once lobbied the council as a liaison for the FHBA, saying the city has plent of parks and should cut its impact fees that are designed to build more parks. In a future workshop, he'll have a chance to plead that case once more, but this time as a member of the City Council.




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