Problems may await Montana’s impact fees

At a recent Senate committee hearing, Senate Bill 142 was introduced to add protections for consumers and developers who pay impact fees.

Fees are imposed by local governments on residents and developers to cover infrastructure costs needed to support new developments. Strong lobby groups opposed the bill. Cities clearly didn’t want the state to oversee their impact fee programs.

The committee voted 6 to 3 to approve SB 142 with one amendment. It passed the entire Senate 35-14. The change, backed by the cities, effectively undermined most consumer protections, including government oversight. This left few security precautions and eliminated transparency. The cities could continue to operate as usual.

Cities offer strong resistanceThe League of Cities invited a large group of cities to testify at the hearing. There were about a dozen speakers opposed to the bill. The league executive director made arguments against the bill, demanding that state exams affect fees. There is no agency in Montana that audits impact fees. Cities now collect $25 million in impact fees.

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“Local control” is a city buzzword, which means let’s do what we want and don’t look over our shoulders. When budgets are tight, it’s easy for cities to look for creative ways to fund operations using impact fees. However, impact fees should never serve this purpose.

Some of the problems: Impact fee studies are not conducted every five years as required by law. Some cities charge fees in excess of the prorated cost. Cities will hire consultants to calculate new impact fees, but cities can override the fees set as the maximum allowable. The cost is replenished with phantom projects (never built). Some impact fee projects are so far in the future that today’s residents will see little or no benefit. Fees, once collected, are spent on independent projects.

A lawsuit is in progressThere is resistance from the development community faced with excessive or illegal fees.

Whitefish is now embroiled in a lawsuit over its impact fees. A class action lawsuit has been filed in federal court against the city’s impact fees, demanding millions in refunds.

The lawsuit alleges that the city government violated state and federal laws by overcharging both residents and builders.

The federal judge ruled that the class action could proceed as a violation of the plaintiff’s rights under the Fifth Amendment.

Looming problems may loom on the horizonThere could be a bigger issue with impact fees in the future. Only half of the states in the US allow impact fees. Some of the development communities in these states have taken a stand over abuses similar to those in Montana.

In North Carolina, developers filed lawsuits against cities and won a major court victory. In 2016, the North Carolina Supreme Court outlawed all fees charged for “prospective” infrastructure. Cities had to offer an immediate benefit for development, not a promise to do so in the future. A 2022 ruling by this court declared that impact fees are subject to the Fifth Amendment and provide citizens and development protections under the “revenue clause”.

As a result of these rulings, many North Carolina cities have suspended impact charging. Twenty-eight North Carolina cities and counties have settled class action claims for an impact fee. Between 2019 and 2020, seven of these claims were almost 100% settled.

What could this mean for Montana? Cities in Montana could now face the same constitutional challenges as North Carolina.

Montana’s cities charge nearly twice the water and sewer rates of North Carolina, but North Carolina developers have rebelled against even these modest rates. Without oversight, cities will continue to push the boundaries or simply ignore Montana’s impact fee laws. If pushed far enough by these abuses, Montana residents or developers could follow in the footsteps of North Carolina developers.

Statewide court challenges or increased class-action lawsuits could mean cities face increased scrutiny and restrictions.

This, in turn, could limit their ability to collect Impact Fees, which could result in significant revenue loss and potentially massive refunds of previously collected fees.

That would be a loss/loss proposition for all of Montana.

Whitefish’s Paul Gillman owns Database Systems Corp. and is co-author of SB 142.

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