HomeMy WebLinkAbout04 - Establishing a Development Impact Fee Program (PA2021-127) - CorrespondenceReceived after Agenda Printed
December 10, 2024
K E K E R Item No. 4
VAN NEST
& PETERS
December 10, 2024
Newport Beach City Council
100 Civic Center Drive
Bay E, 2nd Floor
Newport Beach, CA 92660
Keker, Van Nest & Peters LLP
633 Battery Street
San Francisco, CA 94111-1809
415 391 5400
keker.com
Bailey W. Heaps
(415) 962-8838
bheaps@keker.com
Re: Newport Beach Stewardship Association Objections to Proposed Development
Impact Fees
Dear City Council Members:
We write on behalf of the Newport Beach Stewardship Association to object to adoption of the
proposed ordinances (Nos. 2024-31 and 2024-32) regarding development impact fees. The
proposed fee amounts lack evidentiary support and run afoul of federal and state law, including
the recent U.S Supreme Court decision Sheetz v. County of El Dorado, 601 U.S. 267 (2024) and
the Mitigation Fee Act, Government Code Section 66000, et seq..
The proposed fee amounts suffer from multiple flaws. At the threshold, the so-called Development
Impact Fee Nexus Study ("Nexus Study") upon which the City relies 1 provides a flimsy,
conclusory and incomplete analysis. A letter from well -respected economists detailing some of
the flaws in the Nexus Study is enclosed.
Further, the City cannot impose fees to fund a $72 million wish list of new recreation facilities.
The law forbids the imposition of fees that do not bear a "reasonable relationship" to impacts of a
project.2 Even when there is a reasonable relationship, the law demands that the fee amount be
"rough[ly] proportional[]" to the project's impacts.3 The City has not made either showing. For
example, the Nexus Study does not even attempt to explain why the City's extensive recreational
facilities are not sufficient to accommodate new residents, let alone why each of the seven new
The City commissioned Willdan Financial Services to prepare the Nexus Study.
2 Gov. Code Section 66001.
3 Sheetz v. County of El Dorado 601 U.S. 267, 275-276 (2024); Ehrlich v. City of Culver City
(1996) 12 Cal.5th 854, 880.
Newport Beach City Council
December 10, 2024
Page 2
facilities are needed due to new development.'
The proposed fire and life safety fees are flawed too. Just as it did for the proposed recreation fees,
the City asserts, without support, that new development should fund the majority of the City's
planned fire and life safety facilities, which are estimated to cost approximately $46.3 million.
The law demands more than a naked conclusion.
The proposed fees also find no support in the market. For example, the proposed police fee
($2,525/2,500 sf) is nearly seven times higher than Huntington Beach ($362/2,500 sf). And the
majority of jurisdictions referenced by the City do not even impose a police fee. The same is true
for fire services, where the City's proposed fee ($4,325/2,500 sf) is more than five times higher
than Huntington Beach ($844/2,500 sf). And again, most jurisdictions do not even impose a fire
fee.5
At bottom, the City's inflated fees are based on forecasts of future growth set forth in the City's
Housing Element and associated Land Use Element of the General Plan. Yet the City openly
violated Section 423 of the City Charter when adopting those major amendments to the General
Plan without first obtaining voter approval. The City now faces multiple lawsuits that challenge
this egregious and illegal departure from standard practice and the law (and indeed from the City's
own prior plans). Thus, the City is compounding its error by seeking to justify excessive fees
based on growth estimates that require voter approval.
CONCLUSION
The proposed fees are excessive and unlawful. The City Council should reject the ordinances.
Sincerely,
KEKER, VAN NEST & PETERS LLP
rz3z�l
Bailey W. Heaps
BWH:
Cc: Aaron Harp, Newport Beach City Attorney
' The omission of this analysis is not surprising. The City's proposed recreation facilities are
clearly intended to benefit and be used by all residents, not just to accommodate new residents.
Accordingly, these projects should be funded by all users through a range of sources (e.g., property
tax revenue and sales tax revenue), rather than exclusively through development impact fees.
5The City proposes to use the California Construction Cost Index to anchor annual increases to
the proposed impact fees. No justification exists for use of this particular index; instead, this seems
like just another attempt to increase already excessive fees.
Brattle
MEMORANDUM
TO City of Newport Beach
FROM Charles Gibbons, Principal, The Brattle Group
SUBJECT Initial Assessment of the Newport Beach Nexus Study
DATE December 10, 2024
The Brattle Group, an economic consulting firm, was asked to analyze the Development Impact
Fee Nexus Study prepared by Willdan Financial Services ("Willdan Report").' The following
represents an initial assessment of the reliability and accuracy of the Willdan Report's analyses
and conclusions regarding the imposition of new development impact fees in the City of
Newport Beach (the "City").' Due to the limited information made available to the public, this
technical analysis does not provide a comprehensive discussion of all issues in the Willdan
Report. The documents that I have reviewed are limited to those cited in this memo. This
discussion is based on concepts in economics and finance and I am not offering any opinions as
to the legal standards applicable for substantiating these fees.
In short, the Willdan Report does not provide an adequate and reliable assessment of the
proposed development impact fees and, based on the information provided, the proposed fees
are excessive.
This Initial Assessment was prepared by Charles Gibbons and reviewed by loannis Gkatzimas (the "Authors")
for the purpose of analyzing issues in connection with the Willdan Report. The Initial Assessment reflects the
preliminary analysis of the Authors and does not necessarily reflect opinions of The Brattle Group's clients or
other consultants. The Initial Assessment was prepared with a standard of care normally exercised by
professional consulting firms performing comparable services under similar conditions judged as of the time
the services are rendered.
Willdan Financial Services, "City of Newport Beach — Development Impact Fee Nexus Study— Revised Final,"
October 22, 2024 ("Willdan Report").
Initial Assessment of the Newport Beach Nexus Study Brattle.com 1 1
1. Assumptions About Growth in Residents and Employment
Are Inconsistent
The Willdan Report assumes that residents would increase by 17% from 2025 to 2045, but
employment would only increase by 2%.3 These assumptions are important because the
proposed fees were set to spread total facility costs across residents and employees. As a
result, understating the number of new jobs arising within the City would result in overstated
fees.
One way to understand the presumptions and dynamics underlying 17% growth in residents
and 2% growth in employment is that new residents are assumed to require only one -eighth
the jobs and one -eighth the retail and entertainment services as existing residents. This
contrasts from the key assumption in the Willdan Report that new residents consume the same
number of parks, police, fire/life safety, water, and sewer services as existing residents. The
Willdan Report does not explain this divergence.
The gap in growth rates is inconsistent with the Connect SoCal source cited by the Willdan
Report for its 2045 employment count. The Connect SoCal report reflects a similar 2% growth
rate in employment from 2016 to 2045, but only 8% residential growth during that period.4 This
contrasts with the 17% residential growth assumed in the Willdan Report. The Willdan Report
does not discuss why the Connect SoCal growth in employment is appropriate when its
projection of residential growth differs substantially.
This divergence in growth rates is also inconsistent with recent observed trends. According to
the sources cited in the Willdan Report, over the last ten years the population of Newport
Beach has been largely unchanged, but employment grew by almost 20%.5
3 Willdan Report, p.10, Table 2.1. Note that the 2% growth rate is assumed to be the same for all employment
categories, including commercial, office, and industrial.
4 Southern California Association of Governments, "Demographics and Growth Forecast Technical Report,"
September 3, 2020, p. 37, Table 14, https://www.mwdh2o.com/media/19043/demographics-and-growth-
forecast-technical-report.pdf.
State of California, Department of Finance, "Estimates —January Population and Housing Estimate: E-5 and E-8
Datasets, " https://dof.ca.gov/forecasting/demographics/estimates/. Population changes from 86,383 to
83,571 from 2013 to 2022, representing a 3% decrease. However, the US Census Bureau's OnTheMap data
reports private primary jobs to have increased from 64,715 to 77,407 from 2013 to 2022, representing a 20%
increase. See United States Census Bureau, "OnTheMap", https://onthemap.ces.census.gov/. Both sources are
cited in Willdan Report, Table 2.1.
Initial Assessment of the Newport Beach Nexus Study Brattle.com 1 2
To the extent that the expected growth in employment is understated, police and fire/life
safety fees are overstated for both residential and commercial properties on a per square foot
basis and are over -allocated to residential properties.
2. The Report Does Not Consider Use by Non -Residents
The Willdan Report evaluates demand for City services arising from residents and employees
within the City. However, it does not attribute any demand for City services to patrons of new
businesses or to tourism. This is particularly relevant for allocating the costs for policing and
parks.
Police Services. In its calculations of the demand for policing, the Willdan Report does not
consider that new businesses lure patrons into the City; instead, it focuses on the hours of
demand for police services per week of residents and employees.6 Using this approach, the
demand for policing for an employee is equal to 31% of the demand from a resident. Put
differently, one employee is deemed to require about one-third the amount of police services
as a resident. This calculation narrowly considers the time that an employee spends working in
the City, not the time of any patrons served by that worker or any additional recreation time
spent by non-resident employees in the City.
The Willdan Report used a different approach to calculate demand for fire/life safety services.
For this category, the Willdan Report compared the calls to businesses per employee to calls to
residences per resident and found that calls per employee are 44% of the calls per resident.'
The Willdan Report does not explain why it did not conduct a similar analysis for police services.
It also does not explain why it assumes that the relative usage of fire/life safety services by
employees should be substantially higher than that of police services.
The Report assumes that each employee generates some level of demand for police services over the course of
40 hours per week. Residents are assumed to generate that same level of demand over all non -working hours
per week (24 hours per day times 7 days per week minus 40 working hours gives 128 hours). Note that this
method assumes that each resident demands more police service while they are sleeping (covering roughly 50
hours per week) than an employee (40 hours per week).
Willdan Report, Table 4.1.
Willdan Report, Appendix A, Table A.3. The report does not directly address the 13% of calls that are not
attributed to either a residence or a business; implicitly, these are attributed proportionally to two identified
categories.
Initial Assessment of the Newport Beach Nexus Study Brattle.com 1 3
To the extent that new businesses attract more visitors than residents on a per person -hour
basis, policing fees are over -allocated to residential use compared to commercial uses.'
Parks. The Willdan Report attributes all costs of parks to residents, not employees or visitors.10
While this may be reasonable for facilities such as youth centers, it is a less defensible
assumption for the two proposed ocean pier projects (the Balboa and Newport Piers). As a
point of comparison, the Santa Monica pier is a very popular tourist destination.11 The Santa
Monica Pier has many stands, generating sales for on -site businesses; neighboring businesses
also likely benefit from visitors to the pier. While the City's piers may not have the same draw
as the Santa Monica Pier, the latter demonstrates that piers can be popular recreational and
commercial destinations for non-residents of the City.12
Almost half of the costs claimed for proposed park facilities arise from the two proposed piers
($35 million of $73 million).13 These amenities will generate value for local businesses;
therefore, the full burden of these costs should not be borne by residents alone.14
One category of business likely to require more police service is bars. The City Council Staff Report related to
the Willdan Report has proposed that bars, among other businesses, be exempted from the fees. Newport
Beach City Council Staff Report, "Ordinance Nos. 2024-30 to 2024-32 and Resolution No. 2024-83: Adopting a
Nexus Study and Fee Schedule, and Establishing a Development Impact Fee Program," November 12, 2024, p.
15-9. Such an exemption would further exaggerate the share of the cost of local services falling upon residents.
The Staffs recommendation is based on a recognition of taxes generated from sales at the exempted facilities.
However, the Staff Report does not provide any analysis to support the conclusion that these enterprises pay
more in existing taxes per unit of demand for services than other enterprises or residents.
11 Willdan Report, Table 3.6.
11 As of the date of this memo, visiting the pier is the "#1 of 124 things to do in Santa Monica" according to
TripAdvisor and has over 19,000 reviews. Trip Advisor, "Santa Monica Pier," accessed December 9, 2024 at
https://www.tripadvisor.com/Attraction_Review-g33052-d104238-Reviews-Santa_Monica_Pier-
Santa Monica California.html.
1z Balboa Pier and Newport Pier are currently listed among the top 10 things to do in Newport Beach on
TripAdvisor. TripAdvisor, "Balboa Pier" and "Newport Beach Pier," accessed December 9, 2024 at
https://www.tripadvisor.com/Attraction_Review-g32780-d4695690-Reviews-Balboa_Pier-
Newport_Beach_California.html and https://www.tripadvisor.com/Attraction_Review-g32780-d6654058-
Reviews-Newport_Beach_Pier-Newport_Beach_California.html.
1s Willdan Report, Table 3.3.
14 Employees of local businesses may also enjoy visiting the piers before or after work or during breaks. This is
another way in which businesses receive value from these facilities.
Initial Assessment of the Newport Beach Nexus Study Brattle.com 14
3. A Substantial Share of Costs Related to Parks Are Related
to Expanding Amenities for All Residents, Rather than
Accommodating New Residents
In supporting its assessment of the costs of new park facilities, the Willdan Report states that
the funds "would be used to fund expanded recreation facilities to serve new development.""
However, the majority of spending would be for facilities that provide new amenities unlike
those currently available to existing residents or improve existing facilities. For example, the
City does not currently offer a pool for its residents, so a new pool does not merely represent
an expansion of existing services to accommodate new residents, but rather a new amenity
that would appeal to new and existing residents alike. For this reason, these costs should be
shared by current and future residents, not placed solely upon new residents.16
Additionally, the Willdan Report has not substantiated the assumption that the need for new
facilities is driven by new residents. In particular, Balboa and Newport Piers require efforts that
are at least in part related to standard improvements and maintenance irrespective of growth
in the residential population.17 To the extent that these expenses are not directly connected to
growth of the City's residential population, they are inappropriately allocated to new residents
alone.
The sole allocation of these costs to new residents violates the Willdan Report's claim that the
fees were designed to "ensure[]... that the fees will not unfairly burden new development with
the cost of facilities associated with serving the existing service population."18 The costs of the
proposed piers and pool represent 69% of the proposed park facilities costs; spreading these
costs across all residents would substantially lower the proposed fees.
is Willdan Report, p. 17.
16 This allocation approach is used in other sections of the report. For example, new police and fire stations are
allocated across all residents and employees within the City.
17 The City's Capital Improvement Program includes a project titled "Ocean Piers Inspection and Maintenance."
The project describes that "the needed maintenance may include crack sealing stringers and piles and replacing
missing or broken timber members, replacing corroded straps and repairing other identified deficiencies." City
of Newport Beach, "Capital Improvement Program," 2023 at p. 83. Available at
https:Hecros.newportbeachca.gov/WEB/DocView.aspx?id=2926656&dbid=0&repo=CNB&cr=1.
18 Willdan Report, p. 18.
Initial Assessment of the Newport Beach Nexus Study Brattle.com 1 5
4. Comparison of the Standard of Service for Parks is
Misleading
The Willdan Report compares the replacement cost of existing park facilities to the existing
population and the cost of new park facilities to the projected growth in the population. Based
upon its comparison of these figures, the Willdan Report concludes that the "planned facilities
cost per capita is lower than the existing standard cost per capita, which indicates that the new
development is not being asked to fund a higher level of service than currently exists in the
City."19 This is based on a faulty comparison, however.
When calculating the cost of new facilities, the Willdan Report excludes $15 million in costs for
the Pool Complex because these funds "are assumed to be funded by other sources."20 When
calculating the replacement costs of existing facilities, however, there is no indication that any
costs are excluded based upon their funding source; for example, there is no credit for funds
received from regional, state, or federal governments that were used to support these facilities.
Hence, to provide an accurate comparison between existing and planned facilities on a per
capita basis, the additional $15 million cost of the Pool Complex ought to be included. This
yields a new facility cost of $6,228 per new resident, which exceeds the existing facility
standard per resident of $5,350.
Once the calculations are adjusted to apply a consistent approach for existing and planned
facilities, it appears that the per capita cost of new facilities exceeds that of existing facilities,
which is contrary to the Willdan Report's claims.21
5. The Report Does Not Consider the Resulting Incentives for
the City or Developers
The Willdan Report does not consider how the fees will impact the incentives experienced by
developers and buyers of new dwellings. This is a key component for assessing development
impact fees as described in the Impact Fee Nexus Study Templates commissioned by the
California Department of Housing and Community Development and prepared by the Terner
19 Willdan Report, p. 18.
20 Willdan Report, Table 3.3.
Z1 This finding echoes the one described in the previous section: a substantial proportion of the costs for
proposed facilities are for projects that expand the amenities offered by the City to all its residents, rather than
expanding existing services to new residents.
Initial Assessment of the Newport Beach Nexus Study Brattle.com 1 6
Center for Housing Innovation at UC Berkeley.22 Furthermore, the Willdan Report does not
discuss the incentives created for the City. Such an analysis is essential for ensuring that both
developers and the City are incentivized to build and approve the level of housing projected in
the Willdan Report and to satisfy any requirements under the Housing Element.
zz Terner Center for Housing Innovation, "Impact Fee Nexus Study Templates," UC Berkeley, December 2023,
Chapter II.
Initial Assessment of the Newport Beach Nexus Study Brattle.com 17