Econ 101 Lessons from Highway 61 Revisited
A year ago, I wrote about twin examples offered by one of Minnesota’s Twin Cities, St. Paul, of the principles of Econ 101 in action. The Saint Paul City Council passed a minimum…
Recently, I had the pleasure of speaking to a local city council about the obstacles to the construction of affordable housing which state and local governments erect in terms of in terms of taxes, fees, and regulations. According to a report from the Housing Affordability Institute, some localities are using these fees, which are meant to be for services rendered, to pad their general funds. I referred to the example of the city of Corcoran, which had been reported as using building permit fees to finance a city hall renovation.
This, according to one of those present, was “a lie”. Well, you don’t want to be going round telling people fibs so I dug into this.
November 8th, 2018
The city hall renovation was discussed at a meeting of Cocoran’s city council on November 8th, 2018. According to City Administrator Brad Martens, the initial finance plan called for new residents to pay for much of the renovation without affecting the tax base. Of the estimated $1,087,288 cost of the project, $901,088 (83%) would be paid for (both directly and indirectly) by excess building permit revenue. Below is a video of this November 8th meeting, with the discussion of the financing of the City Hall renovation starting at 15:55.
As you can see below, the finance plan proposed to split the cost of the renovation into two categories, New demand and General fund.
At 18:55, City Administrator Martens says
…The ‘New Demand’ costs would be paid for by new growth revenue, building permit revenue essentially, which we’ve thrown into the Long Range Planning Fund.
For the ‘New Demand,’ I’m recommending we use $300,000 from our Long Range Planning Fund; use a 2019 Budget Transfer for $120,000, which is generated from Building Permit Revenue.
The council’s minutes for the November 8th meeting show that the city went as far as to dedicate excess building permit revenue from a specific number of new homes, 20, to fund the City Hall project (also 28:31 in the video)
Council inquired about the number of building permits needed to fund the project. City Administrator Martens noted 20 buildings were allocated to the project. Per consensus, Council directed stated to proceed with the draft finance plan.
This is possible because the City of Corcoran only requires the fees from the first 21 new homes built in the city to fund its inspections and plan review programs. The rest of the building permit revenue from new homes, estimated at $3,000 per home, is used to build up reserves and other funds that are not sufficient. A city memo dated July 12th, 2018, says
For the past several years the City has kept the building permit revenue from new home permits at 21 homes. The remainder has been used to build up reserves and other funds that are not sufficient.
The finance plan was passed by the city council without objections. But, according to the Minnesota Department of Labor and Industry’s Code Adoption Guide, these fees are intended to cover actual services rendered so there should be no excess revenue. The code reads
Each municipality is to evaluate local costs associated with the enforcement of the code. From this local evaluation, a fee structure can be established to cover associated and related code enforcement responsibilities. Again, by Minnesota Rule, the fees are to be commensurate with the services required/provided; building permit fees may not be used as a tool to raise additional monies for the municipalities’ general fund.
The State Building Code specifically requires that building permit fees be fair, reasonable and proportionate to the actual costs of the services for which the fee is being imposed (see MN Rule 1300.0160). Ideally, when a citizen purchases a permit, it is considered a “fee for service”charge that should be set-up to balance out at zero. Building permit applicants should not be charged additional or extra fees to support a municipalities’ general fund or other special interest projects undertaken by the municipality. (Emphasis added)
May 9th, 2019
A meeting of Corcoran’s city council on May 9th, 2019, noted that the costs of the project had risen by 21%. The additional cost could be met either with cuts to the city budget or from the Long Range Planning Fund – excess building permit revenue.
The original needs analysis showed an anticipated project cost of $1,116,541 based upon big picture estimates. Option A1 as attached to this report has a median estimate of $1,353,000 which is approximately $236,000 higher and based upon a more detailed design. If this cost is accurate, additional cuts would need to be made or the City could allocate additional funds towards the project from the Long Range Planning Fund.
August 20th, 2019
On August 20th, 2019, the Housing Affordability Institute released its report. It said that
…documents from the City of Corcoran, Minn., indicate the city is using its building permit fees from new homes to remodel its City Hall.
The City of Corcoran…has indicated that it has earmarked the majority of building permit revenue as general fund dollars, noting that the revenue from the first 21 new home permits annually is adequate to fully fund the city’s inspections department. There are approximately 70 new homes built annually in Corcoran in recent years.
According to the City of Corcoran, the City Hall will soon be undergoing a significant capital improvement project of approximately $1.35 million without a direct impact on existing taxpayers in large part because the city will use excess building permit revenue.
In a June 2018 memo from the Corcoran City Administrator to the Corcoran City Council, the Administrator indicated that to fund its annual permitting and inspections, the City of Corcoran only requires the fees from the first 21 new homes built. After these 21 permitted new housing units, additional building permit revenue, roughly $3,000 per home, is used to build up reserves and other funds that are deemed by city officials to be insufficient.
Judging by Corcoran’s public records, all of this would appear to be true. The Housing Affordability Institute noted
The plan to finance this new City Hall with the City’s building permit fees clearly raises pointed questions about proportionality. If viewed through the standard set by the Minnesota Department of Labor and Industry in its Code Adoption Guide, the City of Corcoran’s fees appear to be excessive, as municipalities have been instructed not to use to building permit income for special interest projects.
In light of the evidence – all there on the public record – these would seem to be accurate observations.
City Administrator Martens replied in a statement e-mailed to 5 Eyewitness News, saying
The remodel (of city hall) is in concept only…No design has been approved and no finance plan has been formally approved. We’ve had conversations about options and are approaching the end of design development.
The Pioneer Press reported on the Housing Affordability Institute’s paper, noting that
Some fast-growing cities used excess building permit revenue to pad the general funds they use for streets, water systems, municipal buildings and other projects. The Hennepin County city of Corcoran, for example, used the extra fees, amounting to more than $3,000 per new house, to finance a city hall renovation.
A correction to the Pioneer Press story now reads
An earlier version of this story erroneously reported the city of Corcoran used revenue from those fees to finance a city hall renovation. Corcoran City Administrator Brad Martens said the city is in “the concept phase for a proposed renovation” and has not used the fees to pay for it.
But the key thing here is tenses. It is true that the city of Corcoran ‘has not used the [excess building permit] fees to pay for [the city hall renovation]’, but they were certainly planning to use it for that purpose, at least as late as May 9th, 2019. This was a minor mistake by the Pioneer Press, not by the Housing Affordability Institute. To call it ‘a lie’ is absurd.
November 7th, 2019
On November 7th, 2019, Crow River Media carried a report titled ‘Corcoran backs off from remodeling City Hall‘. There, for now, the matter seems to rest.
John Phelan is an economist at the Center of the American Experiment.
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