A stormwater fee study is a pivotal document for the entire process of developing a stormwater utility. It will be the basis for the rate ordinance and must comply with Proposition 218, which requires that property-related fees “shall not exceed the proportional cost of the service attributable to the parcel.”
This implies two elements: costs (expressed as a revenue requirement) and apportionment (how much of the costs are assigned to various property types and sizes in the form of fees). Accordingly, most fee studies are divided into those two primary elements: Revenue requirements and proposed fees. Revenue requirements may include various cost elements including those for capital projects, operations and maintenance, regulatory requirements, planning, engineering, and administration. Fees are typically broken into several categories of land uses and sizes, along with possible service zones and fee incentives.
Rate smoothing is a goal of most fee studies. While the rate base (number and use of parcels) may increase over time, the biggest variable is the revenue requirement – particularly the capital improvement program, which can often be “spikey.” Unlike water and sewer rates that must be revisited and re-set at five-year intervals (but do not have to submit to voters), stormwater rates (which must be approved by voters) are not limited to the five-year interval but must have an identifiable formula or index for yearly increases. Therefore, it is important for stormwater fee studies to create a smooth revenue-versus-expense curve over the long haul, often incorporating a way for revenues to keep pace with inflation, such as using the Consumer Price Index to assign annual increases.
The planning that went into understanding the needs of the stormwater utility (see Homework) is key to determining the revenue requirements. Operations and maintenance, as well as other costs, are typically expressed in annual needs. Future needs may simply be escalated using a common index (e.g. Consumer Price Index).
However, if the municipality plans major expansions in infrastructure, planning for these is important. The master plan or other document may identify future capital project needs as lump sum amounts, which must be amortized over a longer period of time. Whether spread over 10, 20, or 30 years, and whether done on a pay-as-you-go basis or funded by long-term debt, will depend on each municipality’s specific needs and goals. These must be balanced against the willingness-to-pay limitations found in the community survey.
Proposition 218 requires that property-related fees “shall not exceed the proportional cost of the service attributable to the parcel.” Therefore, it is essential to develop an apportionment of costs that best reflects the stormwater services provided by the municipality.
Across the U.S., most stormwater fee structures are based on the amount of impervious surface on a parcel, which is proportional to the amount of rainwater that runs off a parcel. This is a straight forward method, although impervious surface data may be difficult or expensive to obtain. Rate-setting consultants have experience working around this issue with sampling and statistical approaches, which can satisfy the Proposition 218 “proportionality” test.
The majority of stormwater rate structures utilize an equivalent residential unit (ERU) as a basis for fees. ERUs estimate the average or median characteristics for a residential property. For stormwater, land use, impervious surface cover, or total size are possible metrics. Once established based on a sample of properties, each parcel in a municipality can be assigned an individual number of ERUs, which is multiplied by the base residential rate to establish the individual fee. With the ERUs assigned and totaled, the revenue requirement is divided by the total number or ERUs to establish the base residential rate.
Most municipalities are bound to an NPDES permit requiring them to reduce stormwater pollutant loading as well as other objectives such as green infrastructure development and public education. These elements could be incorporated into the stormwater fees for various types of parcels.
It is worth noting that Proposition 218’s strict requirements on a fair apportionment method means that a municipality should create a thorough administrative record of how the rate setting process was done. The fee study is the primary document in this record, but other plans and studies upon which it relies would need to be clearly referenced.
Other Fee Study Features
In addition to the basic revenue requirements and apportionment, many fee studies include provisions for other features such as fee duration (sunset clause) and future increases (typically based on the CPI or other index).
A sunset clause is always a consideration due to the voter approval process. Voters typically prefer a sunset clause, as it removes the fear of a “forever tax”. But it is worth noting that if long-term debt is incurred, the fee structure must be in place for at least as long as the debt repayment term. In other words, a fee cannot “sunset” until all debt obligations are done. Two California municipalities, Palo Alto and San Clemente, have opted to routinely include a sunset of their fees. In both cases, capital projects are completed on a pay-as-you-go basis (as opposed to taking on long-term debt). Voters must approve any renewal or extension of the fees (something that is not guaranteed) and municipalities must spend money and resources to run a new ballot measure each time.
Most municipalities adopt an ordinance to memorialize the rate setting process as well as include other administrative elements. Along with the duration and future increases discussed in a fee study, the ordinance may also include:
- The right of a property owner to appeal his fee and the process to do so.
- Fiscal controls such as establishing a separate enterprise fund and annual audits.
- Procedures for setting annual rates (including the inflation factor).
- The requirement for citizen oversight (if any).
Below are several examples of fee studies and ordinances:
A Technical Note on Structuring Stormwater Utility Rates (part of the Local Government Financing Manual, Environmental Finance Center, University of Maryland)