Residential Development: Balancing the Needs of the Community with the Strain on the Municipal Budget

Residential Development: Balancing the Needs of the Community with the Strain on the Municipal Budget

By Lynn Kelly-Lehner, City of Temecula, CA, Principal Management Analyst, Linkedin

As you have likely read in the media, there is currently a housing crisis in California. California’s high housing costs and soaring rents are driving low and middle-income people into less expensive areas of the state, or even to other parts of the country. According to the State Legislative Analyst’s Office, California needs to double its housing stock in order to meet demand.

Given all of that, it is not surprising that the City of Temecula has seen a rise in the number of General Plan Amendments and zone changes requesting increased residential capacity over the past several years. Housing is in high demand, leading to a hefty profit for developers, but simple economics dictate that if the supply of housing increases, prices should decrease.

While increasing the supply of housing is beneficial for addressing the housing crisis, the City questioned – what effect would this increase in the supply of housing have on its operating budget?

To answer that question, the City of Temecula worked with Keyser Marston Associates to conduct a citywide fiscal land use study that analyzed remaining undeveloped and vacant land. The analysis examined the supply of land for four different land uses versus their anticipated absorption rates until build-out. We found that, in the long run, the City has a surplus of office and retail land, relatively balanced supply balance of residential land, and an under supply of industrial and hotel land.

Nevertheless, what did that mean for our budget? By considering the potential projected revenue from the four land use types, or the fiscalization of land use, General Fund expenditures were expected to exceed revenues by almost 30% in 20 years. To make matters more complicated, outside of the development world, fiscal projections showed that the City could be operating in a deficit in as little as two years.


How did we get to that point?

Temecula, as well as the rest of California, suffers from some unintended consequences of Proposition 13, which limits the growth of property taxes on a property to two percent a year. This limits tax revenue to cities. In addition, the City got the short end of the stick regarding tax-sharing negotiations with the County of Riverside when we incorporated. All of this means that it costs the City of Temecula more to provide municipal services to residential developments than the revenue we make from them. Coupled with the exponentially rising costs of public safety, these outside forces have a significant impact on the City’s financial outlook.

So how can the City balance the market and social demands of housing, while remaining fiscally sustainable for the future?

The City has continued to pursue classic economic development solutions, such as attracting new tax generating businesses like auto dealerships and hotels.  However, the City chose to be even more proactive in ensuring its fiscal sustainability, and not just relying on market forces to bring in additional sales and transient occupancy taxes.

The City tied one solution directly to land use, specifically increases in residential development. The City adopted a City Council budget policy requiring all General Plan amendments and zone changes requesting an increase in residential density to complete a fiscal impact analysis to determine the net impact on the City’s operating budget. These developments are then required to enter into a Services Community Facilities District (CFD) with the City to offset any deficit from the provision of municipal services to these additional residential units.

Because of this policy, the City has conducted three fiscal impact analyses and will work with developers to create two CFDs, with another CFD on the horizon. In the first twenty years of these CFDs, the City will bring in $14.4 million to pay for the provision of municipal and public safety services for this new development.

While the CFD policy assists in offsetting the cost of increased residential development, it did not completely remedy an impending budget deficit. Again, the City Council was pro-active in its efforts to be good financial stewards. For many years, the City has had development impact fees to offset the effects of development on its budget; however, the City Council recognized that costs had outpaced the revenue these fees were generating. To address the rise in the cost of municipal services, the City Council proposed a one-cent sales tax increase, which the voters approved in the 2016 election. This will generate approximately $23 million a year, which affords the City to enhance and maintain a high level of municipal services as the community continues to grow.

What does the future hold?

Recently, the State Legislature passed a package of fifteen affordable housing bills, in a bold move to address the situation. Cities are scrambling to understand the ramifications of these new laws, and their implications for the future of residential development.

The housing crisis is undoubtedly a complex problem. There is no one size fits all solution. Cities will need to be creative in their solutions to balance market and social demand with what is best for the community.

Does your community struggle with balancing residential development versus the cost of municipal services? What has your community done to overcome this challenge?