2025-065 Water and Wastewater Impact Fees August 15, 2025 Report No. 2025-065
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
This informal staff report combines an analysis of the consequences of not adopting recommended
water and wastewater impact fees with responses to questions raised during the public hearing on
Aug. 5, 2025. The report aims to provide additional information before the City Council considers
adopting the new fee structure on Aug. 19, 2025.
BACKGROUND:
Responses to Public Hearing Questions
Proposed Implementation Date
The originally proposed implementation date of Jan. 1, 2026, has been changed to Apr. 1, 2026.
This three-month delay is expected to result in an estimated $9.5 million loss in impact fee
collection. The change in implementation date will have a minimal effect on the Water Utility's
financial stability while still providing a seven-month window between City Council adoption and
implementation. This change also gives existing projects additional time to finalize plats and be
assessed under the current fee structure.
Phased Implementation
Staff does not recommend a phased implementation of the new fee structure. One option studied
was a 50% initial implementation with a 10% annual increase to 100% of the maximum value. A
phased implementation approach would reduce water impact fee collections compared to current
rates for the first two years, with the water fund not reaching a break-even point until the fourth
year. A phased approach would also reduce the collection of impact fees from the current level,
which could endanger two loans (from the Texas Water Development Board and the Water
Infrastructure Finance and Innovation Act) that provide substantial savings over traditional bond
funding. This could result in unfavorable rate changes or loan cancellation, and escalating costs
for ratepayers.
Impact Fee Refunds and Project Delays
If a project is determined to be no longer necessary, it will be removed from the next study, and
any impact fees collected for it will be refunded with interest. The interest rate for refunds is 6%
per year on the principal amount, as specified by Local Government Code Section 395.025(d) and
Section 302.002 of the Finance Code. If a project remains necessary but is delayed,the"Utilization
Percentage"not accounted for in the previous study will be carried forward to the next study. This
ensures impact fees are not over-collected when a project is delayed or canceled.
Service Areas and Economic Development
The establishment of Water and Wastewater Service Areas places the infrastructure burden on
developments within those areas, which approximately mirrors the limits of the Extraterritorial
Jurisdiction (ETJ). The impact fee burden generally increases with distance from the City's
corporate limits. The average water bill for residents outside the City's corporate limits is higher
August 15, 2025 Report No. 2025-065
than for those within them. These factors all contribute to encouraging infill within the corporate
limits before expansion into the ETJ. It should also be noted that the city's Certificate of
Convenance and Necessity(CCN)was issued by the Public Utilities Commission of Texas(PUCT)
in the mid1970s. This certificate authorizes and obligates the city to provide service within the
identified CCN, which extends into the city's ETJ.
Senate Bill 1883
Senate Bill 1883 will be effective on Sept. 1, 2025, and the City will be required to meet all its
requirements on that date, including auditing impact fees.
DISCUSSION:
Consequences of Not Adopting Recommended Impact Fees
Not adopting the recommended water and wastewater impact fees at 75% of the maximum
identified in a recent study would lead to a substantial funding shortfall. The study, conducted in
accordance with the Texas Local Government Code, Chapter 395, found that over$500 million in
water infrastructure and over$700 million in wastewater infrastructure will be necessary to support
future growth.
The failure to adopt these fees, which are designed to have new development pay its proportional
share of capital improvements,presents the city with a critical choice:
• Shift the Burden to Existing Residents: The funding gap would have to be covered by
increasing water and wastewater rates for current customers or through new or increased
ad valorem taxes. This would place the costs of new growth on the existing community.
• Delay or Abandon Critical Infrastructure Projects: Without the necessary funding, the
city would be unable to proceed with capital improvements. This could strain existing
systems,potentially leading to service unreliability, outages,and a loss of system capacity.
• Hinder Economic Development: A lack of adequate infrastructure could force the city to
implement moratoria on new development, which would impede economic growth,
discourage new businesses, and limit housing opportunities.
Adopting the recommended impact fees is a crucial and equitable growth management tool that
protects existing residents from an undue financial burden by ensuring the costs of new
development are funded by new development itself.
CONCLUSION:
The adoption of the recommended impact fees is the most fiscally responsible path forward to
ensure sustainable growth and maintain a high quality of life for all residents. Staff s
recommendation is to change the implementation date to April 1, 2026,to provide additional time
for existing projects to be assessed under the current fee structure. The phased implementation
approach is not recommended due to potential financial instability and risk to loan agreements.
ATTACHMENTS:
1. Phased Adoption Rate Comparison
2. Service Area Impact Fee and Water Rate Comparison
August 15, 2025 Report No. 2025-065
3. Capital Improvement Project Impact Life Cycle Example
STAFF CONTACT:
Stephen Gay
General Manager, Water Utilities & Street Operations
Stephen.Gay@cityofdenton.com
(940) 349-8086
REOUESTOR: Staff Initiated
STAFF TIME TO COMPLETE REPORT: 20 hours
PARTICIPATING DEPARTMENTS: Water Utilities
Impact Fee Collected
Impact Fee%of Maximum FY26 FY27 FY28 FY29 FY30 FY31
50%w/+10%annually through 2031 $ 29,146,342.20 $ 32,060,976.42 $ 35,267,074.06 $ 38,793,781.47 $ 42,673,159.62 $ 46,940,475.58
Water 0% (Current) $ 32,924,218.60 $ 32,924,218.60 $ 32,924,218.60 $ 32,924,218.60 $ 32,924,218.60 $ 32,924,218.60
Difference $ (3,777,876.40) $ (863,242.18) $ 2,342,855.46 $ 5,869,562.87 $ 9,748,941.02 $ 14,016,256.98
Running Total Difference $ (3,777,876.40) $ (4,641,118.58) $ (2,298,263.12) $ 3,571,299.75 $ 13,320,240.77 $ 27,336,497.74
50%w/+10%annually through 2031 $ 35,355,095.00 $ 38,890,604.50 $ 42,779,664.95 $ 47,057,631.45 $ 51,763,394.59 $ 56,939,734.05
Wastewater 0% (Current) $ 24,653,361.60 $ 24,653,361.60 $ 24,653,361.60 $ 24,653,361.60 $ 24,653,361.60 $ 24,653,361.60
Difference $ 10,701,733.40 $ 14,237,242.90 $ 18,126,303.35 $ 22,404,269.85 $ 27,110,032.99 $ 32,286,372.45
Running Total Difference $ 10,701,733.40 $ 24,938,976.30 $ 43,065,279.65 $ 65,469,549.50 $ 92,579,582.48 $ 124,865,954.93
Residential Cost of Development Map
Residential Cost of Development per Service Area @ 75%
Service Areas IA/Wastewater 1B/Wastewater 2/Wastewater
.......................................................................................................................................................................... .............................:....................................................................
W/WW Fees...' $8,285 ' ........................................$.10,068..........................................:.........................$12,354........
Current ...................................................................... .................
:Other Fees $10,457 $10,457 $10,457
......................................................................................................:......................................................................................................:....................................................................
:Total Cost $18,742 $20,525 $22,811
Service Areas IA/Pecan 1A/Hickory 1B/Pecan 1B/Clear 1B/Hickory 2/Hickory 2/Clear
W/WW Fees $10,076 $10,958, $16,770: $21,496 $17,652 $18,697 $22,541
Proposed
Other Fees $10,457 $10,457 $10,457: $10,457 $10,457 $10,457: $10,457
.................................:.....................................................................:.......................................................................................................;....................................................................
Total Cost $20,533 $21,415 $27,227: $31,953 $28,109 $29,154: $32,998
FD ifference: $1,791 $2,673 $6,702€ $11,428 $7,584; $6,341 $10,187
2/Clear 1B/Clear Creek
Creek
8 -
2/Hickory Creek _ r
1B/Hickory Creek
1A/Pecari Creek
1B/Pecan Creek
SA/Hickory
Creek
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July 15, 2025 - ID 25-1 139
Capital Improvement Project Impact Fee Life Cycle Example
Project 38 has a proposed capacity of 57
Million Gallons per Day (MGD). Based on �`" ur" 0
projected growth, the total flow expected o®-• Q
through the pipe for the 2025 Impact Fee ®® a g
10-yr planning period is 33 MGD. The
amount of available capacity "used up" in
the 2025 Impact Fee planning period,
known as the % utilized, is 33/57 = 58%.
As development occurs, the flow through
the pipe increases, increasing the %
utilized. Once the flow equals the pipe
capacity, 57 MGD, Project 38 is considered
100% utilized, and any further development Figure 1. Project38
in the area would require a new project.
See Table 1 below for the projected % utilized for Project 38 through the 2040 Impact
Fee study.
Table 1. Projected % Utilized
IF Capacity Flow through %
Study pipe Utilized
2025 57 33 58%
2030 57 40 70%
2035 57 46 80%
2040 57 57 100%
The % utilized is used to calculate the % recoverable for each project included in the
Impact Fee Study. The % recoverable is the percentage of the total project cost that can
be collected during the Impact Fee Study based on the % utilized. The recoverable cost
for Project 38 is then determined based on the % recoverable and project cost and
shown in Table 2.
The recoverable cost for Project 38 is then rolled up with the recoverable costs for all
other projects in the planning period to determine the total recoverable cost for the
Impact Fee Study. The maximum assessable impact fee is then calculated by dividing
the total recoverable cost by the service units. Projected service units are determined
based on expected growth within the planning period.
Table 2. % Recoverable and Recoverable Cost
Impact Project Recoverable
Fee Stud % Utilized % Recoverable Cost $M Cost $M
2025 58% 58% 69** 40.0
2030 70% 12%* 70** 8.4
2035 80% 10% 70 7.0
2040 100% 20% 70 14.0
Total 100% 100% 1 69.4
Notes:
*Since 50% of the project cost was recovered in the 2025 study, only the additional
amount"used up" is recovered for the 2030 update (70%-58% = 12%)
**69M is the estimated opinion of probable construction cost (OPCC). Assuming the
project is built in the next 5 years, the 2030 update would account for the actual cost of
construction rather than the OPCC— in some cases, the actual construction cost is
higher, so I assumed it went up to $70M.
As shown in Table 2 above, the City would "recover" a total of up to $69AM for Project
38 after the 2040 Impact Fee Study, depending on the number of service units that
actually come online and the adopted impact fee. Local Government Code 395 does not
specify how the collected impact fees must be allocated to fund constructed impact fee
projects; only any impact fee not spent within 10 years must be refunded. The City would
likely pay the full $70M at the time of construction for Project 38 using impact fees, but
would not fully recover that cost through impact fees until the project was fully utilized.