Improving Impact Fees in California: Rethinking the Nexus Study Requirement

Fees charged by cities on new housing development are critical to paying for the infrastructure and services that cities provide. Yet, as the Terner Center has documented in previous studies, the total slate of fees required by California cities can add up significantly, and is one factor contributing to high construction costs in the state. Fees vary widely between different jurisdictions, and the processes for setting fees are not always transparent. Nexus studies are analyses that illustrate the connection between new development and its impact on city infrastructure and provide a justification for the proposed fee level, and the studies are an area where reforms could help to improve transparency and rein in excessive fees

In the analysis published today, we conduct a review of nexus studies from a sample of California cities, and identify three key changes to improve how nexus studies are conducted and how impact fees are set:

  • Clarify expectations around the treatment of levels of service. Impact fee nexus studies should clearly identify the level of service currently provided by a city, and estimate the cost needed to keep that service at the same level after new housing is added. Cities that seek to increase their level of service should do so through a bond measure, parcel tax, or other less regressive approaches that do not disproportionately impact new residents. 
  • Tie fees more closely to direct impacts of new development. The methodological best practices outlined in our analysis—such as targeting fees geographically—would help ensure fee calculations are closely tied to actual project impacts specific to new housing. 
  • Incorporate consideration of feasibility and mechanisms for triggering review. Rigorous analysis of the financial consequences of new impact fees—as well as the total set of existing fees and exactions that the city would charge—on potential housing development should be a critical part of the nexus study process. In addition, the state should set a collective fee threshold at which point a city’s fee program would be audited to make sure the fees are reasonable.

These changes will help to ensure that fees are being set and used as intended: to support the expansion of critical infrastructure needed to accommodate more housing. Read the full analysis on our website here.