What MN Cities Should Consider in Response to Infrastructure Fee Ruling

By Jean McGann, CPA

A recent Minnesota Supreme Court decision could have ramifications for cities statewide, particularly for those experiencing high rates of housing development. The ruling, which came in the case of Harstad v. City of Woodbury, upholds limits on the infrastructure fees cities are permitted to charge developers. 

In the case, Woodbury had assessed fees against the developer, Martin Harstad, to cover "future road improvements" that were outside of a 183-home housing development he sought to build in the city. In response, Harstad sued. Although current statutes do allow cities to assess these fees to cover the costs of infrastructure needed to serve new development, they do not specifically state cities can use the fees to cover future costs—hence, the court's ruling. 

To ensure other cities aren't out of compliance, Housing First Minnesota plans to contact the Twin Cities metro's top 25 cities for housing development to request proof of compliance. The court has not said how the decision will affect home-rule charter cities. 

Here are a few things statutory cities should consider in response. 

1. Are you accounting for all costs associated with your fees?

Avoid using boilerplate language for fee schedules. Instead, identify all of the costs associated with administering the building code. These could include staff wages and benefits, supplies, equipment, overhead, and materials. 

If you haven't already, consider conducting an indirect cost allocation to ensure you're accounting for all costs associated with your fees. This includes allocating depreciation for your infrastructure and overhead factors associated with delivering a service. You may also want to consider incorporating a utility rate study with your long-term plan to make sure your user fees cover your operations and infrastructure. 

2. What are the future impacts of current development?

When reviewing your long-term plan, it's important to address the impacts any current developments will have in future years. Make sure future revenue projection increases align with development projections. Explore options for recouping infrastructure costs that are in line with current statutes (Minnesota Statues, section 462.358, subdivision 2a). 

3. How are you tracking costs throughout your organization?

Now is the time to circle the wagons. Gather all affected departments and assess the current state of fees and expenses, and examine processes for cost tracking. And be proactive. Having this type of organization-wide conversation can make the examination of your cost tracking processes more efficient, and allow for a well-thought-out communication to city council. 

4. Think of the ruling as an opportunity to review your fees and costs.

On a positive note, the court's ruling gives you an opportunity to review future development financing plans and make sure fees and costs line up. It's also a chance to involve your finance team in considering all of the infrastructure and indirect costs associated with development. 

The AEM Financial Solutions team can help you take the next step, whether that's conducting an indirect cost allocation, developing or reviewing your long-term plan, presenting your communication to city council, or responding to a proof-of-compliance inquiry. Regardless of your situation, it's wise to be proactive. Taking action now will not only help to keep your city in compliance but also pave the way for future positive growth. 

We're keeping a close watch on this issue so we can keep our clients informed. If you're unsure of how the new ruling could impact your city, don't hesitate to give me a call. You can reach me at 952-715-3059 or jean.mcgann@aemfs.com.