Memorandum
To: Interested Parties
From: Evan Manvel, Planning Advocate
RE: SDCs and Housing Costs

When we ask, "do system development charges (SDCs) increase the cost of housing?" We need to ask: "compared to what?" and "costs to whom?" and "other than a new revenue source, what else do we gain with SDCs?"

Compared to What?
When a growing population leads to increased demands on infrastructure, local governments have several options:

•They can do nothing, forcing existing roads, schools, parks, and sewer and water systems to bear the burden. This usually means lower quality government service for existing residents;
•They can decrease other budget items, which are of lower priority than providing infrastructure;
•They can issue bonds secured by future property tax income;
•They can increase property taxes; or
•They can increase system development charges, causing purchasers and builders of new homes and buildings to pay for the infrastructure directly.

Over time, most cities use a combination of the above approaches.

Elected officials concerned with affordable housing are often hesitant to increase SDCs. Some cities using SDCs address this concern by waiving SDCs for houses built by providers of non-profit affordable housing.

Growing cities who decide not to use SDCs usually end up issuing bonds or increasing property taxes to make ends meet, a decision that is often divorced from discussions about providing new infrastructure required by growth. These strategies surreptitiously drive up the price of all housing (mortgage payments plus taxes). In the end, housing in cities increasing SDCs is likely to be no more expensive than in a city increasing property taxes. The "sticker price" of homes may differ, but what housing consumers care about is the housing price plus the property tax burden.

Costs to Whom?
The total cost of a house differs from its market price, because some of the costs of new housing are not captured by the housing market. The total cost includes public resources expended for the new house, as well as the market price. SDCs, therefore, do not change the cost of housing, but rather shift how much of the cost is borne by the homebuilders and buyers of new homes and how much by the general public.

The homebuilders' lobby will argue taxes and fees charged to new housing will increase housing costs for everyone, as SDCs are "passed on" to the ultimate consumers - homebuyers and renters throughout the community. While this is partially true, it is unlikely all the fees will be passed on. Instead, depending on the land, capital, and housing markets, some of the burden of SDCs will be shouldered by homebuilders, owners of vacant land, and purchasers of new homes. The rest will be built into the price of housing - just as property taxes are built in to housing prices in cities without SDCs.

What Else Do We Gain With SDCs?
SDCs decrease a subsidy that currently exists for new development. By closer reflecting the actual cost of providing infrastructure to new housing, SDCs may cause some homebuyers to purchase homes in areas that are already developed, where less new infrastructure is required. Thus, SDCs can encourage a more compact, efficient urban form and spur redevelopment and revitalization of existing areas. In short, SDCs help remove a market distortion.

If you have further questions about SDCs, call Evan Manvel at (503) 497-1000.

Paying for Capital Construction of Growth-Related Infrastructure

Notes: There are other forms of local taxes and fees, but they are not commonly used for growth-related infrastructure, and are sometimes prohibited from being used for such infrastructure.

Each approach to funding new infrastructure will have an affect on both the price and the value of housing in a community. Every time home prices increase, homeowners see their assets increase. Similarly, if infrastructure is simply not built, the price of housing may go down, along with the value of homeowners' assets.

"Paying" for poor infrastructure can be non-fiscal; for example, the value of time lost to congestion is "paid" by those caught in it.