In 2024, the City Council adopted a comprehensive fee update to the City’s Development Impact Fees, Inclusionary Housing In-Lieu Fee, and User Fees. As part of that adoption, the City identified the ability to update the adopted fees based on reasonable inflation indices to retain purchasing power of those fees.
Discussion
The City of San Marcos (“City”) charges development-related and service-related fees to ensure that the cost of private development activity and limited-benefit services is not borne entirely by the broader community.
Development Impact Fees, also known as Public Facilities Fees (PFF), are imposed on new development to mitigate the impacts of growth on City infrastructure and public facilities. These fees fund the construction of various facilities needed in the future as a result of growth. The City assesses fees in several categories such as transportation facilities, parks and recreation facilities, fire and emergency medical services facilities, advanced planning, habitat conservation, and storm drainage facilities.
The City also maintains an Inclusionary Housing In-Lieu Fee (IH Fee), which allows certain residential development projects to satisfy inclusionary housing requirements through payment of a fee in lieu of constructing affordable units.
Citywide User Fees are charged for specific services that primarily benefit an individual applicant or customer, such as development review, permitting, inspection, entitlement processing, and similar services. These fees are intended to recover all or a portion of the City’s reasonable cost to provide the applicable service.
In 2024, the City adopted updated PFF, IH Fee, and User Fees. In connection with that effort, the City performed a comprehensive analysis of three sets of fees through nexus and cost of service studies, which justified the reasonable costs associated with those fees. Those studies identified the ability of the City to increase these fees based on reasonable inflation indices. Inflation affects the cost of constructing public facilities, producing affordable housing, and delivering City services. If adopted fees remain static, the City’s ability to fund needed infrastructure, support affordable housing production, and recover the cost of limited-benefit services is reduced.
Annual inflationary adjustments are a common and appropriate tool used by cities to maintain the effectiveness of adopted fee programs between comprehensive updates. These adjustments do not replace the need for periodic comprehensive fee studies. Rather, they help preserve the purchasing power of adopted fees until the City undertakes future nexus studies, cost of service studies, or other comprehensive updates.
Any change to the PFF, IH Fee, and User Fees cannot take effect in less than 60 days from the date of adoption. For simplicity of administration, staff would make the fees effective on September 1, 2026. Notice has been given to the upcoming fee change and staff will continue to communicate out the proposed changes through the effective date.
Public Facilities Fees
Because PFF are used for infrastructure and capital facilities, the City Council identified the Engineering News-Record Construction Cost Index (ENR CCI) as the inflationary index that should be applied to these fees as described in Resolution 2024-9385. The ENR CCI is an established construction cost index and is appropriate for fees that fund capital improvements, infrastructure, and public facilities.
The proposed adjustment would increase the adopted Development Impact Fee schedule by 2.7% percent, based on the change in the ENR CCI from March 2025 to March 2026. The adjusted fees would remain within the maximum justified amounts identified in the applicable nexus study or would otherwise be limited to the legally supported amount.
Inclusionary Housing In-Lieu Fee
City Council also identified the ENR CCI as the inflationary index that should be applied to Inclusionary Housing In-Lieu Fees as described in Resolution 2024-9387, designated because it operates as a construction cost index. The proposed adjustment would increase the IH Fee by 2.7% percent.
Citywide User Fees
The Consumer Price Index (CPI) was approved by Council to apply to Citywide User Fees pursuant to Resolution 2024-9389. CPI is appropriate for user fees because the cost of providing City services is affected by broad inflationary pressures, including personnel, supplies, contract services, technology, and administrative costs. The proposed adjustment would increase applicable User Fees by 3.2%. However, no user fee would be increased above the City’s estimated reasonable cost of providing the service. Where an inflationary adjustment would cause a fee to exceed the documented cost of service, the fee would be capped at the cost recovery amount or excluded from the adjustment.
Environmental Review
The proposed increase in Development Impact Fees, Inclusionary Housing In-Lieu Fees, and User Fees based upon inflationary indices is exempt from CEQA pursuant to Section 15061(B)(3) of the CEQA Guidelines.
Fiscal Impact
The increase in Development Impact Fees and Inclusionary Housing In-Lieu fees by 2.7% and the increase in User Fees by 3.2% will increase revenue to the City to address increases in costs for construction costs and services.