Using Cash Flow Models to Incorporate Interest Costs in Impact Fee Calculations Joe Colgan National Impact Fee Roundtable October 6, 2005

What Do The Models Do?  Tabulate Revenue and Expenditures, Period by Period, over a Defined Timeframe  Identify Surpluses or Deficits in Any Period  Determine Exactly How Much Fees Must Be Adjusted to Cover Principal + Interest on Bonds, Given Certain Assumptions

Advantages of Cash Flow Models vs. Summary Methods  More Realistic Financial Forecasts  Can Reflect Variable Rate of Development  Can Reflect Timing of Bond Issues  Can Incorporate Multiple Bond Issues  Can Use Actual Debt Service Schedules  Can Incorporate Interest Earned/Paid on Annual Surplus/Deficit  Eliminate The Black Box

Disadvantages of Cash Flow Models vs. Summary Methods  Models Require Assumptions Regarding Rate of Growth and Timing of Bond Issues  Creating Models Requires More Effort  Separate Model Needed for Each Fee Calculation

The Interest Factor  The “Interest Factor” in the Cash Flow Models is the Constant Used to Adjust Fees to a Cost- Covering Level  Models Use 20-Year Bonds (Level Amortization) with 5.0% Interest and 2.5% Discount Rate  Comparable Factors For Summary Methods:  Sum of Interest Method: Factor = 1.61  Discounted Interest Method: Factor = 1.50  Real Interest Cost Method: Factor = 1.25

Cash Flow Model – Example 1  Assumptions  Level Growth Projections/20 Year Buildout  Bond Issue to Cover 100% of Improvement Costs Issued At Same Time Fees are Established  Fund Balance Starts at $0.00  3% Interest Earned/Charged on Fund Balances  Outcomes  Interest Factor =  Fund Balance Constantly in Deficit  Total DIF Revenue = % of Total Debt Service

Cash Flow Model – Example 2  Assumptions  Front-Loaded Development Projections  Bond Issue to Cover 100% of Improvement Costs Issued 5 Years After Fees are In Place  Fund Balance Starts at $0.00  3% Interest Earned on Fund Balances  Outcomes  Interest Factor =  Fund Balance Always Positive  Total DIF Revenue = 79.3% of Total Debt Service

Cash Flow Model – Example 3  Assumptions  Level Growth Projections/20 Year Buildout  Bond Issue to Cover 100% of Improvement Costs Issued At Same Time Fees are Established  Fund Balance Starts at $1,000,000  3% Interest Earned/Charged on Fund Balances  Outcomes  Interest Factor =  Fund Balance in Deficit After Year 7  Total DIF Revenue = 95.8 % of Total Debt Service

Cash Flow Model - Conclusions  “Sum of Interest” Method and “Discounted Interest” Method Both Result in Excessive Fees  “Real Interest” Method Approximates Correct Fee Calculation for A Special Case Only  Models Have Obvious Benefits for Financial Forecasting  Models Cannot Resolve A Key Legal/Policy Issue: Is it reasonable to include interest cost in fees paid before bonds are issued?