1. October 6, 2005 Edward Cebron, FCS GROUP Including Interest Costs in Impact Fees: Economics, Equity and Methods NATIONAL IMPACT FEE ROUNDTABLE 8201 164th Ave. NE, Suite 300, Redmond, WA 98052 (425) 867-1802

2. 2 Outline of Discussion 1)Defining the Question 2)Some Rules of the Road 3)Analytical Basics for Incorporating Debt Costs 4)Conclusions and Observations

3. 3 Including Interest in Impact Fees: What’s the Question? Do “Costs of Facilities” include debt service costs such as interest or issue costs? –For debt already issued? –For debt to be issued? To What End? –Equity? –Cash Flow? –Sufficiency?

4. 4 Aside: How do We Define Equity? As a group, to generate a targeted level of revenues; or As an individual, to pay a pro rata share of costs Growth pays for growth Ensure that all related costs are met Minimize cash flow risk suggests equity is defined by a charge fair to the payer suggests equity is defined by protecting existing customers / users from subsidy Constraining LawEmpowering Law

5. 5 Defining Unit Costs of Capacity …Capital cost divided by capacity served …Debt Issuance Cost –Not applicable prior to financing –Applicable once financing decision is reached …Debt Interest Cost –Accumulated until time of payment –Provision for future net interest costs Cost of Capacity Includes …

6. 6 Simple Project Assumptions

7. 7 Summary of Traditional Interest Cost Analysis

8. 8 What About Future Interest Costs for Debt Already Incurred? Future Interest Costs are real costs incurred in order to provide needed system expansions Cost is defined by cost of debt (interest rate) Present Value Analysis defines the equivalent “up-front” cost for a future interest payment stream Equivalent lump sum payment Considers investment value of early payment Also needs to consider the PV discount of future principal payments

9. 9 Sample Analysis to Incorporate Future Interest Costs

10. 10 General Follow-up Questions & Issues Who subsidizes future shortfalls due to artificial limitation? –Existing Customers? Initial charge must reflect equitable cost Future charges would not fully reflect costs –Today’s Future Customers? Initial charge must be increased to recognize limits in escalation rates Can only be accurate if growth rate and pattern are known. What about corollary contributions/payments? –Past taxes and charges prior to development –Future taxes and charges after development

11. 11 Conclusion and Observations …should include a provision for interest reflecting net interest costs –Accurate determination reflects both interest and principal payment structures …should escalate with accumulating cost burden –Does not conform to inflation-based adjustments …should be designed to fully recover costs …cannot be designed to assure adequate and timely cash flow …could (should?) consider other offsetting revenue benefits Equitable Impact Fees…