SDC's are one-time fees paid by new construction within the city.  The purpose of an SDC is to ensure that new development covers the cost of lost capacity within the various systems.  A 100-home subdivision, for example, will introduce 100 more families using the park system, and rather than require developers to construct a small park, which may not make sense within a larger system, a Parks SDC paid per home allows the City Parks department to more efficiently plan for and develop new and expanded public parks.  Similarly, we don't expect each new development to drill a new well, or create a small sewage treatment plant.

The City of Hermiston first adopted a Water and Sewer SDC in 1998, and those rates have never been increased.  A Parks SDC was also adopted in 2006, and that rate has never been increased.  Meanwhile, since 1998, the Engineering-News Record's Construction Cost Index shows that the cost of construction (lumber, concrete, labor, etc.) has risen 104%, or an average of 4.52% per year. Similarly, ENR's CCI shows an increase of 56% since 2006.

City Council has had, "Fiscal Prudence," as an annual goal for several years, and in 2021, one of the goals is specifically to review System Development Charges.  Meanwhile, dating to 2017, City Council has had 'housing' and 'economic development' as annual goals.  Therefore, adoption of an appropriate SDC schedule, is a balancing-act between protecting long-term financial health of the City, and maintaining affordable development standards for residential and commercial construction.

FCS Group is a consulting firm specializing in SDC development, and has been retained to review community growth projections and long-range system expansion needs, and recommend a maximum allowable SDC which can be charged to new development.  FCS Group will present a more detailed review of the mechanics of their process at the June 28 Council meeting.  A notice was published in April to the local development community, outlining FCS' report, and inviting testimony at the June 28 public hearing.

The maximum allowable SDC, as determined by FCS Group works out to the equivalent of $12,258 on a new single-family home.  With the addition of a Transportation SDC, there begins to be many variables in how this might look for various types of commercial construction, but the basic SDC for a single-family home is easiest to compare what these changes mean.  This maximum allowable SDC allows City Council to adopt a final fee schedule anywhere below that total.

The current total SDC charged for a new single-family home is $907.  For comparison, the proposed total SDC in this resolution will equal $1,768.16 for a new single family home beginning January, 2026.  That is a key date for comparative purposes, because this new SDC schedule looks to update the total SDC amount for inflation over the course of four years, and then, beginning in 2026, automatically adjust all SDC's by 3% per year, in order to keep pace with inflation moving forward.

Inflation adjustment:  This figure was reached by inflating the water and sewer SDC's from 1998 by 104%, and inflating the parks SDC from 2006 by 56%, which gives us a 'hold harmless' SDC amount, which keeps total costs static, when accounting for inflation.

Transportation addition:  Hermiston has never charged a transportation SDC to help cover the cost of increased traffic & need for transportation system expansions.  Meanwhile, the last time that the Federal Gas Tax was adjusted was 1993; directly reducing the purchasing power of one of the Street Department's main funding sources.  Prior to 2017, State and Federal Gas Taxes were the only dedicated funding streams for the Street Department.  City Council increased local Franchise Fees on utilities within the Right of Way in 2017, and dedicated the increase to the Street Fund.  The addition of a transportation SDC will help to diversify permanent funding for roadway projects away from fuel-based taxes, and increase some local control.

Transportation Addition:  In order to balance the need to minimize impacts on housing/development affordability, with maintaining Fiscal Prudence, the Transportation SDC has been added in to the SDC mix without impacting the overall total, when adjusted for inflation.  In other words, the other SDC's will lose a little bit of purchasing-power, in order to accommodate the Transportation SDC at an affordable price.

Adjustment Phase-In:  City Staff spoke with a number of local home-builders throughout this process, and settled on the proposed 4-year phase-in approach.  This approach is largely to mitigate, as much as is reasonably expected, uncertainty and lingering market volatility in the construction industry.  The price of lumber has been a well-documented victim of market volatility over the past year, with futures peaking at $1,670 on May 7, from a price of $700 in January.  Since May 7, those prices are already back down to the low $900's.  Meanwhile, much of what has fueled home construction and kept it within affordability thresholds throughout 2020 has been historically low benchmark interest rates from the Federal Reserve; however, in response to significant government spending induced inflationary pressure, it is likely that interest rates will generally rise over the next four years, which will put pressure on home-buyers taking out loans to buy a home.

These changes will allow the Water, Sewer, Streets, and Parks systems to better keep pace with community growth in demand, while also keeping pace with inflation.

Actual revenue impacts are difficult to project, as these revenues are highly elastic and are directly tied to the pace of development.  The Hermiston area has seen a significant increase in home-building over the past 3-4 years.  As a result, Water, Sewer, and Parks SDC's through May, stand at $148,000 in 2021; that's opposed to only $43,964 at the same time in 2015.  This is another argument for phasing these adjustments in over time; as a sudden spike in these costs may curtail interest in development to the point that gross revenues actually decline year-over-year.

- Approve Resolution 2191

- Reject Resolution 2191

- Direct Staff to amend methodology and return at a future meeting