By Steve Zurier. Back-room negotiations over land-use planning, fee increases, and even building moratoriums are taking place nationwide as builder trade groups and public officials sort out tough choices as states face the worst cumulative budget deficits since World War II.

The challenge for home builders and government officials is that the strong economy builders enjoyed the past couple of years created demand for new public infrastructure at a time when state and local governments are least able to afford new sewers, roads, and schools.

Although many states have been hurt by industry layoffs and declining stock market investments -- especially tech states like California and Massachusetts -- the underlying cause of the state budget crisis is that the rate of revenue growth has declined and fixed costs for salaries, pensions, education, and health care are tough if not impossible to cut. The pressure to spend more on homeland security also has increased in the wake of yet another round of terrorist attacks.

And though state and local governments will receive a $20 billion windfall from the new federal tax cut and spending plan, the money is not expected to solve the ongoing fiscal imbalance. The fear among builders is that the state budget crisis could stall or even sink the housing boom.

"While the state budget crisis won't totally kill off the boom in housing because demand for housing is still high, builders are certainly seeing an increase in attempts by local governments to pass off higher impact fees and other ways for government to shift off the costs to new-home buyers," says Clayton Traylor, a senior staff vice president at the NAHB who's familiar with state and local issues.

"We'll also see state and locals defer much needed capital improvements such as new roads, freeways, and water and sewer capabilities," says Traylor. "And if we start seeing local governments laying off their planning staffs, it will take builders twice as long to get their projects through."

Builders on the front lines see the trouble brewing. Thomas Doucette, president of Frontiers Community Builders in Stockton, Calif., says while the full impact of California's budget deficit hasn't hit yet, builders are seeing pressure in the form of higher impact and building permit fees.

"Last time there was a budget crisis, during the recession of 1990-1991, the state went after every available dollar at the county and city level,'' says Doucette.

Zudi Karagjozi, president of Kara Homes in East Brunswick, N.J., says that local municipalities are pushing builders to make additional contributions. He says on a recent 76-unit project, the town wanted a connecting road that cost $550,000 -- even though there were no lots he could build on along that portion of the road. Building the road added $7,000 to $8,000 to the cost of each unit that he did build.

Karagjozi also points out that housing starts in New Jersey dropped from 35,000 to 26,000 in the last three years, due largely to the state's prevailing anti-development sentiment.

"When you lose that many units you're talking about a $1 billion impact annually on the state's tax receipts," he says. "Now we're looking at a 10,000-unit drop per year because of the state's new smart-growth policies."

Another problem builders face is the uncertainty created by transportation projects being cancelled or stalled. Phil Dommer, development director for Bright Keys Building and Development in Stillwater, Minn., says the stalling of a local light-rail project and interstate improvements due to budget cuts has had a "chilling effect" on at least three Bright Keys projects.

"The worst thing is that the state and locals can't give us any clear answer of what their plans are," says Dommer. "Either we move forward on projects with increased risk, or wait and miss an opportunity and slow our building engine. We think that's significant since housing has been such a key component of the economy."

Tough year ahead

The National Conference of State Legislatures (NCSL) reports that fiscal 2004 will be another difficult budget year. In late January, when most states were just beginning to craft their 2004 budgets, 36 reported that they had to close gaps to the tune of a combined $68.7 billion.

On top of spending reductions, many states are considering raising additional revenues. Six states have upped cigarette taxes, and two raised beer taxes. Another 14 states are considering higher cigarette and tobacco taxes -- and 11 are looking at sales tax changes. At least a half-dozen states are thinking about higher personal income taxes, always tough to pass, while many states are looking at a broad range of proposals that include most types of taxes.

Despite these measures, builders know in their guts that whopping state budget deficits are sure to mean increased fees and slowdowns in local services such as permit processing, as state governments look to find new ways to raise money and cut overhead and local governments grapple with cuts in state aid. The NCSL reports that at least 19 states are looking at fee increases. A quick look around the country shows that the push to increase fees among state and local governments is strong:

  • California's projected $38.2 billion state budget deficit is the worst in the nation. The California BIA consistently complains that excessive state regulations and fees stymie local development. One measure the CBIA is watching closely is a law passed in March that will increase fees for stormwater permits. In the past, builders paid a $700 fee per project, and city and county fees were capped at $20,000 per year. Now, builders still pay the $700 fee, and the cap on city and county fees was removed. The CBIA fears that removing the cap will open the door for higher fees to be imposed on the business and agriculture communities, including builders. A task force of city, county, and state officials, manufacturers, agriculture groups, and the CBIA is meeting to negotiate the fees each group will pay. CBIA also warns its members that impact fees will go up in many municipalities across the state. California's impact fees average $30,000 per house, but are well in excess of $100,000 in many locations.

  • New Jersey faces a $5 billion fiscal 2004 deficit, and relations between Gov. James E. McGreevey's office and the New Jersey Builders Association couldn't be worse. Builders face a doubling of environmental permit fees, expanded impact fees, and worst of all for builders, a proposal that would allow local municipalities to impose a one-year moratorium on building.

  • Minnesota is looking at a $4.5 billion deficit for its 2004-2005 budget. Builders across the state are looking at increases for sewer and water access and general building and zoning permits. For example, the city of St. Paul proposed a 25 percent fee increase for all building-related permits, and the St. Cloud area is looking at a jump in hookup fees for sewer and water access from $2,500 to $4,000 per lot. Builders also beat back some statewide initiatives that would have had a negative effect on builders. One would have given local municipalities the ability to pass broad-based fees without a public hearing. Another bill that was defeated would have eliminated the state's rule that requires municipalities to respond within 60 days when a builder applies for a zoning change, permit, license, or any other government approval for action. Builders were concerned because it's the only tool that the building and development community has to require municipalities to make a decision on a pending permit. The locals feel they need to eliminate the rule because they don't have the manpower to process the permits fast enough. Although both bills were defeated in committee, the legislature still has the option to revive the measures.

  • In Massachusetts, the $3 billion 2004 deficit has the state facing about a 15 percent cut in local aid. The HBA of Massachusetts reports that the state is looking to expand its impact fee law so cities and towns could impose impact fees for new schools. Under existing law, the locals can only impose impact fees for very narrow purposes, mostly for core infrastructure such as water and sewer lines.

  • The deficit in Illinois is around $5 billion for fiscal 2004, and the big hit builders face is a new fee for stormwater permits. The state proposed a fee of $100 an acre annually, but builders still have questions as to whether they would have to pay fees on the full 100 acres in year two if they developed 50 acres in year one. Also on the table is an agenda item supported by the Sierra Club that would use the fee money to fund soil protection programs for local government agencies and nonprofit groups. The HBA of Illinois is concerned that the result would be that builders would pay a fee to subsidize yet another fee. Another builder concern is that the plan as of the early spring was to fund the state EPA primarily on fees as opposed to general revenue funds from state income taxes. The state HBA is negotiating with state agencies and Gov. Rod Blagojevich's office to clarify the stormwater permit fee and encourage the governor's staff not to rely totally on fees to fund the state's EPA. The trade group seeks to find a compromise proposal that would fund the agency on both fees and general fund monies. A common theme

    Builder trade groups echo a common theme: They don't like impact fees, excessive permit requirements, or most restrictions on growth -- and they especially fear moratoriums. But their fears are based on reality.

    Tim Coyle, the CBIA's vice president of government affairs, says 2003 is the worst possible time to stifle the housing industry. Coyle points out that the economic impact of new-home construction in California -- a state reeling from the economic downturn -- is $40 billion annually, including 360,000 new jobs. Coyle says new construction brings in about $3 billion to the state's coffers in the form of sales, property, and income taxes from the production of new homes.

    "When the state can't fund special programs, where does it go?" poses Coyle. "To the private sector to draw from the vitality and wealth of the private sector. When government gets in a pickle they panic and just start taxing."

    The same kind of anti-government rhetoric comes out of the New Jersey Builders Association, which is steaming over the smart-growth plan Gov. James McGreevey outlined in his State of the State message last January. The builders say McGreevey's plan -- which includes building moratoriums -- is nothing more than a program of restrictions, regulations, taxes, and fees.

    "The State of the State message was hardly an invitation to tea," says Patrick J. O'Keefe, CEO of the New Jersey Builders Association. "It's difficult if not impossible to imagine a moratorium proposal that would not be met with resistance from the development community. And there's every indication that even if there was a budget surplus, the land-use policy of this administration would be similar."

    Benjamin Fierro, an attorney who represents the HBA of Massachusetts, says restrictions on growth in the Bay State are profound. Fierro says at least 62 of the state's 351 municipalities have an outright ban or cap on the permits they issue. And, 127 local governments have adopted their own standard for installation, repair, and maintenance of sewage disposal systems, all of which exceed state standards.

    "Within greater Boston, the problem is not a lack of land," says Fierro. "The problem is a lack of available building lots with communities limiting permits and having moratoriums on construction. Our struggle here is that we're dealing with this huge state budget deficit at the same time that we have a significant housing crisis here in Massachusetts."

    Fierro notes public officials in Massachusetts are hearing from physicians and hospitals that the teaching hospitals are having a very difficult time recruiting because of the high cost of housing. Fierro says high-tech companies around the region have the same problem, and the high cost of housing also has put pressure on the Boston region's extensive college community.

    "It's become an economic competitiveness issue here in the past six to eight months," Fierro continues. "Promoting open-space preservation runs counter to producing housing unless we do more cluster development. With the fiscal crisis, towns come back to us and say: Where will we get the money? We'd love to help you but we can't.' So much of the costs get passed back to the builders."

    First impact

    NAHB's Traylor says the impact fee is the measure most governments fall back on. The reason? Many states already have high property taxes. And passing personal income taxes and increased sales taxes is not popular. So, the impact fee becomes one of the easiest ways for state and local governments to raise money.

    But Traylor says impact fees are an unhealthy way for government to finance basic infrastructure. For starters, he notes, when governments depend too much on impact fees during trying economic times, communities tend to sacrifice strategic planning goals for short-term economic survival. Second, impact fees don't really generate that much money. For example, local governments cannot write bonds off impact fees, which is really the most efficient way state and local governments raise money for big public service projects.

    Traylor says the NAHB is studying new ways to deliver and pay for public infrastructure. He says one good model is in California, where the home builders and teachers unions team up to finance general obligation bonds for schools. Traylor says the NAHB also advocates broad-based funding mechanisms such as transportation, property, sales, and income taxes. He adds that although a transportation tax failed in Northern Virginia in last November's election, the willingness of the public sector to take an integrated approach and the high involvement among builders were major steps forward.

    What's more than clear is that there are no easy answers. Tax increases and staff reductions are not politically popular, so builders have to be realistic and expect more attempts to raise fees in the months ahead. What's needed from builder trade groups is less gnashing of teeth and more concrete alternative proposals. The NAHB is about to release a study that tries to identify ways for communities to meet the challenges of building, paying for, and operating critical infrastructure. But the jury's out on how successful the initiative will be. For now, state builder trade groups are fighting it out, one statehouse at a time, one proposal at a time -- and praying for a speedier recovery!

    Builders Feel the Pinch: Here's a snapshot of some of the measures builders face as states look to raise money to offset record shortfalls.
    State FY 2004 budget gap Impact on builders
    California $38.2 billion

    Increased stormwater permit fee became law in March; 224 bills to generate revenue are under consideration in state legislature

    Illinois $5 billion Increased stormwater permit fees proposed
    Massachusetts $3 billion Expanded impact fees proposed
    Minnesota $4.5 billion (2004–2005) Local municipalities raising sewer and water access fees and general building fees
    New Jersey $5 billion

    Proposals include doubling of environmental permit fees, expanded impact fees, and a law that would let local municipalities impose a one-year moratorium on building

    Sources: BUILDER, National Conference of State Legislatures, various state government Web sites