State Allocation Board Authorizes Collection of "Level 3" Developer Fees for the First Time in California History

Lozano Smith Client News Brief
*** Update: May 27, 2016***
The litigation that was threatened and that was mentioned in the below client news brief has become a reality. Details here.

May 2016
Number 33

The State Allocation Board (SAB) has taken the unprecedented step of determining that state funding is no longer available for apportionment for school facilities, triggering some school districts' eligibility to collect higher 'Level 3' fees for the first time ever.

The Board's historic May 25 decision is already facing potential challenges. The California Building Industry Association (CBIA) has indicated that it will seek a temporary restraining order to halt collection of Level 3 fees. If voters approve the $9 billion school bond measure on the November ballot, making state facilities money available again, collection of the fees may no longer be authorized. The triggering of Level 3 fees for the first time - in the nearly 18 years since Senate Bill 50 (SB 50) went into effect, in 1998 - will raise a number of questions for school districts, particularly in light of the threatened litigation and the November vote.

SB 50 revamped the state's school facilities funding program and rewrote the law regarding school impact fees. Under SB 50, school districts could be eligible for one of three different levels of developer fees. All school districts that are able to justify the fees remained eligible to collect what have commonly become known as 'Level 1' fees, the statutory amount authorized by Education Code sections 17620, et seq. The Level 1 fee amounts are adjusted by the SAB every two years, and most recently rose to $3.48 per square foot for residential development and $0.56 per square foot for commercial development. For further discussion of the Level 1 fee increase, see 2016 Client News Brief No. 9.

School districts that meet certain express criteria laid out in Government Code sections 65995.5 and 65995.6, a higher 'Level 2' can be imposed on residential development. Unlike a fee justification study supporting a Level 1 fee, which gives school districts some flexibility in how to calculate the justified fee, the Level 2 fee is based on a very specific statutory formula. School districts support their eligibility for this fee in a "School Facilities Needs Analysis."

Under SB 50, school districts that meet the criteria to be eligible for Level 2 fees would be able to increase to Level 3 fees if the SAB determines that state funding is not available for local school facilities projects. (Gov. Code 65995.7.) Theoretically, Level 3 fees equate to approximately 100 percent of what the state assumes is the cost of school construction to house students from new residential development. (Both Level 2 and Level 3 fees are limited to residential development; school districts are only eligible to impose fees on commercial development under the Level 1 statutory scheme.)

One major difference between Level 2 and Level 3 fees is that while a Level 2 fee calculation takes into account the amount of local funds school districts dedicate to accommodating new growth (such as a general obligation bond), the Level 3 fee calculation does not include that component. As a result, unlike the Level 2 fee, the Level 3 fee does not penalize a school district for raising funds locally for new construction.

Until yesterday, the SAB has never taken action to determine that state funding is not available for facilities projects.

Since the early 2000s, there have been disputes about what it means for state funds not to be "available." In 2012, ostensibly to avoid limiting California's economic recovery, the Legislature amended Government Code section 65995.7 to make Level 3 fees inoperative through the end of 2014, unless no statewide bond measure was placed on the ballot by November of 2014, or such a measure was placed on the ballot but did not pass. When there was no statewide bond measure in 2014, the Level 3 fee legislation became effective again. The renewed the SAB's authorization to determine that state funding is "unavailable."

CBIA remains steadfastly opposed to Level 3 fees, as evidenced by their threat of legal action and testimony to the SAB. Until any such litigation is pursued and resolved, the question of how to move forward remains somewhat clouded. For school districts that are already eligible for or are collecting Level 2 fees, existing School Facilities Needs Analyses and previously adopted Board resolutions for Level 2 fees should be reviewed. Lozano Smith has long offered a Level 2 fee Board resolution that includes authorization for a Level 3 fee in the event that the SAB determines that state funds are no longer available. Absent such language in a resolution adopting a Level 2 fee, as well as supporting analysis in an adopted School Facilities Needs Analysis, school districts interested in levying Level 3 fees may have to begin a new process of preparing and approving a School Facilities Needs Analysis. School districts seeking to impose Level 3 fees may wish to consult with their legal counsel regarding the applicable procedures.

The intent of SB 50 was that Level 3 fees would essentially provide bridge financing until state funds again are available. If voters approve the Kindergarten through Community College Public Education Facilities Bond Act of 2016, a $9 billion school bond measure on the November ballot, Level 3 fees will likely no longer be authorized. Thus, any adoption of Level 3 fees may be only a temporary measure in place for the next several months.

Also, consistent with the intent of SB 50, once a statewide bond measure does pass, school districts will be required to reimburse the amount of Level 3 fees that were collected above the Level 2 fees. The reimbursement of this differential must either be made through an optional "reimbursement election" to the developers who pay the higher Level 3 fees, or by a reduction of future state facilities funding in an equivalent amount. (Ed. Code 17072.20(b); Gov. Code 65995.7(b).) This affords school districts some flexibility to negotiate with developers regarding school impact mitigation, including just how much may be reimbursed to the developer versus retained by the school district. SB 50 expressly authorized such negotiations. (Gov. Code 65995.7(c).)

We will continue to monitor and report on the developments regarding Level 3 fees in the coming weeks and months. Lozano Smith authored the Level 3 fee section of "Senate Bill 50 and School Facilities Fees: A Report Prepared by C.A.S.H.'s Legal Advisory Committee" when SB 50 passed, and the firm also authors the "Developer Fee Handbook for School Facilities: A User's Guide to Qualifying for, Imposing, Increasing, Collecting and Accounting for School Impact Fees in California," which includes procedures and relevant laws related to Level 3 fees.

Lozano Smith is continuing to make the handbook available to school district clients at no cost. School districts that have not previously ordered the handbook can do so here or by contacting Client Services at or (800) 445-9430.

For any questions about school impact fees, or Level 3 fees in particular, please contact the authors of this Client News Brief or one of our nine offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.
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As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.