Title
Infrastructure Funding and Financing Update - Citywide
Description
This report provides information to the Transportation, Infrastructure and Planning Subcommittee on infrastructure funding and financing challenges to serve newly developing parcels in Phoenix. The report provides general infrastructure funding and financing information, however, the complexity of the topic necessitates a focused approach on water infrastructure because of the significant infrastructure needs to address new growth areas of the City.
THIS ITEM IS FOR DISCUSSION AND POSSIBLE ACTION.
Report
Summary
According to the US Census, Phoenix was the fastest-growing major city in the United States between 2010 and 2020. The Mayor and City Council’s long-standing commitment to responsible long-range planning, prudent fiscal management, and targeted economic development opportunities, has enabled the City to capture beneficial growth over an extended period. Phoenix is well-positioned to continue high levels of new development, but a unprecedented infrastructure investments will be needed to deliver the quality-of-service residents and businesses have come to expect.
Development Opportunities
Desirable development conditions exist in all corners of the City, please see attached Citywide Map. Areas north of the Central Arizona Project Canal (CAP) feature vast expanses of undeveloped land, controlled by the Arizona State Land Department, suitable for world-class commercial, mixed-use development, and large master planned communities. The City’s more-established central areas have experienced record levels of infill housing and mixed-use redevelopment that is promoting a more walkable and transit-oriented urban environment. The western portions along the Loop 101 Freeway are seeing significant development interest. The south and southwest areas feature new opportunities to “reimagine” the Salt River- The Rio Reimagined project facilitates post-war industrial development with new uses that promote riparian river restoration along with public access and bring value to the neighboring communities. The expansion of the light rail along Central Avenue will continue to attract development interest. The far southwest area (Estrella and Laveen Villages) has the major infrastructure pieces in place to quickly fulfill first-generation “build-out” with high-quality development projects.
While there is no shortage of development opportunities in Phoenix, it is incumbent on the City to ensure that new development continues to cover a fair and proportionate share of the infrastructure costs to expand City services and ensure growth minimizes negative impacts to existing residents or City operations. These capital infrastructure/facility costs do not include the required maintenance and operating staffing costs that are the responsibility of the City.
Infrastructure Challenges
The City employs a multi-pronged approach to provide public services to new development and to ensure the existing community is minimally impacted by growth. In general, it is the developer’s responsibility to extend public networks and mitigate impacts to the City’s roadways, water, and sewer facilities as these are required to serve new development. Developer contributions for other City services, such as public safety facilities, parks, libraries, and flood control improvements are typically covered with development impact fees that charge the development their proportionate share of the upfront capital cost of infrastructure. Those facilities are provided by the City as impact fee funding is collected over time and a significant enough amount becomes available to construct the facility. It is critically important to note that some public services can be delayed and phased in over time, while others must be installed at the time of development like water, wastewater and some public street infrastructure.
Water and sewer treatment plants present a unique challenge. These facilities are typically designed to achieve economies of scale, operating efficiency, and sized to serve regions comprised of many individual developments. As a result, water and sewer treatment plants carry a price tag that few developments can amortize alone. Historically, the City has financed water and sewer treatment plants using revenue bonds backed by water rate payers. While costs for new treatment capacity can be captured in water and sewer development impact fees, they are also reflected in rate-setting and have an impact on the existing customer base. However, this is how prior water and wastewater facilities were financed and constructed. Those impacts can be mitigated by charging impact fees that can then help pay down the debt financed by the water rates to help offset future water utility costs.
Below are specific examples of imminent infrastructure funding challenges:
Wastewater Collection: The “primary” sanitary sewer system that drains to 91st Avenue Wastewater Treatment Plant (WWTP) is unable to support continued development north of CAP.
- Re-commissioning and expansion of Cave Creek Water Reclamation Plant (WRP) will serve northeast areas.
- The planned North Gateway WRP will serve northwest areas.
- Both northern treatment facilities will free-up capacity in the “primary” sewer collection system and 91st Avenue WWTP to allow for other new growth to utilize that capacity.
Water System Reliability: The growing risk of losing access to Colorado River water dictates high-cost alternatives to ensure an adequate and resilient water system capable of supporting future development.
- Advanced Water Purification is needed at all wastewater treatment facilities to maximize value by extending the utility of water supplies for existing and new development.
- Surface water supply augmentation is necessary to mitigate long-term impacts of climate change.
- Continued development of groundwater production capability, that is commensurate with demand to meet essential needs, is necessary to mitigate risk of short-term loss of supply due to an emergency.
Roads and Bridges: More than two dozen new bridges costing 10’s of millions of dollars each are needed to extend the road network across an array of washes and canals.
Drainage Infrastructure (New Development): The City and the Maricopa County Flood Control District had to construct new drainage basins, channels and pipes as the Southwest area has transitioned from primarily agricultural to a mix of residential, commercial and employment uses. This has happened over multiple years and continues with the current draft impact fees including $75M to continue with these projects to serve new development.
Public Safety: Lower density development and limited road networks create the need for more public safety resources per capita and facilities to house the new staff to provide response times that are comparable to other parts of the City.
These examples highlight some of the pressing infrastructure challenges the City faces in supporting continued growth and development. Addressing issues such as wastewater system capacity, water reliability, roads, bridges and drainage improvements, and public safety resource infrastructure will require significant financial investment.
Funding and Financing Tools
Funding and financing tools (FFT) that provide for infrastructure are divided into three sections below that address their potential based upon the scope of required infrastructure and timing of when that infrastructure is needed to serve new development. Most projects use a number of different funding and financing sources to help pay for the overall construction project financing as determined by the developer and approved by the City.
Typical Funding and Financing Tools
It is important to note that most infrastructure for new development is provided by the developer in one of two ways: exactions or developer contributions. These two are broad terms that can be used to describe other funding tools in other sections.
Exactions:
Impacts of a new development on existing infrastructure networks may be mitigated by developer exactions. An exaction usually requires the developer to construct improvements. The City may allow a payment “in-lieu” of requiring construction when plans are already in place or to address proportionality requirements. Project mitigation requirements are determined by a study performed by a licensed engineer (e.g. Traffic Impact Study) and must be approved by appropriate City staff.
Developer Contributions:
Upfront capital costs for public facilities needed to serve new development can be covered with various types of developer contributions. Developer contributions may be assessed by the City in a variety of means but must be specific and proportional to the impact created by the proposed project. An example of this would be the City charging an impact fee for Police and Fire facilities that will serve the new development.
Large Scale Funding and Financing Tools
These tools typically require larger land areas, more costly infrastructure service requirements or are more complicated development projects.
Private Developer:
In addition to building infrastructure, developers may contribute funding known as in-lieu payments to help cover the cost of public facilities. The Sonoran Desert Drive Funding Policy is one example of an in-lieu payment framework. The policy functions like an exaction, where the developer is required to mitigate their impact, except the mitigation is in the form of a cash contribution. While in-lieu payments represent a cost to new development, they can be a preferred alternative to allow projects to move forward prior to completion of large regional facilities that can take several years to finance, design, and construct.
Landowner:
In some instances, upfront infrastructure investments can generate efficiencies and increase land values, providing a positive return to landowners. The Rawhide Wash Flood Control Project is an example of a developer, under a contractual obligation with the Arizona State Land Department, who provided the City’s share of funding toward the project; this will result in hundreds of acres of undeveloped state land being removed from a floodplain. This will increase land value, reduce development costs, and accelerate timelines by eliminating 404 permit requirements and other challenges of building in a floodplain
Impact Fees:
Paid by developers/builders at the time building permits are issued. Impact fees are a restricted funding source that can only be used for one-time capital construction expenses or debt service payments for upfront capital financing. Impact fees are assessed for Fire Protection, Police, Parks, Library, Roads & Bridges (Major Arterials), Flood Control (Storm Drainage), Wastewater (Collection & Treatment), and Water (Transmission, Treatment, Resources). Impact fees are regulated via Arizona Revised Statutes 9-463.05 and subject to proportionality and nexus standards established in US case law. While impact fees have been a useful tool to ensure all new development contributes a share toward the cost of extending services, impact fees rarely cover the full cost of facilities, timing of collections are unpredictable and frequently serve to reimburse or offset private and/or public investments in qualifying facilities.
Revenue Bonds:
Bonds backed by water or sewer rate revenue for major capital infrastructure and paid back over an extended timeframe (e.g. 25 to 40 years). Payments on the bonds are reflected in rate-setting such that rate revenues received, in-excess of operating costs, are pledged to the bondholders.
Other Funding and Financing Tools
These tools are utilized on an infrequent basis. These tools cannot cover the infrastructure to construct water or wastewater treatment facilities by themselves. Federal grants are helpful if they are awarded but are not a reliable funding source to pay for infrastructure that serves new development.
Community Facilities District:
Community Facilities Districts (CFD) are special taxing districts used to finance public infrastructure. CFDs typically collect secondary property taxes or special assessments from property owners within the district to pay debt service on infrastructure bonds. CFDs are initiated by developers and subject to City Council approval. City staff (primarily Finance Department) and Council serve as district administrators and board. CFD’s are time intensive for staff to initially setup and administer over time and typically cannot fund significant infrastructure improvements such as wastewater treatment plants because the estimated value of the improved land is utilized to secure the bonds. Since it is an estimated value and the chances of market volatility over time, the financed debt must be significantly below the land value or the bonds will not sell.
Federal Grants:
The City has used a variety of grants to support projects to modernize infrastructure while addressing key challenges like climate change, equity, and economic growth. For example, Bipartisan Infrastructure Law (BIL) / Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) Grants are specifically designed to target the needs of underserved and historically marginalized communities, focused on improving a wide range of infrastructure with an emphasis on promoting equity and improving resilience in infrastructure investment. The City has used these funds to support the construction and planning of projects aimed at rehabilitating aging infrastructure, enhancing community access to public transportation, improving safety for roadway users, and bolstering resilience against climate change. For the reasons stated above, these types of grants are not typically allocated for infrastructure in newly developing parcels in Phoenix. However, there have been some opportunities available to the City to apply for. For example, in the summer of 2023 the Water Services Department applied for up to $292 million from the Bureau of Reclamation’s “Lower Colorado River Basin Conservation and Efficiency Program” to support construction of the North Gateway Water Reclamation Facility. These funds, if granted, will provide critical upfront capital to support sustainable development in north Phoenix in exchange for continued forbearance of the City’s Colorado River allocation. As of the Fall of 2024, the City’s application remains active but has not been issued a final award.
Historical Funding Sources
Prior to 1980 the cost for all water and wastewater infrastructure was fully born by water and wastewater rate payers, with some supporting federal monies. This started to change in the 1980's when the federal government slowed infrastructure spending. The City adopted the Development Occupation Fee, an early fee meant to ensure development funded some portion of the water and wastewater infrastructure necessary to support their projects. These programs were expanded in 1996, when the City adopted it’s first impact fees which included all new development infrastructure in the suburban growing parts of the City. These programs were restricted by Arizona statute in 2012, when the current impact fee legislation was adopted, creating the City’s current Impact Fee Program.
How these funding sources have been used to finance new infrastructure has varied widely as the legal frameworks have changed. Infrastructure constructed prior to the Development Occupation Fee and Impact Fee programs were funded almost exclusively by tax and rate payers. As the Development Occupation Fee and Impact Fee programs matured, funds collected from these programs began to help fund minor and major infrastructure improvements, such as the Lake Pleasant Water Treatment Plant and Cave Creek Wastewater Treatment Plant. However, treatment plant size infrastructure investments always include significant capital costs that must be installed prior to/concurrent with new development. Because impact fees accrue over time they cannot be used to cover those substantial early costs. As such, the City has previously elected to sell revenue bonds to raise upfront capital. Because water and wastewater rates are the collateral used to backstop all revenue bonds such transactions must be backed by water and wastewater rates. In order to maintain a high bond rating (lower interest costs), the City has committed to the bondholders to collect fees from customers, in an amount sufficient to make the payments on the bonds. Impact fees, once collected, can be used to fund periodic payments on the bonds or reimburse the water or wastewater system and reduce future water utility costs.
The net effect of this policy is water and wastewater rate increases to fund infrastructure followed by rate modulation if development proceeds as planned and impact fees are collected. If development fails to occur, water and wastewater rate payers are responsible for the full cost of this infrastructure.
Recommendations for Next Steps
The overall focus of this report is to provide an overview of infrastructure financing and funding tools to facilitate new growth. In alignment with the broader goal of optimizing infrastructure financing for new developments, the following recommendations focus on strategies to efficiently utilize existing resources, encourage thoughtful development sequencing, and ensure fiscal sustainability.
- Leverage Available Capacity: Evaluate existing infrastructure networks for available capacity and guide new development to those locations.
- Parcel Sequencing Strategy: Coordinate with landowners, like the Arizona State Land Department, on development sequencing (large-scale phasing) plans to facilitate economically efficient growth that leverages existing public facilities and minimizes the need for new infrastructure.
- Fiscal Impact Analysis: The City could hire a consultant to help develop a robust fiscal impact model that helps to evaluate development revenue with potential future operating and maintenance costs. Staff will need to devote time to further develop a scope of work and identify potential costs. There is no identified funding to undertake this effort and it would require a future allocation by the City Council to pursue.
By leveraging available infrastructure capacity and coordinating development sequencing, the City can help to minimize some infrastructure costs, but regional scale infrastructure requirements, like water and wastewater treatment plants, are necessary now to facilitate new growth. These types of tools require a comprehensive strategy that involves private property owners, developers, City staff along with elected officials to maximize fiscal benefits
Department
Responsible Department
This item is submitted by Deputy City Managers Alan Stephenson, Ginger Spencer and Inger Erickson, the Planning and Development, Water Services, and Street Transportation departments and the Office of the City Engineer.