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Loveland, November 14, 2010

When Councilman Daryle Klassen inquired about using monies in the city’s capital expansion reserve
fund for general ongoing expenditures last August, former city manager Don Williams responded,
“not
unless I want to go to jail.”
 This is because money collected as fees on new developments called CEF’
s (Capital Expansion Fees) are required by state law and city code to be used only for the purposes for
which they were collected.

Colorado’s State Constitution
(Colo. Const. art. X, § 20(7). Amendment 1 passed as part of TABOR)
provides that any new “tax” intended for general governmental expenditures must first be approved by
voters in the jurisdiction where the tax is collected.   Fees, however, are not considered a general tax
because the money is sequestered in separate accounts and used only for the specific purpose for
which it was levied and therefore doesn't require a public vote to be approved.  Loveland’s CEF’s were
never approved by voters and therefore cannot be treated as general tax revenue by the city.

When the topic of transferring monies collected as fees into a general fund was again raised during a
more recent city council study session on September 28, the before unthinkable idea was given serious
consideration by members of Loveland’s City Council.  Confused,
Councilman Klassen reminded his
colleagues of the former city manager’s caution about going to jail if they ever treated CEF’s as general
tax revenue.

City Attorney Opens Door
Loveland City Attorney John Duval informed the council during the same September 28 study session
that he reviewed a 2008 Colorado Supreme Court Decision (
Barber v. Ritter).  According to Duval,
Barber vs. Ritter opens the door to the council using the fees collected for capital improvements to
cover future budget shortfalls instead of the purpose for which the funds were collected.

Duval argued the city has much wider discretion on how to use the funds collected by the CEF’s without
the risk of being accused of converting a fee (not approved by the voters) into a general fund tax that
would have required voter approval – because of the 2008 Colorado Supreme Court ruling.  When
Councilman Klassen asked why should any city would ask for voter approval if all they needed was to
call a new tax a fee, Duval explained his interpretation of the case.  Duval told the council that so long as
they "intended" to use a fee for the purpose it was collected, they were in compliance with the law (per
the Supreme Court ruling) regardless of how they ultimately spent the money.

Duval also argued that as a home rule city (meaning Loveland operates under its own charter) the state
imposed limitations on how such money is spent could be argued as not applying to Loveland.  He did
acknowledge that Loveland's municipal code would need to be changed before the council began using
one time capital expansion fees instead for ongoing operating expenses of the city.

Duval also told the council "The fact they [CEF's] may be used later for general fund purposes would
not be a violation of TABOR”

Intrigued, several on the council asked for staff to research the matter further and provide an overview
of what would need to be done to change city code so such an action could be seriously considered.

Ironically, the city's forecasted budget shortfall which is especially onerous in 2013 is largely the result
of the city borrowing money from the long-term capital reserves
to buy 97 acres of property along
-25.  The property is now worth less than what the city paid for the land (see side bar: right).  


Unmentionable Becomes A Goal
Therefore, the unmentionable last year has now become a serious consideration this year as Loveland’
s council struggles with a worsening financial situation and a projected $1 million budget shortfall
beginning in 2013.

Collected from developers over the past two decades, CEF’s are the city’s methodology for funding the
expansion of public service necessary in a growing community.  Without CEF’s, the city is forced to
either reduce service levels for existing residents or increase taxes on current residents to
accommodate the cost of expanding city services to accommodate new residences and business being
built in the city.   In other words, the fees collected are to be used only for the one-time cost of
expanding these services while the ongoing maintenance of maintaining the services is accomplished
through normal city tax revenue.  See a recent letter to Loveland's City Council by Loveland resident
Roger Hoffmann asking the annual CEF increase not be suspended (lower right side of this page).  

CEF’s are a one-time fee charged to new developments within the City of Loveland to fund capital
improvements in public services necessitated by development.  In other words, a new subdivision of
housing may not require an entirely new fire station but multiple developments along with the retail
that follows does.  Therefore, each development contributes to the city’s capital expansion fund
through fees called CEF’s.

If the CEF program is working properly, each development would have contributed in fees an amount
commensurate with their need for new city services, thus a special account preserving those fees is
used to build a new fire station, for example.  In Loveland, CEF fees are levied on new developments to
fund expansions of Fire Protection, Law Enforcement, General Government, Library, Museum and
Cultural Services, Parks, Recreation, Trails, and Open Lands.

City Arbitrary Use of CEF's

While most developers have been required to pay all the CEF's generated by their project some have
not.  McWhinney, for example, was successful last year in persuading the city council to make a
temporary reduction in CEF's long enough to get approved a 300 unit apartment project backed by
loan garuatees from HUD (Housing and Urban Development) used to finance the "low income" housing
project. (see
McWhinney Tax Holiday).

While some have profited by arbitrary actions while administrating the CEF's others have suffered by
the council's inconsistent application of the fees.  Using CEF's in a punitive fashion, the City of Loveland
forced Ed and Steve Klen to pay CEF's even before they were due according to Loveland's Municipal
Code before they could receive a building permit.  A state-wide news website and blog, Face The State,
reported on Loveland's misapplication of the CEF's in the Klen's case last month.
Slippery Slope To Financial Insolvency
Loveland’s Council Flirting With Pillaging Long-term Capital Reserves
To Meet Budget Shortfalls Beginning in 2013
City of Loveland Definition:
Capital Expansion Fees

"The City of Loveland has utilized Capital Expansion
Fees as a method to meet the capital needs of our
growing community since the mid-1980s. The fees are  
set based on studies that indicate the impacts that
result from different types of construction, the major
categories being  residential, commercial, and
industrial.  Capital Expansion Fees for Fire, Police,
General Government, Library, Museum, Parks,
Recreation, Open Lands, and Trails are based on the
value of capital assets, equipment, fixtures, and
furniture and unspent prior years’ CEF contributions"
 
State Law and/or City Code
City of Loveland
Examples
Assessment of the Fee
Amount
Rational Nexus Required

A "rational nexus" is required
between the fee charged and
true capital costs to city of
development
Arbitrary and
discountable
When politically
connected developer
asks for discount
McWhinney requested across
the board 60% discount to
CEF's to build 300 apartment
units. Loveland granted
request without studying
development costs to the city
ignoring nexus requirement in
state statute and precedent
setting court case
Dolan/Nolan
Collection
LMC 16.38.020     Fees
Imposed
"The fees shall be due and
payable at the time the final
inspection for Certificate of
Occupancy is requested."
Punitive & Arbitrary
Used as weapon or
reward depending on
developer relationship
with city
Klen brothers forced to pay
on a core and shell application
years before Occupancy
Certificate requested
Matter under investigation by
Larimer County Sheriff's Dept.
Custodian of funds
No commingling with
general funds

Funds must be deposited in
an interest-bearing account
which clearly identifies the
category, account, or fund of
capital expenditure for which
such charge was imposed.  
Funds may not be used for
anything other than what they
were collected
Commingled

Used for property
speculations and other
city acquisitions
unrelated to capital
improvements
City purchased 97 acres along
with water shares using
restricted funds
(c
alled it an internal loan
which has not been repaid
)
for property along I-25 and
402
If Capital Improvement
Indefinitely postponed
State Law

Must be refunded to
developer
Kept indefinitely by city
with no certain plans
Amassed millions of dollars
for police, fire and
infrastructure never returned
to developers but instead
called "
reserves"
Mayor Gutierrez and other Council
Members,

I'm writing to strongly object to the proposed
suspension of the annual CEF adjustment for inflation,
which is listed as an ordinance on 2nd reading for
tonight's meeting.

As a citizen volunteer who served on the City's
"Economic Vitality Committee" during the mid- 1990's,
I spent numerous hours, working with other citizens
from diverse backgrounds and perspectives to make
recommendations for improvement of Loveland's
economic well-being.   I also was a member of the
"Costs of Growth" subcommittee, charged with looking
at Loveland's service cost recovery program.  That
subcommittee found numerous deficits in the City's
management of its service cost recovery program (the
impact fees), which were bound to leave the City with
growing deficits; and the committee recommended ways
to correct that.  While not all of the recommendations
were implemented, some improvements were made as a
result.

But the main result was that it drew to officials'
attention the need to maintain the program as designed,
if the City were not to experience further deficits. The
City had already lost much ground as a prior Council
had, much like the current proposal, suspended its
annual review and adjustment for inflation of the CEF
program; with predictable results. Services were in
decline as the corresponding revenues were inadequate
to keep pace.

When impact fees are arbitrarily reduced, suspended,
or the program prevented from increasing to cover
inflationary costs, there are only 2 potential outcomes.
Either:

a)  Service levels for City services and amenities must
be cut;
or
b)  The costs of mainaining/restoring services to their
prior levels will be distributed to all residents and
existing businesses.   

Usually, both of the above will take place.  Thus,
Library services must be cut or new taxes raised; the
same with Parks and Open Space, and Streets, etc.   
There simply is no other outcome possible.

To compound the problem, suspension for any period
often means that the CEFs can not be restored to their
proper levels, because to do so would represent an even
greater jump in a single year; which future Councils are
often unwilling to allow.  So the long-term effects are
much more damaging than would appear.

So it is troubling that once again, despite having
experienced before the inevitable problems that will
ensue, the development community and or staff would
try to shift the burden for the impacts of new
development on the existing residents and businesses.

This is both inherently unfair, and unacceptable from a
City health and sustainability standpoint.  I certainly
will do all I can to make public this example of unfair
treatment of the taxpayer, should it proceed.

Please contact me if you have any questions.

Sincerely,
Roger Hoffmann
Cities' Financial Woes Have Roots In Bad   
Land Speculation Deal For Annexation

Beginning in 2013 the City of Loveland will need to repay
$1.13 million per year from general fund operating expenses
of a
$4.85 million loan from the city's restricted reserves
used to
buy 97 acres along I-25 during a lame duck session
back in Nov. 2007.

LovelandPolitics.com first reported the suspicious land
purchase that was first decided upon by council during an
illegal closed session.  When LovelandPolitics
first reported
the item was a council agenda for final approval, it was
postponed until after a city election. A lame duck 'old guard'
council approved the property purchase shortly after the
election.

Including interest and the
$1.6 million already paid from the
general fund, the city will have spent
$8.4 million for a
property today worth only around
$3.4 million according to
estimates by local commercial brokers.

The city is spending approximately
$250,000 per year in
interest alone for the internal loan.  While the interest goes
towards future capital programs it is consuming operating
revenue and has delayed the city's plans to open Mehaffey
Park in West Loveland due to a lack of operating revenue.

Last June an Editorial in the Loveland Reporter-Herald
entitled "
City takes advantage of economy" lead readers
to believe the long delayed Mehaffey Park for West Loveland
was being delayed due to a lack of capital funds when it is
really being delayed due to limited operating funds;

"The savings with these projects could come in handy
to complete other delayed projects, such as the next
phase of Fairgrounds Park or even Mehaffey Park"

The "slippery slope" is the council's current discussion to
re-allocate the capital reserve funds accumulated for
MeHaffey Park and other capital improvements to cover
current city expenses instead.

read the Face The State website
article about Loveland's
financial troubles related to CEF's
See the slide presentation by Loveland City Staff
providing the history of CEF (Capital Expansion Fees)
in Loveland. Highly recommended as an excellent
overview of CEF's.

See a video of the September 28, Council Study Session
when the idea of using long term reserves for budget
problems was first introduced.