Grand Jury Questions Developer Fee Expenditures

06.17.2019

On June 4, 2019, a civil grand jury in the San Luis Obispo County (“Grand Jury”) submitted a report entitled, “School Developer Fees Revisited: Differing Interpretations?” (“Report”).  The Grand Jury received a complaint alleging that persons paying developer fees were not being notified of their right to protest and that school districts may have been using developer fees for impermissible uses.  The Grand Jury made several recommendations relating to the maintenance and expenditure of developer fees.

Statutory School Fees and Alternative School Fees

School districts are authorized to levy Level 1 School Fees (also referred to as “statutory school fees”) pursuant to Education Code § 17620 and Government Code § 65995.  Education Code § 17620 authorizes a school district’s governing board to levy a fee against any construction within the boundaries of the applicable school district for the purpose of funding the construction or reconstruction of school facilities.  This fee may be applied to: (i) chargeable and enclosed space of new commercial and industrial construction; (ii) new residential construction; and (iii) other residential construction if the resulting increase in assessable space exceeds 500 square feet.  “Assessable space” is defined as all the square footage within the perimeter of a residential structure, not including any carport, covered or uncovered walkway, garage, overhang, patio, enclosed patio, detached accessory structure, or similar area.  “Covered and enclosed space” means the covered and enclosed space determined to be within the perimeter of a commercial or industrial structure, not including any storage areas incidental to the principal use of the construction, garage, parking structure, unenclosed walkway, or utility or disposal area.

In November 1998, the California voters authorized school districts to levy “alternative school fees” or what have become known as Level 2 Fees and Level 3 Fees.  Pursuant to Government Code § 65995.5, alternative school fees may be levied only on residential construction (i.e., cannot be levied against commercial/industrial development, unlike statutory school fees).  A school district may levy Level 2 or Level 3 Fees only if the it meets the requirements set forth in Government Code §§ 65995.5 and 65995.6 and conducts a “School Facilities Needs Analysis” that justifies the levying of such alternative school fees.

Collectively, statutory school fees and alternative school fees are referred to as “developer fees.”  Developer fees are generally insufficient to fund school facilities necessitated to accommodate the impacts of potential new students by new development.  The actual cost to provide school facilities to the students generated by the new development tends to be higher than the resulting fees levied against the development.

Permissible Expenditures of Developer Fees

School districts must adhere to restrictions on how to expend such developer fees.  State law requires that school districts expend developer fees solely for the purpose for which the fee was collected.  Since school districts must only spend developer fees on the “construction or reconstruction of school facilities,” the law strictly prohibits the expenditure of developer fees for any of the following:

1. The regular maintenance or routine repair of school buildings and facilities;
2. The inspection, sampling, analysis, encapsulation, or removal of asbestos-containing materials, except where incidental to school facilities construction or reconstruction for which the expenditure of fees or other consideration collected; or
3. Deferred maintenance.

San Luis Obispo Grand Jury Report

The San Luis Obispo Grand Jury Report (“Report”) investigated four concerns relating to the collection of developer fees by school districts: (a) expenditures of developer fees; (b) written notice provided to developers; (c) accounting procedures; and (d) effective oversight.

1. Permissive Expenditures of Developer Fees

The Grand Jury found that the law was silent as to the definition of “construction and reconstruction,” which allowed for varying interpretations for developer fee expenditures.  The Grand Jury interviewed various administrators within San Luis Obispo County (“County”) and identified that school districts viewed the limitation of developer fee expenditures broadly.  Specifically, the Grand Jury found the following examples of developer fee expenditures: construction of a multi-purpose room; construction of an office expansion; purchase of a kindergarten playground structure; restroom modernization; remodel and upgrade rooms; aerial survey; electrical work, a walkway, and a canopy; materials and supplies; Facility Master Plan; etc.

The Grand Jury did not identify which expenditures were impermissible or permissible; however, the Grand Jury found that school districts across the County took a permissive view of the restrictions or limitations on developer fee expenditures. 

b. Written Notice to Developers

California law requires that, at the time of the imposition of fees, a school district provide written notice to the applicant paying developer fees that he or she has ninety days to protest such fees.

The Grand Jury sent inquiries to various school districts throughout the County regarding the written notification for the 90-day protest period.  Some school districts did not provide notice and was rectifying the error, and other school districts provided such notice.  If a school district failed to provide notice, the Grand Jury found that the lack of written notice may expose the district to potential future liability.  The Grand Jury recommended that school districts provide the required protest notice and that the County Office of Education create a standardized format for the notice by January 1, 2020.

c. Accounting Procedures

School districts are required to maintain developer fees in a “separate capital facilities account or fund in a manner to avoid any commingling of the fees with other revenues and funds of the local agency.”  (Government Code § 66006.)   The Grand Jury could not identify if school districts were in compliance of such requirement, as specific accounting information was not readily available.  However, it was recommended by the Grand Jury that school districts maintain separate accounts for developer fees and not commingle developer fees with other monies.

d. Oversight

The Grand Jury identified that the county offices of education provide many services to schools, including approval of school budgets.  Based upon its school budgeting services, the Grand Jury found that the county offices of education should also oversee and ensure fiscal integrity relating to developer fees.  Specifically, the Grand Jury determined that the county offices of education should oversee whether:

1. Developer fee collection and expenditures are appropriate;
2. Reports are issued in a timely manner, both annually and every five years;
3. Notices are provided consistent with regulatory requirements; and
4. Developer fee studies, reports and expenditures are easily accessible by the general public on a school district’s website.

Conclusion

Although the Report is not binding upon school districts throughout California, it should serve as a reminder for all school districts of the requirements for collecting and expending developer fees (either statutory school fees or alternative school fees).

Please contact us if you have any questions relating to the levy, collection, or expenditure of developer fees.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation/publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

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