In a case decided last year by the California Court of Appeal, Hamilton & High, LLC v. City of Palo Alto (2023) 89 Cal. App. 5th 528, the City of Palo Alto was required to return unexpended developer fees, also known as school impact fees, due to the City’s failure to make five-year findings required by Government Code section 66001, subdivision (d). The case is a reminder to school districts to either expend all the funds in their school impact fee accounts or to formally adopt findings along with a proper accounting of those funds every five years. Failure to do so could result in the districts being forced to refund any unexpended school impact fees.
The Mitigation Fee Act (“Act”), Government Code sections 66000 et seq, requires that local agencies levying fees under the Act, including school districts, deposit the fees in a separate account and spend those fees only for the purpose for which the fee was collected. In addition, the Act requires that local agencies make a series of specific findings with respect to any unexpended funds in the account. Should the local agency fail to make the findings, or if the findings do not comply with the specific requirements of the Act, the local agency could be required to refund the money. (Walker v. City of San Clemente (2015) 239 Cal. App. 4th 1350, 1364.)
In Hamilton & High, the plaintiffs paid over $900,000 to Palo Alto as an “in-lieu parking fee” to fund the creation of new parking spaces in an assessment district. Palo Alto failed to make the required five-year findings by the deadline and the plaintiffs demanded a refund of the parking fees. Palo Alto refused and thereafter made the findings almost a year late. The plaintiffs sued.
Although the trial court ruled for Palo Alto largely on procedural grounds, the Court of Appeal did not agree. In its opinion, the court rejected Palo Alto’s arguments that its failure to comply with the findings deadline was harmless and that it had substantially complied with the Act. In doing so, the court reasoned that although failure to comply with statutory procedures can often be excused, because the Act specified a penalty for not making the five-year findings, complying late was insufficient. Therefore, Palo Alto was required to refund the unexpended portion of the fees and pay Plaintiffs their legal costs for the appeal.
The implications for school districts are significant. Districts that have unexpended funds in their school impact fee accounts at the end of the fifth fiscal year after the first deposit into the account, and every five years thereafter, must make findings consistent with the Act. If they do not, they could be vulnerable to legal action seeking a refund of the fees.
We always recommend that our school district clients implement school impact fee “best practices.” These include increasing school impact fees every two years as permitted by the State Allocation Board’s biennial adjustment under Government Code section 65995 as well as passing an annual resolution providing the information required by the Act. If districts adopt a consistent practice of providing information annually, they will be much less likely to forget to make the five-year findings.
Districts interested in learning more about how to comply with school impact fee statutes should contact the author or their regular Tao Rossini counsel.