Guest Column

The Future of Montana Impact Fees 

the amendment supported by cities effectively gutted most of the consumer protections

By Paul Gillman

At a recent Senate committee hearing, SB 142 was introduced to add protections for consumers and developers that pay impact fees. Impact fees are imposed by local governments on residents and developers to defray the infrastructure costs needed to support new development. Opposing the bill were strong lobbying groups. Cities clearly did not want the state overseeing their impact fee programs.

The committee voted 6-3 approving SB 142 with one amendment. It passed the full Senate 35-14. But the amendment supported by cities effectively gutted most of the consumer protections, including state oversight, leaving only a few safeguards and eliminating transparency. The cities would be allowed to continue business as usual.

The League of Cities and Towns enlisted a large group of cities that testified against the bill. The League claimed the state audits impact fees but there is no Montana agency that does that. Cities currently collect $25 million in impact fees.

City Abuses are Well Documented

“Local control” is a catch phrase used by cities that means let us do what we want and don’t look over our shoulders. With tight budgets, it’s easy for cities to look for creative ways to fund operations using impact fees, but the fees were never meant for that.

Impact fee studies are not performed every five years as required by law. Some cities are raising fees above the proportionate costs. Cities hire consultants to calculate new fees but cities can override what was determined as maximum allowable fees. Costs are padded using phantom projects (never built) and some projects are so far into the future that today’s residents will see little to no benefit. Once collected, fees are spent on unrelated projects.

Litigation is in Progress

There is pushback from the development community that face excessive or illegal fees. Whitefish now finds itself embroiled in litigation because of its impact fees. A class action lawsuit was filed in federal court against the city’s impact fees, demanding millions in refunds. It alleges city management violated state and federal laws when it overcharged both residents and builders. The federal Judge ruled the class action can proceed as a Fifth Amendment violation of the plaintiff’s rights.

Looming Problems May be on the Horizon

There may be a bigger problem looming. Only half of U.S. states allow impact fees and some in the development community in those states have fought back because of abuses similar to those found in Montana.

In North Carolina, developers filed suit against cities and won a major victory. In 2016, the North Carolina Supreme Court ruled all impact fees collected on “future” infrastructure illegal. Cities had to provide an immediate benefit to development, not a future promise. A 2022 ruling by the court declared impact fees subject to the Fifth Amendment, providing citizens and development added protections under the “takings clause.”

As a result of these rulings, many North Carolina cities have suspended impact fee collections and 28 have settled class action claims. From 2019 to 2020 alone, seven Class Action claims were settled, all at nearly 100%.

What Could That Mean for Montana?

Montana cities could now be subject to the same constitutional challenges as North Carolina. With no oversight, cities will continue to stretch the limits or simply ignore Montana laws. If Montana residents or developers are pushed far enough, they could follow North Carolina developers and a statewide court challenge or increased class action litigation could result. Cities may face tougher scrutiny and restrictions through the court system. This in turn could hamper their ability to impose impact fees, resulting in significant loss of revenue and possibly large refunds of previously collected fees.

That would be a lose/lose proposition for all of Montana.

Paul Gillman of Whitefish is co-author of Senate Bill 142.