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Since the advent of the “tax revolt” in the late 1970s and early 1980s, the dominant political philosophy in many U.S. communities has been “fiscal conservatism.” Operationally, it generally means elected officials will not support increases in taxation. Hence, a bedrock principle of fiscal conservatism should be the Benefit Principle, which states that those who benefit from government services should pay for them.

If the Benefit Principle is not followed, then the alternatives are to raise taxes or lower the level of service, which results in a lower quality of life. The reluctance of elected officials to raise taxes means that the most likely outcome is to lower the standard of service. This result was documented in a study that a colleague and I recently published in the Journal of Park and Recreation Administration. It showed that over a 12-year period, the level of park provision in 54 fast-growth cities in Texas declined with growth, and the greater the growth the larger the decline in level of park provision.

Parkland dedication (which includes fees-in-lieu and park development fees) is a manifestation of the Benefit Principle. It can be conceptualized as a type of user fee because the intent is to pass the cost of accommodating increased demand for parks through to the landowners, developers and/or new homeowners who are responsible for creating the demand. It does not have a role in cities experiencing slow growth or declines in population, but in fast-growth cities it provides local government-elected officials with at least a partial solution to their capital funding problems.

Rationale for Implementing Parkland Dedication

Growing awareness of the costs of growth; reduced availability of external funds from federal and state governments; caps that state governments have imposed on local jurisdictions’ spending; the growing strength of fiscal conservatism as a political imperative; an increase in costs caused by an increase in expectations of communities for higher quality standards in parks than was accepted in the 1970s (for example, ballfields marked on grass areas often are no longer acceptable, they now are groomed and manicured); and elected officials’ reluctance to support tax increases needed to retain the existing level of service for parks provision have resulted in recognition that in many contexts, parkland dedication represents the most palatable political option for funding new parks.

In my September 2020 column, I reviewed the results from 151 studies, which showed that in contrast to farm/forest/open space uses and industrial/commercial uses that were “positive” taxpayers, residential developments were “negative” taxpayers because for every $1 million received in revenues from residential developments, the median amount communities expended to service them was $1,160,000.

Since most residential development fails to pay, building more residential development inevitably leads to existing residents paying higher taxes. This relationship has been documented in multiple scientific studies (See Chapter 9 of The Impact on Property Values of Parks, Trails, Golf Courses, and Water Amenities by John L. Crompton and Sarah Nicholls). Given this reality, in most contexts, it appears difficult to justify requiring existing taxpayers to further subsidize new residents by subsidizing the capital cost of the new park facilities needed to service them.

Who Pays the Cost of Parkland Dedication?

The dedication cost could be absorbed by the homeowner, the landowner and/or the developer. The development community often vigorously asserts that the cost will be borne by the new homeowner and suggests it will lead to some potential buyers being priced out of the market.

In my city, the median price of a new home is approximately $400,000. If an additional (say) $4,000 parkland dedication fee is imposed and passed through to the homeowner, it would be a one percent increase in the median home price. If the ordinance is reviewed every four years, then the average price increase per year would be 0.25 percent. That is not likely to adversely impact a purchase decision.

Further, the contention that it will be passed forward to the homeowner fails to recognize the reality of market forces. Housing prices and developer costs are market determined. Since under most market conditions they are not price-
setters, home builders cannot simply add the cost to a home’s price. If the market would bear a price of $404,000 rather than a price of $400,000, then builders would charge that amount because their goal is to maximize profits. Hence, in many cases, the market price does not allow them to pass the new fees forward to the new homeowner.

A second alternative is that the additional $4,000 per dwelling unit fee could be absorbed by the developer. This is not a viable option because a developer’s willingness to accept the financial risk associated with a project is predicated on a given projected profit margin. Without that profit margin, the project would not proceed, so it cannot be reduced.

Third, the non-feasibility of the first two options means many times, the most viable option for absorbing the additional $4,000 dedication fee often is to reduce the developer’s costs. This can be done in one of three ways:

Reduce the dwelling unit size. Instead of 2,000 square feet, it becomes 1,980 square feet (assuming a cost of $200 a square foot). The new homeowner would receive less quantity.

Engage in “value engineering” to reduce the costs of finishes, fittings, furnishings or landscaping in the house by $4,000. The housing consumer would receive less physical quality per dollar.

Pay less for the land. The imposition of a $4,000 parkland dedication fee effectively changes market forces and reduces the value of the land to be sold. This is explained in the following scenario:

Suppose a developer intends to buy a piece of land when the city announces a $4,000 increase in the park dedication requirement. Before the increase, the developer intended to build 100 units on the land and sell them for $400,000 each. Based on the cost of construction and required profit, she was willing to pay $4 million for the land. As a result of the new ordinance, the builder recognizes she cannot sell them at $404,000. If she was able to get that price, then why did she not charge that price before the imposition of the fee? In fact, the market limits her to selling the houses for $400,000 each. As a result, she is willing to pay only $3.6 million for the land (100 units at $4,000, so she can reduce costs and maintain her profit margin). Thus, the cost of the dedication increase is shifted back to the owner of the land.

Park and recreation department managers have three strategies they can use to optimize park dedication requirements in their community: (i) Follow the Supreme Court guidelines which establish the anchor around which the political debate will revolve; (ii) highlight the opportunity cost of “low-balling” dedication requirements; and (iii) use phasing, discounting and caps as “opt-outs” rather than “opt-ins” to minimize initial resistance.

John L. Crompton, Ph.D., is a University Distinguished Professor, Regents Professor and Presidential Professor for Teaching Excellence in the Department of Recreation, Park and Tourism Sciences at Texas A&M University and an elected Councilmember for the City of College Station.