HomeMy WebLinkAbout2026.01.20 Council Mtg Handout from ECOnorthwestor 0
,!, ECOnorthwest
DATE: January 6, 2026
TO: Honorable City of Pasco Councilmembers
CC: Harold Stewart, City Manager, City of Pasco City Manager
FROM: Morgan Shook
SUBJECT: Connection Fee Increases and Pasco Policy Outcomes
Executive Summary
ECONorthwest is a northwest -based economic and public finance consulting firm with
extensive experience supporting cities on infrastructure finance, housing policy, and growth
management. ECONorthwest was retained by Road 68, LLC to provide an independent, third -
party perspective on the City's proposed utility connection fee increases and their potential
interaction with Pasco's housing and fiscal policy objectives.
Pasco's utilities rely on connection fees as a legitimate tool to fund growth -related
infrastructure. The policy issue before Council is not whether connection fees are appropriate
tool, but whether the scale and pace of increases introduce near -term development effects
that interact with the City's housing and fiscal objectives.
Connection fees are large, up -front charges applied at a specific development milestone.
When increases occur rapidly, they affect projects already in the pipeline that have limited
ability to reprice land, financing, or unit mix. The immediate response is often changes in
timing —delays, re -phasing, and redesign —which can slow near -term housing delivery.
This timing sensitivity matters in Pasco for housing. The City's Housing Action &
Implementation Plan identifies a need for more than 23,000 additional housing units by
2045, alongside documented affordability constraints. In this context, rapid increases in fixed
up -front costs raise the risk that housing production slows, product mix shifts away from
affordability -oriented housing types, and cumulative housing delivery falls behind adopted
targets.
Development timing also carries broader fiscal implications. Construction activity is a
significant driver of local sales tax growth, and new construction is the primary mechanism
through which Pasco can expand its property tax levy above the statutory one -percent limit,
maintain purchasing power, and accommodate population growth. When housing starts slow,
the City experiences a fiscal double -effect: reduced near -term General Fund revenues tied to
construction activity and delayed growth in the utility customer base that supports long-term
utility revenues.
Connection fees are a legitimate part of Pasco's utility funding framework. From a policy
perspective, two questions follow from the analysis in this brief. First, Council may wish to
consider whether the balance between large up -front connection fees and ongoing utility rates
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Connection Fee Increases and Pasco Policy Outcomes 1
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is aligned with the City's broader housing, growth, and fiscal objectives, particularly given the
sensitivity of housing delivery and construction activity to fixed, up -front costs. Second,
regardless of fee structure, the pace and predictability of implementation matter. Phased
implementation, clear effective dates, and objective transition provisions can reduce
unintended "pipeline shock" while preserving the City's long-term utility revenue objectives.
Construction activity is a real economic and revenue driver
Even though connection fees are administered through the utility fund, the pace of
development has broader implications for the City's general revenue base. In Pasco,
construction activity is not a peripheral economic sector —it is a meaningful driver of taxable
sales and related fiscal growth. This linkage matters for policy because construction -driven
sales tax growth is timing -sensitive. Delays in housing starts do not simply defer utility
connections —they can reduce near -term construction spending and the associated sales tax
receipts that support general government services.
Policy Implications for Council Consideration
Policies that materially affect near -term housing feasibility and timing —such as sharp, up-
front cost increases —can have fiscal implications beyond the utility system. A slowdown in
housing starts can translate into weaker construction activity, lower taxable sales, and
reduced short-term revenue growth, even if long -run development demand remains strong.
Connection fees are a legitimate and important component of Pasco's utility funding
framework. The analysis in this brief does not take a position on the technical cost -of -service
methodology underlying the proposed fees. Instead, it highlights two related policy questions
that flow from the City's housing and fiscal objectives.
1. IS THE BALANCE BETWEEN CONNECTION FEES AND ONGOING UTILITY RATES
ALIGNED WITH CITYWIDE POLICY GOALS?
Connection fees recover costs through a large, up -front charge, while ongoing utility rates
recover costs over time across the customer base. The choice between these tools has
implications for who bears costs, when those costs are paid, and how development responds.
From a policy standpoint, Council may wish to consider:
• Whether the current reliance on up -front fees places a disproportionate burden on
new housing delivery, relative to spreading some costs through ongoing rates that are
recovered over time.
• Whether the balance between fees and rates aligns with the City's housing production,
affordability, and long-term fiscal stability goals, particularly given the documented
sensitivity of housing delivery and construction activity to large fixed costs.
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Connection Fee Increases and Pasco Policy Outcomes 2
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• Whether alternative cost recovery mixes could better support steady development
while still preserving utility fund integrity.
This is not a question of technical correctness, but of policy alignment between the City's
utility finance structure and its broader growth and housing objectives.
2. HOW SHOULD INCREASES BE IMPLEMENTED TO AVOID UNINTENDED PIPELINE
SHOCK?
Regardless of the fee structure chosen, the pace and predictability of implementation are
central policy levers. Large, rapid increases in up -front costs are more likely to create near -
term development disruptions that can affect housing delivery and citywide fiscal conditions.
Council may wish to consider:
• Phased implementation schedules that reduce step -change effects while still moving
toward the City's long-term revenue targets.
• Clear and predictable effective dates that allow projects to price, finance, and plan
accordingly.
• Objective transition provisions for in -process or permit -ready projects that have
limited ability to adjust to late -stage cost changes.
• Monitoring and revisit triggers tied to housing starts, permit volumes, and construction
activity to allow Council to respond if near -term development slows materially.
Together, these considerations frame the core policy question for Council: how to preserve
utility revenue sufficiency while minimizing unintended impacts on housing delivery and the
City's long-term fiscal resilience.
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/ Connection Fee Increases and Pasco Policy Outcomes 3
Fee Setting and Outcomes - What the Council Must Balance
Connection fees are one of the City's most consequential growth -related policy tools. They
help fund needed utility infrastructure, but they also shape the feasibility and timing of
development. When fees change materially, particularly when increases occur rapidly, they
can create ripple effects that extend well beyond the utility system itself.
The decision facing Council is not a simple tradeoff between revenue needs and development
costs. Rather, it is a question of how to align utility funding decisions with the City's adopted
goals for housing production, affordability, and long-term fiscal stability. In weighing this
issue, Council is balancing several legitimate and sometimes competing objectives:
• Utility financial stability and infrastructure delivery. Utilities require predictable
revenues to operate and implement planned capital improvements, and future growth
is an important component of that funding model.
• Housing delivery and affordability. The City's housing strategy depends on steady
production and a mix of housing types that the market can absorb.
• Predictable growth management and fiscal stability. Large, rapid changes in up -front
development costs can alter the timing, location, and type of development that occurs.
These shifts affect not only near -term housing delivery, but also the pace at which
taxable value, construction -related sales activity, and new utility customers are added
to the City's revenue base —shaping longer -term fiscal stability across both utility and
general -government funds.
The core policy question for Council is whether implementation choices can
preserve the City's revenue intent while reducing unintended near -term
disruption to housing and development activity.
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Connection Fee Increases and Pasco Policy Outcomes 4
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Why the scale and pace of change is important
Pasco is contemplating significant increases to water and sewer connection fees
Connection fees are not incremental operating charges; they are large, up -front costs
triggered at a single point in the development process. As a result, both the scale of an
increase and the speed with which it is implemented matter for how the market responds.
As illustrated in Exhibit 1, the contemplated changes represent a material step -change from
existing charges. For a typical single-family home, the combined water and sewer connection
fees would increase by several thousand dollars per unit, with the proposed maximums
representing multiples of current charges. While connection fees are intended to recover
growth -related costs, increases of this magnitude can be difficult for projects already in the
development pipeline to absorb —particularly where land costs, financing terms, and unit
pricing were established under prior assumptions.
Exhibit 1: Example GFC Comparisons from City Rate Study
Source: City of Pasco Water & Sewer Revenue Requirement & Connection Charges, FCS Group (10/6/25)
Exhibit 2 provides broader context by showing how Pasco's proposed charges compare to
other jurisdictions. This comparison is not intended to establish a "right" or "wrong" fee
level. Rather, it helps frame the policy question facing Council: when Pasco's fees move
materially relative to historic levels and peer cities, the likelihood of near -term behavioral
responses increases —including project delays, re -phasing, redesign, or decisions to wait
until conditions stabilize.
This context is directly relevant to current development conditions in Pasco. Because
connection fees are paid up front, a rapid increase functions like a shock to project
feasibility, particularly for projects that are already entitled or nearing permit issuance. This
section sets the stage for the policy discussion that follows —how a large, fast change in
connection fees can ripple into housing production, affordability outcomes, and broader
fiscal conditions that depend on steady development activity.
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/ Connection Fee Increases and Pasco Policy Outcomes 5
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Exhibit 2: Connection Charge Survey
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
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Source: City of Pasco Water & Sewer Revenue Requirement & Connection Charges, FCS Group (10/6/25)
Connection fees are a "time -sensitive" cost
Unlike rates that are recovered over time, connection fees are paid all at once at a specific
upfront development milestone. Development, however, is a staged process —land acquisition,
design, financing, permitting, and construction —with many key decisions locked in well before
a building permit is issued. When fees change gradually, projects and land markets can
adjust. When fees change abruptly, the adjustment mechanisms are far more limited:
Project assumptions become mismatched. Financing and pricing were underwritten
with a certain fee expectation.
Land costs cannot easily adjust in the short run. Land is typically contracted months
or years before permits are issued.
Most project "levers" are blunt. If a major fixed cost shows up late, the response is
often delay, re -phasing, redesign, or cancellation.
Even if the long -run market would eventually adapt, the City can still experience a real near -
term impact if a large volume of projects hits the same "fee shock" at the same time.
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Connection Fee Increases and Pasco Policy Outcomes 6
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How Fee "Shocks" Translate into Policy Outcomes
The fee shock itself is not the policy outcome, it is the mechanism that puts into play other
things the community has prioritized. The outcomes Council will care about show up in
housing delivery, affordability, and fiscal conditions.
OUTCOME 1: HOUSING DELIVERY SLOWS OR SHIFTS
Near -term timing is the first impact
When a large up -front cost increases abruptly, the immediate response is often a change in
timing, even for projects that remain viable. Developers commonly pause to re -run financing,
re -phase infrastructure and construction, adjust unit mix, or wait for more favorable market
conditions. Because these decisions occur late in the development process, even short delays
can translate into fewer starts in the near term.
Timing matters in Pasco because the City's Housing Action & Implementation Plan (HAIP)
identifies a need for 23,318 additional housing units by 2045, including a recognized
underproduction component. 0 Periods of slowed starts are difficult to "make up" later,
particularly where entitlement timelines, construction capacity, and financing cycles already
constrain delivery.
Product mix can change —often away from the most affordability -oriented products
Large, fixed costs tend to have the greatest effect where margins are thinnest. In Pasco, the
HAIP emphasizes the need to expand housing options beyond single-family detached units —
particularly multifamily and missing -middle housing —to better align supply with
demographic and affordability needs.
In practice, a sharp increase in per -unit connection fees can shift development outcomes
toward:
1. fewer units per project (lower density),
2. higher -priced units (to absorb added costs), or
3. fewer marginal projects moving forward at all.
Policy implication:
Rapid fee increases can unintentionally reduce near -term unit delivery and skew
production away from the housing types the City has identified as priorities.
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/ Connection Fee Increases and Pasco Policy Outcomes 7
OUTCOME 2: AFFORDABILITY PRESSURES INCREASE (OR SUPPLY DECLINES)
Fees do not disappear; they redistribute risk
Connection fees must ultimately be absorbed somewhere in the housing system. In practice,
there are only three mechanisms:
1. Price pass -through to buyers or renters,
2. Land value adjustment over time, or
3. Reduced production when projects no longer pencil.
While land values can adjust in the long run, the HAIP documents market conditions that limit
how easily costs can be passed through to households in the near term —and therefore
increase the risk that reduced production becomes the adjustment mechanism.
HAIP evidence shows limited affordability headroom
The HAIP documents a constrained affordability environment:
• Median home values in Pasco increased by more than 100 percent between 2010 and
2022, far outpacing income growth.
• A Pasco household would need approximately $96,500 in annual income to afford the
median home price of roughly $386,000.
• More than 60 percent of renter households are cost -burdened, and renter incomes
remain substantially lower than owner incomes.
• The HAIP shows that only one major industry in Franklin County earns wages
sufficient to afford the median home price, while large employment sectors —such as
education services and retail —fall well below that threshold.
These conditions limit the market's ability to absorb additional fixed costs through higher
prices or rents. When affordability headroom is thin, cost increases are less likely to be
passed through and more likely to result in projects being delayed, downsized, or not built.
Policy implication:
In an already constrained affordability environment, sharp increases in fixed up-
front costs tend to worsen outcomes either by increasing prices for the few
households who can absorb them or by reducing overall housing supply —both of
which are inconsistent with the HA1P's stated objectives.
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Connection Fee Increases and Pasco Policy Outcomes 8
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OUTCOME 3: CITYWIDE FISCAL CONDITIONS ARE AFFECTED BY SLOWER
CONSTRUCTION
Development activity and citywide fiscal conditions are linked
Even though connection fees are a utility -fund tool, the City's broader fiscal system is closely
tied to the pace and continuity of development activity. New construction does not only
generate one-time utility revenues; it also supports ongoing taxable activity, assessed value
growth, and longer -term fiscal capacity.
As shown in Exhibit 3, Pasco's general tax revenues have grown substantially since 2014, with
local sales tax revenues exhibiting the strongest growth trajectory relative to other major
revenue categories. Property tax revenues have also increased steadily over time, reflecting
both new construction and broader appreciation, while utility -related tax revenues have grown
more modestly. The city's tax base and revenues have expanded with sales taxes accounting
from the strongest growth.
Exhibit 3: Pasco General Tax Revenue Growth — Indexed to 2014
250.0
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0
'— 200.0
0 150.0
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100.0
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50.0
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2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
—Property Taxes --Sales Tax (local option)
a — Utility Taxes All Other Taxes
Source: Washington State Auditor's Office - Financial Intelligence Tool (FIT), 2025.
Construction activity is a real economic and revenue driver
Even though connection fees are administered through the utility fund, the pace of
development has broader implications for the City's general revenue base. In Pasco,
construction activity is not a peripheral economic sector —it is a meaningful driver of taxable
sales and related fiscal growth.
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Connection Fee Increases and Pasco Policy Outcomes 9
As shown in Exhibit 4, construction -related activity represents a substantial and growing share
of total taxable retail sales. Over time, construction has accounted for a material portion of the
City's sales tax base, reflecting not only direct construction expenditures (materials,
equipment, subcontracting), but also secondary spending associated with development
activity. When housing production accelerates, these revenue streams tend to strengthen;
when production slows, they soften.
This linkage matters for policy because construction -driven sales tax growth is timing -
sensitive. Delays in housing starts do not simply defer utility connections —they can reduce
near -term construction spending and the associated sales tax receipts that support general
government services. Unlike long -run population growth, which may eventually recover, lost
construction activity in a given year is not easily recaptured later.
In this context, policies that materially affect near -term housing feasibility and timing —such
as sharp, up -front cost increases —can have fiscal implications beyond the utility system. A
slowdown in housing starts can translate into weaker construction activity, lower taxable sales,
and reduced short-term revenue growth, even if long -run development demand remains
strong.
Exhibit 4: Construction Activity as Share of Total Taxable Retail Sales
40%
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- 15%
0
0 10%
5%
0%
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ti ti ti ti ti� ti ti ti ti ti ti ti ti ti ti ti ti ti ti
Source: Washington State Department of Revenue, 2025.
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110 Connection Fee Increases and Pasco Policy Outcomes 10
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New construction adds assessed value —and property tax capacity
New construction is the primary mechanism through which Pasco can grow its property tax
base beyond the statutory 1 percent levy limit factor. While annual levy growth on existing
property is capped, the value of new construction is added outside the 1 percent limit,
allowing the City's levy to increase in proportion to growth. This distinction is critical; new
construction enables the property tax to:
• Keep pace with population growth, as new households and businesses come onto the
rolls;
• Maintain purchasing power over time, helping offset inflationary pressures on City
services; and
• Support service expansion without over -reliance on other revenue sources, including
utility taxes and fees.
Exhibit 5 illustrates the scale and variability of new construction value added in Pasco over
time. Periods of strong development correspond to substantial additions to assessed value,
directly expanding the City's levy capacity. Conversely, periods of slower construction
translate into weaker growth in the tax base.
Exhibit 5: New Construction Value for City of Pasco
$700,000,000
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$600,000,000
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$500,000,000
Q
o $400,000,000
2 $300,000,000
c
u $200,000,000
3
a�
z $100,000,000
$0
.II I I I I I I I I I I I I I I I I I I I I I
N pMp pt Up-) Ip.D pn Co M O� N M ;t n Q0 n 00 M O -1 N M d' u7
S O O O O O O g 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
N N N N N N N N N N N N N N N N N N N N N N N N
Source: Washington State Department of Revenue, 2025.
When construction is delayed or re -phased, the City experiences a lag between growth -related
service demands and the addition of assessed value needed to support those services. If
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► Connection Fee Increases and Pasco Policy Outcomes 11
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delays persist, the effect compounds: fewer additions to the tax base today mean lower levy
capacity in future years than would otherwise occur.
Over time, slower growth in assessed value can place added pressure on other revenue
sources to fill the gap. In that sense, sustained housing and development activity does not
simply affect housing outcomes —it plays a central role in stabilizing the City's overall fiscal
structure and reducing pressure on utility taxes to make up for foregone property tax
capacity.
Taken together, these dynamics underscore an important consideration for Council: policies
that materially affect the pace and timing of development —particularly those that introduce
sharp, up -front cost shocks —can influence not only housing delivery, but also the City's long-
term fiscal resilience under Washington's levy constraints.
Policy implication:
If fee implementation materially slows housing starts, the City may experience a
fiscal double -effect —reduced near -term General Fund revenues tied to
construction activity (particularly sales tax and property tax growth), and slower
expansion of the utility customer base that supports long-term utility fund
revenues.
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,/ Connection Fee Increases and Pasco Policy Outcomes 12