An infrastructure fee shortfall for an 1,840-acre project in the City of Modesto could reach into the tens of millions of dollars and has become a major controversy in the Central Valley city. No one knows for sure just how large the deficit is, but there is little doubt that the revenue available to the city does not match the amount needed for roads, storm drains, parks and other infrastructure promised in the Village I Specific Plan. And the potential solutions � ranging from increasing fees on future development to asking current residents to pay more taxes to whittling away at planned infrastructure � are all unpalatable.

The reasons for the mess are many.

A consultant concluded that fee reductions for the Village I Community Facilities District (CFD) � which the City Council approved in 1994 and 1997 to induce development � created a deficit. The city has compounded the problem by failing to increase fees to account for inflation and rapidly rising land costs. This issue is frequently a front page story in local newspapers and has even drawn the interest of the district attorney.

In a May report for the city, Goodwin Consulting of Sacramento estimated the shortfall in the CFD and in the Village I portion of a separate capital facilities fee (CFF) to be nearly $47 million. The consultant and city officials have since backed away from that estimate and are now working to identify the deficit precisely. "The initial report was a good way to test whether there was a problem," consultant Susan Goodwin said. "We found that there was one, and that got everybody focused." Mayor Carmen Sabatino figures the shortfall is at least $35 million. Builders, however, are not ready to concede to any amount until there is further investigation. The city intends to hire an outside auditor this month to determine how much money the city has received, how it has spent the funds, and how the city went about crediting developers for building infrastructure during the 1990s.

"We don't have people here who were necessarily responsible or accountable for that period of time," Councilman Denny Jackman said.

The remedies being considered by city officials include increasing annual taxes on existing residents, raising the CFD and CFF fees on future Village I development (the area is about half built), reducing amenities such as parks, and shifting annual maintenance taxes to capital projects. In the meantime, the city has placed a one-year moratorium on new developments in Village I, although vested projects can still proceed. "If there's a lesson to learn here," Mayor Sabatino said, "it's that infrastructure goes in first, and then you build the houses."

A new style of development
The history of Village I, on the city's northeast side, dates to the late 1980s, when the city began work on a specific plan and a number of precise plans within the nearly three-square-mile specific plan area. The specific plan calls for about 6,200 housing units, 220 acres of industrial development and 15 acres of commercial development. Village I was designed as a neo-traditional development, with fairly high densities, and neighborhood stores and parks within walking distance of many homes.

To date, about half of the housing units have been built, but Village I still awaits its first nonresidential construction. In October 1990, city officials adopted the first Village I finance plan. The following month, Modesto voters approved extension of a sewer trunk line to the area. A 1980 initiative requires voters to decide on sewer extensions. Then, in 1992, the 219 registered voters in the specific plan area approved annexation to the city. At that point, development could proceed. However, a recession � which would last about six years � was just settling into the region. With the Village I Specific Plan collecting dust, city officials in 1994 approved a revised finance plan with lower fees. There was little market response, so the city cut fees again in 1997. That's where fees have remained, despite inflation and right-of-way acquisition costs that have risen at least 40%.

"We failed to raise the fees when the construction got hot," Mayor Sabatino said. "You had developers making $50,000 to $60,000 a house, but the fees were $10,000 too low."

Bill Zoslocki, a Village I developer, said the city made several decisions in 1997 that helped spur construction. The city eliminated some parks from the plan and shifted the cost for some planned roads to adjacent property owners. Both moves reduced the fees, and the different approach to roads made developers feel more comfortable. Still, larger market factors were clearly an influence on Village I activity. In 1998, the recession started to ease, and by 1999 Modesto began to ride the swell of prosperity that swept across Northern California. Silicon Valley created hundreds of thousands of jobs, and many of the people who filled those jobs sought affordable housing in the Central Valley. However, not long after Village I development began getting serious, storm drainage problems arose. The city chased those gremlins for a couple years and eventually decided the system needed about $5 million in upgrades. But officials also detected other shortcomings, so they hired Goodwin to get a handle on the situation.

The Goodwin report of May estimated the average CFD fee of $7,700 per residential unit is less than half the amount needed to pay for infrastructure required by the specific plan, and the average CFF fee of $5,380 per unit is about two-thirds of what is necessary. Goodwin said financing plans for any large project often contain assumptions regarding the pace and cost of construction, land values and regulations that do not hold true over the many years of development.

"It's not completely unique to Modesto by any means. It points out the need for regular updates to any financing plan for a major development," she said.

Who was in charge?
No one disputes that the City Council slashed fees in hopes of encouraging development during poor economic times. But whether the fee reductions were the result of simple policy choices or of political shenanigans is an open � and touchy � question in Modesto.

The District Attorney's Office is investigating campaign donations by Mid-Valley Engineering to Modesto city councilmembers, as well as the city's contracts with Mid-Valley. Mid-Valley engineered some of the infrastructure in Village I and prepared reports on which the council based the 1997 fee reductions. Two years ago, the Fair Political Practices Commission fined Mid-Valley $185,000 for laundering campaign contributions to candidates for the Modesto and Oakdale city councils. Councilman Jackman, who was a slow-growth activist in Modesto for years before winning election in 2001, said the building industry had a great deal of influence on the City Council at the time of the fee reductions. Only one of seven councilmembers remains from that time.

"I'm hopeful that there wasn't malfeasance. I hope it was a response to the ills of the day," Jackman said of the fee cuts. Zoslocki said Jackman and others have exaggerated the industry's influence. The city conducted a public process, hired professionals for their expertise and made documents available. "We never had control of the process � ever," said Zoslocki, a member of the Building Industry Association of Central California board who insisted he was only speaking for himself. "Everybody needs to get off their soap box."

That seems unlikely to happen soon. But city officials clearly want to learn more about the situation before making some difficult decisions.

"The only thing we seem to know for sure is what parcels are vested, and what parcels are not vested," said Jackman. Sabatino said he "not optimistic" about what the outside auditors will find. By his reckoning, Village I needs $68 million worth of infrastructure. So far, the city has collected $12 million, but the residential portion is already half-built. Sabatino does not like any of the options for resolving the issues, although he concedes the council majority might try to recover some of the last money by substantially increasing fees on undeveloped and unvested portions of Village I.

Backers of that idea say it is the best way to raise revenue, but Sabatino considers it discriminatory. Plus, Sabatino said, Village I development could soon slow. The undeveloped portions of the project area have more than 100 property owners. Many of them live on ranchettes and, a city survey found, have no short-term plans to sell. A proposal to ask property owners citywide to pay a special tax has few supporters. And either a citywide tax or an increase in annual assessments on existing Village I residents would need two-thirds voter approval. Zoslocki urged city officials to identify fully the problem before going any further. He, for one, cannot believe that the highest development fees in the city were off by half.

"There's a lot of discovery that needs to be done," he said. Goodwin and city officials hope by April to prepare a new infrastructure financing plan and formulate a financing district to bridge the funding gap. "I don't believe that there are fatal flaws. There are solutions that can be implemented," Goodwin said. But, she added, the city ought to have those solutions in place when the current moratorium expires in June 2003.


Modesto Mayor Carmen Sabatino and Councilman Denny Jackman, (209) 571-5169. Bill Zoslocki, Bill Zoslocki Construction Company, (209) 579-1221. Susan Goodwin, Goodwin Consulting Group, (916) 561-0890. Village 1 Specific Plan, Village 1 finance documents,