San Diego County Grand Jury • 2024-2025

Never Been Challenged City of San Diego Development Impact Fee Program Redux

Published: May 22, 2025 43 pages

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Findings 9 findings

F01

The City has not filed DIF Annual Reports in accordance with § 66006(b) for the last four fiscal years including FY 2021 through FY 2024.

F02

The City has been chronically late publishing Annual DIF Reports in violation of MFA § 66006(b) since FY 2015. Fact: MFA § 66006(a) provides that “the local agency receiving the [development impact] fee shall deposit it with the other fees for the improvement in a separate capital facilities account or fund in a manner to avoid any commingling of the fees with other revenues and funds of the local agency.” Fact: MFA § 66006(e) provides that “funds held longer than five years must be refunded when a legitimate need for the funds can no longer be justified.” Fact: The City publishes on its website the Annual DIF Report each fiscal year.

F03

The City does not comply with MFA §§ 66006(b)(1) and 66006(b)(1)(E) annual and § 66001(d)(1)(D) five-year reporting requirements. Reporting detail, including yearly fund balances, expenditures, and fees collected, and the five-year reporting requirements do not provide timely, objective, substantive and accurate data that meets all MFA requirements. Fact: The MFA five-year finding requirement imposes a duty on the City to reexamine the nexus for each fee to justify the continuing need for the funds collected. Fact: If the fee can no longer be justified, the local agency shall refund the moneys in the account or fund per MFA § 66001(d)(2). Fact: MFA § 66008 requires that “[a] local agency shall expend a fee for public improvements, as accounted for pursuant to § 66006, solely and exclusively for the purpose or purposes, as identified in § 66006, for which the fee was collected. The fee shall not be levied, collected, or imposed for general revenue purposes.” Fact: San Diego has fifty-two individual community-based DIF Fund “Legacy” Accounts. Fact: The City’s DIF Annual Reports rely on the financing plans for each of the fifty-two communities to justify nexus for the mitigation fees collected. Fact: The City Attorney has advised on two separate occasions the requirement for community plans and financing plans to be updated annually.

F04

The City’s Community Plans and Financing Plans are outdated – some in excess of 10 years, or more. Fact: The City charges each community DIF fund an administration fee to cover the costs of managing the funds. Fact: Maximum administration fees are established in each individual community nexus study (Public Facilities Financing Plan (PFFP) or Impact Fee Study (IFS)). Fact: The City has targeted a maximum of 5% - 8% cumulative administration fees be charged to each DIF account over the full life of each account.

F05

There are instances where administration charges exceed the target percentages documented in each community PFFP or IFS. For example, one DIF account has been charged 18%. This exceeds the City’s established maximum for administrative charges. Fact: MFA § 66001(g) provides that DIF fees shall not include costs attributable to existing deficiencies in public facilities. 34

F06

Community-based DIF funds have been spent by the City to develop the Citywide Build Better SD DIF program, in violation of § 66001(g).

F07

The City used fees collected and deposited in twenty-two of the fifty-two legacy DIF accounts, totaling $720,159.87, titled “DIF Rebuild,” for administrative use to create the Build Better SD program.

F08

The cost of developing the Build Better SD program structure should have been borne by the City’s General Fund. Fact: MFA § 66023(a)(1) provides that “a person may request an independent audit if a local agency does not comply with § 66006(b)(1) for three consecutive years both of the following shall apply: (1) The local agency shall pay the cost of the audit. (2) The independent audit conducted shall include each consecutive year the local agency did not comply with § 66006(b). Fact: MFA § 66023(f) intent is clear: “The Legislature finds and declares that oversight of local agency fees is a matter of statewide interest and concern. It is therefore the intent of the Legislature that this chapter shall supersede all conflicting local laws and shall apply in charter cities.” Fact: The 2018 Confidential Audit Memorandum revealed areas in which the City was noncompliant to the requirements of the MFA. Fact: There are red flags from as far back as 2011 that alerted City management of the potential legal compliance deficiencies in administration of the City’s DIF Program. Fact: The GJ interviewed City Management staff from the 2018-2019 timeframe and all interviewees either did not recall the Confidential Audit Memorandum, could not remember what actions were recommended or taken by Management, or claimed they were not involved in any actions taken. Fact: The GJ interviewed City employees, who are involved in direct administration of the DIF Program, who demonstrated little knowledge or awareness of MFA requirements or the severity of the consequences for non-compliance.

F09

The GJ investigation concluded that despite warning signs, the City has failed to take appropriate actions to correct problems or take corrective action in administering the DIF program.

Recommendations 4

R10

Task the City’s Planning Department to establish necessary processes and procedures to ensure compliant management of DIF funds and timely generation of DIF Annual Reports to comply with the MFA requirement for publication of each fiscal year end.
R11

Initiate a return of the $720,159.87 in funds that were expended to develop Build Better SD to their respective community DIF accounts.
R12

Ensure that moving forward the Build Better SD administration and Nexus study updates are paid from the City’s General Fund.
R14

Direct the Planning Department to develop and initiate an education and training program for all City Management and staff employees who are charged with administering the City’s DIF programs. REQUIREMENTS AND INSTRUCTIONS The California Penal Code §933(c) requires any public agency which the Grand Jury has reviewed, and about which it has issued a final report, to comment to the Presiding Judge of the Superior Court on the findings and recommendations pertaining to matters under the control of the agency. Such comment shall be made no later than 90 days after the Grand Jury publishes its report (filed with the Clerk of the Court); except that in the case of a report containing findings and recommendations pertaining to a department or agency headed by an elected County official (e.g. District Attorney, Sheriff, etc.), such comment shall be made to the Presiding Judge with an information copy sent to the Board of Supervisors. Furthermore, California Penal 38 Code §933.05(a), (b), (c), details, as follows, the manner in which such comment(s) are to be made: (a) As to each grand jury finding, the responding person or entity shall indicate one of the following: (1) The respondent agrees with the finding. (2) The respondent disagrees wholly or partially with the finding, in which case the response shall specify the portion of the finding that is disputed and shall include an explanation of the reasons therefor. (b) As to each grand jury recommendation, the responding person or entity shall report one of the following actions: (1) The recommendation has been implemented, with a summary regarding the implemented action. (2) The recommendation has not yet been implemented, but will be implemented in the future, with a time frame for implementation. (3) The recommendation requires further analysis, with an explanation and the scope and parameters of an analysis or study, and a time frame for the matter to be prepared for discussion by the officer or head of the agency or department being investigated or reviewed, including the governing body of the public agency when applicable. This time frame shall not exceed six months from the date of publication of the grand jury report. (4) The recommendation will not be implemented because it is not warranted or is not reasonable, with an explanation therefor. (c) If a finding or recommendation of the grand jury addresses budgetary or personnel matters of a county agency or department headed by an elected officer, both the agency or department head and the Board of Supervisors shall respond if requested by the grand jury, but the response of the Board of Supervisors shall address only those budgetary or personnel matters over which it has some decision- making authority. The response of the elected agency or department head shall address all aspects of the findings or recommendations affecting his or her agency or department. Comments to the Presiding Judge of the Superior Court in compliance with the Penal Code §933.05 are required from the: Responding Agency Recommendations Date Mayor, City of San Diego R-01 through R-14 9/30/25 City Council, City San Diego R-01 through R-14 9/30/25 39 1 CA Govt Code §§ 66000 et seq., https://law.justia.com/codes/california/code-gov/title-7/division-1/chapter- 5/section-66000/ 2 The exact amount is difficult to glean as financial reports available on the City’s website are no longer available. 3 “Redux” refers to the fact that the subject matter of the 2022-2023 Grand Jury Report is being brought back with additional information and confirmation of issues initially raised, which appear historically to have been known and disregarded (or ignored) by City management (Management), legal counsel and staff.] 4 City of San Diego Development Impact Fees - What’s the DIF?, San Diego County Grand Jury, May 30, 2023, https://www.sandiegocounty.gov/content/dam/sdc/grandjury/reports/2022- 2023/City%20Of%20San%20Diego%20Development%20Impact%20Fees.pdf 5 The GJ recommended the San Diego City Attorney perform a legal compliance review, and the Office of the City Auditor perform a Financial and Performance Audit of the City’s DIF program for strict compliance with the annual and five-year nexus reporting requirements of the MFA. City of San Diego Response to San Diego County Grand Jury Report Titled “City of San Diego Development Impact Fees - What’s the DIF?, November 14, 2023, p.2, https://www.sandiego.gov/sites/default/files/2024-01/gjr- cr-development-impact-fees.pdf 7 Performance Audit of Development Impact Fees, OCA 18-022, June 2018, https://www.sandiego.gov/sites/default/files/18-022_development_impact_fee_0.pdf 8 The 2024-2025 Grand Jury reviewed a copy of the Confidential Audit Memorandum, referred to hereinafter as the Confidential Audit Memorandum. This Memorandum is not publicly available. 9 “Management” refers to City staff who have supervisory or administrative responsibility for administering the City’s DIF Program. MFA § 66006(a) restricts expenditure of those fees solely for the purpose for which the fee was collected. A Priority 1 recommendation is made when fraud or serious violations are being committed; significant fiscal and/or equivalent non-fiscal losses are occurring, costly and/or detrimental operational inefficiencies are taking place, a significant internal control weakness has been identified and the potential for incurring significant fiscal and/or equivalent non-fiscal losses exists. Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350 (Pet. for Rev. denied, Nov. 10, 2015), https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 13 Hamilton & High v. City of Palo Alto (2023) 89 Cal.App.5th 528 (Pet. for Rev. denied, July 19, 2023), https://law.justia.com/cases/california/court-of-appeal/2023/h049425m.html 14 Proposed Updates to Facilities Benefit Assessment and Development Impact Fee Ordinances, RC-2011-28, Office of the City Attorney, Jan Goldsmith, July 19, 2011, https://docs.sandiego.gov/cityattorneyreports/RC-2011-28.pdf , at pp. 2, 5-7. An FBA is a Facilities Benefit Assessment and for all practical purposes, including this Report, as the same as a DIF. Note: seven years later this is one of the findings in the 2018 Confidential Audit Memorandum. 17 https://law.justia.com/codes/california/code-gov/title-7/division-1/chapter-5/section-66000/ 18 San Diego Municipal Code § 61.2212 Annual Adjustment of Facilities Benefit Assessments (Added 8–25–1980 by O–15318 N.S.) (Repealed 4-6-2016 by O-20627 N.S.; effective 5-6-2016.) https://docs.sandiego.gov/municode_history/Chpt%2006%20History%20Tables.pdf 19 Requirements for Annual Adjustment of Facilities Benefit Assessments and Prepayment of Assessments, Council Policy N. 600-36, https://docs.sandiego.gov/councilpolicies/cpd_600-36.pdf 20 Proposed Updates to Facilities Benefit Assessment and Development Impact Fee Ordinances, RC-2011-28, Office of the City Attorney, Jan Goldsmith, July 19, 2011, https://docs.sandiego.gov/cityattorneyreports/RC-2011-28.pdf , at pp. 2, 5-7. 21 https://docs.sandiego.gov/council_reso_ordinance/rao2012/R-307565.pdf 22 Currently the City makes updates to individual community plans on roughly a ten-year cycle. Of the fifty-two community plans there are usually, at any given time, approximately five plans in the update process. Public Facilities Financing Plan Update Considerations, RC-2013-14, Office of the City Attorney, Jan Goldsmith, September 6, 2013, https://docs.sandiego.gov/cityattorneyreports/RC-2013-14.pdf 40 24 San Diego Municipal Code § 61.2212 dealt with the process of adjusting the amount of facilities benefit assessments on an annual basis. Repealed 4-6-2016 by O-20627 N.S.; effective 5-6-2016. Note: The repeal of San Diego Municipal Code § 61.2212 occurred soon after the Walker v. San Clemente decision was published. 26 https://law.justia.com/codes/california/code-gov/title-7/division-1/chapter-5/section-66000/ 27 This was also identified as an issue in the 2018 Confidential Audit Memorandum to Management. Overview and Challenges Related to Public Facilities Financing Plan Updates, IBA Report 14-23, June 2014, https://www.sandiego.gov/sites/default/files/14_23_140609.pdf, pp. 4-5. Walker v. City of San Clemente, supra, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 30 Technical Analysis – Evaluation of DIF Methodologies, Prepared for The City of San Diego. This document is not published on the City’s website but was reviewed by the 2024-2025 Grand Jury. City of San Diego Development Impact Fees - What’s the DIF?, San Diego County Grand Jury, May 30, 2023, https://www.sandiegocounty.gov/content/dam/sdc/grandjury/reports/2022- 2023/City%20Of%20San%20Diego%20Development%20Impact%20Fees.pdf 32 Hamilton & High v. City of Palo Alto, 2023, https://caselaw.findlaw.com/court/ca-court-of-appeal/2193685.html 33 The appellate court in Hamilton ruled DIF funds must be refunded but did not determine how much or what method. The specific amount and methodology of return was remanded to the trial court to decide. City of San Diego Community Planning Groups, https://www.sandiego.gov/planning/community-plans 35 These are the PFFP and IFS documents. This report is limited to community-based legacy/lockbox funds – this GJ is not challenging how DIF fees were established, the amount of the fees or the nexus findings which support the legacy/lockbox DIF. 37 https://www.sandiego.gov/planning/work/public-spaces/reports 38 The City of San Diego’s Fiscal Year ends June 30th. 180 days hence is December 28th. City of San Diego Build Better SD, https://www.sandiego.gov/buildbettersd 40 Total funds include citywide DIF funds collected to date plus the legacy community-based funds. City of San Diego Development Impact Fees Funds Report, Fiscal Year Ending June 30, 2024, (FY2024), https://www.sandiego.gov/sites/default/files/2025-03/funds-report.pdf 42 The Development Impact Fee Annual Report, FY2024, overdue since December 28, 2024, had not been published as of the date of this Report. City of San Diego Development Impact Fees Funds Report for The Fiscal Year Ending June 30, 2023, Issued March 13, 2024, https://www.sandiego.gov/sites/default/files/2025-02/development-impact-fees-funds-report-fiscal- year-2023.pdf 44 The report does not differentiate the sub-account in which the five-year funds reside, i.e., one cannot tell whether the funds are for Parks, Fire, Library or Streets. 45 § 66006(b)(1)(E) requires “identification of each public improvement on which fees were expended and the amount of the expenditures on each improvement, including the total percentage of the cost of the public improvement that was funded with fees.” 46 § 66006(b)(1)(F)(i) requires “identification of an approximate date by which the construction of the public improvement will commence…” 47 According to California Government Code, General Provisions, § 14 the term “’shall’ is mandatory and may’ is permissive.” Additionally, San Diego Municipal Code §11.0209, General Rules of Interpretation of Ordinances, parrots the same California Government Code definition. 48 “If the administrative costs of refunding unexpended revenues…exceed the amount to be refunded, the local agency, after a public hearing, notice of which has been published pursuant to § 6061 and posted in three prominent places within the area of the development project, may determine that the revenues shall be allocated for some other purpose for which fees are collected subject to this chapter and which serves the project on which the fee was originally imposed.” 49 San Diego’s Fiscal Year is July 1st through June 30th. For San Diego, 180 days from fiscal year end is December 28th each year. This finding of noncompliance was confirmed by the independent Auditor. The DIF Annual Report for FY 2023 was approved by City Council March 5, 2025, via Resolution R-316039. 41 52 City of San Diego development Impact Fees FY 2015 Annual Report, December 31, 2015, https://www.sandiego.gov/sites/default/files/development_impact_fees_annual_report_-_fiscal_year_2015.pdf 53 Hamilton & High v. City of Palo Alto, 2023, supra, https://law.justia.com/cases/california/court-of- appeal/2023/h049425m.html (Pet. for Review denied, July 2023). Walker v. City of San Clemente, supra, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 55 https://www.sandiego.gov/city-clerk/officialdocs/council-resolutions- ordinances#:~:text=What%20are%20Resolutions%20and%20Ordinances,the%20date%20of%20final%20passage. A Resolution of The Council of the City of San Diego Accepting the Development Impact Fee Annual Report for FY 2023, March 5, 2025, https://docs.sandiego.gov/council_reso_ordinance/rao2025/R-316039.pdf 57 City of San Diego City Charter, § 40 (City Attorney), https://docs.sandiego.gov/citycharter/Article%20V.pdf 58 CA Govt Code §§ 66000 (2024), https://law.justia.com/codes/california/code-gov/title-7/division-1/chapter- 5/section-66000/ 59 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P. 6, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 60 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P. 17, https://law.justia.com/cases/california/court- of-appeal/2015/g050552.html 61 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P. 3, https://law.justia.com/cases/california/court- of-appeal/2015/g050552.html 62 Hamilton & High v. City of Palo Alto (2023) 89 Cal.App.5th 528 (Pet. for Rev. denied, July 19, 2023) https://law.justia.com/cases/california/court-of-appeal/2023/h049425m.html 63 Refunds would be made to either the developer paying the DIF or to the then current record owner or owners of the lots or units, as identified on the last equalized assessment roll, of the development project or projects on a prorated basis. Walker v. City of San Clemente, 239 Cal.App.4th, 2015, P.13, https://law.justia.com/cases/california/court-of- appeal/2015/g050552.html 65 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P.16, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 66 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P. 16, https://law.justia.com/cases/california/court- of-appeal/2015/g050552.html 67 Hamilton & High v. City of Palo Alto (2023) 89 Cal.App.5th 528 (Pet. for Rev. denied, July 19, 2023), P 49, https://law.justia.com/cases/california/court-of-appeal/2023/h049425m.html 68 Beach Parking Impact Fee, City of San Clemente, November 23, 2022, https://www.san-clemente.org/about- us/city-news/beach-parking-impact- fee#:~:text=After%20refunding%20over%2081%25%20of,such%20claims%20with%20the%20City. Development Impact Fee Funds Report as of Fiscal Year Ending June 30, 2023, https://www.sandiego.gov/sites/default/files/2025-02/development-impact-fees-funds-report-fiscal-year-2023.pdf 70 Hamilton & High v. City of Palo Alto (2023) 89 Cal.App.5th 528 (Pet. for Rev. denied, July 19, 2023). P. 39, https://law.justia.com/cases/california/court-of-appeal/2023/h049425m.html 71 Hamilton & High v. City of Palo Alto (2023) 89 Cal.App.5th 528 (Pet. for Rev. denied, July 19, 2023), P 38, https://law.justia.com/cases/california/court-of-appeal/2023/h049425m.html 72 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P. 20, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 73 Walker v. City of San Clemente (2015) 239 Cal. App. 4th 1350, https://law.justia.com/cases/california/court-of- appeal/2015/g050552.html 74 Walker v. City of San Clemente, supra, 239 Cal.App.4th at p. 1368, 192 Cal.Rptr.3d 635, P. 15, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 75 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P. 15,16, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 76 Walker v. City of San Clemente, (2015) 239 Cal.App.4th 1350, P. 20, https://law.justia.com/cases/california/court-of-appeal/2015/g050552.html 77 CA Govt Code § 66000 (2024), https://law.justia.com/codes/california/code-gov/title-7/division-1/chapter- 5/section-66000/ 42 78 Bixel Associates v. City of Los Angeles (1989) 216 Cal.App.3d 1208, https://law.justia.com/cases/california/court- of-appeal/3d/216/1208.html 79 San Diego Municipal Code, § 142.0640, Development Impact Fees for Public Spaces, February 2025, https://docs.sandiego.gov/municode/municodechapter14/ch14art02division06.pdf 80 Municipal Code need not explicitly include MFA provisions, as the MFA is State Legislation which supersedes the municipal code. FY 2021 through 2023 according to the Audit; and FY 2024 is currently overdue. 43

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