Bentonville’s Proposed Wastewater Development Fee: Ensuring Growth Pays for Growth

Growth is a strength for Bentonville, but it also brings responsibility. Our wastewater system has reached its limits in several areas, and expanding capacity is now unavoidable. These improvements are essential for housing, for economic development, and for the continued health of our community.

The question before us is not whether to expand the system, but how to pay for the expansion in a way that is fair and financially responsible. Large wastewater projects are typically financed using structures that rely on utility revenues for repayment unless a separate, dedicated funding source is available. Without a funding mechanism tied directly to growth, the cost of new capacity would ultimately be paid by current residents through wastewater rates. Preliminary modeling shows that relying on rates alone could require increases to current rates approaching 90 percent.

A wastewater development fee provides a better path. It assigns the cost of new capacity to the new development that creates the demand for it, a principle often described as growth paying for growth. This protects current residents from large, across-the-board rate increases and ensures that Bentonville can continue to grow without placing an undue burden on families and businesses already here.

Among the region’s major cities, Bentonville is the only one without a wastewater impact or capacity fee. Reinstating this tool aligns us with established best practices and provides a dedicated way to fund the growth-related improvements our system now requires.

This document explains why the fee is being considered, how it would work, and why it represents the most responsible approach for Bentonville’s long-term future.

How We Got Here

Bentonville’s discussion about wastewater development fees is not new. In fact, we are reinstating a tool the City adopted more than two decades ago when rapid growth first began to strain our wastewater system and challenge our ability to approve new development responsibly.

The First Era of Development Fees (2002 to 2008)

In the late 1990s and early 2000s, Bentonville was growing faster than its wastewater system could support. By 1995, the City’s treatment facility was already nearing capacity, and staff warned that a development moratorium might be necessary if infrastructure was not expanded. Traditional funding tools such as sales taxes, bonds, and rate increases were not sufficient to meet the scale of need.

To address this, the City hired Tischler and Associates, one of the nation’s leading impact fee consultants, to conduct a full analysis. After extensive interviews, capital plan reviews, and public meetings, the City adopted water, sewer, and fire/EMS impact and capacity fees in 2002.

These fees followed nationally recognized methods and met the legal standards of nexus and proportionality. This ensured that new development contributed to the infrastructure it required rather than placing the entire cost on existing residents. This allowed Bentonville to manage growth in a financially responsible way by assigning costs where they originate.

Organized Opposition and a National Strategy

Opposition to the fees emerged immediately. Local homebuilding groups used several of the same strategies described in the National Association of Home Builders’ Impact Fee Handbook, which outlines ways local builders often respond to fee proposals and participate in public decision making. These approaches typically focus on concerns related to housing costs or the economic climate. In communities where these approaches have influenced policy decisions, fee reductions or fee removals have sometimes occurred. When that happens, the outcome is well documented. The costs of growth do not disappear; they are absorbed by existing residents through higher rates, deferred capital improvements, or both.

Local Litigation and Its Resolution

In 2003, a lawsuit was filed in the United States District Court for the Western District of Arkansas challenging Bentonville’s impact and capacity fee ordinances (case #04CV-03-898). The suit alleged the fees were an unlawful tax and required the City to dedicate staff time, legal resources, and outside consultants to defend the program.

The lawsuit remained active for several years. In 2008, the suit was withdrawn. The withdrawal of the lawsuit and the City’s decision to reconsider the fee program occurred in the same moment. As soon as the five-year legal challenge ended, City leadership began discussing whether to continue the impact and capacity fees that had been in place since 2002. The two developments unfolded together, marking a single turning point in how Bentonville approached funding growth.

City leadership maintained throughout this period that the fee structure was consistent with Arkansas law and with the principle that development should contribute toward the infrastructure needed to support it.

2008–2009: Fees Are Reduced as Funding Responsibility Shifts

Following the resolution of litigation and amid broader economic uncertainty, City leadership began reevaluating Bentonville’s impact and capacity fee structure. In 2009, impact fees were reduced, reflecting concerns about economic conditions and development activity rather than fully eliminated at that time.

During this same discussion, the mayor and the finance director explained that water and sewer capacity costs could be recovered through utility rates paid by existing customers instead of through development fees. This clarification made the practical effect of removal clear. By shifting capacity funding to utility rates, the cost of growth would move from new development to current residents. Several experts warned at the time that this would create long-term consequences for Bentonville, because it required existing ratepayers to subsidize the wastewater capacity needed to support new growth.

• · Economist Jeff Collins cautioned: “Eventually you have got to pay, one way or another. You can get rid of impact fees, but you are going to have to find another way to pay for infrastructure.” He also noted that when growth returned, “the same reasons impact fees were put in place will return.”
• · Former Public Works Director Britt Vance explained: “When new developments come on board and the old residents’ rates go up in order to subsidize this new development, that is just the very thing that impact fees are trying to mitigate.” He also pointed out that sewer impact fees were a tool that could help support regional treatment capacity, such as the North Arkansas Conservation Authority (NACA) facility.

A key lesson from this period is that temporary reductions made during economic downturns require a clear review and reset mechanism. Without a defined process for reevaluating fees as conditions change, interim decisions can persist long after growth pressures return.

In Bentonville’s case, impact and capacity fees were ultimately suspended by ordinance in 2016, formalizing a shift that had been discussed years earlier. The warnings raised during the earlier debate closely mirror the challenges the City faces today as growth has accelerated and infrastructure capacity constraints have reemerged.

What the Past Seventeen Years Have Shown

As impact and capacity fees were reduced beginning in 2009 and later suspended in 2016, new homes and businesses continued to connect to the wastewater system without contributing proportionally to the cost of the additional capacity they required. Over time, this funding approach shifted the responsibility for growth-related infrastructure away from new development and onto existing residents.

As growth accelerated, residents increasingly absorbed these costs through utility rates, reduced timing flexibility for infrastructure delivery, and mounting pressure on a system that was not expanding at the same pace as development.

The outcome is now clear and measurable. Growth-related infrastructure costs were largely borne by existing residents. Wastewater capacity did not keep pace with development. Multiple sewer basins reached or neared capacity. The City now faces hundreds of millions of dollars in required wastewater improvements.

Simply stated, the prolonged reduction and eventual suspension of development fees shifted the cost of growth onto existing residents. Today’s wastewater capacity challenges reflect the cumulative impact of that policy choice.

The Case for a Different Approach Today

Bentonville has a responsibility to make decisions that support the long-term health of our city. How we fund growth shapes everything from affordability and competitiveness to the stability of our utility system. When the development fees were removed in 2008, the cost of expanding wastewater capacity shifted from new development to current residents. Over time, that created an imbalance in both the utility system and the broader local economy, because families and businesses were funding growth that was not their own.

We have now seen the second- and third-order effects of that shift. Monthly bills carried infrastructure costs that should have been tied to new demand. Growth outpaced system

capacity in several sewer basins. Large capital needs accumulated without a dedicated revenue source shaped specifically for growth. These pressures built slowly, but the outcome is clear: removing development fees placed long-term strain on both residents and the system that serves them.

Bentonville cannot return to that model. A well-designed development fee is not just about fairness to current residents. It is a core tool for economic balance, affordability, and sustainable growth. It ensures that the infrastructure needed for tomorrow’s homes and businesses is funded in a way that keeps our entire community strong. Reinstating the wastewater development fee positions Bentonville for healthy, responsible growth in the decades ahead.

THE NEED FOR A WASTEWATER DEVELOPMENT FEE

Bentonville must expand its wastewater system to keep pace with the city’s rapid growth. Several sewer basins are already at or near capacity, and continued residential and commercial development requires additional investment in the system. These improvements are not optional. They are necessary to maintain reliable service, meet regulatory requirements, and avoid a situation where new development can no longer be approved.

Expanding the wastewater system is a significant capital undertaking. Engineering and capital planning analyses show that the City will need to expand multiple components of the system over time, including constructing new large-diameter interceptor sewer lines, adding treatment capacity, and making other regional improvements. If all of these needs were funded solely through wastewater rates, the impact on residents would be substantial. A rate-only approach would mean:

• · A residential wastewater rate increase approaching or exceeding ninety percent
• · Existing ratepayers bearing the full cost of growth-related infrastructure
• · Reduced fairness, since new development would not contribute directly to the infrastructure required to serve it
• · A long-term financial burden placed on current customers rather than shared proportionately
• · Less alignment with the principle that growth should help pay for growth

The Mayor, City staff, and a majority of City Council sought a solution that would allow Bentonville to move forward with required improvements without placing this burden on existing ratepayers.

Arkansas law provides a path for growth-related improvements to be funded through development fees, so long as those fees are proportionate and tied to the infrastructure required to serve new development. As part of evaluating alternatives to a large rate increase, the City is considering a financing structure in which a wastewater development fee revenue bond would be issued and purchased by the Alice L. Walton Foundation. Rather than providing the full bond amount up front, the bond is structured so that the proceeds are delivered over time through a draw-down line of credit.

Under this structure:

• · The revenue bond establishes the legal obligation and is secured solely by wastewater development fee revenue
• · The Foundation serves as the bondholder and commits to provide funding up to a maximum amount
• · The City draws funds only as eligible interceptor sewer projects are constructed
• · Interest accrues only on the amounts actually drawn
• · No taxes or monthly utility rates are pledged
• · The City avoids borrowing more than is needed before projects move forward
• · Existing customers are protected from bearing the cost of growth-driven interceptor improvements

This financing structure is limited to large interceptor sewer lines twelve inches and larger, which are a critical part of the regional wastewater backbone and must often be built in advance of development. Other components of the wastewater system, such as treatment plant expansions and smaller collection lines, are funded through separate mechanisms and are not part of this draw-down financing structure.

With this option under consideration, the City commissioned a detailed analysis to determine whether a wastewater development fee could fairly allocate interceptor-related costs, meet statutory requirements, and provide a stable long-term funding source tied directly to new development.

The need is clear. Bentonville must continue expanding its wastewater system to support future growth. A wastewater development fee, paired with a carefully structured revenue bond that delivers funding through a draw-down line of credit, provides a responsible and fair way to ensure that growth contributes its proportionate share, while protecting the residents who live here today.

WHAT THE WASTEWATER DEVELOPMENT FEE IS

The Wastewater Development Fee is a one-time fee paid by new development. It is designed to fund the growth-related wastewater infrastructure needed to serve additional homes and businesses as Bentonville continues to grow. The fee is separate from monthly wastewater rates and does not apply to existing customers.

How the cost was determined

Before setting the wastewater development fee, the City completed a systemwide analysis to determine the cost of growth-related interceptor sewer improvements consisting only of pipes 12 inches in diameter and larger. The analysis focused exclusively on the additional interceptor capacity needed to serve future growth, not on replacing or rebuilding infrastructure that already exists.

For example, if an existing 12-inch interceptor must be replaced with a 24-inch interceptor, the cost equivalent to the original 12-inch pipe was treated as already paid for and excluded from the analysis. Only the incremental cost associated with the added capacity provided by the larger pipe was included. In other words, new development is charged only for the increase in capacity, not for the portion of the pipe that replaces existing infrastructure. Smaller collection lines below 12 inches were not included in the cost calculation.

The result is a total cost that reflects only the net new interceptor capacity required for growth, providing a clear and defensible foundation for allocating costs fairly to new development.

What the fee pays for

Based on that analysis, the wastewater development fee is used to fund:

• · large interceptor sewer lines 12 inches and larger that are required to convey wastewater from new development to existing treatment facilities

These interceptor lines are part of the regional wastewater backbone. They often must be constructed in advance of development and are separate from the smaller neighborhood and subdivision lines that developers already design, build, and pay for directly.

How the fee amount is assigned

Once the total cost of growth-related interceptor improvements was established, the City uses a standard measure called an Equivalent Residential Unit (ERU) to allocate those costs across new development.

An ERU is not a cost and was not used in the cost calculation. It is a unit of demand used to fairly assign a share of an already-determined growth cost to individual projects.

For residential development, each dwelling unit is defined as one ERU.

For commercial and other non-residential development, ERUs are calculated by converting projected wastewater demand (measured in gallons per day) into ERUs. Because projected demand varies by use, non-residential ERU values can be fractional.

The total cost of interceptor improvements is determined once at the systemwide level through engineering and capital analysis. ERUs are then applied on a project-by-project basis to determine how much of that fixed, growth-related cost each development is responsible for, based on its relative wastewater demand.

The result

Under the recommended structure:

• · Each new home pays one ERU toward the cost of new interceptor capacity
• · Larger or higher-flow projects pay proportionately more
• · Each project pays only for its share of net new capacity, not existing infrastructure

How the Wastewater Improvements Are Financed

Constructing large interceptor sewer lines requires significant upfront investment. These lines often must be built before new development occurs, so that capacity is available when growth happens. To address this timing challenge without shifting growth-related costs onto existing residents, the City is considering a financing structure that pairs wastewater development fees with a revenue bond and a draw-down line of credit.

Revenue bond

Under the proposed approach, the City would issue a wastewater development fee revenue bond. This bond is not backed by taxes or monthly wastewater rates. Instead, it is secured solely by wastewater development fee revenue.

The revenue bond establishes:

• · the maximum amount that may be financed,
• · the types of wastewater improvements that are eligible,
• · and the source of repayment.

Because repayment is limited to wastewater development fees, existing ratepayers are not responsible for repaying the bond.

The Alice L. Walton Foundation has offered to purchase the bond. The City Council will determine whether to approve this arrangement.

Draw-down line of credit

Rather than receiving the full bond amount upfront, the bond is structured so that funds are provided over time through a draw-down line of credit.

Under this structure:

• · Funds are drawn only as eligible interceptor sewer projects move forward
• · Interest accrues only on the amounts actually drawn
• · The City avoids borrowing money before it is needed
• · Financing costs are reduced by matching borrowing to construction timing

This draw-down structure functions like a line of credit but is secured by the revenue bond and repaid exclusively from wastewater development fees.

What this financing covers

This financing structure is narrowly scoped.

It applies only to:

• · large interceptor sewer lines 12 inches and larger needed to support future growth

It does not apply to:

• · smaller collection lines within subdivisions,
• · wastewater treatment plant operations,
• · or routine system maintenance.

Those costs are addressed through other funding mechanisms.

Why this approach matters

By pairing wastewater development fees with a revenue bond and a draw-down line of credit, the City can:

• · build critical interceptor infrastructure when it is needed,
• · ensure growth contributes to the cost of growth-related improvements,
• · and protect existing residents from large, growth-driven rate increases.

This approach allows Bentonville to continue growing responsibly while maintaining fiscal discipline and fairness for current ratepayers.

Why Other Approaches Were Not Used

Before recommending this financing structure, the City evaluated other common ways to fund wastewater infrastructure. Each option presented significant limitations when applied to Bentonville’s current growth conditions.

Traditional municipal revenue bonds

Under Arkansas law, traditional wastewater revenue bonds are typically secured by system revenues, which means monthly wastewater rates. Issuing this type of bond would require the City to commit to rate increases sufficient to cover debt service, regardless of when or whether new development occurs.

Because the interceptor improvements being considered are driven primarily by future growth, this approach would shift the cost of growth-related infrastructure onto existing residents through higher rates, even though the need for those improvements is created by future development.

Using wastewater development fees alone

Another option would be to rely solely on wastewater development fees as they are collected over time, without financing.

The challenge with this approach is timing. Large interceptor sewer lines often must be constructed well before enough development occurs to generate sufficient fee revenue. Relying on a pay-as-you-go approach would delay needed improvements and could lead to capacity constraints in areas already nearing their limits.

In practical terms, wastewater development fees alone would take many years to accumulate enough funding to begin major interceptor projects, even though additional capacity is needed sooner.

Why the proposed approach was selected

The proposed approach allows the City to move forward with needed infrastructure while aligning the cost of that infrastructure with the growth that makes it necessary. By pairing wastewater development fees with a revenue bond and draw-down line of credit:

• · Infrastructure can be built when it is needed, not years later
• · Growth contributes directly to the cost of growth-related improvements
• · Existing residents are protected from large, growth-driven rate increases

This structure balances timing, fairness, and long-term financial stewardship, allowing Bentonville to continue growing responsibly while maintaining trust with current ratepayers.