Water and wastewater services play a vital role in helping communities grow and thrive. When these systems are planned carefully and aligned with growth strategies, they allow local governments to manage population increases and support long-term community and economic development. But building and maintaining this infrastructure is expensive. Smaller or economically challenged communities often struggle to cover the costs, and even fast-growing areas can find it hard to keep up. Local governments face large upfront costs to build or expand systems, and they must also budget for regular maintenance, repairs, and compliance with state and federal regulations. These financial pressures can make it harder to extend services to new areas and may lead to higher rates for current customers.

To help offset these challenges, North Carolina law allows local governments to charge System Development Fees (SDFs) on new development. SDFs are meant to ensure that the cost of growth is shared by those creating the demand—new homes and businesses—rather than by existing ratepayers. The revenue from these fees can be used to pay off debt for infrastructure expansion or to fund future improvements that benefit new users.

In theory, SDFs help utilities support growth in a way that’s financially sustainable. In practice, though, things are more complex. Growth doesn’t always happen as expected, and utilities still have to maintain their systems regardless of how much or how fast a community grows. In many cases, local governments must invest in system improvements before new development arrives. Still, SDFs provide a useful tool for covering the costs of growth-related infrastructure.

The authority for SDFs comes from G.S. Chapter 162A, Article 8. The law has been amended several times since its enactment in 2017. This post provides a current snapshot of the law—explaining what SDFs are, who can assess them, how they are calculated, when they are assessed and collected, how the funds can be used, and how SDFs fit into broader efforts to manage regional growth.

What are SDFs?

SDFs are charges assessed on new development to fund the construction or rehabilitation of water and wastewater facilities necessitated to serve the new development that paid the fees. These fees may cover costs related to:

• Constructing new infrastructure to serve the new development;
• Expanding capacity in existing systems to serve the new development;
• Recouping past investments for facilities that serve the new development;
• Repairing, maintaining, modernizing, upgrading, updating, replacing, or correcting deficiencies in facilities that serve the new development;
• Increasing the preexisting level of service for existing development (defined as land subdivisions, structures, and land uses in existence at the start of the written process for the SDFs, but no more than one year prior to the adoption of the SDFs.); and
• Purchasing or reserving capacity in facilities owned by other local government units that serve the new development.

The law is designed to ensure that new development pays its proportional share of the water and wastewater infrastructure needed to serve it. Unlike traditional impact fees, it does not permit local governments to use fees from current development to fund infrastructure for future growth. It is not a revenue tool for financing expansion projects unrelated to current “new development.” And due to the timing of fee collection (discussed below), it may not even be suitable for funding major system upgrades needed to serve current “new development.”

Who Can Assess SDFs?

There are three categories of local governments that are authorized to assess SDFs—(1) those that own or operate a water or wastewater system; (2) those that purchase reserved capacity in another local government’s system; or (3) water and sewer authorities who enter into wholesale agreements with other local government utilities (either the water and sewer authority or the other local government utility may assess an SDF to cover the costs of the wholesale arrangement). G.S. 162A-201(9).

Own or operate water or wastewater system. A local government entity that owns or operates a water and/or wastewater supply, treatment, storage, or distribution facility (including a facility for the reuse or reclamation of water) may assess SDFs. Local government entity includes municipalities, counties, sanitary districts, water and sewer authorities, county water and sewer districts, metropolitan water districts, metropolitan sewerage districts, metropolitan water and sewerage districts, and any joint agencies formed by two or more of these entities. It also applies to any local government entities created by local act of the general assembly, including Fayetteville Public Works, and Greenville Utilities Commission. 

Purchase reserved capacity in another local government’s system. A local government entity (including any of the governance structures listed above) that purchases reserved capacity in another local government entity’s water or wastewater facilities also may assess SDFs to cover the reserved capacity costs. 

Wholesale arrangement between Water and Sewer Authority and another government. Finally, a water and sewer authority authorized under G.S. Chapter 162A, Article 1, or another local government entity that contracts with a water and sewer authority, may assess a System Development Fee (SDF) to cover the cost of services it provides through a wholesale arrangement. This option applies only to wholesale agreements between a water and sewer authority and another local government entity.

What is the Process for Calculating SDFs?

SDFs can only be imposed after completing a thorough system development fee analysis, which serves as the basis for calculating the fees. The analysis must:

• Be conducted by a licensed professional engineer or qualified financial expert. (Most of the time this is going to require a local government to contract with a private entity to do the analysis. A local government is free to contract with any qualifying entity it chooses. It may use an RFP process to select the contracting party.)
• Use generally accepted accounting, engineering, and planning methodologies to calculate system development fees for public water and sewer systems. (Note that this includes incorporating state law or regulatory standards, such as Section 18 of Session Law 2023-137 that established a wastewater design flow rate of 75 gallons per day per bedroom (GPD/BR) for wastewater systems serving two or more dwelling units.)
• Employ one of the following recognized methodologies: buy-in, marginal (incremental) cost, or combined cost methods, tailored to the specific utility system. (More on the methodologies below.)
• Document all data, assumptions, and calculations in detail to ensure transparency and reliability.
• Cover a planning horizon of 5 to 20 years, projecting infrastructure needs and costs.
• Include any purchased capacity in, or reserved capacity supplied by, capital improvements or facilities owned by another local government.
• Include public input: The analysis must be posted on the local government’s website for at least 45 days, allowing for written comments. The analysis must be reconsidered in light of any written comments. G.S 162A-205 & -209.

The fee schedule includes a service unit rate, stated in gallons per day (GPD), and a conversion table for various demand categories. Id. It also provides credits for oversized infrastructure that benefits others or to avoid double-recovery of costs. The final fees cannot exceed the maximum justified by the analysis. G.S. 162A-207(a). Adoption occurs through a public hearing and is incorporated into either the unit’s annual budget ordinance or a separate water and wastewater rate ordinance. 

The analysis must be updated at least once every five years to ensure it reflects current conditions. G.S. 162A-209(c). It may have to be redone more frequently to address amendments to the SDF law.

The following is a sample water system SDF schedule for residential development, based on $7.00 per GPD of projected demand.

Note: These blocks reflect expected peak daily demand, not actual meter flow rating. GPD estimates may vary based on local planning standards or connection type.

Methodologies
There are multiple ways to calculate System Development Fees (SDFs) under each of the three primary methods—buy-in, marginal cost, and hybrid—and local governments can choose from several approaches depending on available data, accounting practices, and growth patterns. However, under G.S. 162A-205(9), all methods must express the service unit in terms of gallons per day (GPD). This statutory requirement does not change the structure of the calculation methods but standardizes the unit of measure to ensure consistency and fairness.

Buy-in method. The buy-in method charges new users based on the value of exiting, unused system capacity. A common approach under this method is to use the replacement cost new less depreciation (RCNLD). This method estimates what it would cost to rebuild the existing system today, subtracts depreciation, and divides by the system’s total capacity expressed in GPD to determine a per-GPD cost. That amount is then multiplied by the projected demand of the new connection in GPD. Some utilities use the net asset value (NAV) approach, relying on audited financial statements to determine the net capital assets and dividing that by the existing system’s GPD capacity. This aligns with GASB reporting and satisfies the statutory requirement. A simpler—but less precise—alternative is to use the historical cost per connection or EDU (Equivalent Dwelling Unit), but even this approach must convert EDUs to their GPD equivalents (e.g., 1 EDU = 250 GPD) for calculation and fee assessment.

Marginal Cost Method. The marginal (also known as the incremental cost) method focuses on the cost of expanding system capacity to accommodate growth. A widely used approach is to identify growth-related projects in the Capital Improvement Plan (CIP), determine the share of costs attributable to capacity expansion, and divide those costs by the additional GPD capacity created. The resulting per-GPD cost is applied to new development based on its projected GPD demand. Another option is to calculate incremental costs by system component (e.g., treatment, storage, distribution), again using capacity additions in GPD to assign more detailed per-unit charges. Some utilities also use master plan projections, estimating the total cost of infrastructure needed to serve forecasted growth in GPD, and deriving a fee per new connection based on that projected demand.

Hybrid Method. The hybrid (or combined) method combines elements of both buy-in and marginal cost approaches. This often involves calculating two separate per-unit costs—one for existing asset value and one for future investment—and combining them based on the proportion of growth served by each. The hybrid approach offers flexibility and may be particularly useful for fast-growing communities with both existing capacity and planned expansions. A common hybrid approach is the weighted average method, which calculates buy-in and marginal cost fees separately and then weights them based on the proportion of future demand served by existing versus new infrastructure—each in GPD terms. Alternatively, some utilities use a time-based blended fee, applying the buy-in method to near-term growth that can be served by existing capacity, and the marginal cost method to long-term growth that will require expansion.

Credits
The law requires two types of credits in the calculation of SDFs. Together, these credits help ensure SDFs are proportionate, equitable, and aligned with actual system impacts.

Revenue credit. The revenue credit applies when a utility uses the marginal cost or hybrid method and includes future capital projects in the fee. Since future users will help fund these improvements through ongoing water and sewer bills, a deduction must be made to reflect that future contribution. This offset must follow generally accepted financial principles and be based on either the outstanding debt or the present value of expected rate revenues over the planning period. The law requires this credit to be no less than 25% of the total capital improvement cost included in the calculation. G.S. 162A-207(b).

Construction / Contributions Credit. The construction or contributions credit applies when a developer has already funded or constructed oversized infrastructure designed to serve others beyond the developer’s own project. In such cases, the fee is reduced to reflect the portion of those costs that exceed the developer’s fair share. However, no adjustment is made for facilities located entirely on-site or solely intended to connect the development to existing water and wastewater systems. G.S. 162A-207(c).

When are SDFs Assessed? 

SDFs are assessed on “new development,” which is an activity that increases the demand for water or sewer system capacity. The law defines “new development” as one of three types of changes that occur after a local government begins the formal process of preparing its SDF analysis (no more than one year before the fee is adopted):

1. Subdividing land, such as splitting a parcel into multiple lots.
2. Changing or enlarging structures, including construction, renovation, redevelopment, conversion, or adding on to a building in ways that increase the number of service units (a measure of how much system capacity is needed—typically expressed as equivalent residential units or ERUs).
3. Changing how land is used or expanding its use in a way that increases service demand—for example, switching from pasture to irrigated crops, or intensifying commercial or industrial use. G.S. 162A-201(6).

Note that assessed does not mean collected. Although the fees are assessed (meaning they become a legal obligation of the property owner) based on these triggers, they are not collected until later in the development process. The collection timing is discussed below.

Trigger 1: Subdivision of Land
SDFs are most commonly triggered when a property owner subdivides a parcel of land into multiple lots. For example, if a developer owns a 10-acre parcel with one existing house and divides it into 20 buildable residential lots, the act of subdivision alone is sufficient to trigger the fee. Even if no homes are constructed immediately, the subdivision increases the potential number of service units the utility must be prepared to serve. Similarly, if a property owner divides a parcel into three lots for future estate transfers, with no plans to build, the subdivision activity still qualifies as “new development” under the statute and triggers the assessment of SDFs. The key here is that subdividing land increases the number of potential service connections to the system, which increases future capacity needs regardless of the timing of actual construction.

Trigger 2: Changes to Structures That Increase Service Demand
SDFs may also be triggered when an existing structure is modified in a way that increases its demand on the water or sewer system. This includes construction, reconstruction, redevelopment, conversion, or physical expansion of a building. For instance, if a homeowner adds two bedrooms and an additional bathroom to their house, the expanded space increases the estimated occupancy and water use—raising the number of service units attributed to that property. Similarly, if a motel is redeveloped into a multi-unit apartment building, the shift from short-term lodging to permanent residences typically increases average daily water and sewer demand. These types of changes fall under Trigger 2.

However, not all renovations qualify. The increase must materially raise the property’s capacity needs. Adding a deck or replacing a roof, for example, wouldn’t trigger a fee because it doesn’t affect system usage. In contrast, changes that increase the number of plumbing fixtures, expand the size of a commercial kitchen, or convert single-family space into multiple independent living units are likely to result in additional service units—and thereby trigger a partial or full SDF. Importantly, if the property already paid an SDF (e.g., at the time of subdivision under Trigger 1), any new fee must be limited to the net increase in service units resulting from the change. The utility cannot charge again for capacity that was already accounted for. 

Trigger 3: Changes in Land Use or Intensity of Use That Increase Service Demand
Even without changes to structures, an SDF may be triggered if the use of land changes in a way that increases system demand. For example, converting a vacant field into an irrigated vineyard or orchard increases water consumption, even if no buildings are added. 

Trigger 3 often overlaps with Trigger 2 in redevelopment scenarios. Suppose a gas station is torn down and replaced with a fast food restaurant. The change involves both new construction (Trigger 2) and a shift in use from low-demand fueling to high-demand food service (Trigger 3). The utility would assess whether the overall service unit need has increased compared to the prior use and, if so, may assess a fee based on the additional capacity required. For both Triggers 2 and 3, the focus is not on the total new demand in isolation, but on the increase over what the property previously required—or what fees have already been paid to support.

Assessing SDF under Trigger 2 or 3 if SDFs adopted by local government utility after property was subdivided

The SDF statute clearly authorizes a local government to assess additional fees under Trigger 2 (structural changes) or Trigger 3 (changes in land use) when those changes result in increased system capacity needs beyond what was assessed under Trigger 1 (subdivision). G.S. 162A-212(d). However, the statute does not directly address whether a utility may impose the full SDF under Triggers 2 or 3 when a property was subdivided before the SDF schedule was adopted.

Consider this example: A parcel is subdivided into 10 residential lots in May 2024. The local government adopts its SDF schedule in July 2025. Construction begins on the homes in September 2025, and the development plan remains unchanged since the time of subdivision. The question is whether the utility can assess the full SDF on each lot at the time of construction under Trigger 2, despite the subdivision having occurred before the adoption of the fee schedule.

One argument against this approach is that the subdivision falls outside the statutory look-back window. The law permits SDFs to be assessed only on “new development” that occurs after the start of the local government’s written analysis, which may begin no more than one year prior to adoption of the fee schedule. G.S. 162A-201(6). If the subdivision took place outside that window, a court could find that no fee may be assessed based on that activity.

However, this interpretation raises questions about the role of Triggers 2 and 3. The statute does not limit their application to developments that increase capacity beyond what was anticipated at the time of subdivision. Nor does it state that development falling outside the look-back period is exempt from future assessment if construction or land use changes occur later. The existence of three distinct triggers suggests the legislature intended to allow SDF assessments at multiple points in the development process.

The answer may hinge on when the local government utility is deemed to “commit” system capacity. If capacity is considered committed at the time of subdivision, the utility may be limited to assessing additional fees only if the development is later modified in a way that increases service demand—for example, by constructing larger homes with additional bathrooms, converting single-family homes to duplexes, or intensifying land use in a way that increases GPDs. On the other hand, if the utility does not commit capacity until building permits are issued or service connections are made, there is a stronger argument that the full SDF may be charged under Triggers 2 or 3 at that later point—because, up until then, no service units were actually needed or assigned.

Given the statute’s instruction to interpret its provisions conservatively, local governments should proceed carefully. Any decision to assess SDFs under Triggers 2 or 3 in these circumstances should be supported by a clear, legally grounded analysis explaining when capacity is deemed committed and how the development qualifies as “new” under the statute’s trigger provisions.

When are SDFs Collected?

The SDF statute establishes strict rules for when system development fees must be collected, and the timing depends on which of the three statutory triggers applies to the new development. For developments triggered by the subdivision of land (Trigger 1), the fee is assessed based on the SDF schedule in effect at the time the final plat is recorded. However, the actual collection of the fee occurs later—specifically, at the later of two events: either the application for a building permit or the point at which the local government utility legally commits water or wastewater service to the development. G.S. 162A-213(a). This means that although the fee amount is fixed at plat recordation (unless capacity needs increase), the payment is not required until development moves closer to construction or service connection.

By contrast, when the SDF is triggered by changes to structures (Trigger 2) or changes in land use (Trigger 3) that increase system demand, the timing is reversed. In those cases, the utility must collect the fee at the earlier of two points: either when the property owner applies for service connection (such as a meter installation) or when the utility commits to providing water or wastewater service. G.S. 162A-213(b). These collection points are not flexible. The statute provides no discretion for the utility to set an alternative timeline, even if the developer is willing to agree. While some utilities may wish to offer installment plans or deferred payment options, doing so poses a legal and financial risk. Once the statutory collection point has passed, the utility may not have the authority to enforce payment, and it risks being unable to collect the fee. 

Committing Service
This statutory framework also raises an important operational issue: determining when a utility has legally “committed” to provide service. Committing service means the utility has reserved sufficient capacity for the new development or has obligated itself to acquire or build that capacity when it is needed. The statute does not define a single moment when this commitment occurs, and in practice, it could vary depending on local policy. For example, some utilities may treat service as committed when the final plat is recorded, when a developer constructs infrastructure to be deeded to the utility, when building permits are pulled, or only when the developer applies for an actual service connection. Before the SDF law, this question was largely academic unless system capacity was scarce. Now, however, the timing of service commitment is central to determining when SDFs must be collected. Each local government utility should define this clearly in its utility ordinances, recognizing that commitment may occur at different times under different circumstances.

Permitting Local Government Collects SDFs
Additional coordination is required when the utility that assesses the SDF is not the same unit that issues building permits. In such cases, the statute requires the permitting authority to confirm that the SDF has been paid before issuing the permit. G.S. 162A-213(c). This ensures that fees are properly collected even when different local governments are responsible for permitting and utility operations.

SDF Fee Schedule Changes
The law requires that if the SDF schedule of fees changes between the time of the SDF fees were assessed and when they are collected, the amount collected must still be based on the schedule in effect when the subdivision occurred. This is consistent with the statute’s requirement that fees be tied to the timing of the triggering event—not the later act of payment. G.S. 162A-213(d). Although local governments are required to update their SDF analyses at least every five years, and may do so more frequently, those updates apply only to future developments. They do not retroactively change the fee owed for developments already triggered under the previous schedule, unless there has been a material increase in capacity demand.

What can SDFs be Used to Fund?

SDFs help ensure that new development pays its fair share for the water and sewer infrastructure it needs. These fees are not a general revenue source—they are legally restricted.

If the SDF was calculated using the marginal cost or a hybrid (combined) method, the funds can only be used for capital improvements that are directly tied to serving the new development that triggered the fee. A capital improvement means a planned facility or an expansion of an existing facility’s capacity—it does not include maintenance or general system upgrades. For example, a utility might use SDF revenue to build a new pump station, expand a treatment plant to serve the development, or extend a main line into a newly constructed neighborhood. The money can also cover engineering and design costs, land acquisition, and debt service on bonds or loans that paid for those projects. However, the improvements must be limited to what is needed to serve the development that paid the fee. Local governments may not use SDFs to build out capacity for other anticipated developments down the road.

If no new capital improvements are planned within five years, or those improvements have already been paid for with other funding, the law allows SDF revenue to be used to repay debt on existing capital improvements that still have capacity to serve the new development. Similarly, if the local government has entered into a contract with another unit of government to purchase or reserve capacity in shared water or sewer facilities, SDF proceeds may be used to cover those costs—but again, only to the extent that the capacity benefits the development that paid the fee. G.S. 162A-211(a) & (a1).

If the SDF was calculated using the buy-in method, or a hybrid method that includes a buy-in component, the local government can use the revenue to recoup the cost of existing facilities with available capacity and to fund capital rehabilitation projects. Rehabilitation projects include repairs, upgrades, and modernization of existing facilities, such as replacing aging pumps, updating treatment technology, or upsizing lines that already serve existing development but need reinforcements due to added demand. These projects are permitted uses because they improve service to the new development paying the fee—not because they support future growth in general. G.S. 162A-211(b).

Across all methods, there are clear restrictions. SDF revenue may not be used for routine operations, administrative expenses, tap or connection charges, or fees for reviewing permits and plans. It also may not be used to fund infrastructure that a developer is already responsible for providing—such as onsite pipes or nearby lift stations—unless there is a written agreement for reimbursement by the developer for these costs. And, as mentioned above, SDF funds cannot be used to build system capacity for development that has not yet occurred. The improvements funded must be necessary to serve the specific new development that was charged the fee.

How to manage SDFs?

A local government must track SDF revenue in a capital reserve fund (unless pledged to repay revenue bonds) and ensure that the money is used only as allowed by law. G.S. 162A-211(d) & (e). The specifics of establishing a CRF are discussed here. CRF serves as a control mechanism to ensure that SDF proceeds are spent appropriately.

Capacity Charges on Existing Development

The SDF law applies only to “new development,” as defined in the statute. Can a local government charge capacity fees or other upfront charges on existing development that doesn’t fall under the SDF law? According to a recent North Carolina Court of Appeals decision, the answer is no.

In True Homes, LLC v. City of Greensboro, 898 S.E.2d 52 (N.C. Ct. App. 2024), the court ruled that the SDF law is the sole legal authority for imposing upfront charges related to utility capacity. As a result, the court struck down the City of Greensboro’s capacity use fees on existing development not covered by the SDF law.

At first glance, this interpretation may seem straightforward. But the issue is more complicated. When the General Assembly enacted the SDF law, it also amended the general fee authority for all local government utilities. These amendments authorized utilities to “establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished or to be furnished by any public enterprise.” (See, for example, G.S. 160A-314(a) for municipalities.)

This phrase—“to be furnished”—was critical. Its absence in earlier statutes had led the courts to strike down prior versions of water and sewer capacity fees. See, e.g., Quality Built Homes Inc. v. Town of Carthage, 369 N.C. 15, 789 S.E.2d 454 (2016); Anderson Creek Partners, L.P. v. County of Harnett, 381 N.C. 1, 871 S.E.2d 309 (2022); Kidd Construction Group, LLC v. Greenville Utilities Commission, 271 N.C. App. 392, 844 S.E.2d 280 (2020).

If the legislature intended for the SDF law to be the only way to impose upfront charges, these statutory amendments would appear unnecessary. Nevertheless, based on the Court of Appeals’ decision in True Homes, local governments currently lack legal authority to charge capacity or similar upfront fees on properties not classified as “new development” under the SDF law.

Other Water and Wastewater Charges

Some water and wastewater charges are not subject to the SDF law because they are explicitly exempted by G.S. 162A-201(9). Local governments may continue to impose the following types of charges:

1. Administrative, plan review, and inspection fees – These cover the costs associated with reviewing and inspecting permits required for development.
2. Tap or hookup fees – These reimburse the local government for the actual cost of physically connecting a new service unit (such as a home or business) to the water or sewer system.
3. Availability charges – These charges apply to properties that have access to the utility system but are not currently connected. (More on these charges here.)
4. Dedication of capital improvements – Developers may be required to build or dedicate on-site, nearby, or related infrastructure (such as pipes or pump stations) without reimbursement or credit, unless a written agreement provides for it under the applicable statutes (G.S. 153A-280, 153A-451, 160A-320, 160A-499, or Parts 3A/3D of Chapters 153A or 160A).
5. Reimbursement for adjacent or related capital improvements – If a developer has agreed to pay for utility improvements near the development, the local government can require reimbursement. However, this reimbursement must be credited against any applicable system development fee, as outlined in G.S. 162A-207(c).
6. Intergovernmental capacity charges – One local government may charge another for access to capacity or reserve capacity in its water or sewer system.

Finally, local governments may continue to charge user fees and penalties to current water and wastewater customers to recover operating and capital costs.

How Local Governments Can Use SDFs Effectively

SDFs are tightly regulated, but with thoughtful planning, they can play a meaningful role in helping local governments manage growth responsibly. The key is to ensure that every dollar collected from an SDF is used to fund infrastructure that directly serves or benefits the development that paid the fee. Below are a few examples of how local governments utilities have used SDFs.

1. Planning Backbone Infrastructure in a Growth Area
A town anticipates steady development along its western edge over the next 10 to 15 years. Instead of building infrastructure project-by-project in reaction to individual subdivisions, the utility incorporates a phased approach into its capital improvement plan. It identifies a series of pump station upgrades, and treatment capacity expansions that will be needed as the corridor builds out. Using the marginal cost method, the utility calculates a per-gallon SDF based on the cost of these planned improvements. As new homes and commercial projects are approved, the SDF is collected and used to pay for the corresponding phase of system upgrades. The approach ensures that growth pays for itself, infrastructure is built as needed, and ratepayers are not footing the bill for long-term capacity upgrades.

2. Recovering Past Investment in Underused Infrastructure
A rural county recently expanded its wastewater treatment plant in anticipation of regional growth. For years, the facility operated below capacity. Now, new subdivisions are finally being built in areas the plant was designed to serve. Using the buy-in method, the county calculates SDFs based on the value of the unused capacity in the existing facility. These fees are assessed on the new development connecting to the system and are used to help repay the debt issued for the original expansion. This allows the county to recover costs from the developments benefiting from the existing capacity—without raising rates on customers who have been paying all along.

3. Funding Capacity Through a Regional Partnership
A small town doesn’t operate its own treatment plant. Instead, it purchases reserved capacity from a neighboring city’s utility. As development increases in the town, the utility assesses SDFs to cover the cost of that reserved capacity. The fees are based on the gallons per day allocated to each new connection and ensure that the cost of the regional arrangement is passed on to those creating the additional demand.

4. Upgrading Existing Infrastructure to Handle Infill Development
In a city’s older core, vacant lots and outdated buildings are being replaced by new apartments, restaurants, and mixed-use development. While the water and sewer infrastructure technically exists, much of it was built decades ago and isn’t equipped to handle the increased demand. Using the buy-in method with capital rehabilitation authority, the city assesses SDFs on the new development and uses the revenue to upgrade sewer lines, reinforce water mains, and modernize lift stations that directly serve the area. These improvements not only make room for new users but also prevent service disruptions for nearby residents and businesses.

In each of these examples, the local government uses SDF revenue to serve the development that paid the fee. None of the projects are designed to create excess capacity for unknown or future growth. 

Managing Reserved Capacity and Its Relationship to SDFs

A related issue to determining when water or sewer service capacity is committed to a parcel is understanding whether—and under what circumstances—a local government can later stop reserving that capacity. This situation often arises when a project stalls or a property’s use changes significantly.

Consider an industrial property that was once a heavy water user but is no longer used for industrial purposes. If the utility continues to reserve capacity based on that previous use, it may be tying up system resources that are no longer needed. This can impose real costs—unused but reserved capacity reduces operational flexibility and may delay other development. Similarly, if capacity was committed at the time of subdivision approval, but the developer goes bankrupt and the project is never built, that reserved capacity remains unavailable to others unless the utility reclaims it.

To address this, many local government utilities are beginning to adopt policies that set time limits or expiration conditions on capacity reservations. These policies typically state that if development does not proceed within a certain timeframe—such as two or three years—the reserved capacity may be released and made available for other projects.

This issue also has implications for SDFs. Although the statute does not explicitly link SDF payment to capacity reservation, there is a clear underlying expectation that payment of an SDF is connected to the allocation of system capacity to that specific “new development.” However, the law does not explicitly authorize a local government to impose time limits on how long an SDF payment is valid. As a result, if a local government chooses to stop reserving capacity for a parcel that has already paid an SDF, it likely cannot charge a second SDF for that same parcel once it reassigns capacity unless a new SDF triggering event occurs that increases service unit needs from the original use. In short, while utilities may set policies to release unused capacity over time, they must be cautious not to violate the statutory limits on when and how SDFs may be assessed.

Conclusion: A Useful but Limited Growth Management Tool

SDFs are not a catch-all solution to funding water and wastewater infrastructure, but they remain a valuable tool for managing the cost of growth. When used properly, SDFs can help local governments build or expand the water and wastewater systems needed to serve new development—without shifting those costs onto existing ratepayers. But the tool has its limits. Fees must be based on legally approved methods, closely tied to real infrastructure needs, and spent only on projects that benefit the development being charged.