ST. PAUL — Minnesota homebuilders urged lawmakers on Tuesday, Sept. 10, to probe the way cities and counties collect inspection fees, alleging some have illegally used the source the revenue as a "cash cow" for local projects at the expense of homeowners.

After reviewing city, county and township reports of their inspection fees and expenses, a homebuilding and remodeling advocacy group told the Senate Select Committee on Home Ownership Affordability and Availability that local governments collected $78 million more than they needed for inspections over the last five years.

The fees are supposed to offset the cost of the inspection expenses at the municipal level. But officials from BATC-Housing First Minnesota said they worried that gap could be a key factor in why the cost of a new home has become out of reach for many Minnesotans.

Under state law, municipalities are allowed to collect building and plan review fees that are "fair, reasonable, and proportionate to the actual cost of the service for which the fee is imposed."

“The urgency of this crisis cannot be overstated,” said David Siegel, executive director of BATC-Housing First Minnesota. “Virtually all the housing roadblocks are in the way we regulate homebuilding in Minnesota."

Siegel pointed to Minnesota's standing as having the lowest-in-the-country homeowner vacancy rates, per U.S. census data, and said the state needs to adjust to make it easier to build new homes and to find affordable ones. And the quickest way to do that, he said, would be to decrease local inspection permit costs.

Nick Erickson, the manager at Housing First Minnesota who wrote the report on local inspection fees, agreed that there were many factors influencing the price of new homes in the state but the fees should be the first option lawmakers should consider in a conversation about affordability.

“This is the easiest one, and we have to start somewhere," Erickson told the panel.

But that report doesn't tell the whole story, city officials told the panel. City officials from the Twin Cities area and greater Minnesota defended permitting fees they impose to offset the costs of planning and zoning, engineering, and administrative work associated with new development.

Over the past 10 years, the cities that have reported the revenue they bring in from inspection fees generally showed they were in the red once they reported their expenses for the inspections and costs for planning new developments.

“Those costs should not be shifted to (existing) taxpayers under the guise of affordability," Lakeville City Administrator Justin Miller said.

Lynda Woulfe, Cambridge city administrator, noted that between 2008 and 2018, the cost to her community to inspect new home projects as well as other renovations outpaced the amount Cambridge took in in inspection fees and other fees. Many other greater Minnesota communities experienced the same situation, she said. But the community approved a tax levy to pay for some of the planning and development expense to help encourage more homeowners and businesses to move to Cambridge.

"Development is a community’s vital lifeblood," Woulfe said.

Another city official representing Corcoran, a northwest suburb of Minneapolis, said that city had weighed using excess inspection fee dollars to pay for a new city hall, but that plan is now off the table. If the plan to build a new city hall moves forward, it will be funded another way, he said.

Roseville-based Housing Affordability Institute had highlighted Corcoran as one of the examples of a community using surpluses from the inspection fees to fund general fund projects.