In Featured, Research Article

By Nicole Kissam and Tim Seufert of NBS along with Scott Catlett, Finance Director and City Treasurer of City of Yorba Linda

With ongoing economic constraints and changing work environments, it may be time to evaluate your fee structures or determine if new fees are necessary. This two-part series focused on fee studies will provide examples of fees, an overview of best practices, and agency considerations as you navigate through implementing new fees or updating current fees.

Local agencies in California can charge a wide range of user and regulatory fees. Common examples of fee programs include (and are not limited to) the following:

  • Community Development departments charge fees for review, approval, and regulation of development permits and projects in accordance with local and State-level laws and requirements.
  • Fire prevention programs charge fees for a variety of regulatory services, including review of development entitlement applications, construction plan review and inspection for sprinkler and fire alarm systems, and annual State mandated inspections of various existing buildings and businesses.
  • Recreation and park programs charge fees for classes and programs, childcare services, pool access, swimming lessons, special park uses and facility rentals.

California Constitution Article XIIIC, Section 1 provides legal guidance as to when a “levy, charge, or exaction of any kind imposed by local government” qualifies as a charge that is not a tax. Specifically, “The local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.”

It is imperative that the municipal manager understand the true cost of providing the services for which fees are the appropriate mechanism to recover costs and identify opportunities where new fees may be charged. This is an essential aspect of overall cost recovery policy and procedure, and paramount to solid financial management and fiscal sustainability. Having a solid implementation strategy for gaining stakeholder buy-in and governing body approval for the proposed fees is equally significant.

It is important then to understand the bigger picture of the “total costs” of providing a service before asking a governing body to adopt what the “price” or fee of each service will be (note that the fee should be either at or below the total cost). The total costs of providing services should include consideration of both direct costs and indirect costs.

Direct costs are the obvious types of costs, such as the staff member’s salary and benefits required to provide a service. Less obvious are various types of indirect costs such as a share of operational supplies, and or overhead costs at both the program and agency-wide level. To define a reasonable share of indirect costs associated with any service, often a cost allocation approach is useful. This is best accomplished via an Overhead Cost Allocation Plan, which is an industry-standard analysis that distributes the indirect support services costs of an organization to the direct services and activities provided in a fair and equitable manner.

Indirect administrative costs can be quantified and recovered from various funds, grants, fees, and charges. However, staff are often unsure of the best method of assigning these costs and, most importantly, how to go about effectively recovering these costs, which can be substantial. In many cases, hundreds of thousands or even millions of dollars are uncollected annually due to a lack of awareness about indirect costs associated with various programs and services.

Sometimes setting a fee at the actual total cost of providing a service may be higher than what the local community can bear. Therefore, local governments sometimes adopt fee amounts at lower than the full cost amount eligible for recovery, especially for certain categories of fees. Most often, these subsidies are provided for programs deemed to be of broad community benefit or to incentivize compliance, such as permitting for minor home improvements. Yet, there can be both internal and external pressure to keep cost recovery levels lower across the board, particularly when it has been a while since the most recent fee increases.

This can have serious budget implications if large subsidies are allowed to continue, and it is important to communicate those fiscal impacts to your agency’s governing body.

By now, you might be wondering when your agency’s fees were last updated and what fees were included. The second part of this two-part series will focus on what a formal Cost Recovery Policy is, why regular fee study updates are beneficial, and how and when it’s beneficial to obtain stakeholder buy-in.

Article first published in CSMFO News at https://news.csmfo.org/2020/10/21/is-it-time-to-update-your-fees-part-one/.

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