Local agencies in California have the ability to charge a wide range of user and regulatory fees. Common examples of these include:

  • Cities or fire districts have fire prevention programs and charge fees for review of planning entitlement applications for
    conditions of approval, plan check and inspection of new residential and commercial buildings for access and fire code compliance, and State mandated annual inspections of existing businesses
  • Recreation and parks charge for recreational classes and programs, child care, aquatics, or park and facility rentals
  • Utilities charge for plan check and inspection of new development’s engineered improvements, installation or removal of water meters, account registration, water turn on or shut off, lateral repair or installation, or annual stormwater compliance inspections

It is important that a municipal manager know the costs of providing such services, and can identify areas where new fees may be charged. This is an important aspect of overall cost
recovery policy and procedure, and paramount to solid financial management and fiscal sustainability.

In California, a fee is defined as a fee (and not a tax) because the amount charged does not exceed the cost of providing the service. It is important then to understand the bigger picture of the “total” costs of providing a service, before deciding what the price of each service will actually 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 an individual’s salary and benefits required to provide a particular 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 a cost allocation plan. An Overhead Cost Allocation Plan is an analysis, accompanied by supporting documentation, which distributes the indirect support services costs of an organization to the direct services and activities provided in a fair and equitable manner.

Many agencies are aware that 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 “left on the table,” annually, due to a lack of awareness about indirect costs associated with various programs and services.

Before any analysis of the costs of services is undertaken, you may already have an awareness that the full cost of providing a service is higher than the amount or “price” for the service that the local community can bear. For a variety of reasons, local governments sometimes adopt fee amounts at lower than the full cost amount eligible for recovery.

Development of a formal Cost Recovery Policy, unique to your agency’s operational and political environment, has a number of advantages. The greatest of these is an agency-specific benchmark for establishing, reviewing, and updating fee amounts in the future. For example, the policy may indicate that services provided to new construction (i.e., building permit) should try to recover 100% of their full cost of providing services, whereas certain types of regulatory inspections for public safety issues might have a recovery goal of 50% to encourage compliance. One city may want to promote teen recreation services as a policy goal, and therefore may subsidize such services or provide them at no user cost at all.

When considering how to “price” services, decision-makers often find it helpful to conduct a survey of fees and fee amounts charged by surrounding agencies. While this is a useful exercise in establishing the “market” for neighboring jurisdictions’ rates for various services, comparative surveys can be misleading. Such surveys are best complimented by an overhead cost allocation plan study and a full cost of service (fee) analysis, and should be understood holistically from this perspective. An in-depth Fee Study should ideally be done every three to five years, or sooner if significant organizational changes are made or costs change dramatically.

For more information, please contact: Nicole Kissam, Director at nkissam@nbsgov.com. Nicole is a Director with NBS in the Financial Consulting Group.