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HomeMy WebLinkAboutItem 13a - Draft User Fee Cost Recovery Level Policy DATE: July 21, 2020 TO: Honorable Mayor and City Council FROM: Dominic Lazzaretto, City Manager By: Michael Bruckner, Deputy City Manager SUBJECT: REPORT, DISCUSSION, AND DIRECTION REGARDING THE DRAFT USER FEE COST RECOVERY LEVEL POLICY Recommendation: Provide Direction SUMMARY On December 3, 2019, the City Council approved a contract with Willdan Financial Services (“Willdan”) to assist in updating the City’s Cost Allocation Plan and to perform a comprehensive User Fee Study in accordance with the recommendation includedin the Citizen’s Financial Advisory Committee Report (“CFAC”). The User Fee Study will allow the City to update user fees to reflect current costs, or to subsidize a certain portion of fees for specific activities at the City Council’s discretion. As a general rule, the burden of paying for specific government services should be borne by those that benefit from the service or drive the need for the service. Some services benefit the community as a whole and it may not be appropriate or desirable to charge user fees that achieve 100% cost recovery for all services. Although the City has embarked on a process to update City fees for services, staff is without policy guidance on cost recovery levels and update frequency. Therefore, it is recommended that the City Council provide direction on the draft User Fee Cost Recovery Level Policy. BACKGROUND At the January 15, 2019, City Council meeting, the City Council received a report from the CFAC that became the blueprint for the City’s comprehensive fiscal sustainability plan. The report detailed 15 specific recommendations, including 10 primary recommendations along with an additional 5 contingency recommendations should additional cost containment and/or revenue enhancements be necessary. User Fee Cost Recovery Level Policy July 21, 2020 Page 2 of 6 Included in the report was a recommendation for the City to retain consultant services to assist in preparing a detailed cost analysis of the City’s productive hourly rates and user fees, and to adopt a User Fee Cost Recovery Level Policy to provide guidance on the appropriate levels of cost recovery for fee based activities. It is estimated that this recommendation would generate an additional $250,000 to $500,000 annually. On December 3, 2019, the City Council approved a contract with Willdan Financial Services (“Willdan”) to assist in updating the City’s Cost Allocation Plan (“CAP”) and to perform a comprehensive User Fee Study. To identify the full cost of providing services to the public, whether the City currently charges a fee for those services or could be charging a fee, the City needs an accurate and defensible CAP. The CAP incorporates appropriate general and administrative cost allocations into the budget and identifies overhead rates that can be used in the calculation of billable hourly rates for grants, fees, federal reimbursements, and other charges. The CAP review was delayed by the COVID-19 pandemic but was finalized in June 2020. City departments are currently in the process of reviewing and updating staffing, time, and materials that are used to calculate costs for fee-based services, to which the CAP and other department- specific overhead rates are applied. In total, the User Fee Study will allow the City to update user fees to reflect current costs, or to subsidize a certain portion of fees for specific activities at the City Council’s discretion. Pursuant to the provisions of the California Constitution, and the laws of the State of California, the City is authorized to adopt and implement fees, rates, and charges for services provided that such fees, rates, and charges do not exceed the estimated reasonable cost of providing those services. While, state law precludes charging more than the cost of providing the service, nothing prevents the City from setting a fee below the cost of service. Propositions 13, 218, and 26 have placed both substantive and procedural limits on cities’ ability to impose fees and charges. Collectively, these constitutional amendments provide safeguards against taxes being imposed without a vote of the people. Proposition 26 contains a more general articulation of the cost of service principle and includes a requirement that the local government bear the burden of proof that, “a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to recover the reasonable costs of the government activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burden on, or benefits received from, the government activity.” While charges for services and other fee based activities must have a nexus to the City’s cost for providing that service, it is important to also distinguish that rental charges for rooms of facilities, fines, penalties and late charges are not technically user fees and are not required to be based on actual costs. Instead, these types of activities are more typically governed by market rates, reasonableness, and other policy driven factors. User Fee Cost Recovery Level Policy July 21, 2020 Page 3 of 6 DISCUSSION As a general rule, the burden of paying for specific government services should be borne by those that benefit from the service or drive the need for the service. Some services benefit the community as a whole and, therefore, it may not be appropriate or desirable to charge user fees that achieve 100% cost recovery for all services. Although the City has embarked on a process to update City fees for services, the CFAC recognized that staff is without policy guidance on desired cost recovery levels. Therefore, staff has developed a draft User Fee Cost Recovery Level Policy for City Council consideration. The purpose of this agenda item is to establish general categories for cost recovery, not to consider specific fees at this time. This policy will serve as a general framework for developing specific user fee recommendations later this summer. The philosophy behind the policy and recommended cost recovery level policies are provided below: 1. Community-wide vs. Private Benefit: The use of taxpayer dollars is appropriate for services that benefit the community as a whole such as Police Patrol services. When the service or program provides a benefit to specific individuals or groups such as the issuance of building permits, it is common for the individual(s) receiving that benefit to pay for the full cost of that service. 2. Service Recipient vs. Service Driver: The concept of the service recipient vs. service driver is particularly important for regulated activities such as development review and public issued permits. Although the community primarily benefits, 100% cost recovery from the “driver” of the need for service is appropriate such as a building permit or Fire Code occupancy permit. 3. Consistency with City Goals and Policies: City policies and Council goals related to the community’s quality of life may also be factors in setting cost recovery levels. For example, fee levels can be set to promote healthy habits, facilitate environmental stewardship (e.g., encouraging solar panel installations), or discourage certain actions (e.g. false alarms). 4. Elasticity of Demand for Services: The level of cost recovery can affect the demand for services. A higher level of cost recovery could ensure the City is providing services such as recreational classes or summer camps for children and youth for without over-stimulating the market with artificially low prices. Such low prices, which reflects a high General Fund subsidy, may attract participants from other cities or crowd out private options for the same service. However, high cost recovery levels could negatively impact the demand for such services to low income individuals, children, or seniors. User Fee Cost Recovery Level Policy July 21, 2020 Page 4 of 6 5. Availability of Services from the Private Sector: High cost recovery levels are generally sought in situations where the service is available from other sources in order to preserve taxpayer funds for core City services. Conversely, services that are not available from other sources and are typically unavoidable and primary governmental services typically have low or zero cost recovery levels. Based on these policy statements, the table on the next page overlays certain cost recovery levels grouped in high (70.1% to 100%), medium (30.1% to 70%) and low (0% to 30%) cost recovery percentage ranges. It is important to note that these groupings provide policy guidance and are not absolute. Some policy statements may weigh more heavily than others, which may result in a different cost recovery level grouping for particular fees. For example, fees for recreational activities are expected to be set in general at the medium cost recovery level; however, fees for recreational activities for which there is a high demand may have a high cost recovery level due to high enrollment levels per class, and fees for senior programs may be set especially low due to concerns over the ability of those users to afford even the medium cost recovery levels. In addition to providing guidance on cost recovery levels of City’s fees holistically, the policy should also include a mechanism for the update of City fees, which typically should be conducted on an annual basis. Generally, the best management practice is to perform a complete update of City fees every 5 years or so. In between comprehensive updates, the City can utilize published economic factors such as the Consumer Price Index (“CPI”) for the Los Angeles Urban Wage Earners and Clerical Workers, or other key economic indicators. Alternatively, the City could also consider using anticipated labor cost increases such as step increases, benefit enhancements, or cost of living raises. It would be recommended that a combination of factors be used in the annual update: the personnel portion of the fees should be updated using employee cost increase factors, whereas the supplies and equipment portion of a fee should be adjusted using standard CPI factors. Utilizing such an annual increase mechanism would ensure that the City receives appropriate fee and revenue increases that reflect growth in costs over time. User Fee Cost Recovery Level Policy July 21, 2020 Page 5 of 6 Cost Recovery Levels Cost Recovery Percentage Range Policy Considerations Fee Examples High 70.1% - 100% • Individual users or participants receives most or all of the benefit of the service • Other private or public sector alternatives provide the service • The use of the service is specifically discouraged • The service is regulatory in nature Business Licenses & Permits Building & Planning Fees Attorney Fees Fire Code Fees Street Fees Medium 30.1% - 70% • Services having factors associated with the Low and High cost recovery levels Parking Fees Paramedic Membership Weed Abatement Low 0% - 30% • No intended relationship between the amount paid and the benefit received • Fee collection would not be cost effective and/or would discourage compliance with regulatory requirements • No intent to limit the use of the service • Public at large benefits even if they are not the direct users of the service • Affordability of service to low- income residents/seniors Recreation Fees (Classes) Library Fees (Programs) Facility Rentals User Fee Cost Recovery Level Policy July 21, 2020 Page 6 of 6 ENVIRONMENTAL ANALYSIS The proposed action does not constitute a project under the California Environmental Quality Act (“CEQA”), and it can be seen with certainty that it will have no impact on the environment. Thus, this matter is exempt under CEQA. FISCAL IMPACT It is estimated that adjusting the City’s user fees and adjusting fees on an annual basis would generate approximately $250,000-$500,000 annually in additional revenue to the City. RECOMMENDATION It is recommended that the City Council determine that this project is exempt under the California Environmental Quality Act (“CEQA”); and provide direction on a draft User Fee Cost Recovery Level Policy. Attachment: Draft User Fee Cost Recovery Level Policy Page 1 of 3 USER FEE COST RECOVERY LEVEL POLICY BACKGROUND The City provides a variety of services to the public which benefit everything from the entire community to individual residents or businesses. For certain services such as regulatory fees, arts and science classes, or recreational activities, the City traditionally has recovered some portion of the cost for providing these services, which would have been otherwise paid from the General Fund. Propositions 13, 218, and 26 have placed both substantive and procedural limits on cities’ ability to impose fees and charges. Collectively these constitutional amendments provide safeguards against taxes being imposed without a vote of the people. POLICY STATEMENT It is the policy of the City of Arcadia to set Municipal Fees based on cost recovery levels in lieu of fully subsidizing fee-related activities with General Fund dollars. The cost recovery levels are reflective of the following policy statements. 1. Community-wide vs. Private Benefit: Funding services such as Police Patrol services only through taxpayer dollars is appropriate for services that benefit the entire community. When the service or program provides a benefit to specific individuals or businesses such as the issuance of building permits, it is expected that individuals or businesses receiving that benefit pay for the full cost of that service. 2. Service Recipient vs. Service Driver: For regulated activities such as development review and public safety issued permits, the service recipient vs. service driver is particularly important. Although the community primarily benefits, 100% cost recovery from the service driver such as an applicant of a building permit or a Fire Code occupancy permit is appropriate. 3. Consistency with City Goals and Policies: City policies and Council goals related to the community’s quality of life are factors in setting cost recovery levels. For example, fee levels can be set to promote healthy habits, facilitate environmental stewardship, or discourage certain actions (e.g. false alarms). 4. Elasticity of Demand for Services: The level of cost recovery can affect the demand for services. A higher level of cost recovery could ensure the City is providing services such as recreational classes or summer camps for children and youth without over stimulating a market with artificially low prices. Such low prices, which are a reflection of a high General Fund subsidy, may attract participants from other cities; however, high cost recovery levels could negatively impact the demand for such services to low income individuals, children, and seniors. 5. Availability of Services from the Private Sector: High cost recovery levels are generally sought in situations where the service is available from other sources in order to preserve taxpayer funds for other General Fund funded City services. Conversely, services that are not available from other sources and are typically delivered when residents experience an emergency basis typically have low Page 2 of 3 or zero cost recovery levels. Based on these policy statements, the table below overlays certain cost recovery levels grouped in high (70.1% to 100%), medium (30.1% to 70%) and, low (0% to 30%) cost recovery percentage ranges. It is important to note that these groupings provide policy guidance and are not absolute. Some policy statements may weigh more heavily than others, which may result in a different cost recovery level grouping for particular fees. For example, fees for recreational activities are expected to be set in general at the medium cost recovery level; however, fees for recreational activities for which there is a high demand may have a high cost recovery level due to high enrollment levels per class. Cost Recovery Level Group Cost Recovery Percentage Range Policy Considerations Fee Examples High 70.1% - 100% • Individual users or participants receive most or all of the benefit of the service • Other private or public sector alternatives provide the service • The use of the service is specifically discouraged • The service is regulatory in nature Business Licenses & Permits Building & Planning Fees Attorney Fees Fire Code Fees Street Fees Medium 30.1% - 70% • Services which promote healthy activities and educational enrichment to the community • Services having factors associated with the low and high cost recovery levels Parking Fees Paramedic Membership Weed Abatement Low 0% - 30% • No intended relationship between the amount paid and the benefit received • Fee collection would not be cost effective and/or would discourage compliance with regulatory requirements • No intent to limit the use of the service • Public at large benefits even if they are not the direct users of the service • Affordability of service to low- income residents Recreation Fees (Classes) Library Fees (Programs) Facility Rentals Page 3 of 3 ANNUAL FEE UPDATE The City of Arcadia recognizes that its operating costs generally increase annually and that fees should keep pace with those increases in order to maintain the established cost recovery levels and to avoid large fee increases at any one time. Cost increases can be attributed to a variety of factors, including labor cost increases and material costs increases attributed to general inflation. Annual increases to City fees may be adjusted either by general increases to total labor costs or the Consumer Price Index (CPI) for the Los Angeles Urban Wage Earners and Clerical Workers, whichever is higher in order to ensure that fee rates and cost recovery levels are maintained over time. The City may also utilize a combination of these factors if the employee portion of a fee can easily be separated from the supplies/equipment portion of a fee. The annual fee update should generally be presented to City Council in concert the annual budget adoption cycle.