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

Part one provided an overview of fees applicable to fee studies, a variety of regulatory requirements, a few best practices to consider, and ended with examples of implementation constraints and external pressures. This second part of the series will continue exploring key aspects of fee studies including 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.

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., a building permit) should try to recover 100% of their total costs, 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.

The Cost Recovery Policy may also benefit from requiring regular updates to a Fee Study. A Fee Study establishes the total cost basis for each individual fee for service through a detailed cost analysis. The Study typically calculates fully burdened hourly staff rates that reflect all identifiable direct and indirect costs, and documents data on the average time required to provide each fee for service. Looking at how many services of each type are performed each year can also assist with projecting revenues and assessing estimated funding gaps for the fee program or agency as a whole. Additionally, the Study may document the total annual cost recovery potential for a given department or program and then identify how much of that cost is eligible for recovery in fees, and how much of that cost requires a funding source other than fees. While there are certainly other acceptable approaches to fee analysis available, the approach described here is the most commonly used to evaluate municipal fee programs.

An in-depth Fee Study of all fees charged should ideally be done every five years, or sooner if significant organizational changes are made or costs change dramatically. The policy can also require that fees be incrementally adjusted by inflation in interim years rather than waiting until a new full fee study is conducted. This incremental approach can make fee increases more palatable to elected officials and customers due to the smaller size of annual increases. If it has been a long time since your most recent fee study, implementing a multi-year phase-in to fee increases as a component of the policy may be advisable. This approach serves both to cushion the impact on those paying the fees and demonstrate that the agency is balancing revenue considerations against the impact on stakeholders. Ideally, a comprehensive Cost Recovery Policy should be adopted by the governing body so that staff have a solid foundation on which to justify recommendations to increase fees in the future.

When considering how to “price” services, decision-makers often find it helpful to conduct a survey of fees and fee amounts charged by surrounding and/or comparable agencies. While this is a useful exercise in establishing the “market” for neighboring jurisdictions’ rates for various services, comparative surveys can be confusing and at times misleading. Rather than survey individual fees, one approach that can both improve the accuracy and understandability of the survey results and narrow the scope of information to digest is to focus on the total fees charged for specific types of popular development projects (such as a single family home, a commercial building, and a tenant improvement), as well as the top 5 to10 stand-alone fees charged in each department. This approach can cut through the noise and complexity of what are often voluminous fee schedules to highlight the fees and costs most likely to impact the majority of an agency’s customers. Such surveys are a valuable addition to, but not a replacement for, an overhead cost allocation plan study and a full cost of service (fee) analysis and should be understood holistically from this perspective.

Making efforts to obtain stakeholder buy-in is equally important as having useful and comprehensive survey data. Reaching out in advance to community and development industry groups, as well as major fee payers such as large homebuilders operating in your city, can go a long way toward demonstrating that an agency has made every effort to put forward a well-supported set of proposed fees. These individuals or organizations often have useful perspectives that can enhance your approach to finalizing fee recommendations.

Finally, depending on how long it has been since your last comprehensive fee study, do give elected officials a chance to review the basis for fee calculations and policy recommendations in a regularly scheduled study session or as an informational item on their agenda, rather than proceeding directly to a public hearing for adoption. This gives elected officials time to review and discuss the documentation supporting fees, review recommendations against local cost recovery policy considerations, and make any adjustments they decide are needed to best implement a fee program for the community.

Ultimately, fee schedules that are frequently reviewed, adequately justified, and supported by a comprehensive fee study, cost allocation plan, and outreach strategy are far more likely to obtain governing body approval and will largely eliminate the budgetary challenges that can result from long gaps between fee updates.

Article first published in CSMFO News at https://news.csmfo.org/2020/10/23/is-it-time-to-update-your-fees-part-two/.

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