HomeMy WebLinkAbout03/28/1995, 1 - COST OF SERVICES STUDY ����hII� I�llul�llff��l�lll
city of San _ AS OBISPO MEETING DATE:
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COUNCIL AGENDA REPORT 11 NUMBER:
FROM: Bill Statler, Director of Finance
SUBJECT: COST OF SERVICES STUDY
CAO RECOMA ENDATION
■ Consider and discuss the results of the cost of services study prepared by David M. Griffith
& Associates.
■ Offer thoughts, comments and general direction to staff as appropriate in preparing for
community group briefings and in considering fee changes currently scheduled for June 20,
1995 as part of the 1995-97 Financial Plan process.
DISCUSSION
Background
Under the City's user fee cost recovery policy as set forth in the Financial Plan (Exhibit A), service
charges should be reviewed on an ongoing basis to ensure that they keep pace with changes in the cost
of living'as well as changes in methods or levels of service delivery. In implementing this policy, the
Council has adopted a strategy of comprehensively analyzing service costs at least every five years,
with interim adjustments annually based on changes in the consumer price index.
The last five year "benchmark" analysis was performed in 1988. Accordingly, the Council approved
a comprehensive evaluation of service costs and related revenues as part of the 1993-95 Financial
Plan, and in September of 1994, approved the use of an independent cost accounting firm to perform
this work. David M. Griffith & Associates (DMG), a nationally recognized management and cost
accounting firm, was selected to perform this work in November of 1994.
Study Workscope
Simply stated, DMG's task was to answer four basic questions:
■ What does it cost the City to provide various services?
■ Are these costs reasonable?
■ What are current cost recovery levels?
■ What fee changes are necessary to achieve adopted cost recovery policies?
As part of this study,.DMG was also requested to review, evaluate and make recommendations as
appropriate on the following matters:
■ Existing cost recovery policy, cost allocation plan and cost of service information.
■ Comparison of existing and proposed City fees in key benchmark areas with those charged by
other agencies in San Luis Obispo County and comparable cities.
■ Other matters that may come to their attention during the course of their review that should
be considered by the City.
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COUNCIL AGENDA REPORT .
Summary of Findings
DMG's study methodology, findings and recommendations are comprehensively set forth in the
enclosed report, and representatives from DMG will fully brief the Council on their findings at the
budget workshop. The following is a brief overview of their findings and recommendations:
■ Cost Recovery Policy. DMG concludes that the City's user fee cost recovery policy is an
appropriate basis for setting City service charges. They make two specific recommendations
regarding our policy, however:
Hazardous materials-related fees. Significant organizational changes will need to be made
in the near future as a result of recent State legislation concerning the regulation of hazardous
materials. These chanW are designed to streamline the regulatory process, especially as it
relates to the number agencies administering these kinds of programs and performing
inspections. Until these organizational changes are made - which should result in cost
reductions - no changes in the current fees for hazardous materials regulation services are
recommended.
Recreation activities cost recovery. Currently, there are no cost recovery goals for specific
recreation program activities; just an overall cost recovery goal of 50% of total program costs,
with general direction that cost recovery for programs oriented towards adults should be
relatively high and those oriented towards youth and seniors relatively low. DMG recommends
that specific cost recovery goals be set for various Recreation categories that would ensure that
the same level of cost recovery is being achieved for similar types of activities. With this
approach, any overall goal would be discontinued; overall cost recovery would simply be the
total result of cost recovery in each category.
Staff concurs with both of these recommendations.
■ significant- Opportunities for Improved Cost Recovery. If the City was to simply set fees at
already adopted levels, the General Fund would improve its cost recovery for City services by
over $1.3 million; in the water and sewer funds, we could improve cost recovery by about
$100,000, reducing general purpose rate requirements by this amount. As pointed out in
DMG's report, however, doing this would require significant fee increases in many service
areas, most notably development review activities. As further discussed in their report, it may
not be possible to achieve full cost recovery in some of these areas due to practical limitations
in collecting fees. Nonetheless, significant improvements in cost recovery are available to the
City under our existing policy, which would enable us to fund other important services and .
facilities that do not have alternative revenue sources available to them.
■ Costs Are Reasonable. A key element of DMG's workscope was not only to determine the
cost of providing various City services, but to form an opinion as to the reasonableness of
those costs. A fair criticism of many cost studies in setting fees is that they are solely revenue-
driven: if revenues are not recovering costs, then the solution must be to increase revenues;
however, the problem may not be that revenues are too low, but that costs are too high.
Accordingly, DMG was asked to specifically address this concern in their study. They
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conclude that City costs are reasonable: administrative and support service staffing levels are
lower than comparable communities, and many significant improvements in service delivery
have been made over the past several years while at the same time significantly reducing staff
levels in several key operating departments, most notably Community Development, Public
Works and Parks & Recreation.
In our case, DMG concludes that the problem is that fees are too low if we want to achieve
adopted cost recovery levels.
Policy Implications of this Study
The City's user fee cost recovery policy was adopted by the Council as part of the 1991-93 Financial
Plan after extensive review and analysis by a broad range of community groups. This review process
was followed by in-depth Council discussions on this policy prior to its adoption.
This review process was precipitated by the 1988 cost study. After reviewing the results of this study,
the Council was generally pleased with the analytical work that had been done, but felt that they were
without policy guidance as to what to do with the results: in short, so what if it costs $100 to issue
a building permit but we only get $50 in offsetting revenue? where does it say that general purpose
tax dollars shouldn't subsidize this service to the business owner or resident requesting this service?
This fundamental question of how fees and general purpose taxes should be used in funding City
services led to the in-depth analysis of this issue described above, which ultimately resulted in the
Council adopting our existing cost recovery policy, which addresses these issues clearly and
straightforwardly.
In short, if user fees do not recover the costs of providing the service, then general purpose tax dollars
are making up the difference. This is a simple truth - there is no other source for funding the
difference. Certainly there are cases where tax subsidies are appropriate, and these are addressed in
the City's user fee cost recovery policy. But to the degree that we use general purpose tax revenues
to fiord services that should appropriately pay for themselves, then we are reducing the resources that
would otherwise be available to fund other important services and facilities that have no.other revenue
sources available to them but general purpose revenues.
This policy issue becomes very important as we prepare and consider the 1995-97 Financial Plan. In
the recent past, the Council has expressed concerns on several occasions with the City's ability to fund
current service levels let alone the programs and projects included in recently adopted policies and
plans like the land use, open space, circulation and parks & recreation elements of the General Plan.
Ensuring appropriate cost recovery is one of the key fiscal tools available to us in helping make the
visions, hopes and.goals expressed in these plans a reality.
Next Steps
After Council consideration of this study, we will schedule a community briefing on these fees to
further discuss them with interested groups and individuals. Additionally, we will meet individually
with interested groups and individuals as requested. Based on the results of these briefings, staff will
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COUNCIL AGENDA REART
prepare fee recommendations for Council consideration at the June 20, 1995 meeting as an integral
part of the 1995-97 Financial Plan process. Any new fees adopted at that time would become
effective August 21, 1995.
Accordingly, no actions by the Council are required or recommended at this budget workshop.
However, any thoughts, concerns or general direction that the Council would like to offer at this time
would be helpful as we begin this process.
FISCAL EMPACT
There are no direct impacts associated with the Council's review of this study at this time. However,
implementation - or the lack of implementation - of the study findings regarding the large gap between
actual cost recovery and our cost recovery goals will have a significant impact on our long-term
financial health and our ability to achieve important community goals and priorities.
ATTACFI31[ENT
Excerpt from Section B of the 1993-95 Financial Plan setting forth the City's user fee cost recovery
policy
ENCLOSURE
Cost of services study prepared by David M. Griffin & Associates
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POLICIES AND OBJECTIVES
W IibiL
GENERAL BUDGET POLICIES (continued)
GENERAL; REVENUE MANAGEMENT
A. The City will seek to maintain a diversified and stable revenue to protect it from short-
term fluctuations in any one revenue source.
B. To emphasize and facilitate long-ran ancial planning, the City will maintain current
projections of revenues for the eding five years.
f C. The City will current expenditures with current revenues, avoiding procedures that
' balance ent budgets by postponing needed expenditures,accruing future revenues,or rolling
short-term debt.
USER FEE COST RECOVERY GOALS
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A. Ongoing Review
'! Fees will be reviewed and updated on an ongoing basis to ensure that they keep pace with
changes in the cost-of living.as well as changes in methods or levels of service delivery.
B. User Fee Cost Recovery Levels
In setting user fees and cost recovery levels, the following factors will be considered:
1. Community-Wide vs Special Benefit
The level of user fee cost recovery should consider the community-wide versus special
service nature of the program or activity. The use of general purpose (tax) revenues is
appropriate for community-wide services, while user fees are appropriate for services
which are of special benefit to easily identified individuals or groups.
2. Service Recipient vs Service Driver
After considering community-wide versus special benefit of the service, the concept of
service recipient versus service driver should also be considered. For example, it could be
argued that the applicant is not the beneficiary of the City's development review efforts:
the community is the primary beneficiary. However, the applicant is the driver of
development review costs, and as such, cost recovery from the applicant is appropriate.
3. Effect of Pricing on the Demand for Services
The level of cost recovery and related pricing of services can significantly affect the
demand and subsequent level of services provided. At full cost recovery, this has the
specific advantage of ensuring that the City is providing services for which there is
genuinely a market that is not overly-stimulated by artificially low prices. Conversely,
high levels of cost recovery will negatively impact on the delivery of services to lower
income groups. This negative feature is especially pronounced, and works against public
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POLICIES AND OBJK VES
GENERAL BUDGET POLICIES (continued)
policy, if the services are specifically targeted to low income groups.
4. Feasibility of Collection and Recovery
Although it may be determined that a high level of cost recovery may be appropriate for
specific services, it may be impractical or too costly to establish a system to identify and
charge the user. Accordingly, the feasibility of assessing and collecting charges should
also be considered in developing user fees, especially if significant program costs are
intended to be financed from that source.
C. Factors Which Favor Low Cost Recovery Levels
Very low cost recovery levels are appropriate under the following circumstances:
1. There is no intended relationship between the amount paid and the benefit received.
Almost all "social service" programs fall into this category as it is expected that one group
will subsidize another.
2. Collecting fees is not cost-effective or will significantly impact the efficient delivery of the
service.
3. There is no intent to limit the use of (or entitlement to) the service. Again, most "social
service" programs fit into this category as well as many public safety (police and fire)
emergency response services. Historically, access to neighborhood and community parks
would also fit into this category.
4. The service is non-recurring, generally delivered on a "peak demand" or emergency basis,
cannot reasonably be planned for on an individual basis, and is not readily available from
a private sector source. Many public safety services also fall into this category.
5. Collecting fees would discourage compliance with regulatory requirements and adherence
is primarily self-identified, and as such, failure to comply would not be readily detected
by the City. Many small-scale licenses and permits might fall into this category.
D. Factors Which Favor High Cost Recovery Levels
The use of service charges as a major source of funding service levels is especially appropriate
under the following circumstances:
1. The service is similar to services provided through the private sector.
2. Other private or public sector alternatives could or do exist for the delivery of the service.
3. For equity or demand management purposes, it is intended that there be a direct
relationship between the amount paid and the level and cost of the service received.
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POLICIES AND OBJECTIVES
GENERAL BUDGET POLICIES (continued)
4. The use of the service is specifically discouraged. Police responses to disturbances or
false alarms might fall into this category.
5. The service is regulatory in nature and voluntary compliance is not expected to be the
primary method of detecting failure to meet regulatory requirements. Building permit,
plan checks, and subdivision review fees for large projects would fall into this category.
E. General Concepts Regarding the Use of Service Charges
The following general concepts will be used in developing and implementing service charges:
1. Revenues should not exceed the reasonable cost of providing the service.
2. Cost recovery goals should be based on the total cost of delivering the service, including
direct costs, departmental administration costs, and organization-wide support costs such
as accounting, personnel, data processing, vehicle maintenance, and insurance.
3. The method of assessing and collecting fees should be as simple as possible in order to
reduce the administrative cost of collection.
4. Rate structures should be sensitive to the "market" for similar services as well as to
smaller, infrequent users of the service.
5. A unified approach should be used in determining cost recovery levels for various
programs based on the factors discussed above.
F. Low Cost-Recovery Services
Based on the criteria discussed above, the following types of services should have very low cost
recovery goals. In selected circumstances, there may be specific activities within the broad
scope of services provided that should have user charges associated with them. However, the
primary source of funding for the operation as a whole should be general purpose revenues,
not user fees.
1. Delivery of public safety emergency response services such as police patrol services and
fire suppression.
2. Maintaining and developing public facilities that are provided on a uniform, community-
wide basis such as streets, parks, and general purpose buildings.
3. Delivery of social service programs and economic development activities.
G. Recreation Programs
The following cost recovery policies apply to the City's recreation programs:
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POLICIES AND OBJECT" -S
GENERAL BUDGET POLICIES (continued)
1. Cost recovery for activities directed to adults should be relatively high.
2. Cost recovery for activities directed to youth and seniors should be relatively low.
Although ability to pay may not be a concern for all youth and senior participants, these
are desired program activities, and the cost of determining need may be greater than the
cost of providing a uniform service fee structure to all participants. Further, there is a
community-wide benefit in encouraging high-levels of participation in youth and senior
recreation activities regardless of financial status.
3. The overall cost recovery goal for recreation programs is 50%.
4. For cost recovery activities of less than 100%, there should be a differential in rates
between residents and non-residents.
5. Charges will be assessed for use of rooms, pools, gymnasiums, ball fields, special-use
areas, and recreation equipment for activities not sponsored or co-sponsored by the City.
Such charges will generally conform to the fee guidelines described above.
6. A vendor charge of at least 10 percent of gross income will be assessed from individuals
or organizations using City facilities for money-making activities.
7. The Recreation Department will consider waiving fees only when the City Administrative
Officer determines in writing that an undue hardship exists.
8. These policy guidelines are sufficient in themselves in providing direction for the setting
of recreation fees. Although targets for specific activities may be internally useful in
administering recreation fees, the City's management should have as much flexibility as
possible in setting specific activity fees as long as they meet the objectives and criteria
provided above.
H. Development Review Programs
1. Services provided under this category include:
a. Planning (planned development permits, tentative tract and parcel snaps, rezonings,
general plan amendments, variances, use permits).
b. Building and Safety (building permits, structural plan checks, inspections).
C. Engineering (public improvement plan checks, inspections, subdivision
requirements).
2. Cost recovery for these services should be very high. In most instances, the City's cost
recovery goal should be 100%. Exceptions to this standard include ARC review fees,
which is a review process clearly intended to serve the broader community as well as the
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POLICIES AND OBJECTIVES
GENERAL BUDGET POLICIES (continued) L
applicant, and public information services such as agenda subscriptions.
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3. However, in charging full cost recovery, the City needs to clearly establish and articulate ;
standards for its performance in reviewing developer applications to ensure that there is L
"value for cost".
I. Comparability With Other Communities r
1. Surveying the comparability of the City's fees to other communities provides useful
background information in setting fees for several reasons:
a. They reflect the "market" for these fees and can assist in assessing the r.'r
reasonableness of San Luis Obispo`s fees. 1
b. If prudently analyzed, they can serve as a benchmark for how cost-effectively San
Luis Obispo provides its services. t
2. However, fee surveys should never be the sole or primary criteria in setting City fees as l
there are many factors that affect how and why other communities have set their fees at
their levels. For example:
a. What level of cost recovery is their fee intended to achieve compared with our cost
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recovery objectives?
b. What costs have been considered in computing the fees? (1
C. When was the last time that their fees were comprehensively evaluated?
d. What level of service do they provide compared with our service or performance
standards?
e. Is their rate structure significantly different than ours and what is it intended to
achieve?
These can be very difficult questions to address in fairly evaluating fees among different
communities. As such, the comparability of our fees to other communities should be one
factor among many that is considered in setting City fees.
E D FEES AND RATES
A The City will set fees and rates a ich fully cover the total direct and indirect costs -
including operations, capital outlay, and debt se he following enterprise programs:
water, wastewater, parking, and golf.
B. As set forth in the Short-Range Transit Plan, the City will strive to cover at least thirty percent
of transit operating costs with fare revenuBes.
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