COUNCIL COMMUNICATION
TO: Honorable Mayor and Council
FROM: Jill Olsen, Administrative Services Director
SUBJECT:Title
Discussion and Action: Review of the Fees and Service Charges Adjustment Process for Consideration of Policy Adoption (Jill Olsen)
Body
FUNDING SOURCE:
N/A
PURPOSE:
To consider adopting a process by which fees and service charges are reviewed and adjusted by the City. This will provide a consistent basis for fees and charges and provide public transparency as to what is charged.
BACKGROUND:
Council reviews the City’s Fees and Service Charges (fees) on an annual basis. Local governments use fees to help fund services. When certain services provided directly benefit a particular group, then cities consider fees on the direct recipients of those that receive benefits from such services. City Code Section 3.20: Fee and Service Charge Revenue/Cost Comparison and Charging System requires that the Council have a mechanism for ensuring fees for services adopted by the City do not exceed the reasonable cost for providing those services.
The Government Finance Officers Association (GFOA) recommends that cities use fees to offset costs and reduce the amount of taxes needed for those services. It is also recommended that the fees be updated on a periodic basis to balance any increases more reasonably. If fee adjustments are avoided or deferred, it not only causes uneven impacts (future spikes), but can have a cumulative effect on future years’ revenue loss.
In the past few years, the City has updated fees on an annual basis to help smooth increases over several years rather than having infrequent spikes. The current process is as follows: In year one, actual service costs are determined (12-month process). In years two and three, the Consumer Price Index (CPI) for a 12-month period is applied to the fees to assist with the smoothing of any cost increases (6-month process). For years two and three, the departments will continue to review fees to ensure the quality and price point of the service continues to meet actual demand and to look at alternatives for cost reduction opportunities, in addition to benchmarking applicable fees with those charged by comparable jurisdictions.
There are other options that may be considered. One option could be to determine the actual costs of services each year. This would eliminate the application of CPI; however, this process takes approximately one year, so this would be a full-time, labor intensive exercise every year. Though this is an option to consider, it is important to note that the results of adjusting fees by CPI has shown to be reasonably accurate when comparing to the updated actual costs; therefore, any benefits received from calculating the costs each year appear to be outweighed by the additional staff costs/time for the process.
Another option would be to calculate the costs in year one and leave in place for the following two years (no fee changes for two years). Then, the actual costs would again be calculated following year three. The positive aspects of this option would be that CPI is not a factor and the community would have no fee increases for two years. However, the likely downside is that there could be a significant spike in fees when increases do finally occur, which eliminates the smoothing effect found with gradual increases. In other words, fee increases may result in significant increases from year one to year four, and there would be additional revenue loss with this option.
Of the three listed options, staff would recommend the option of calculating costs in year one, then applying CPI to years two and three. The use of CPI in the fee increase calculations is supported and recommended by the GFOA, with actual cost calculations occurring within a reasonable timeframe. CPI is an index commonly utilized by most local governments and is considered a cost effective and verifiable method.
To summarize, the options for Council consideration are:
Option 1: Update actual costs in year 1; apply CPI factor in years 2 and 3 and adjust to actual costs in year 4 (current cyclical process);
Option 2: Calculate and update actual costs each year (12-month process each year); or
Option 3: Update actual costs in year 1; leave fees in place for years 2 and 3 and adjust to actual costs in year 4.
With Council direction as to the option preferred, staff will add the process to the Fiscal Sustainability Policy and return to Council for adoption of the updated policy.
COMMUNITY IMPACT:
Creating a transparent process helps residents understand how fees are calculated and helps to ensure that services are priced consistently. It also allows for better public engagement so that residents can see the “why” behind fees, which encourages constructive feedback and participation in policy decisions.
FISCAL IMPACT:
N/A
ATTACHMENTS:
Presentation of Fees and Service Charges Process
POSSIBLE MOTION:Recommended Action
I move to approve Option 1 to update actual costs in year 1 and apply CPI factor in years 2 and 3 and to have staff amend the Fiscal Sustainability Policy to include this method as the process for adjusting fees and service charges.
I move to approve Option 2 to update actual costs each year and to have staff amend the Fiscal Sustainability Policy to include this method as the process for adjusting fees and service charges.
I move to approve Option 3 to update actual costs in year 1 and leave fees in place for years 2 and 3 and to have staff amend the Fiscal Sustainability Policy to include this method as the process for adjusting fees and service charges.
I move to not approve an option for setting City fees and service charges.