Here’s your business school case for the day:
You run a city whose politicians have decided that spending on public safety is sacrosanct. It already consumes 70 cents out of every dollar generated for the general fund by taxes and other revenues, but, rather than try to control costs, the lawmakers have voted to increase the police and fire budgets by $5.7 million over the next two years.
Your task is to find a way to pay for the politicians’ profligacy. But two of the city’s principal sources of revenue – property taxes and sales taxes – depend largely on economic factors beyond your control And the city can’t raise taxes without voter approval anyway. So what do you do?
Those of you who have taken Professor Russo’s class on municipal finance know the right answer: You generate additional revenue by raising the fees the city imposes on its citizens for the services it provides to them.
And that is exactly what the current administration in the City of Alameda has been doing in the last year.
It started last February when staff presented, and Council approved, a new fee schedule for the recreation and parks department whose “overarching goal” was to “provide more effective cost recovery with a balanced model of community benefit.” For the first time, the City began charging a fee for adult leagues, inflatable jumpers, co-ed kickball, and even use of park open space. A visit from Santa went up by ten bucks (and breakfast with him by a fiver).
These rec/park fees are deposited in a separate fund out of which the expenses associated with the programs are paid. According to City Finance Director Fred Marsh, the fee increases, together with greater demand, enabled staff to limit the amount transferred out of the general fund to pay for rec/park programs to $1.4 million in each of the next two years.
Then came the FY 2013-14 and FY 2014-15 budgets. As a result primarily of the budgeted increase in police and fire spending, the City faced a multi-million-dollar “gap” between revenue and expenses. The Merry-Go-Round already has discussed, and will discuss again in this week’s Sun, how staff recommended, and Council approved, drawing down general fund reserves to cover part of the deficit. But staff and Council also acted to boost revenue by increasing fees and penalties. Specifically,
- Parking meter rates in the Park and Webster Street Business Districts went up by 50 cents per hour, and parking garage rates rose by 25 cents per hour. The increased rates were projected to produce an additional $410,000 annually for the general fund.
- The fine for parking at an expired meter went from $38 to $45, and other fines were raised by even greater sums. The increased penalties were projected to produce an additional $380,000 annually for the general fund.
- The penalty for an unpaid business license fee rose from 10% per month to 20% per month. This increase was projected to produce an additional $60,000 annually for the general fund.
Staff hasn’t stopped there. In July, the City hired a collection agency called Municipal Auditing Services to chase after Alameda-based enterprises that allegedly owe business license fees. Like plaintiff’s personal injury lawyers, the collection agency works on a contingent fee basis: It gets 40% of the amount recovered. The collection efforts were budgeted to generate $80,000 for the City this fiscal year.
By far the most significant step was taken two weeks ago when Council approved a new master fee schedule for fees charged by the planning and building, public works, and fire departments. (These include plan check fees, encroachment permit fees, and hazardous materials inspection fees).
Staff had commissioned a consultant – if they were re-making “The Graduate” these days, that’s the job Mr. Robinson would whisper in Benjamin’s ear instead of “plastics” – to conduct a “comprehensive fee study” of the fees charged by the three departments. The goal was to determine, for each specific service for which a fee was or could be charged, the “average full cost” of providing the service.
Nor surprisingly, the consultants concluded that the City was short-changing itself. The total cost of the services provided by the three departments for which a fee could be charged was $4,534,344. But the City was collecting fees totaling only $3,128,023. The consultants advised the City to move toward the goal of “full cost recovery.” Specifically, planning and building fees should be set to “recover” 100% of cost; public works fees 90% of cost, and fire inspection fees 50% of cost.
By adopting the recommended new master fee schedule, the consultants estimated, the City would generate about $1 million in additional revenue, of which about $300,000 would go into the general fund. (The planning and building department has its own separate fund). After making a few tweaks, Council approved the new master fee schedule on November 5.
This emphasis on generating revenue by raising existing fees and imposing new ones may strike some as nickel-and-diming. But the unfortunate fact is that Council’s own actions have made it necessary. Throughout the tenure of Mayor Marie Gilmore, Council has refused to consider reining in public safety costs, notwithstanding City-sponsored surveys showing that the public favors such a move. Instead, Council has gone in the opposite direction.
Just after the November 2012 election, Council approved new four-year contracts that raised police and fire salaries and benefits by at least $6.2 million. Since then, CalPERS has boosted employer contribution rates for pensions once and is expected to do so again, so the cost of the four-year contracts to the City is greater still.
Later, after two firefighters’ union-supported candidates joined the two union-supported incumbents on the dais, the new Council voted to amend the City’s contract with CalPERS to allow firefighters who worked at the former Naval Air Station to purchase air time credits. This move would increase the City’s pension liability in an amount staff asserted was “unknown.” Then, in October, Council voted to expand a basic life support transport program run by the fire department even though, after operating for a year, it had failed to produce the profit projected when it was instituted.
Simply put, unless Council wants to cut non-public safety services drastically, the decision to spend so much money on police and fire means that the City needs to put every nickel and dime it can find into the general fund. And the quest for cash necessarily must focus on sources of revenue over which – unlike property taxes and sales taxes – the City can exercise control. That means the fees for services the City provides to its citizens.
The “full cost recovery” approach to departmental fees is not unreasonable. If the City provides services that benefit a particular user – as distinguished from the community as a whole — there’s nothing wrong with making that user pay for the cost of those services. And while we’re skeptical of anyone’s ability to determine costs as precisely as the City’s consultants purport to, their method makes more sense than the sort of seat-of-the-pants cost allocation staff tried to get away with when it wanted to close the Mif Albright golf course.
Moreover, both the consultants and staff recognized that there may reasons to make exceptions to the “full cost recovery” goal in specific instances — like when staff anticipated an outcry from the business community if fire inspection fees rose to the level necessary to cover the fire department’s “fully burdened” labor rates. We might long for the days in which citizens didn’t have to pay anything to reserve open space in a public park for a family get-together, but we realize we live in an era in which airlines charge passengers for the privilege of sitting in an aisle seat.
The increase in parking rates can’t be similarly justified on a “cost recovery” basis. Yet parking fees, like departmental fees, represent a charge to a particular user for a particular benefit (in this case, a parking space or a slot in the garage).
The constraint will come from the market. Higher parking fees might deter consumers from driving to Park Street or Webster Street to shop, eat, or take in a movie. (There are some around town who would regard that as a good thing: Let ’em get there by bike! Somehow, though, we doubt that PSBA or WABA would agree). But we didn’t hear any impassioned opposition when Council voted to raise the parking rates, so presumably the charges haven’t yet reached the level at which they’d reduce demand.
Likewise, it is difficult to object to increasing the penalties for parking violations or delinquent business license fees. We know that, if we don’t have our property tax installment in Donald R. White’s hands by December 10, we’ll have to write a larger check down the road. And who’s to say that the amount of the penalty is excessive?
On the other hand, siccing a collection agency on allegedly delinquent business license tax payers may be a little over the top. What’s more, we’ve already heard stories, and read letters in the Sun, raising questions about the collection agency’s tactics.
And we do wonder what comes next. Yes, Madam Vice Mayor, we are thinking of the Alameda Free Library. For FY 2013-14, the costs of operating the library system are budgeted to be $3.6 million. But revenues from library fees are projected to be only $1.7 million. The balance will be paid for by a transfer from the general fund.
If the City decided to take the same approach to the library as it has been taking to the rec/park department, it would raise library fees, thereby increasing library revenues, and thereby reducing general fund transfers. Will it happen? Remember, the concern about outraged businesspeople apparently dissuaded staff from raising fire inspection fees. Imagine the outcry from library patrons – not to mention the Vice Mayor – if staff recommended the City start charging citizens to borrow books.
In the end, given the sanctified status accorded public safety spending, we can’t fault staff for how it has gone about the task of generating revenue by increasing existing fees and adding new ones. We would have preferred, of course, that staff and Council confront the 800-pound gorilla in the room. But we realize that such a confrontation might result in political aspirations getting mangled. There surely would be no more clambakes to kick off fundraising for the next campaign.
FY 2013-14 & FY 2014-15 budget: 2013-06-11 staff report re FY 2013-14 & FY 2014-15 budget; 2013-06-11 FY 2013-4 & FY 2014-15 budget summary; FY 2013-14 & FY 2014-15 library budget
FY 2012-13 results: 2013-11-05 staff report re 4Q 2012 financials
Rec/park fees: 2013-02-05 staff report re park-rec fees
Business license tax penalties: 2013-06-18 staff report re penalty for business license fees; 2013-07-23 staff report re business license fee collection agency