Cost Accounting in Local Government

Should Across-the-Board Cuts affect all Departments?

In this time of financial uncertainty it has become common for cities, and even the State, to call for across-the-board reductions in expenditures. But what if a department or function is entirely fee supported? This could apply to Building & Safety, Current Planning, and Development Engineering. Should those departments have to reduce staffing even if their funding comes from user fees and not general taxes?

Under Article XIIIB of the State Constitution, fees are only allowed to recover up to the costs reasonably borne of providing the service. So if expenditures are reduced without alignment with the needs of the customers, it could lead to lower fees and therefore lower revenues, even though there may sill be unfinished work to be done.

The building cycle will tend to reduce development-related expenditures at its own pace. As there is less development during an economic downturn there will be less need for development-supported services. So a reduction in expenses, whether contract or actual staffing, should follow to fit the new workload.

But the ups and downs of the building cycle don’t go in lockstep with the ups and downs of tax revenues. By applying an across-the-board reduction to these departments there may still be work to be done that was previously funded by fees. At the other end of the cycle, building tends to ramp back up before the rest of the economy and before new tax dollars start flowing in.

All in all, this makes the case that these development-supported departments should be in an enterprise or special revenue fund and allowed to act independently of the variations in general taxes. The bottom line should be the fund balance for that fund. As development increases, expenses need to keep pace. As development slows, expenses need to also contract. It becomes the responsibility of the fund manager (department head) to insure that the revenues are always around the costs and that the fund balance is not too large or negative.

This should not have a large impact on the amount that individual applicants pay in fees. But it should insure that there is the right amount of staff on hand to process the project in a timely manner.

To treat these development-supported departments in the same manner as general tax-supported departments creates unneeded management and customer service problems.

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