Cost Accounting in Local Government

What’s the difference between Capital Fees and Service Fees?

Lately, there seems to be some confusion about the difference between Capital Impact Fees and Operational Service fees and the rules about how each of those very different types of fees are calculated.

In short, Capital Impact Fees, most often referred to as Development Impact Fees (DIFs), are fees that are imposed upon development to accommodate the new infrastructure demands created by that new development.  This includes everything from streets, storm drains, utilities, parks, vehicles and equipment, as well as facilities, like City Halls, Police Stations, Fire Stations and Community Centers.

To be able to calculate new development’s fair share of new infrastructure there a few basic steps.  The first is to identify the various land-use types of development that are projected in your General Plan through theoretical build-out of your jurisdiction.  Then, you will need to identify infrastructure additions necessary to accommodate that proposed development at build-out.  Lastly, you will need to identify how much of each infrastructure project is related to new development. Some projects may be 100% new development related, while others may be 0%, with still others somewhere in between. Here is a good question to ask yourself: Does the capital project or acquisition increase capacity, or is it merely needed to replace existing, but aging, infrastructure?

Then, after a few reasoned assumptions and a few more calculations, you have your new Capital Impact Fees. But the key part to remember is that while these fees may include the engineering costs and other project costs related to the infrastructure projects, they cannot include recovery of on-going staff costs.

Operational Service Fees, on the other hand, are all about on-going staff costs. These service fees, as their name implies, are designed to recover the costs of the services provided, whether it be on-going staff costs or other operational expenses.

Service fees are calculated by first determining that amount of staff time and other out-of-pocket expenses spent on the various services.  Then a cost per employee is determined by including salaries, benefits, operating expenses, and various overheads.  The State Constitution allows public agencies to charge up to the cost reasonably borne to provide a service. Anything charged over the full cost of providing the service is considered a proceed of taxes, and the fee must either be lowered or voted on by the electorate as a tax.

So in brief, capital fees are for new infrastructure related to new development and operational service fees are for on-going services.  These two categories of fees are for very different things and calculated in very different ways, and they should be studied separately.

There are of course many details we have skimmed over here, but that is the high-level view of the two different types of fee.

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