Cost Accounting in Local Government

Fee Increases in Between Cost Studies

When I first started doing Cost Studies, cities were unlikely to know the cost of their services let alone charge what the services cost. The most common approach, when fee increases were considered necessary, was to compare the city’s fees with neighboring cities, which I called the “blind leading the blind” update.

Later, as cost studies became more common, cities had to face the issue of significant jumps in proposed fees if the fees stayed constant between updated studies. More and more cities began the process of incremental annual increases. The most common approach was to use the local CPI increase. This worked well when interest rates were higher and the CPI reflected the increases.  At present, we have a low inflation rate and the CPI increases may not truly reflect the increases in cities’ costs.

Conventional wisdom claims that 70% of local government costs are personnel related. Assuming that this is true, we can suppose that the cost increase for the other 30% probably does track with the CPI.  But, what about the personnel costs?

I know of cities that have foregone salary increases due to the economy and their cost/fees have not increased.  I know of other cities where the pressure for salary increases, after years of holding the line, has led to significant increases in salaries, especially those for public safety.  At least one local county has recognized that fact and used the percent increase in salaries as the fee increase factor. If we open the discussion to salary increases, we must also consider the increases in retirement and health contributions (both for employees & retirees) which seem to have had the greatest recent increases.

Therefore, I would like to make the following suggestions:

1) Even if it would be “nice” to update service costs/fees annually, the benefit of the update does not exceed the cost, in my opinion, for three to five years.

2) I would recommend a simple weighting analysis of the three most significant personnel cost drivers: Salary increases, retirement contribution increases and health insurance cost increases (Including retiree costs as well as current employee costs), and then use the CPI for all other costs. The CPI should be the base increase with an incremental factor for each of the other three drivers modified by the ratio of their costs to total costs.

3) For agencies with Police and Fire activities, I would recommend calculating a factor separate from that for general employees. For agencies with high cost utilities, I would exclude them from the analysis but use the results for their miscellaneous fees.

4) If your agency is not making annual increases to their fees, I strongly recommend that you encourage them to do so. Being “steady at the helm” with fee increases avoids problematic increases where fees have to be increased 30-40-50% to recover costs.

5) Nobody is being fooled if your fees are expressed to the penny. I always round recommended fees to the nearest $5. To push fees to dollars and pennies implies an accuracy that I know you don’t have because I don’t have it. I discovered early in my career that when I wanted a greater accuracy the smallest cost change had the potential to ripple through all my costs and fees. The nearest $5 tends to insulate the cost/fees from changes due to minor cost increases/decreases that are normal in any study.

6) No matter what analysis you perform, keep in mind that the most significant fee changes will be due to staff experience where they discover that it either takes more time or less time to perform the service than the time the cost/fee was based on. Keeping the intra-update period to between three and five years insures that these “time” changes remain an insignificant part of the total.

 

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