This is not a new problem to me. Over the years of costing Fire services, I’ve encountered lots of the non-emergency services that Paramedics are asked to perform. The “Times” article was referring to the Los Angeles County Fire Department where the Paramedics “…responded to 543,715 calls in 2010…“ and where County staff estimated that about 20% of those calls were non-emergency calls that could be handled differently. This calculates to one wasted Paramedic response every 5 minutes in LA County.

The big concern in changing current practices to curb the abuse of this service is the fear of making the wrong decision and not helping someone who really needs help. Most judgment calls are easy to make. If there has been a major accident with multiple injuries you definitely send Paramedics, Engine Companies withEMS/BLS-trained firefighters, and ambulances. Whereas, if Grandpa John has fallen out of bed and Grandma can’t lift him up to get back in bed you send someone to help and consider billing for the service.

That leaves the 10 to 20% in the middle that are true judgment calls. Expecting a dispatcher to make the judgment call will require additional training to determine if a probable medical emergency exists.

What changes have Police Departments made to procedures to try and maximize the availability of Officers for emergencies? When I was a kid, if a home was burglarized the Police would race out to the home after being called. Today, the homeowner is cautioned about what not to touch and a civilian Community Services Officer (CSO) or the equivalent will come out to take a report, and if there is a possibility of evidence, schedule a crime scene investigator (also civilian) to search for clues.

When I was a kid, Police Officers would respond to all automobile accidents. Now, many jurisdictions determine whether there are any injuries and, if not, a civilian officer (CSO) will come and take the accident report, or a Police Officer will appear long enough to give each party a form to fill out and submit. In other words, Police Departments have made a special effort to insure that Officers’ time for true emergencies is maximized.

All Fire Departments should read that Los Angeles Times article and, if they haven’t already, begin the discussion on how to structure Paramedic services so that Paramedics’ time for true emergencies is also maximized.

Link to the Los AngelesTimes article – L.A.County’s 911 system burdened by non-emergency calls

Budgets are treated as financial documents by most organizations for two main reasons. The first is that it is the minimum they are required to do. You might as well roll up into the fetal position as an organization if you can’t at least broadly identify how you plan to spend your money over the next 12 months. Second, it is much easier to update and project numbers than it is to update and project what services are provided with those numbers and whether anyone wants those services.

Budgeting for Outcomes means you need to start with identifying your current outcomes. What services are you providing to your community and how much do they cost? While it is nice to identify in your budget how much the Police Department costs, that doesn’t really identify what services are provided with that money, let alone what each of the services cost.

Which brings us to the first component of treating the budget as a management document: what services are currently being provided and at what cost? What some people call “pricing,” and what we have been calling “costing” for over 30 years, is really just breaking down your organization to the level of services that are meaningful from a management standpoint, and then identifying the service level being provided. While RCS is often asked by an agency to identify services for fee recovery purposes, we can also provide the broader identification of the cost the rest of the services provided by an agency.

But first, this involves a discussion at the management level and then at the departmental level to determine how finely to parse the services being provided. Do you just identify fire emergency response as a service or do you break out medical calls from other calls? Do you just identify street maintenance or do you break it down to arterial, collector, and residential street maintenance? There is no right answer but your organization needs to think about this as your customers would. A customer probably doesn’t care how much Police patrol costs in different parts of the City, but they probably do care about how much emergency calls cost versus non-emergency calls, as well as the response times for each. The organization needs to decide early on about what its service list looks like. It is especially important that this discussion takes place across departments as many services are provided by multiple departments.

If time and effort is not spent on the costing component, the prioritization component will die from a lack of meaningful information and you will be left at the same place you started, which is managing by instinct without much input from actual data or from customers, the taxpayers.

So while everyone should strive to clearly and precisely identify what they want for the future, you must first identify in a meaningful way what you are really providing now.

•  It’s not the plan that is important, it’s the planning. (Graeme Edwards)
• Thinking is the hardest work there is, which is probably the reason why so few engage in it. (Henry Ford)
• It is always wise to look ahead, but difficult to look further than you can see. (Sir Winston Churchill)
• Our struggle is to identify the sources of revenue and the means to obtain the funds. Without funds, all the planning and research studies can’t help us. (John Breaux)

Of course one has to balance these fine motivational comments with the inevitable quote you can expect from one of your agency’s department heads:

Budgeting is the biggest pain in the butt I have to deal with all year.

Well okay, I guess not everyone saw the process the same way I did.  You can’t blame them since the process basically starts with, “Expect less resources, expect more obligations, but don’t present me with any more problems.”  These are pretty tough times and it’s going to be difficult to balance the budget.  But remember, you always have and you always will. Times have changed but let’s look for an upside.  Here are some thoughts:

Difficult times can lend themselves to greater ease in making significant changes.  Be prepared to change something! No doubt many of you have nearly had your head handed to you in the past for merely suggesting that services currently done by in-house staff be contracted out.  Now you might enjoy some success with such suggestions.  Does it really matter who sweeps a street as long as it is done properly?  Does it have to be weekly? While no one wants to “lose” a public service such as your “own” fire-fighters, does it really matter what seal they have on their helmets? They are all professionals and what really matters is that you obtain the best services available for your residents and local businesses that your agency can afford. Be bold.  Maybe you can start a consortium that owns a sewer vactor for three cooperating agencies instead of each of you owning one.  Why wait for someone else to do it?  Start it now, or at least start the discussions.

Make sure your budget changes show short term and long term results.  This can be a very vexing prospect, considering that your career, hopefully, is long term, while often some elected officials only seem concerned with the next four years of their term (or see it as the proverbial stepping stone).  Yes, that makes it more of a challenge.  You will need to try to convince them that their decisions will have both short term and long term consequences and that a legacy of better long term decisions is as important as the short term ones.  Contracting out some services, thus by reducing retirement obligations, will probably generate more long term savings than short term ones.

Don’t be afraid to suggest that a service may no longer be affordable at all.  Again, while no one wants to be the harbinger of death to a particular service, because somebody likes it, it may simply be necessary.  It may be best to have the public provide input on which services they feel are most important.

Identify any policies that got the agency into the existing shortfall situation and try to extract some policies from your elected officials.   Over-dependence on sales tax receipts put many a city in a difficult position by simply becoming fully dependent upon that maximum amount based upon unrealistic annual increases.  Learn from that error and then consider… what would you have done differently had you known (or even if you did know) that those levels of sales tax receipts were unrealistic?  Perhaps a suggestion that any amount collected over a more conservative annuals percentage increase be dedicated for one-time capital purposes that reduce long-term costs or for funding that nagging underfunded vehicle replacement fund.   I had the opportunity of working with a very rural fire district many years ago that had an interesting policy:  Where a change in service delivery was required, a solution requiring additional expenditures could be suggested only after two solutions not requiring any additional financial resources were put forth.   On occasion, one fire-fighter would put out a trash bin fire. They said, “Well, it’s that or let it burn”.

Lastly, and perhaps more importantly, check every one of your revenues very closely. You may want to conduct a service cost study and development impact fee calculation study (full disclosure, WE do those).  Or contact us about our software that allows you to undertake these by yourselves.  More importantly, don’t be afraid.  You didn’t make the problems, but strong problems require strong alternatives and strong plain talk and that is what you were hired to do.

Be bold.

Lead.

Consider all alternatives regardless of how different they may sound.

And have some fun along the way and retain a sense of humor.

It may seem like heresy but there is no absolute number that represents the cost of a service. The reality is a range of costs based on the assumptions made by the consultant/analyst. When the Study is updated on a regular basis, the city and consultant/analyst have the opportunity to refine the calculations to narrow the range of possible costs. However, this refinement is only possible when a Study accounts for 100% of the time of staff performing fee services.

There are different ways to obtain service time. The first approach was Frederick Taylor’s stopwatch time study. This was a great start but very labor intensive (i.e. expensive); and, the Hawthorne Effect, based on a seminal study of labor at a Western Electric plant, showed that the mere act of studying employees increased their productivity.

The approach used by RCS is to interview supervisory personnel on the time a task should take for each position that they supervise. This number becomes the initial time in an iterative process that involves staff review of the results. The validation of this time estimate comes from calculating the total time that would be spent over all the estimated annual units of service summed across all of the services performed by each position. This total time is then compared with the total work-hours that the position has available in a fiscal year.

If the position has more calculated hours of work than exists in the year, either the estimated time – no matter how carefully estimated – is too high, or the estimated number of units are too high. On the other hand, if the total calculated work-hours are significantly below the available work-hours, then either (1) there are services not accounted for, (2) the estimated time for the services was too low, (3) the estimated annual units are too low, or (4) the position has insufficient work to perform.

Once service time is validated, the result can be used by the supervisor as a performance standard for the experienced employee. The standard accomplishes two goals: (1) alerts the employee to management expectations that a certain amount of time is the “norm,” and (2) alerts the supervisor when an employee’s performance has improved enough for the next step increase.

This second goal is often “lost” on supervisors. The issue can be quantified as: “The cost to the city should be the same no matter which employee does the work. An employee at Step 1 of a payroll range will take longer. As their time for doing the service decreases, they should receive a step increase that keeps the cost to the city constant.”

Currently, the most common criteria used for initiating a step increase is “time in grade” or a subjective evaluation of the employee’s performance. However, the costing process can make the managerial evaluation objective.

But the more things change the more they stay the same. Because, in the face of all this change, it is more important than ever to know what it is you do and how much that costs. As the new normal for tax revenues becomes apparent over time, you will need to know what your new normal is for the costs of the services that those taxes are supposed to fund.

But we can’t make those kinds of decisions until there is a discussion at the local level about what we are willing to pay for. Is your agency still trying to provide yesterday’s level of service with today’s level of funding and staffing? Are you still hoping that revenues will return to their previous level? Do you even know precisely what level of service the community is currently receiving, and more importantly, willing to pay for?

Local government needs to have an honest conversation about what that level of service costs. Does your community want the cheapest police department with the commensurate service quality? Does your community want to outsource maintenance services, even if that has a long term impact on the quality of the infrastructure?

So once you have figured out what your new normal is for revenues, it is time to clearly identify what it costs to provide the current level of service and specifically talk about what the residents are receiving for that level of service. What is your average police and fire response under current and other cost scenarios? What is your pavement and park maintenance schedule under current and other cost scenarios?

Only once you have that level of information can the community prioritize what they want to do and do well within the revenues they are willing to pay. We should be past trying to do everything and do it poorly. It is time to choose.

One day, the very wise City Manager called me in to inform me that I would be going with the Mayor to the State Capitol to take part in the annual League of California Cities (LOCC) one-day invasion of Sacramento. I thought his choice was brilliant, even though I was secretly surprised that he even knew my name. But it kind of made up for the time he had me drive into the Los Angeles produce market to pick up the three watermelons that the Salinas Mayor has sent our Mayor. But wow, a coordinated march on Sacramento. This League thing is COOL! I imagined the some 3,000 council members (and dutiful staff) ascending upon the many assembly and senator offices like some well-tuned army, requesting, (Nay I say!), demanding that the State Legislature FULLY address the fiscal needs of the 540 UNIFIED cities! I knew that we would show them our might, and they would quake at our strength and unification.

Now fast forward to Reality 101. I was basically sent to keep the Mayor on schedule, pick up the bar tabs, give him his talking points, carry his bags, listen to his many lawyer/golf stories, and get him back. I also realized that the elected state officials knew something that we didn’t. The LOCC represents some 540+ cities, each with different demographics, financing, and service needs. It’s like representing all the animals on the Ark; sure animals all, but bears just aren’t like giraffes. We weren’t a unified army at all, but instead were just a bunch of individual cities with individual tin cups in hand that could be simply taken care of by a grant (usually a partial grant) for a traffic signal or a community center (always with the local assembly or senator’s name on it). We were bought off cheaply.

And this is my point (because Rick and Eric suggest there should be one). The time-honored process of divide and conquer works; always has and always will. There are roughly 540 cities in California, each with little in common with any other city. Pretty much the only thing that all cities have in common is providing (and maintaining) circulation and storm drainage infrastructure systems. After that, public safety services can be provided in a myriad of ways, whether it is contract, in-house, special districts, etc. Some cities have water, sewer, electric, or refuse utilities. Recreation, library and beach services can cross inter-agency lines. Then, some have enterprises such as golf courses, sports stadiums and airports. As extreme examples, what does the City of Industry have in common with, say, the City of Malibu, Anaheim with Oroville, or San Francisco with Pomona? It’s hard to find more than a few alike.

Stated more precisely, your city is not so much in league with the other 539 cities as you are in competition with them. Most dues paying cities are members of the League of California Cities pretty much in name only, sort of like catastrophe health insurance. Cities will take advantage of whatever they can over any city they share boundaries with. Admit it; there is some sense of satisfaction when your strategy wrestles that Chrysler dealership away from that contiguous city. So what if you spent a million or two in Redevelopment increment money to construct that freeway-contiguous giant Chrysler electronic sign to do it (2009 Honda Accord just $17,500 in bright eight foot letters!).

So we end up with this. Glendale takes advantage of the fact that Los Angeles has a high business license tax based on gross receipts and steals L.A.’s auto dealers and the sales tax dollars that come with them. Los Angeles is then forced to consider dropping that business license tax revenue, probably with poor net revenue results. Then again Villa Park, a residential community in the hills of northeast Orange County, collects less than five figures in sales tax revenues and probably couldn’t care less about that revenue source. But sales tax collection is still a major component to most cities (and State) and thus Redevelopment Agency monies have tended to slide towards getting that big box retail or hardware store or car dealership to move into their City.

The unintended consequence of Redevelopment Agency efforts, as currently constituted, appear to create more low-paying than high-paying jobs. Frankly, we have gotten to where there are enough places to shop and enough places to spend money. We do have a shortage of places to make a viable income. But given a choice between a big box hardware store and a research facility creating over 90 jobs with an average salary of $75,000, both competing for an eight acre parcel owned by your Redevelopment Agency, which would you pursue? It happened, and you can guess the outcome. Is there any wonder that there was no hue and cry from the public when Governor Brown started eyeing the increment-rich Redevelopment Agencies.

California’s cities, for all to survive, need to find a revenue policy stream that works for most of the 540 cities, if not all. Dependence upon sales taxes may no longer be the answer. We have enough consumption-based retail jobs. Redevelopment receipts need to be used to entice career-based light/clean manufacturing and more design/research career jobs back to California. It can happen but not under the current revenue structure. It’s simply bad policy and the existing tax structure is the ultimate statement of policy. I’m not saying that competition isn’t good. I always enjoy and respect seeing a great staff work hard for better services for the residents and businesses in their City, but there appears to be too much zero-sum gaming going on to make things better in the aggregate.

The League of California Cities needs to be part of it to make it happen. Cities will need to compromise. Legislators need to think about the State and not their re-election. California is a great State and that’s why we have all chosen to live here. It’s time to work together, to be an actual League.

Under the Council-Manager form of local government, the council hires a city manager who hires, fires and directs
staff. The manager is an at-will employee of the city council and can usually be fired with minimal fuss.

This manager, either directly or with the support of the finance department and/or personnel department, negotiates with the various recognized employee groups over annual pay and benefit changes.  Since the negotiators usually benefit from whatever the employees receive, we have a classic case of the “Fox guarding the Hen House.”

There is no incentive, outside of professional integrity, to hold the line on employee total compensation. In fact, all the incentives seem to be stacked against making a “good” decision:

• The negotiators generally receive the same benefit and compensation package that the employee groups receive.
• Other “competitive” cities are using the same negotiation model and making it hard not to be “competitive.”
• The reward for holding the line with employee groups can be psychologically difficult when the negotiators have to work with the same people on a daily basis.
• The negotiator’s own retirement might be near and the fiscal impacts on the city might be far off.

So, what did this well-managed San GabrielValleycity do? They had an independent labor negotiator on retainer who was hired by the city council and reported directly to the council in closed-session. This negotiator had no “skin in the
game” and could make his/her best professional recommendation to the council. If the council was unhappy with the professionalism of the negotiator, it was easy to terminate the contract.

I won’t embarrass the city by naming it. I suspect that this practice ended many years ago. Yet, it is interesting to speculate how many cities today would be better off fiscally if the negotiators were not in-house.

If you haven’t updated your CAP in a number of years then whatever allocations you are using are outdated and most likely recovering an inadequate amount.  You are leaving money for the General Fund on the table.

If you are using direct budgetary allocations of staff instead of a CAP to recover these costs then you are losing the cross-allocations that should go with those staff.  For instance, if you are allocating part of the Public Works Director to the Water Fund, you are probably only allocating that position’s salary and benefits.  But by using this method you are losing all of the other support costs related to that position.  Those costs will stay in the General Fund but would be picked up using a CAP.

If you are transferring money from your Enterprise Funds to the General Fund without a CAP, either through use
of in-lieu fees or by a percent of revenues, then you are most likely running afoul of Proposition 218’s requirements about substantiating transfers from Utility funds.  This could create a legal problem for your Agency.

In conclusion, if you are using a CAP for recovery of General Fund costs from your Enterprise Funds, then it is time to start thinking about updating that CAP.  If you are not using a CAP to do so, then you should really start doing so for the reasons listed above.  Otherwise you are either leaving money on the table or you are exposing yourself to a citizen lawsuit.

Regardless of what you may think, it is hard to know for sure if the changes are more politically or fiscally motivated. Given that all of the current council members consider themselves fiscal conservatives, politics would be hard to ignore. But given that the City has also had a significant downturn in General Fund tax receipts, combined with escalating retirement costs, the fiscal prudence needs cannot be eliminated either.

Municipal service delivery changes that are being considered include sharing service delivery with other nearby local agencies, as well as fully contracting out to other levels of government or private sector contractors. Also, numerous services that are deemed as not being worth the cost are being eliminated. These changes are not unheard of in municipal government. Many newly incorporated cities employ them with great success. And hey, we all get it; the public elects a City Council, the City Council makes policy, and staff, at least the remaining ones, carry out that policy to the best of their ability. If you don’t understand this, you are probably in the wrong business.

So what are a few ways that make any actions more fiscally prudent and less politically motivated? Here are some suggestions:

Recognize the twin principles of efficiency and effectiveness.  Sure, they differ. The former relates to cost, the latter relates to how well the service is provided. Savings can always be made, but at what cost to the level of service (or LOS)? The City could easily hire a bunch of monkeys (officially called a “troop”) and give them a hundred typewriters to write the City’s press releases. No doubt it will be efficient, but the monkeys would probably fail on effectiveness. On the other hand, hiring ten fully tenured literature professors to carry out the same task would probably be effective, but not efficient. You need to strike a balance between the two.

Measure the delivery of municipal services.  You know the process by many names, including Management by Objectives, Quality Circles, and Zero-Based Budgeting. But whatever the name, they all require the measurement of the provided service, identifying the resources it takes to provide the service, and then measuring the quality of the actual service. I know that it seems counter-productive to spend more time on record-keeping (or as I like to call it, management) when resources are limited, but to make changes just for the sake of saving money, is (as my dad used to call it) just whistling past the cemetery. Everyone in the room is just pretending the decision was for the better.

Distribute Resources and Responsibility.  Rather than micro-manage how a service is provided, the City Council could simply allocate the available resources (or the revenue pie) to the departments and then let the professionals responsible for that service determine how to best use those limited services. The Police Chief should be the professional the Council chooses to look for law enforcement delivery decisions. If they don’t, then its time they choose one that they do. If the Council makes the staffing decisions, how can you hold the Chief responsible for the outcome? You simply can’t.

Discuss these major changes above board.  No one should fault any city council for reviewing service delivery options. But sweeping statements like, “the private sector can do it better” do not make better decisions. “Better” needs to be defined, as does the task and the follow-up review of the results. For instance, did it actually complete the needs of the public and was it cheaper (again the effectiveness/efficiency thing). If the service is to be outsourced to a private sector firm that has to consider a profit, be sure to include the costs of monitoring the contract work to insure that the terms of the contract are met.

What is most helpful to all of us is that Costa Mesa has placed themselves in the Petri dish for all of us to observe. They have become the biggest experiment going, and frankly, we should all take advantage of that.

Today, the norm seems to be that dog license fees cover about 25% of the cost of animal control. This trend seems to be a combination of fewer and fewer pet owners feeling compelled to license their pets and mission creep in animal control operations.

There are a number of ways to identify the owner of unlicensed dogs and to structure animal control to reduce the tax subsidy. However, as a dyed in the wool iconoclast, I would like to question the very existence of animal control.

I suggest that it is time for society to step back and discuss the role and importance of animal control in the modern world. Are pet owners responsible enough to vaccinate their dogs for rabies prevention? Maybe, but does it matter any more. Only about two to three people die in the U.S. from rabies each year and the greatest risk is from wild animals, especially bats. To put that number in perspective for the U.S., approximately 1,100 people die annually from firearm accidents and 43,000 from motor vehicle accidents.

Considering mission creep, more and more cities are proposing annual inspections of businesses boarding, selling, and grooming dogs, cats, horses and fish. These additional inspections may be the best thing in the world for the protection of horses, dogs, cats and fish, but, is the community buying into the mission any more than they are buying into rabies vaccinations?

In our urban world, maybe the most important role for animal control is: (1) to identify and quarantine vicious dogs; (2) to control noise pollution from continually barking dogs; (3) to require dog owners to clean up after their dog in public; (4) to control wild animals such as foxes, raccoons and opossums living in urban areas; and, (5) to control feral cats which are impacting the song-bird population. In each case, the dog license would be of minimal value and the service could only operate by means of a tax subsidy.

Please respond with your thoughts on whether you feel there is a role for animal control in the modern world.

To determine whether that is the case you must look at not only the direct cost of providing the service, but any ancillary costs that go along with that service.  Let’s use as an example outsourcing tree trimming services.

Direct Costs

It could be relatively simple to determine the direct cost of providing tree trimming services in your City, if there discrete individuals who only do tree trimming.  But if you have staff that does tree trimming and other services, such as park mowing, then it gets more complicated.  You need to determine what each employee does and how much time they spend doing it?  Then you need to look at your employee mix if tree trimming were no longer provided by City staff.  How many employees and supervisors are needed to provide the remaining services?  If there are minimal layoffs, chances are the cost savings will be less than hoped for because you will likely be laying off newer and cheaper employees.

Indirect Costs

While you should look at the full costs of providing a service when comparing that service with a private contractor, including overhead costs, it is important to understand what costs the City will be saving and what costs will just be reallocated to other services.  For instance, part of the overhead cost is a portion of the City Manager cost.  Obviously, even after contracting out tree trimming services, there will still be a need for a City Manager.  These costs will just be reallocated to other services, and there is no cost savings to the City.  But if contracting out tree trimming services means there will be less vehicle maintenance costs, then there will be a cost savings to the City.  So now the same questions that were asked of the park maintenance staff above will need to be asked of the vehicle maintenance staff and everyone else who provides administrative support to parks maintenance: How would you job responsibilities change based on tree trimming being contracted out.  Only then can you determine what are the fixed costs and what are the marginal costs.

Contract Administration and Conversion Costs

Finally, it needs to be determined what costs would be added to City staff if tree trimming is outsourced.  There is now a new contract that needs to be administered and supervised, and there should be performance measures in the contract that would need to be spot-checked.  Who would do contract administration and how will that affect the other services currently provided by that person?

Are there one-time conversion costs, such as pay outs to laid-off employees or costs associated with transferring maintenance vehicles to the contractor?  Are those costs going to be front-loaded in the first year or amortized over the length of the contract?

Also, are there any off-setting revenues that would accrue to the City by contracting out, or would the City lose any revenues by contracting out.

This overview shows that deciding whether to outsource a service is not a simple process.  More importantly, it reinforces the idea that decisions of this type cannot made in a vacuum.  Good decisions come from good information.  You will need information about what services are being provided to the public, what services are being provided to other departments, and who is providing those services.  Without this information you can’t know whether outsourcing a service is economical or not.

]]> http://www.revenuecost.com/blog/general/to-outsource-or-not-to-outsource-313/feed 0 http://www.revenuecost.com/blog/dif/methodology-utilized-in-dif-calculations-307 http://www.revenuecost.com/blog/dif/methodology-utilized-in-dif-calculations-307#comments Mon, 11 Apr 2011 17:04:49 +0000 Scott http://www.revenuecost.com/blog/?p=307

Back in 1988, RCS identified two distinct methods for calculating development impact fees (DIFs) and identified them as inductive and deductive.  A third method, buy-in calculation, would be limited to public utilities and will not be addressed here. Using fire safety services as an example, the inductive and deductive methodologies are briefly described below.

INDUCTIVE DIF CALCULATION

This method employs DIF calculation by determining the cost and the capacity of a particular facility and identifies it as the model for all similar facilities.  What is known is the cost and capacity of a particular facility, and what is unknown is the base amount that will require use of the facilities and thus the total magnitude of those facilities that will be required.  As an example, your fire chief might determine that a two bay wide by two vehicle deep fire station can meet the needs of a population of 5,000 dwelling units or 10 million square feet of business space, or any pro-rata combination of the two. This methodology is helpful when the amount of additional residents and business square feet (at build-out of the city) is unknown.  Using this method, and assuming land and construction costs to be uniform throughout the state, the fire impact fee would not vary from jurisdiction to jurisdiction.

Advantage of Inductive Calculation.  One of the advantages to this type of fee is that it is absolute. When permits for 10 million square feet of manufacturing, commercial, or office space, or 5,000 dwelling units are issued, there will be enough DIF revenues collected for the model station, but not necessarily for the station that might be required.  Major changes to the City’s General or Community Plan growth estimates become irrelevant.  It simply doesn’t matter what is privately constructed in the City. Whatever is built will pay for its pro-rata share of the need based upon that model. It is, in effect, no-fault DIF estimating.

Disadvantages to Inductive Calculation. A significant disadvantage to this method is that the fee is based on the model and does not take into consideration unusual or specific needs that may affect the cost and thus the appropriate fee.  Additionally, it tends to focus on the ultimate or final product, such as the model fire station, but ignores overhead or support facilities such as fire administration offices, vehicle maintenance, or training facilities.

DEDUCTIVE DIF CALCULATION

This method of DIF calculation can only be accomplished by determining three major factors, they are:

1)      Land Use Database. What additional residential, commercial, and manufacturing development is expected to create demand for additional facilities or infrastructure based upon the city’s community (or general) plan and the zoning code?

2)      System Capital Improvements. What specific master plan facilities will be needed as a result of the identified demand growth?

3)      Land Use Demand (Nexus) Generators.  What are the factors that differentiate the demand for the services from one land use to another, or how does a detached home create demand for police services as opposed to a light manufacturing plant or any land use?

What becomes known are the specific facilities and any unusual circumstances that define the need for those specific facilities, including the cost of the identified facilities and the base of undeveloped parcels over which to distribute the financial responsibility for land use demand generators, and therefore the resulting project costs.  This method creates valid fees that will differ from city to city because it recognizes the specifics of geography and locally defined levels of service of each agency.

Need for Definitive Information.  The deductive method clearly requires a greater amount of effort as it requires a comprehensive needs-planning effort for the entire agency, both developed and undeveloped.  As an example, a fire department often has an adopted standard of a five minute or less response to all fire alarm calls.  However, it could be that part of a given city is very hilly and has five acre estate lots, each accessed by a slow curving road, while the rest of that city is flat, developed to five dwelling units to acre and is served by a typical grid circulation system.  Add to that there are 60 undeveloped acres in the City zoned as a manufacturing area with a private plan for an ammunition factory, a fireworks factory, and a gasoline refinery.  You can see the issues.

To meet and maintain the standard five minute response in this city, a station built in the hilly portion of the City would only be able to serve 500 homes, while a station in the flat area would be able to serve 3,500 homes.  The proposed factories and refinery are special cases where a five-minute response may not even be sufficient.  The result is that the cost to supply the appropriate level of service to the three above described areas will differ per dwelling unit or business square foot for each area of the City.  Information supporting such calculations will take effort to generate but are required to calculate a valid DIF schedule.

Advantages of Deductive Calculation. The advantage of a deductively calculated impact fee is that it will relate directly to the specifics of each city because the more than 500 cities in the state of California all differ in needs and standards.

Disadvantages of Deductive Calculation.  There are, unfortunately, numerous disadvantages to this calculation method.  Initially, this method requires a great deal of effort to generate the information necessary for a valid calculation.  Omitted projects will result in inadequate fee collections for all of the facilities/infrastructure needed.  The development community may find the results confusing as the resulting DIF schedule will vary from agency to agency, sometimes with little understanding as to why.  The deductive approach may also identify a disparity between the amount of infrastructure currently provided by the existing community with that being required by the future community.  Lastly, this type of fee will likely require more frequent updates.

IS EITHER METHOD MORE CORRECT OR HAVE GREATER VALIDITY?

Neither method is more correct.  Both methods, with proper information, would be a reasonable representation of what it costs to accommodate the public infrastructure needs and service levels of new development.  Thus, both retain inherent validity.  However some work better with one method over the other.  Public infrastructures that lend themselves well to the inductive DIF calculations are capacity specific wastewater treatment plants, water treatment plants, community and aquatics centers, and parks. Facilities that lend themselves to the deductive DIF calculations are circulation systems, wastewater collection lines, water distribution lines, storm drainage systems, police protection, fire suppression, and many others.  As shown by the above fire example, some infrastructure can be calculated using either method with similar results.

While we are cutting our budgets and some are laying off staff, it certainly puts our problems in perspective to see what others are facing. On NPR the next morning, I heard Lalit Acharya, who is the Riverside, California, international relations manager, worry that he has been unable to contact the host that he stayed with when he last visited Sendai to celebrate the 50th anniversary of their sister city relationship. Although Riverside’s Mayor was able to reach the Sendai City Hall, he reported that it was part hospital, part homeless shelter and part general store.

This earthquake, coming less than a month after the Christchurch earthquake in New Zealand, makes abundantly clear the danger that we face in California. What brought the danger home to Los Angeles was the article yesterday in the Los Angeles Times that warned there were many thousands of local buildings constructed similar to the Canterbury Television Building in Christchurch, which collapsed and may have killed 100 people. The Times quoted a Caltech expert as saying, “When they fail, the failures are just unsurvivable. You just end up with a pile of floor slabs, one on top of another.”

All of these natural disasters, plus our own fiscal disasters, point up the need for proactive risk assessment. We are all very good after the fact in taking action but very poor beforehand in identifying the risk and taking actions that might lessen the disaster. Unfortunately, modern humans don’t need to be Cassandra and incur the wrath of Apollo to foretell the future but have no one believe it, it’s just human nature to disbelieve what we don’t want to believe.

However, if we could accept that there is a probability of an event and multiply the probability by the potential cost of the event, we could rank the costs of unlikely events without considering whether we believe they will happen. The costing process that we encourage for local governments is the embryonic form of this costing – the framework exists, it just needs to be implemented.

Meanwhile, we should enjoy each day to its fullest and see to our own personal disaster planning.

But are these accident response fees a good idea for your city? Let’s set aside the philosophical and political issues of whether you should charge these fees. Let’s look at whether it is a practical fee that will actually get your city extra revenue. I have seen many quotes about the amount of revenue that is projected from these fees when they are first set up. But I have seen very little information about cities actually receiving substantial revenues. One example, though, since July, 2009, the City of Costa Mesa has collected $91,000 in revenues after paying commissions to a collection agency, according to a Los Angeles Times article. The City is still trying to collect on $186,000 in outstanding bills.

So if you are thinking about this fee, you should ask yourself and your Police and Fire Departments the following questions:

• Who would be expected to pay this fee? Only non-residents? Only the at-fault party?

• If only non-residents are going to pay, how broadly do you define a non-resident? Is a business owner a non-resident? Is someone visiting a resident or a business in town going to pay the fee? What if that person is an employee of a business in town?  What if someone is just renting a room?

• If only the at-fault party is going to pay, how do you define at-fault? In many accidents there is more than one at-fault party? If someone is more than 50% at fault do they pay the whole bill or only their proportionate share?

• Who is going to do the billing and the collecting? What percent of bills will you expect to be uncollectable? Is that a realistic percentage?

Cities have charged DUI accidents the cost of accident response for years, with generally a pretty dismal collection rate since many courts don’t like to add these fees onto what that person is already paying in fines and restitution. With a DUI accident it is easy to define who pays the fee. As you can see from the above questions, it is far more difficult to define who will pay a general accident response fee. And, of course, the general accident response fee would in most cases be paid by insurance companies, and they have made it clear that they will fight these fees.

So there may be some extra revenue available through this fee for some cities, especially those near a freeway. But you should make sure that you are one of those cities before the fee is in place and not after.

I would love to hear anyone’s experience with accident response fees. Feel free to comment on our blog.

City Manager’s Office – This can generally work well, considering that it is the City Manager, but that office can also be pretty busy and communication can be delayed for “more pressing issues.”  However, a kick-off meeting involving the City Manager and scheduled updating of progress to someone in the City Manager’s Office is generally suggested.

Finance – This important operation provides required financial information such as account structure, existing DIF funds and existing balances (as well as obligations), bond debt on existing facilities, and other financial record keeping. Finance is also responsible for the annual DIF collection/use report.  The finance operation benefits from the process by finding out all of the capital needs over General Plan build-out.  This helps prevent surprises, such as the immediate need for a new fire station when the City Council merely says, “find a way to pay for it.” The final report is a treasure trove of financial information.  Additionally the process generates information about how much money is required to finance long-term replacement of the City’s sizable assets.

Planning – The agency’s planners provide the all-important “Land-use Database” that identifies the service area(s) for which DIF schedules will be crafted.  The information usually consists of at least six basic land-uses identifying existing and future anticipated acres and units.  The planners benefit in that the agency’s General Plan (GP) is made relevant by determining how the agency can provide infrastructure-based services to the anticipated future population and business community.  The DIF calculation acts as a General Plan Capital Infrastructure Financial Element (even though one is not legally required).  While critical to the process, the planners do not generally have the broader concerns required to undertake the on-site project management job.

Public Safety Chiefs – The public safety chiefs generate demand and capacity information and in return receive the statistical number of additional calls-for-service they can expect from GP development.  This information allows the Police Chief to have a more valid determination of how many additional sworn personnel (along with space, vehicles and equipment) they will need in the future, based upon statistical demand, instead of the oft-quoted, but equally unfounded, 1.5 officer per 1,000 residents guesstimate.  The information allows the fire chief to determine where stations will be needed and how many bays they will need to be.  This process mirrors the Master Plan process evident in other public works infrastructure such as the ubiquitous Circulation or Storm Drainage Master Plans.  However these two positions have little to offer in terms of the MFP/DIF project management.

Public Works Directors – This group hits the mother lode with the possibility of fully funded circulation, storm drainage, and utilities systems needs based upon well thought-out Master Plans.  The process also identifies the amount money (annually) necessary to maintain the existing structure capacity, even though DIFs cannot be used for this process. This knowledge could help recognize that some rehabilitation or replacement of aging infrastructure is essential.  Regardless of how many infrastructures may be represented by the Public Works Director, it’s still not a particularly good idea to have one line (or infrastructure) manager as the project manager in the MFP/DIF process.

Community Service Managers – The MFP/DIF process identifies the existing, or de facto, standards (capacity per resident) for the agency’s parks, aquatics centers, libraries, and public use facilities.  Based upon this relatively simple information, the legislative body can determine if these existing standards are insufficient or adequate to meet the resident’s needs.  Most agencies do not have any type of standard referenced in the General Plan elements. This void is recognized and dealt with in the DIF report by identifying the current de facto standard and determining if that is the desired standard.

So who does make the best on-site MFP/DIF Calculation on-site project manager?  Based upon my experience, it’s a fully invested member of the Finance operation.  The MFP process is all about capital planning, (as I wrote earlier, it eliminates surprises), and the DIF process is all about capital financing.  Finance’s task is to continually improve the agency’s ability to finance capital expansion and then on-going operation costs.  In my book that is the essence of Finance.

When we consume government services, we try to get as close to capitalism as possible. We pay taxes to get what we perceive as tax services: primarily public safety and improved quality of life. We also understand that governments will aid those less fortunate than ourselves but we often question the efficacy of those services because we only want to subsidize individuals who deserve to be subsidized.

The bottom line for me, personally, is that when I pay my taxes I expect to get police, fire, and park services. I don’t expect to be subsidizing my neighbor who is adding an addition to his house. I don’t expect to be subsidizing the guy down the street who wants the city to organize a softball league so that he and his buddies have someplace to play. All of my judgments are subjective. Others will have their own list of what they think should be included in tax services and what should and should not be subsidized.

All of the decisions on how local taxes are spent should be determined by local taxpayers and voters. The perceived failure to do this led to the voter backlash in California where several voter initiatives were adopted to force the issue. The authors of the “tightest” initiative, Proposition 4, wanted to know several things which seemed commonsense to them: (1) what was the local government doing? (2) Who on staff was doing it? (3) What did it cost to do it? And, (4) who was paying for it?

These questions seem so straightforward. Every business asks them and must know the answers. But, at that time they were foreign concepts to local governments. They budgeted and accounted for expenditures (flow of cash) not expenses (accruals). They worked a normal workday with minimal consideration given to what or how many products were produced. Fees were determined by either “That’s what we always charged” or by calling around to other governments to ask what they charged. Taxes were raised as necessary to balance the budget with little consideration given to how the taxes were used.

With the start of the taxpayer revolt, the capitalist marketplace addressed the need with niche companies that were formed to answer these questions for local governments using the kinds of tools that the private sector had developed many decades ago. That the private sector jumped into the information gap was logical given that the taxpayer revolt was underwritten by realtor associations and chambers of commerce.

The result was that more and more local governments began to understand the private sector approach. As tax revenues were reduced and as more accurate costs for “personal choice” services were identified, fees that benefited small groups of individuals were increased so that the taxes that were formerly subsidizing them could be used to provide tax services to the general community.

The natural bias before the taxpayer revolt was to keep fees artificially low so that the customer would be happy. The unintended consequence of the taxpayer revolt was that it was now possible to identify the cost of individual services and to charge accordingly.  That, along with the reduced level of taxes, made it essential for the remaining tax revenues to be more precisely focused on traditional tax services.

“Whoa – that’s not what I wanted! I wanted my taxes to be spent ‘better’ but my subsidies to remain.” Maybe those were not the words used but they certainly seem to be the attitudes expressed once fees started rising.

Now what? Well that old saw, “location, location, location” is still true. I can show you two cities of identical population within miles of each other. One has a lot of vacant commercial space and courts development by discounting fees. The other has done everything possible, with the exception of digging a moat, to discourage developers, including the cost of additional development reviews, and developers still fight to get into the city.

Well then, maybe all cities should have the same fees mandated by the state legislature? It seems logical as all cities have the same basic laws that have to be met. If they all had to work within the limits of a mandated fee, wouldn’t they become more efficient? Let’s take that concept to its logical conclusion: Shouldn’t all gas stations charge the same amount per gallon after all, gas is gas is gas? Shouldn’t all housing have the same price per square foot? “Whoa – that’s socialism! I only want socialism for government? Arrrgh. What did I just say?!!”

Capitalism is capitalism and socialism is socialism. Decide what you want but I’m happy with our capitalist system with the least number of tweaks. So, for the sake of argument, can we agree that capitalism is also “good” for government? If so, the issue becomes how to insure that the calculation of fees is legitimate.

Business people may not know government (Schwarzenegger proved that in California) but they certainly know when a fee makes sense. Since we are in a transition stage from the old (“what are the neighboring cities charging?”) to the new (“here’s how we calculated our costs”), there are going to be errors made by local governments.

A classic error comes from a city experiencing rapid growth. Their grading fee structure was established in formerly quiet times. As their growth turned to the rolling hills that were formerly pasture land, a developer submitted a project that involved a tremendous amount of dirt being moved from one spot to another. When the city calculated the grading fee, it penciled out to over $1 Million. Staff should have immediately recognized the problem and adjusted the fee. However, government staff like to fall back on the “that’s the way we’ve always done it” excuse. It took the developer threatening to sue and a call from staff to me before the fee was changed to actual cost of staff time.

There were two lessons from this example: First, government staff needs to think like the consumers of their services. If something doesn’t “smell” right, resolve it as quickly as possible. Notice that I said “resolve it”, the other problem that I see is the vigilante staff person who will change the fee without any authority because they believe that the change is “just.” Vigilante justice is no more appropriate in government than it is in the “new” west.

The second lesson is that mistakes have been and will continue to be made. I don’t walk on water. I don’t know of any other cost consultant who walks on water. And, although they may claim otherwise, governmental staff don’t walk on water either. If government staff and customers approach the obvious errors with the attitude of “Wow, that’s really weird. I’m surprised no one saw this before,” we can dispel the defensiveness that would have occurred with the “how could you be so stupid” approach.

In case you haven’t noticed, I’ve segued into discussing development service fees for the same reason that Willie Sutton robbed banks. Police services that can be charged for generate little revenue. Fire prevention fees are a growing source of fees but they also impact the development and business community. Recreation fees, “can we talk” should be raised but cannot practically be raised if the community wants a recreation program. I’ll discuss that issue at another time.

So, focusing on development fees, the goal of appropriate fees is that the revenue is sufficient to insure adequate, well-trained staff to perform the application review process in a timely manner. Developers have consistently said that the fees are not unreasonable if he/she would be able to get through the process quickly and without hassles. The real cost to a developer has usually been the interest on construction loans that pile up while staff dithers with the application.

The alternative is to have low fees which pay for low-skilled and overworked staff that slowly process the application such that the fee savings are spent on interest payments. Either way, the developer pays, but it’s my expectation that correctly calculated higher fees supporting a skilled staff will ultimately cost less to the developer.

How does the decision affect you? If you followed the (reasonable) basics of §66000, you will be just fine (and we at RCS did and continue to follow those requirements).  I am sure that your City Attorney has already sent a summary of the decision to Council and staff outlining this fact.  Many have copied me and I appreciate them remembering and including me.  If it weren’t for the current building economics, we’d get this party started!

Having dedicated a great deal of my career to this very important revenue source, I am pleased, but not particularly surprised, by the Fifth Appellate District’s decision.   Initially, I am glad to see an “on-point” court decision, that is, it was a challenge on a specifically calculated Development Impact Fee Calculation and Nexus Report.  This is far better than having to extrapolate principles from the “Big Two” exaction cases, Nolan and its little sister Dolan (not that they aren’t important, they are).  Secondly, given the data we generate for a DIF Report, I am not surprised that it was not one of my client’s Reports (or, as I prefer to call them “our reports”) that had to go through the challenge.  Here (with as much brevity as I am capable of) is what the judges concluded:

1. General descriptions of needed projects are sufficient.  In our reports, Community-use Facilities DIF collections can be used to acquire additional generally defined, as opposed to specifically defined community-use facility square feet to accommodate future residents.  The specific type of community-use facilities can be determined at a later point in time.  In our reports we identify the acquisition and construction of park acres, but not necessarily specifically where or what type. This process, I have always contended, while general in nature, is specific enough.

2. Existing DIF collection fund balance paid (on behalf of) businesses and residents upon permit issuance are part of the existing community and represent a current asset.

3. The Quimby Act does not preempt §66000. The decision supports RCS’s application of dual park DIF calculations, the Quimby Act for application to subdivision of land (where specific land acquisition is required), and §66000 for non-subdivided developments for general Citywide park needs.  There is no conflict, and to exempt either category (sub-divided or non-subdivided developments) would be inconsistent.

4. Minor contradictions with the General Plan are not a problem.  Nice, but that being said, your municipality adopts both the General Plan and the DIF Calculation/Nexus Report, so there is no need for any such contradiction. If required, amend your General Plan.  If your currently met (or de facto) standard for library space is 0.32 square feet per resident, insert a comment in your General Plan that the City’s library standard is either A) the current de-facto standard or, B) the actual 0.32 square feet per resident.  I recommend the former.  Then indicate whether or not the City wishes to maintain that standard or alter it.

5. Inclusion of vehicles and specialty equipment is reasonable.  The court stated “Vehicles and officer safety equipment are necessary to provide the public service of police protection.”  Just document it.  We do.

6. Recoupment of previous project costs is invalid, as it represents general revenue to the City. I generally understand this conclusion with two possible exceptions.  The first would be if a project were constructed with additional capacity specifically intended for future demands.  Findings would need to be made at the time the facility was acquired or built and the excess capacity must exist.   Secondly, I maintain my belief that a case can be made for a “buy-in” approach for utilities (only) would be considered fair because the system has been constructed with utility rate proceeds, not general taxes.  A DIF defense would require a full appraisal of the utility system to determine its current value.  A perfect example would be Loma Linda’s water system. It was 80% complete (due to specifically creating additional capacity) but served less that 65% of the system’s ultimate demand as represented by the existing users (and payers).  Thus, 65% of the users have overpaid for the system.  They should be able to get that back, and I think a combination of the two above instances would meet court scrutiny.

So, what is the practical application of the Court’s decision?  Most importantly, it provided acceptance; the acceptance that DIFs are a reasonable (and necessary) capital financing tool. The development community and their BIAs will no longer be able to merely threaten lawsuits over the entire report.  Instead they will have to identify some sort of substantive complaint about specific projects.  Given the cost of litigation, a few projects here or there will not likely generate a lawsuit.

Again, be as specific in identifying specific projects as possible without handcuffing yourself. Clearly touching base with the development community to identify these projects they consider too vague will continue to be a good plan. That doesn’t mean they are, but maybe some stronger language can strengthen your claims.  Be sure to make your findings clear. The Mitigation Fee Act requires a local agency to: (a) identify the purpose of the fee and the use; (b) determine that the fee’s use and the need for the public facility are reasonably related to the type of development project on which the fee is imposed; and (c) determine a reasonable relationship between the amount of the fee and the cost of the public facility.  We have done that.

Secondly, you can keep your Quality of Life infrastructure projects (community and aquatic centers, libraries, parks and open space) sufficiently vague, or vaguely sufficient. A park is pretty much a park. The City’s Hard Infrastructure, consisting of law enforcement, fire suppression/medic, circulation, storm drainage collection, general facilities, and all public utilities should be based upon Master Plans, and thus will likely be more specific.

So, let’s hear it for the Fifth Appellate District Court judges, who actually know what “reasonable” is.  Now, if we can just do something about that whole bad economy thing.

While this is a continuation of the budget battles at the state level, it is the inclusion of local levies that could make it affect your agency. There are numerous exemptions from the terms of the proposition, including fees “which do not exceed the reasonable costs to the local government of providing the service or product” and “a charge imposed as a condition of property development.”  That should include most fees that local agencies charge.

Instead, it appears that the proposition is targeting regulatory fees where the funding is to pay for a program of broad public benefit rather than providing a service directly to the fee payer.  This issue goes back to the State Supreme Court’s Sinclair Paint decision in 1997, which said that a lead paint fee was a regulatory fee and not a tax.  So the fees that would most likely be affected by this proposition would be things such as health and environmental fees, like Hazardous Materials Fees or Oil Recycling Fees.  But it could also affect such things as Business District Fees or General Plan Maintenance Fees, where the service is not directly provided to the fee payer.

Another important component of Proposition 26 is that it puts the burden on the local government of proving that a fee is not a tax and that it is fair and does not exceed its costs.  While a local agency should already be properly accounting for the calculation of its fees, this will make it clearer that it is a local agency’s responsibility to do these calculations.

I am sure that over the next few months the League of California Cities and others will provide more analysis of the effects of this Proposition, but it might be a good idea to look at your regulatory fees and determine which ones might be affected if Proposition 26 passes in November.

The developer is the entrepreneur who sees potential in the development of a parcel of property. The developer is the risk taker who bets that he or she can buy the rights to develop a parcel, hire a contractor to build the development and sell/lease it to buyers/tenants at a profit. As the risk taker, the developer can lose everything, win big, or end up somewhere in between. Costs are extremely important to developers as they come out of their pockets. Some develop to leave a legacy, others to acquire a fortune, and most because developing is what they know how to do to make a living. Often the developer goes where the opportunity is the greatest, which can make their association with a community tenuous at best.

Contractors are the local workers who construct the development conceived by the developer. Their livelihood is based on the existence of development. Anything that threatens development is perceived as a personal threat, so consequently, they are allies of developers.

Land owners of developable land can be realtors or the rancher/farmer who is ready to retire or move to an area more remote from civilization. Often they are the long-term speculator who sees potential in property where others see dust. Land owners and developers will court each other until a match is found that meets the needs of both parties.

These three groups are obviously pro-development as that is their career and it affects their financial well-being.  The fourth group is comprised of a community’s current residents, who have a conflicted view of development.

The current resident is someone who already lives in the community and, along with the business community, pays taxes for current services. The individual resident may have limited clout in the local legislative body where businesses and other special interests often contribute money and time to elect candidates for office. Only when sufficient numbers of residents are aggravated about an issue can the strength of their electoral numbers overcome the financial advantage of their perceived adversaries.

In the early stages of a community’s growth, open land is plentiful and development is scattered and sparse. Developers who work in this environment rarely encounter opposition for modest developments or for developments that meet a particular need of the community. However, at some point in the growth of a community, it becomes more and more apparent that new developments are impacting the existing residents. The signs are subtle at first: a longer commute to work or to the store because of the volume of cars on the road or because an intersection takes so long to get through. That open space across the street or down the block that the kids could play in is now filled with homes or stores and the kids have to find a new place to play. The little Carnegie Library that served the community so well in its early days is now overwhelmed by local school children seeking books that their school libraries can no longer afford.

It is generally at this point that the professional staff of a community recommends development fees to the legislative body. The impetus can be financial or “quality of life.”  From a financial standpoint, the community may not have the monies to construct the infrastructure that a development requires to avoid impacting the current residents. From a “quality of life” standpoint, the empty lots which were used as unofficial parks are now full of homes and alternatives need to be found for youth recreation.

What has happened is that a community has reached a “tipping point.” Obviously, every development that has occurred in the past has had an impact. But, suddenly, “It’s my development that is going to be charged. Where the guy who developed before the impact fees made lots of money, I may now go broke.”

No one questions that there is an impact from building thousands of new homes in a small community. But, it is a lot harder to see the impact of building three homes on a small parcel.

The Development Agreement process was the initial method used to obtain infrastructure funding from a developer. However, the development agreement was not always the fairest way to mitigate the impacts of a development. Many communities found that the facilities constructed, using the development agreement, were perceived as “belonging” to the neighborhood and not to the community as a whole. At the same time, other impacts were too small to be addressed in the development agreement, such as library books, or else they were too large to be thought of as impacts, such as the need for a larger sewer trunk line servicing the entire community.

Believe it or not, the development impact fee process was designed to be the fairest for all developments: neither overcharging the large development nor undercharging the small development. The process is simple: (1) identify the cost of additional infrastructure that will be necessary to support the community at build-out; (2) split the cost of the additional infrastructure between what the existing community requires and what new development requires; (3) identify what new development will occur between “now” and build-out; (4) Identify a “use” factor for how the new development “uses” the infrastructure; and, (5) spread the cost of the additional infrastructure over the new development based on how the new development will use the infrastructure.

If we can agree that development impact fees are, conceptually, the fairest way to allocate impacts to developments, why is the development community often seen as opposed to them? The obvious answer is that the cost of the impact fees is coming out of the developer’s pocket. Therefore, if a community is at the “tipping point,” the rational developer would like to be the last one to develop before the impact fees are imposed.

An argument is often made that impact fees increase the price of homes. In a perfect world, that would be true as every home being built has an impact on its community’s infrastructure. However, we don’t have a perfect world. Some communities have established impact fees while neighboring communities have not. Since the value of a home is determined by the marketplace, the home in a community that has established impact fees may not be marketable at a price where the impact fee is in addition to the developer’s costs. In such cases, the developer pays the fees out of his/her own pocket.

Nevertheless, once the tipping point is in the past, new developments will all be paying the impact fees and these costs will then be included in the price of homes. Is this bad? I don’t think so because the costs will have to be paid by someone. If it isn’t the owner of the new home, it is everyone else in the community who is paying, either overtly by having some of the taxes that would have been used for police and fire diverted to capital projects, or covertly such as a longer commute time with increasing road rage. What this means is that a community that has rejected development impact fees has made a decision to have the entire community pay for the impacts caused by new development. In a democracy, that is perfectly okay as long as it’s understood that the non-decision is actually a decision that the existing community is going to pay.

So, are all development impact fees wonderful? No! Often when staff and the legislative body develop the list of projects required by build-out, the list includes projects that inflate the cost and are unnecessary. Or, projects that the existing community needs are attributed to new development. Members of the development community should carefully review the projects to understand why, or if, they are needed and whether the cost-sharing is fair.

The positive side of development impact fees for developers and land owners is that projects and land in a community where the infrastructure has kept pace with development will command a higher price than in a community where residents are unhappy with their facilities. Unfortunately, the marketplace does not immediately make that adjustment so those at the “tipping point” will not see the benefit.

Impact fees are another price of civilization. It is no different from our paying taxes to have a professional firefighter standing by rather than depending on our neighbors to put out our fire with garden hoses. Nevertheless, at each tipping point, there are winners and losers. We need to understand that when the development community fights to develop without paying its fair share of infrastructure, it’s similar to the “open range” philosophy that all grazing land and water should be free. In case you haven’t noticed, the times they are a-changin’.

I use an analogy of magicians, but please don’t take this badly as it’s a time-honored and respected skill. Just think of it as marketing.  Now don’t take that badly either, as many of you still have PIO’s!  Well, since the passage of Proposition 13 and the follow-up Proposition 4, many of you, like magicians, have had to annually pull rabbits out of hats.  You have had to create the illusion of a balanced budget where no one’s services have been affected or one that is somehow exactly what the community needs.  Except now there are fewer rabbits, they seem to be smaller, and no one is willing to refill your magician’s hat. To generate a balanced budget suitable for Council adoption over the roughly 35 years since the passage of Propositions 13 and 4, you (department heads, finance and administrative types, and other rabbit pulling magicians) have probably had to do the following things (and this is a very partial list):

• Close your libraries to maybe 50% of what they had once been open.  We won’t even mention the book budget.
• Contract out many services you never thought you would, like park mowing and maintenance, sometimes with good results and sometimes not.
• Increase the number of hours you expect out of your public safety vehicles before replacing them, or simply reduce the number of vehicles you have.
• Increase all of the fees for your fee-based services to the “cost reasonably borne” standard of Article XIIIB of the California Constitution.
• Institute hiring freezes on the replacement of public safety personnel, which drops the level of service even if the approved number of officers has not changed.
• Decrease the amount of financial reserves to lower percentages than you are comfortable with.
• Eliminate replacement reserves and maintenance of public facilities to absolute minimums, or sadly, less than the minimum and watching them deteriorate faster than normal.
• Pass on grants because they would build a facility you cannot staff or maintain.
• Reduce maintenance of streets and storm drainage systems to the point where any dysfunction can cause other more costly events, like lawsuits.  Utility systems with the more lenient rate-setting capabilities still cannot seem to get the support for revenue increases needed to properly replace continually aging systems.

You can see where this is going. [WARNING: you are beginning to run out of rabbits or already have an empty hat].  The illusion of budget reduction without some sort of corresponding significant service reduction cannot continue. Actual service reductions with actual consequences are going to have to happen.  I expect we will start seeing some actual municipal bankruptcies within a year or two.  There have been some agencies close to this drastic action in the past.

So, the audience comes to the act expecting to see rabbits pulled out of a hat (we knew you could!).  How can you not leave the public disappointed when you have to admit there are no more rabbits and we have to start making service reductions that are significant and noticeable to all residents and business owners? Well if other agencies continue to pull rabbits out of their hats (or out of yours, but that’s a different story) it will be hard to end the magic act with crowd applause.  A few suggestions come to mind, and they all relate to information.  Start planning for this end of the rabbit-from-the-hat-pulling act.  Generate data and compile a list of services that were once available in the mid-70’s that no longer exists.  Also, identify the major cost saving processes that have been instituted during that time.   The lack of revenue is NOT your fault. You have stretched it as far as it can go.  It is time to say that out loud and then make suggestions as to what reductions in service can or need to be undertaken.  You have to be your advocate, and the Council’s advocate, on what has been done.  Act as if it was your money.  What would you do?  Over the last 35 years I have seen government change in so many positive ways.  Don’t keep what you have done a secret.

For questions or comments respond here or contact Scott Thorpe at scott@revenuecost.com.

This statement had been circulating in various forms almost since the inception of the Board in 1984. By that time, Management Services Institute (MSI), the predecessor to RCS, had been preparing cost of services studies for over six years to assist California local governments with the twin body-blows of Proposition 13 and Proposition 4.

Fortunately, the authors of Proposition 4, which was sold to voters as finishing the job of Proposition 13, opined that an appropriate cost of government was “…reasonable allocations for capital replacement.”  Since these authors were members of the California Chamber of Commerce and the California Board of Realtors, they would have assumed that everyone knew that you replace assets at their current cost and not their historical cost. In an attempt to influence GASB’s research, MSI sent a voluminous packet of information that showed the significant difference that we had found between historical cost and current replacement cost for clients to that date.

In defense of the Board, we accepted the fact that historical cost was a traditional element of financials in the private sector and that changing to replacement cost for government financials would be a hard sell, especially as representatives of the Governmental Finance Officers Association (GFOA) were already opposed to incurring the cost to provide information of no demonstrative value.  Although “replacement cost” has demonstrative value, the GFOA was mum on the concept at the time and only recently has discussed it as a budgetary best practice.

Today, governments have a GASB 34 report. The Statement’s authors expect that people will want to compare the current maintenance of infrastructure groups with the depreciation of those groups as would be done in the private sector. The problem is that few private companies have infrastructure that is between 50 and 100 years old. Unfortunately, that “problem” is too common for governments.  This will allow you to determine if your agency’s maintenance effort is adequate.

Most GASB 34 reports prepared by professional consultants have an estimated replacement cost.  Therefore, it is possible to calculate the average age of an infrastructure category using the historical information and apply that factor to the estimated replacement cost.  Most of you will have to do this on your own as I have not seen any reports that take that next step of comparing current maintenance expenditures with the annual expiration of infrastructure value. If there is any interest among the readers of this article, I will post or email a simple spreadsheet that demonstrates this calculation.

Intergenerational Equity is the reason that this is an issue. To the extent that governments are blithely going on their way, sure that compliance with GASB 34 is the last word, they are spending too much on current operations and not enough on infrastructure maintenance. Our kids and grandkids are the ones who will have to pay the piper for poor decisions made today.

Historically, our cost of services studies included estimated infrastructure replacement cost and showed the annual “expiration of infrastructure value” as a tax expense. This was very helpful for managers and council members as fee for service increases could be justified to free tax revenues to partially cover that expense.

Unfortunately, Gresham’s Law also applies to cost of services studies. Due to asymmetry of information, our potential clients did not understand the value of the infrastructure information and chose consultants who provided a less expensive product. Therefore, we also stopped providing this information. Now, governmental staff are facing the question of why fees should be increased.  The answer is to pull out your GASB 34 report and compare current maintenance expenditures with the annual amount of infrastructure expiration at current cost, thereby achieving the full potential of GASB 34.

Please contact Rick Kermer at rick@revenuecost.com with comments and questions.

On the other hand, I have seen many California local governments react to crime by increasing the number of police officers. If they have created a crime prevention program, it is one of the first programs to bite-the-dust in a period of budget contraction.

As a result, there is a tremendous growth industry in the provision of burglar alarm systems. It’s been mentioned that home security is a $30 Billion industry which is growing at a rate of 7% to 8% compounded annually.

The growth of this industry has been matched by the increase in false alarms to the point that some department’s response is lackadaisical. When we had a burglary at our old office in Anaheim, the alarm system alerted the alarm company, which called the police. The response was so slow that the burglars were long gone before the police arrived. We joked at the time that the alarm company should have called the fire department as their response time was faster and it would have scared off the burglars.

So, what’s happening? On the one hand, you have home and business owners installing alarm systems to protect their property. On the other hand, you have cities establishing alarm permits and charging for excessive false alarms. Each party is irritated by the other. Why should I pay for an alarm permit when I’m helping the police to do their job? versus Why should we respond to alarm calls when over 90% are shown to be false?

This is a perfect opportunity for a paradigm change. Rather than fight alarm systems, I suggest that police departments embrace alarm systems.

When I started in this field, many departments had alarm boards where alarm systems, mostly businesses, came direct to the dispatch center. As the boards aged, most departments discontinued the service rather than replacing the boards with more modern equipment because this was viewed as a cost center not a revenue center.

Let’s do a sample business plan using my home town for the numbers:

1. Nationally, most companies that monitor alarm systems charge between $15 and $40 per month. Also, nationally, 17.8% of all homes were alarmed in 2000, compared to 7% in 1988.
2. My town has 40,000 homes and 11,000 businesses.
3. If we estimate that 10% of the homes would want our municipal alarm system at $15 per month, it would amount to $720,000 per year.
4. If we estimate that 25% of the businesses would want our system at $40 per month, it would amount to $110,000 per year.
5. Assuming that the current water billing system could incorporate our fixed monthly charge, there would be minimal on-going expense after the initial setup.
6. The direct cost of the current dispatch center is about $1.7 Million. Since private alarm monitoring centers will generally call a dispatcher when getting an alarm, it is hard to estimate how much additional workload would be created. However, the revenue stream would be almost 50% of the current budget. With eleven dispatchers currently, this new revenue would support at least five additional dispatchers.

Other benefits:

1. The town becomes known for an aggressive response to burglar alarms which, by itself, will decrease the number of burglaries.
2. The town doesn’t need the alarm permit except for residents and businesses that are not using the municipal alarm system.
3. The town can better manage false alarms through training and maintenance services that it offers to customers while still charging for excessive false alarms.

Finally, through closer contact with the police department, the town becomes more crime resistant. The department is proactively preventing crime rather than reacting after it’s occurred just like the fire department is proactively preventing fires rather than relying on fire suppression.

The case turned on the fact that the City of San Diego resolution authorizing the fee:

states that the purpose of the levy is to recover costs associated with processing applications and renewals for Business Tax Certificates and [Renewal] Certificates.’Nothing in the language of the Resolution indicates that the purpose of the levy is to fund any regulatory activity or provide any municipal services beyond those involved in recovering the costs associated with processing the Business Tax and [Renewal] certificate applications.

The Court goes on to say: It is also undisputed that the levy is not exacted in return for permits or other governmental privileges.

The Court does make a distinction between services that are regulatory in nature and those that are primarily for revenue collection:

Under the Sinclair Paint primary purpose test, if revenue is the primary purpose of a levy and regulation is merely incidental, the levy is a tax, but if regulation is the primary purpose, the mere fact that revenue is also obtained does not make the levy a tax.

So it appears that any Business License Processing fee for which the primary purpose is the processing of the tax itself is no longer allowed. But if your Business License Processing fee includes a regulatory review by, say, the Planning Department for zoning regulation purposes, that part of the fee may be allowed.

So ask your City Attorney for his or her interpretation of this Court decision. If you have the cost detail which shows what was included in the processing fee, show that to your City Attorney and ask for an opinion on what is now allowable.

If you need help in providing this cost detail for work that RCS has done for you then just let us know.

Many California cities are now struggling with the issue of DIFs. The BIA is orchestrating a statewide campaign to have these important fees reduced or eliminated, with successes in some agencies. Now, if you calculated your DIFs according to California State Law (Gov’t Code 66000 et. seq.), the fees are limited to an amount that merely accommodates new development. So it follows that if you do not impose and collect the DIFs, by definition, you are not accommodating new development. But clearly new development creates increased demands for (among others): public safety services, circulation system travel space and storm drainage/utilities capacity. So, the capital needs still exist, but at whose expense? Thus, uncollected DIFs become an unrecognized or delayed tax, and they take the form of longer commutes, longer police/fire responses, and more crowded public facilities. They also take the form of taxes diverted from general benefit to the benefit of the purchasers in the development and will ultimately be paid with future taxes. Or in the current climate, it will simply not ever get constructed and the resulting infrastructure problem will just become a part of the fabric of the community.

I recently got to sit in on a meeting with the staff of a client city and four developers. I thought I was invited to defend that City’s DIFs. What I saw was a City defense of DIFs in general. They simply get it. Their City Council’s policy is that new development must pay its own way, period, and that they will accommodate, but not subsidize development. Development does not define them, but it could break them. They are paying more attention to the operational needs of the existing community and less to the developers asking for subsidies to enhance a profit. They have rejected the argument that development for the sake of development is somehow a good or necessary thing. Oh, they did review their DIFs to see where actual reductions to project costs (mostly to land acquisition) have occurred and will act on those.

So, what should you do? It’s probably best to ask yourself, do you need to subsidize development and is there any substantive benefit to the existing community from it? Let’s assume a suspension of DIFs and roll on through the three major land-uses.

RESIDENTIAL – I have not yet heard the plausible explanation of how the approval of twenty residential dwellings without any DIFs imposed improves the economy of your community. It may merely increase your currently high vacancy rate and will be a drag on your current General Fund taxes. You may wish to check with the many homeowners with homes for sale now on how they would feel about that.

COMMERCIAL It is one the highest demand land-uses and you no doubt have many existing struggling businesses and current vacancies there also. However, if it is in an urban area already containing the hard infrastructure, it may be beneficial.

INDUSTRIAL/MANUFACTURING Okay, such a subsidy may make some sense, especially if it’s a new business that creates jobs that increase the average wage in the community (check your U.S. census). But if it reduces the average wage, why would you wish to subsidize that?

And that’s the point. You need to have a policy and consider that large gray area in the middle of that continuum. Avoid the knee-jerk reaction of assuming that the DIFs are somehow a bonus revenue. They are real, they are important and they represent what your community will be in the future. If there is a real desire to reduce the DIFs to stimulate building, have those reductions sunset at a certain date. When it comes time for your elected body to have this DIF discussion (and perhaps you can control that point), be prepared with a cognizant and logical policy that makes sense for your community. It ought to meet some sort of group objective other than the fairly vague partner with the construction industry to get the economy going. That will happen when the number of vacant residential and business structures decreases. Count on it.