Cost Accounting in Local Government

Capitalism and Local Government

One of the many nice features of our capitalist system is the ability to vote with our dollars to get the products that we want in the market place. When we go into a grocery store, we have many choices in the products that we buy and we can buy one item or many. The grocer does not tell us that if we want to buy milk that we also have to buy apples. If he did, we would go to another grocery store that let us buy what we wanted.

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.

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