Updated: Sep 15
A need for new revenue sources has caused the city of Riverside, population 210,000, to look at the services it provides and decide how much can and should be charged for those services. The city must decide which services should recover their full cost and which ones should be subsidized because of their nature. Some of these are administrative issues, but many are political questions for the elected body to answer. It is very difficult to make any of these decisions without information about the cost of services.
Identifying Sources of Revenue
A driving force in Riverside’s decision to look at the cost of all services was the city council’s desire to add services when there was not enough revenue to make the additions. During the mid-year budget review process for the 1987/88 budget year, revenue and expenditure projections for the following two years were presented to the city council. With this information was a list of possible new revenue sources. Since we could not raise property taxes because of Proposition 13, we had to look at other sources of revenue. The list of possible revenues included an increase in the business license fee, which had not been increased in over 15 years; an increase in the utility user tax added to all utility service bills and an increase in the maximum amount paid by large users; an increase in the contribution to the general fund from the city’s electric utility; contributions from the sewer, refuse, and landfill enterprises; implementation of a lighting and landscape assessment district for park maintenance; and implementation of a street lighting assessment district. A fees and charges study was suggested, which it was estimated would generate at least $5 million in revenue across all funds.
The city council referred the matter to the three-member finance committee and asked for its recommendations. The finance department provided information on each of the alternative revenues: how they could be implemented and the approximate revenues that might be received. The council was looking for enough revenue to increase public safety spending by about $3 million, and to add a few other services. In addition they recognized the need to start building up a reserve of approximately three percent of the following year’s general fund budget, so it became apparent that they would have to consider several of the alternatives.
Over the past few years, there had been a gradual erosion of Riverside’s general fund balance in order to meet the demand for increasing services in this rapidly growing area. Riverside’s population has grown 27 percent over the past decade. Revenues were not growing at the same level as expenditures. The sales tax plays a very important role in general fund revenues — during 1989 and 1990 it constituted about 30 percent of the anticipated general fund revenues — and yet it is a revenue that the city has relatively little control over. Business continues to develop outside of the city limits, despite the development efforts within the city, and the sales tax is not growing at the same level as the services it supports.
A number of measures were recommended by the finance committee and adopted by the council to increase revenues for the 1988/89 budget year. First, the utility users’ tax was increased, requiring only an ordinance change. The electric utility contribution to the general fund was also increased. Steps were taken to implement the street lighting assessment district, to free up about $3 million dollars of general fund revenues. While these increases would take care of the following year’s needs, it was acknowledged that some long-range solutions were needed.
A Fees and Charges Study
The council had to consider not only the need for revenue, but also the impact of a new state law that requires that cities be accountable for their fees and charges. The law sets specific record keeping requirements and time limits for spending the collected fees. In addition the city was not satisfied with its internal cost allocation system: it was too much of a “black box” and no one really felt comfortable with the numbers going in and coming out. Staff recommended to the finance committee that the city embark upon a major fees and charges study that would meet some of our administrative needs and also identify additional sources of revenue. It should be pointed out that there was support from the chamber of commerce and other organizations for this study. It would allow them to prove to their membership that the fees and charges collected by the city were appropriate for the services they received. (The true test of the business community’s support will come when the city presents the results of the study to the council and to citizen organizations.)
The finance committee and the city council agreed with the staff recommendation and committed $250,000 to a year-long fees and charges study to be conducted by an outside consultant. In addition to the consultant staff, the study would require the dedication of one and a half in-house staff people and a great deal of cooperation from all city departments. It was decided that the electric and water utilities would only participate in the study relative to the other functions that involve them, since they had recently done a major cost of service study. The utilities were interested in the cost allocation portion of the study rather than their own fees and charges. With that exception, the consultant was turned loose to look at all services provided by the city.
Each department was asked to appoint a liaison to be the consultant’s main contact for all information. In addition, a management review team was established to provide the overview and policy guidance required throughout the study. This team consisted of the two assistant city managers, the assistant to the city manager responsible for the budget office, the finance director, and an assistant director from the utilities department. This group met monthly to monitor the progress of the study and to deal with problems.
During an orientation meeting for all key participants, the consultant communicated a very significant fact: for the study each department would identify all services that it provided. That sounded like a fairly simple project, but each service also had to be costed out. Fortunately, the consultant had done the study in several other cities and was able to provide the departments with a generic list of service centers to use as a starting point. The finance department staff looked at our own list of service centers and realized that we probably didn’t want to know how much it really cost to issue a bicycle license or process an “insufficient funds” check, but we were going to found out. The generic lists were very applicable to the services being provided in the departments and were very helpful.
One very interesting discovery was that we didn’t realize how many different people and departments were involved in providing planning reviews and permits. During the past year the planning department had analyzed several of their fees and recommended increases, but we now discovered that we did not include all of the costs when we increased those fees.
The process of identifying each service center, the various operations of a department, and those departments involved in a service center was a very good exercise. This process required staff to analyze who was doing what, and why. As we all know, procedures started in response to a temporary situation may continue long past their reason for being. Most of the work processes in Riverside were instituted before automation and some processes are still being done manually, even though automation is in place to do them. Change isn’t always to deal with! In addition, in a period of rapid growth, the main goal is to get things processed. Staff are usually so busy doing the day-to-day tasks that they cannot take the time to analyze the what and why of these tasks. Many processes have been reevaluated because of this study and we hope that in addition to properly costing services, we will ultimately reduce our cost of providing services.
Once all the services were identified, we had to figure out how many units of service were being provided. In some areas we had excellent statistical information, but in others, we had to go back to source documents and develop the numbers. For some, we had to estimate what the number of service units would be. In many instances, the full-time staff person went in and helped a department gather its statistical information.
The study required the preparation of a historical listing of all of our revenues for the past eight years. The information was available, but since there had been changes in our financial management system during that time period — and some account numbers naturally had changed — it took a little more time than anticipated. However, the draft report brings together all those historical revenues in one great list.
Another major phase of the study was fixed assets. Since our reportable fixed assets have to be audited, we had a lot of information, but many smaller items that we do not keep records on needed to be identified. We had to identify all of our building occupancy costs and go over our space allocations to make sure they were up to date. In addition, since we are not required to maintain all of our infrastructure (streets, curbs, gutters, storm drains, etc.) detail for financial reporting, it took some digging to get some of the information necessary for the study. Now that we have the base listings, all we have to do is update the information on an ongoing basis. During many management discussions throughout the study, the question of including the cost of infrastructure replacement in the fees was up in the air. Somehow, charging people, as part of their street-related fees, to replace the streets seemed strange. A final decision on this issue was delayed until the study could be completed.
The consultant worked extensively with the department liaisons throughout the study. At various points information went back to the departments for review and concurrence, starting with the finalized service center list. Each department had to sign off on this list, to make sure it showed the services they were really providing. Departments were provided a preliminary listing of costs and service units to review, and they identified some items that had to be researched and changed. After all of this, there were still a few items that looked a little strange, but most questions have now been resolved. The costs were then summarized on a form.
The draft report was received in March 1990. It was over four inches thick, which was frightening when we first looked at it and realized that it all had to be absorbed, but there was an a amazing amount of good information and detail included. Naturally there was a summary listed each service center, its revenues, costs, and any subsidy or “profit” plus the current methodology for charging, the current fee, each department’s cost in total and by unit, and a total cost and revenue comparison. Some current fees shown appeared to be higher than they should have been relative to service costs, but many of these fees included services that were identified in the report for separate fees, so the current fee was not really out of line.
The process from here will be an interesting one. As we approach the budget for 1990/91 the city council again wants to increase some services, and while our previous actions have kept revenues on a more equal footing with expenditures, we have not build up excesses to allow significant increases in service. All departments are reviewing the fees and charges study and management will be recommending changes in a number of the fees before the completion of the current budget review cycle. The city council will have to make a number of policy decisions, specifically in the area of leisure and cultural services. They will have to make policy on the city’s responsibility to provide certain services and the citizen user’s responsibility to pay for other services.
We feel that the study has been worthwhile, not only for costing fees, but as a management tool. The study has identified the following as possible new revenues: $1,750,000 from community development services, $3,000,000 from public safety services, $750,000 from leisure and cultural services, and $5,500,000 from maintenance services. These possible revenues all include replacement costs for infrastructure, so some of the new revenue would not be available for added services, but would have to be reserved for future use. We also realize that it may not be practical to implement all of the suggested fees.
As we go through the review process with the city council and other organizations, we have adequate documentation to show the true cost of the services. We have also met our objectives of documenting costs to comply with state law and improving our cost allocation system.
The city plans to use its own staff to maintain and update this study each year as part of its budget process. We do not plan to have a consultant come back each year. We acquired software from the consultant as part of the contract and now we must make the commitment to update the records each year. This may require hiring a full-time cost accountant. By following through each year and updating this information and changing the fees appropriately, our revenues should clearly match our expenditures for those fee-supported items that do not require general revenues to support them. The time and effort has been worthwhile.
Steckel, Barbara (1991). Identifying the Cost of Services in Riverside, California. ICMA MIS Report, Vol. 22, No. 5.