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Is it bad to show a profit?

Updated: Sep 14, 2020

We all know that government is not allowed to make a profit on the services that it provides.  While there are exceptions with the rental or use of a city asset, such as a marina, golf course, or meeting rooms, this is generally true.  Article XIIIB, Section 8(c) of the State constitution states that:

Proceeds of taxes shall include, but not be restricted to, all tax revenues and the proceeds to an entity of government, from regulatory licenses, user charges, and user fees to the extent that those proceeds exceed the costs reasonably borne by that entity in providing the regulation, product, or service.

Therefore, all fees that do not exceed the costs reasonably borne are not considered a tax, but those that do are considered a tax with all the limitations put on taxes in California.

But is making a profit the same thing as showing a profit?  While Article XIIIB makes clear that any revenue over the cost of providing a service is a tax and therefore needs to be approved by the voters, it also allows an agency time to resolve that situation if it shows a profit.  Article XIIIB allows an agency to carry an excess of taxes, or fee overages, into a subsequent fiscal year to resolve the issue.  Any excess funds after the second year must be returned by reducing fees.  Therefore, as long as you adjust your fees once this information becomes known, then you are complying.

But what about the political implications of showing a profit.  This, of course, means that some fee-payers in the past were paying too much.  The importance of this issue is dependent on the political climate in your community, but it does show that your agency is being proactive in resolving these situations as they occur.

It also shows that the costing process has been fair and is not just about raising revenue.  Some fees are going up, but other fees are going down.  You have identified the full costs of providing services and let the chips fall where they may from a revenue perspective.  It also means that changes may have been made to the process that have made it more efficient and therefore less costly.

This issue is also another reason why fees should be adjusted every three to five years.  When you keep up to date on determining the cost of services, any fee decreases are generally due to process changes which are then easy to explain.

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