CITY OF
USER AND REGULATORY FEE STUDY
APRIL 20 25
ATTACHM ENT 3
CONTENTS
REPORTING
1 TRANSMITTAL
2 EXECUTIV E SUMMAR Y
4 PROJECT ORIENTA TIO N
8 IMPLEMENTA TION
APPENDI X
I REGIONA L FEE COMP ARISON
II COST OF S ERVICE ANALYSIS
April 2025
Attn: Carol Molina, Finance Director
77 Fair Drive
Costa Mesa, CA 92626
Dear Ms. Molina:
ClearSource Financial Consulting submits the following report describing the findings of our preparation of a User and Regulatory Fee Study for the City of Costa Mesa.
Please refer to the Executive Summary for the key findings of the analysis. The balance of the report and its appendix provides the necessary documentation to support those outcomes.
Thank you for the opportunity to serve the City on this topic. We are happy to continue discussion on this study as the need arises or consult with you on additional topics.
Sincerely,
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EXECUTIVE SUMMARY
STUDY OVERVIEW
The City of Costa Mesa has completed a User and Regulatory Fee Study. California cities regularly conduct these studies to justify fee amounts imposed and to optimize the overall portfolio of revenues available to the municipality to fund its services.
Industry practice and fiscal conditions in the state have led most cities to link cost recovery for services of individual action, cause, or benefit to that same individual through user fee revenue, relieving the agency’s general revenues as much as possible for use toward services of broader community benefit.
USER AND REGULATORY FEES
Cities derive annual revenue from a number of sources. These include, but are not limited to, property taxes, sales taxes, license fees, franchise fees, fines, rents, and user and regulatory fees. User and regulatory fees are intended to cover all, or a portion of, the costs incurred by the City for providing fee -related services an d ac tivities that are not otherwise provided to those not paying th e fee .
California law provides guidance regarding the amounts the City may charge for fee-related services and activities. Specifically, in order to avoid being considered taxes, the fees ch arged shall not exceed th e estim ated reasonable c ost of providing th e services , activities, or materials for which fees are charged.
At its conclusion, this study proposes for City Council review and consideration at public hearing a new Schedule of User and Regulatory Fees for application in Fiscal Year 202 5-2026 and continued update in subsequent years.
COST RECOVERY POLICY AND PRACTICE
Recovering the costs of providing fee-related services directly influences the City’s fiscal health and increases the City’s ability to meet the service level expectations of fee payers.
The services for which the City imposes a user or regulatory fee typically derive from an individual person or entity’s action, request, or behavior. Therefore, except in cases where there is an overwhelming public benefit generated by the City’s involveme nt in the individual action, a fee for servic e en sures that th e individual bears m ost, if not all, of the cost incurred by the City to provide that servic e . When a fee targets “100% or full cost recovery,” the individual is bearing the entirety of the cost. When a fee targets less than full cost recovery, another City revenue source – in most cases, the General Fund – subsidizes the individualized activity.
Generally, fees for service are targeted to full cost rec overy, inclusive of operating, direct, indirec t, and c apital costs, exc ept in cases wh ere the City Counc il cites a public interest in lower fees . The City may also be influenced by market conditions, comparing to municipalities of similar size and service profile.
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EXECUTIVE SUMMARY
FINDINGS AND PROPOSED ACTION
During the course of study, information and analysis was generated and is discussed substantively throughout this report and its technical appendix. However, summarized in the following table by broad fee category and highlighted in the subsequent findings statements, are outcomes and proposals of particular interest to City leaders and policymakers.
PRIMARY OUTCOMES
CREDIT CARD TR AN SACTION PR OCESSING FEE
• The new fee is intended to offset processing fees charged by the City’s credit card payment processors. Accordingly, this fee will only apply to applicants that pay fees with a credit card. o The proposed fee is 2.7% of the amount paid by credit card o The fee is not intended to generate any new revenue for the City. It is simply intended to function as a pass-through collection of amounts directly payable to the City’s credit card transaction processing vendor.
GENER AL PL AN UPD ATE F EE
• A new fee is proposed to help offset the costs of General Plan and supporting document updates:
o This is a $2,000,000+ project with a multi -year useful life, including updates of the City’s Housing Element and Zoning Code updates.
o The proposed fee will be collected as 5% of applicable permit fees TECHN OL OGY ENHANCEMENT F EE
• A new fee is proposed to recover costs of future development related technology enhancements and system replacement:
o This is a $2,000,000+ project with a multi-year useful life. o The proposed fee will be collected as 5% of applicable permit fees INFLATION ARY ADJUSTMENTS AND COST OF SER VICE ADJUSTMENTS F OR
VARIOUS CITY F EES
• The City Council has authorized annual fee adjustments to keep pace with regional cost inflation. The prior year annual CPI change was 3.3%. Accordingly most fees are proposed to be adjusted by 3.3%. No adjustments are proposed to fees for youth or senior services.
FISCAL IMPACT
The anticipated fiscal impact of the proposed fee ch anges is an additional $ 750 ,000 in annual General F und revenue. The primary purpose of the adjustments to the City’s fee schedule is to correlate fees to services provided. The City’s proposed fees seek to recover the City’s full cost of service for new development within the City and avoid cost recovery deterioration for non-development related fees.
Please continue to the following technical report and appendix for further discussion of this User and Regulatory Fee Study.
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PROJECT ORIENTATION
SCOPE OF STUDY
The City of Costa Mesa has completed a User an d R egulatory Fee Study , which represents an external review of prevailing practices and development of a new Schedule of User and Regulatory Fees . ClearSource Financial Consulting has prepared this analysis using FY 202 4/25 organizational information and will be available to answer questions as the City proceeds in implementing findings as it chooses.
Key tasks expected by the City from this study included the following:
Review eligible fee -related services Citywide to establish the reasonable relationship between current fees for service and the underlying costs of service. Calculate the full cost of service, including estimated Citywide overhead costs. Recommend fees to be charged for each service.
Recommend cost recovery strategies and best practices in setting fees, while considering the complexities and demands of responsible programs or departments. Identify underlying billable rates for cost recovery opportunities and as the basis for user fees.
DIRECT SERVICES UNDER REVIEW
FEE CATEGORIES
Credit Card Transaction Processing Fee
Technology Enhancement Fee
General Plan Maintenance Fee
REASON FOR STUDY
Cities derive annual revenue from a number of sources. These include, but are not limited to, property taxes, sales taxes, franchise fees, fines, rents, and user and regulatory fees. User and regulatory fees are intended to cover all, or a portion of, the costs incurred by a City for providing fee-related services and activities that are not otherwise provided to those not paying the fee.
California cities regularly conduct fee studies to justify fee amounts imposed and to optimize the overall body of revenues available to the municipality to fund its services. Widespread industry practice and fiscal conditions in the state have led most cities to link cost recovery for services of individual action, cause, or benefit to that individual through user fee revenue, relieving the agency’s general revenues for services of broader community benefit.
PREVAILING GUIDANCE
The objectives of this study, the methodology used to complete the study, and the formulation of outcomes and recommendations for future consideration were significantly influenced by Article 13C of the California Constitution and Section 66014 of the California Government Code.
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PROJECT ORIENTATION
Article 13C states that the local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payer bear a fair or reasonable relationship to the payer’s burdens on, or benefits received from, the governmental activity. Additionally, Article 13C identifies the following as items that are not defined as taxes:
A charge imposed for a specific benefit conferred or privilege granted directly to the payer that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege. A charge imposed for a specific government service or product provided directly to the payer that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product. A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication th ereof. A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.
A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.
A charge imposed as a condition of property development. Assessments and property-related fees imposed in accordance with the provisions of Article XIII D.
Section 66014(a) of the California Government Code includes the following, “Notwithstanding any other provision of law, when a local agency charges fees for zoning variances; zoning changes; use permits; building inspections; building permits; …the processing of maps under the provisions of the Subdivision Map Act…; or planning services…; those fees may not exceed the estimated reasonable cost of providing the service for which the fee is charged, unless a question regarding the amount of the fee charged in excess of the estimated reasonable cost of providing the servic es or materials is submitted to, and approved by, a popular vote of two-thirds of those electors voting on the issue.
The outcomes and recommendations of the study are intended to comply with applicable federal, state, and local laws including providing confirmation that the proposed fees (“charges”) recommended as a result of this study are not taxes as defined in Articl e 13C of the California Constitution and that the proposed fees are no more than necessary to the cover the reasonable costs of the City’s activities and services addressed in the fees. Additionally, this report is intended to show that the manner in whic h the costs are allocated to a payer bear a fair and reasonable relationship to the payer’s burdens on, or benefits received from the activities and services provided by the City.
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PROJECT ORIENTATION
METHODOLOGY AND DATA SOURCES
This study calculated the estimated reasonable cost of providing various fee -related services across the City organization. Generally, the estimated reasonable cost of providing the fee-related services and activities examined in this study can be calculated as the product of the composite fully-burdened hourly labor rate of the division responsible for providin g services and the estimated labor time required to process a typical request for service.
The composite fully-burdened hourly rates calculated in this study are based on the estimated annual hours spent providing fee related services, and estimated labor, services and supplies, and Citywide overhead expenditures, sourced as follows:
Labor expenditures for in -house personnel were based on budgeted salary and benefits expenditures.
Contract service personnel and other services and supplies related costs were based on current industry market rates for service.
Citywide overhead cost allocations were developed to assign a reasonable share of central service support to the City’s direct service units.
Estimated labor time spent providing fee related services were developed based on interviews with City staff and are in-line with typical direct service ratios experienced by the consultant via studies of similar municipalities throughout California. Commonly used industry data also aided in the development of time estimates and proposed fee structures.
Once cost of service levels are identified, the City may use this information to inform targeted cost recovery from fees. Fees set at the cost of service target full cost recovery. Fees set at any amount less than the cost of service target less than full cost recovery.
An illustration of the methods used in this analysis is shown in Exhibit 1.
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PROJECT ORIENTATION
EXHIBIT 1 | STEPS IN ANALYZIN G COSTS OF SERVICE AND USER FEES
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IMPLEMENTATION
CONSIDERATIONS FOR IMPLEMENTATION
If the City decides to adopt or otherwise utilize outcomes generated through this study, it should:
Update Systems for Fee Outcom es - Ensure that City staff begin using updated fees and associated outcomes once the updated schedule of fees becomes effective. Values should be included in all official fee schedules used throughout the City (e.g., departmental pamphlets, counter schedules, and online information). Additionally, ensure collections processes are updated, which may include coding in billing systems and training for personnel who handle fees directly with the public.
Actively M onitor th e Use of F ees - In order to recover accurate and eligible amounts expected, the City should be diligent about tracking time to projects for time and materials billings and ensuring fees are applied in the correct amount and using the correct and intended basis for fixed fee billings.
Monitor F eedback and Perm it Statistics - Monitor permit and application volume and applicant feedback to determine if fee modifications are resulting in any unanticipated changes in project frequency and to increase the level of detail available for revenue forecasting.
Annually R eview an d Adjust F ee Values - In order to generally maintain pace with regional cost inflation and/or the City's salary cost inflation, the City should adjust its fees on an annual basis. A commonly used, reasonable inflation index is the annual change in the all-urban Consumer Price Index (CPI) representative of the region. Periodic ally Perform Comprehen sive An alysis - A comprehensive fee study should be conducted periodically (e.g., every three to five years) to ensure fee levels remain at or below legal limits and are consistent with evolving service practices and local conditions.
APPENDIX I
FEE COMPARISON
REGIONAL FEE COMPARISON
Similar fees are collected by communities throughout the region and the State. The proposed fee amounts do not exceed the City’s cost of service and are in -range of amounts charged by other jurisdictions.
In order to provide the City Council with additional information as it considers potential adjustments to fees, current and proposed fees were compared to amounts collected by other agencies. For sampling purposes, the fee comparison examined fees for:
• Fountain Valley
• Huntington Beach
• Laguna Beach
• Laguna Niguel
• Long Beach
• Mission Viejo
• Newport Beach
• City of Orange
• Seal Beach
APPENDIX I
*Fees also collected by City of Huntington Beach, Orange, and Seal Beach. For those agencies, fees are collected as percent of project valuation, so they are not compatible for chart comparison purposes.
0.00%
2.70%
2.85%
3.00%
3.00%
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50%
COSTA MESA - CURRENT
COSTA MESA - PROPOSED
NEWPORT BEACH
SEAL BEACH
HUNTINGTON BEACH
Credit Card Transaction Fee - % of Fees Paid by Credit Card
0.00%
2.00%
3.50%
4.50%
5.00%
5.00%
10.00%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
COSTA MESA - CURRENT
LAGUNA NIGUEL
LAGUNA BEACH
LONG BEACH
COSTA MESA - PROPOSED
NEWPORT BEACH
FOUNTAIN VALLEY
General Plan Maintenance Fee - % of Building Permit Fee
APPENDIX I
*Fees also collected by City of Mission Viejo, Orange, and Seal Beach. For those agencies, fees are not collected as percent of permit fee, so they are not compatible for chart comparison purposes.
0.00%
1.70%
2.00%
4.50%
5.00%
6.00%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%
COSTA MESA - CURRENT
LAGUNA BEACH
LAGUNA NIGUEL
LONG BEACH
COSTA MESA - PROPOSED
HUNTINGTON BEACH
Development Technology Fee - % of Permit Fee