DATE: August 20, 2024
TO: Mayor and City Council
FROM: Director of Finance
SUBJECT Presentation of City of Hayward User Fee Study
RECOMMENDATION
That City Council reviews and provides feedback on user fees as calculated in the City’s User Fee Study conducted by Willdan Financial Services.
SUMMARY
Staff recently completed a comprehensive study of all of the City’s User Fees; the study was conducted by Willdan Financial Services. The User Fee Study (the study) has calculated costs associated with user fees and is presenting the proposed fees to be considered by Council and brought back for a Public Hearing on September 17, 2024 for adoption. The proposed fees shown in the study have been calculated at a level, unless noted otherwise, to allow the City to achieve full cost recovery, and no more.
BACKGROUND
The last comprehensive user fee study was completed in October 2016. Over the last eight years (FY 2016 – FY 2024), the City has undergone minor annual adjustments and modifications to the fee schedule. Given the changes to the City’s structure, staffing levels, and the significant increase in cost of operations during this period, the study recently undertaken is more comprehensive and will provide updates to user fees throughout the City.
As part of a general cost recovery strategy, local governments have adopted user fees to fund programs and services that provide limited or no direct benefit to the community as a whole. As the City struggles to balance levels of service and the variability of demand, Council has become increasingly aware of subsidies provided by the General Fund for fees which do not recover full costs. To the extent that the City uses general tax monies to provide services that it can recover full cost for, but does not, a subsidy is provided, and this reduces funds that may be available to provide other community-wide benefits. Unlike most revenue sources, the City has more control over the level of user fees they charge to recover costs.
Legislative Requirements
Proposition 13
Before Proposition 13, California cities were less concerned with potential subsidies and recovering the cost of their services from individual fee payers. In times of fiscal shortages, cities simply raised property taxes, which funded everything from police and recreation to development‐related services. However, this situation changed with the passage of Proposition 13 in 1978, which limited property taxes to no more than 1% of assessed value plus any additional rates approved by local voters, such as general obligation bonds.
Proposition 4 (1979) defined the difference between a tax and a fee: a fee can be no greater than the cost of providing the service; and Proposition 218 (1996) further limited the imposition of taxes for certain classes of fees. As a result, cities were required to secure a supermajority vote to enact or increase taxes. Since the public continues to resist efforts to raise local government taxes, cities have little control and very few successful options for new revenues. Compounding this limitation, the State of California took a series of actions in the 1990s and 2000s to improve the State’s fiscal situation—at the expense of local governments. Most recently, the Educational Revenue Augmentation Funds (“ERAF”) take‐away of property taxes and the reduction of Vehicle License Fees have severely reduced local tax revenues.
Proposition 26
In November 2010, California voters approved Proposition 26, which amended Articles XIIIA and XIIIC of the State constitution regarding the adoption of fees and taxes. Proposition 26 seeks to assure that taxes are not disguised as fees: taxes must be approved by the voters whereas fees can be approved by legislative bodies, such as a City Council.
Proposition 218
In November 1996, California voters passed Proposition 218, the “Right to Vote on Taxes Act.” This constitutional amendment protects taxpayers by limiting the methods by which local governments can create or increase taxes, fees and charges without taxpayer consent. Proposition 218 requires voter approval prior to imposition or increase of general taxes, assessments, and certain user fees.
DISCUSSION
Goals of the study
The principal goal of the study was to help the City determine the full cost of the services that the City provides. In addition, Willdan established a series of additional objectives including:
Developing a rational basis for setting fees
Identifying subsidy amount, if applicable, of each fee in the model Enhancing fairness and equity
Ensuring compliance with State law
Developing a comprehensive list of fees that is easy to update Maintaining fees in accordance with City policies and goals The study results will help the City better understand its true costs of providing services and may serve as a basis for making better informed policy decisions regarding the most appropriate fees, if any, to collect from individuals and organizations that require individualized services from the City.
Methodology
The basic concept of a User Fee Study is to determine the “reasonable cost” of each service provided by the City for which it charges a user fee. The full cost of providing a service may not necessarily become the City’s fee, but it serves as the objective basis as to the maximum amount that may be collected. The standard fee limitation established in California law for property‐related (non‐discretionary) fees is the “estimated, reasonable cost” principle. To maintain compliance with the letter and spirit of this standard, every component of the fee study process included a related review. The use of budget figures, time estimates, and improvement valuation clearly indicates reliance upon estimates for some data.
Fully Burdened Hourly Rates
The total cost of each service included in the study are primarily based on Fully Burdened Hourly Rates (FBHRs). FBHRs were determined for City personnel directly involved in providing services. The FBHRs include not only personnel salary and benefits, but also any costs that are reasonably ascribable to personnel. The cost elements that are included in the calculation of fully burdened rates are:
Salaries & benefits of personnel involved
Operating costs applicable to fee operations
Departmental support, supervision, and administration overhead Internal Service Costs charged to each department
Indirect City‐wide overhead costs calculated through the Cost Allocation Plan
ECONOMIC IMPACT
The overall economic impact is currently unknown. Although approving the proposed fee levels may have a minor economic impact on the community, the review of fees in relation to neighboring communities did not indicate any significant proposed outliers that would create a negative economic environment for the City of Hayward.
FISCAL IMPACT
Adopting these fee changes will allow for more self-sufficient and sustainable service levels in many areas of the City and could have a potential net positive increase to revenue in the General Fund of approximately $1.5 million annually. The fees will also help the City recover the costs of doing business from those who are requesting specific services, thus freeing up General Fund resources for other community-wide services.
PUBLIC CONTACT
Upon recommendation by the City Council, staff will present the User Fee Study for City Council adoption at a public hearing during a regular scheduled meeting on Tuesday, September 17, 2024.
NEXT STEPS
The study will be brought back to Council on September 17, 2024 for a public hearing and adoption. Once adopted, the fees will take effect on January 1, 2025.
Prepared by: Christina Crosby, Deputy Director of Finance Recommended by: Nicole Gonzales, Director of Finance
Approved by:
Dustin Claussen, Interim City Manager
Page PAGE 6 of NUMPAGES 6