Revenues and the General Fund

Dear Management Doctor,

As a new director, my assessment of the department tells me the city should set up a special fund to capture revenues from development permits and applications to support these operations instead of sending them on to the General Fund. Do you know of any “best practice” research that would support my recommendation?

Thank you.

Dear New Director,

I have dealt with this issue in numerous cities and counties throughout the US and Canada. Best Practice is for development permits and applications to be full cost and pay for cost through processing fees. Revenues are then set aside in a special account to support the function. In some communities they go directly into an enterprise fund. When revenues exceed costs, city managers, finance directors, and often elected officials like to drain off the excess into the General Fund. In many states this is not legal and in California we have had law suits to stop this practice. Check what your state law says on this topic.

Many communities not only put the revenue into a General Fund but then fund the functions out of the General Fund. However, the problem with this system is that development and applications can never compete with fire and police services in a budget debate. This means that development and applications are often underfunded.

The normal planning department budget should have at least two divisions. One is for the development activities funded by fees. The other is city-wide functions like the General Plan which should be funded by the General Fund. However, some communities also have a building permit fee of 5 to 15% to be set aside for work on the General Plan or neighborhood plans. Most building permit fees are 100% cost recovery and often 125 to 150% of costs. On the other hand, many planning fees cover only 50 or 60%. In these cases, either the fees are too low or the planners are not efficient. Additionally, some communities feel it is reasonable to merge building and planning costs and revenue so they balance out to 100%.

Once you move to an enterprise type approach, there are a number of cautions. What happens when development slows down and revenues drop below costs? Many planning managers simply don’t have the skills to reduce costs fast enough to balance the budget. One good approach to this is to use a blended staff. In this approach, a base level staff is established and then the peak workloads are handled by consultants. In a time of shortfall, the consultants are no longer used.

Finally, if an enterprise type approach is used, it is essential to establish a reserve account so that employees don’t need to be laid off during a downturn in activity. I suggest the reserve account should be equal to the normal budget for the functions. A good example of this is the work we did for Calgary. They are a full cost development department with a $30 million reserve. We did a California type recession analysis and recommended that they needed to build the reserve to $60 million. In your case, I would try to build the reserve through increased fees over a 5 to 10-year period. Be prepared, your finance director won’t like this.

the Management Doctor