Dear Management Doctor:
We are in the process of reviewing our schedule of fees for the Department and are looking for a little guidance. Is there any relationship between the General (tax dollar) Fund budget and Developer funded revenues. Also, do jurisdictions usually "eat" the costs of those developing their land uses or should there be total cost recovery for this type of service?
Are you aware of any studies or reports that could help in this matter? Thanks in advance for any assistance you can provide.
From, Budget Challenged
Dear Budget Challenged,
The answer to your questions will vary from state to state. In most states, the General Fund is the fund that is under severe pressure and city and county mangers are under the gun to cut these funds. When planning and building departments are supported by these funds, times can be tough since most police and fire functions come from the same fund and it is hard to compete with public safety.
In some communities, fees from planning and building actually go into the General Fund. Often, the fees are less than the cost to provide the service. However, it is not unusual that building fees actually exceed the cost of providing the service and become a source of revenue for the General Fund. With one recent client, we found that building fees actually exceeded cost by some five million dollars a year. In California, as well as some other states, it is illegal to collect more fees than the cost of the services without a vote from the people.
As a norm, I find that building fees generally cover the cost of the service, so whatever comes from the General Fund is paid back by the fees. The same is not true for most planning fees. In our studies, it is not unusual that planning fees cover only 10 to 50 percent of the cost of the service. However, there are exceptions to this. Because of the tax revolt in California, more and more communities are charging planning fees that cover the cost of the service. This results in what may seem like high fees. But, the developers tell us that the size of this fee is minimal if they can get good service. It is also normally very small as compared to impact fees.
My philosophy is that the cost to the developer for poor service from planning or building is very high, so the community should not nickel and dime the staff or the planning and building department budgets. But, give the developer good service and they are more than willing to pay the higher fees.
On the other hand, many communities do charge less than the cost for planning and building services. In some cases they do so from an economic development perspective. In other cases, they simply feel that the broader community should absorb some of these costs.
In summary, if your department has all the budget it needs or wants (which I doubt), don't worry about it. However, if you need more budget, make the case and sock it to them. But don't let the finance director use this revenue for other functions.
The Management Doctor
When setting fees, staff should also be keenly aware of comparable fees charged in peer cities. Reviewing proposed fee changes with the affected building and development community is also helpful. Beware of increasing fees for items such as appeals by neighbors which can be interpreted as anti-democratic.
Your column on setting fees was terrific. I circulated it to the Research Department. I absolutely agree with everything you said.
Well done article folks!
Additional Comment from the Management Doctor
One of our readers, who is a consultant, liked the article until I used the words, "sock it to them." He suggested that "for some reason, people in the public sector, and the public in general, seem to think that fee comes out of the developer's pocket. Wrong. The buyer of the lot pays the fee, either directly or in the vast majority of the time through the sale price of the lot. When a community tacks on a fee to the development of land, it is not the developer that pays, it is the ultimate user of the land."
I agree that I could have found a better phrase than "sock it to them." I also agree that often it is the end user that pays the extra cost, particularly when talking about impact fees. However, for permit fees let me suggest another scenario which could actually decrease the cost of the house. If through improved service from government, 30 days is saved in the process, there is a good chance that the increased fee would actually be substantially less than the interest rate the developer is paying on his or her loan. In this case, the developer would actually make more profit or pass the savings on to his customer.