· The Department"s fee revenues of $10.2 million recovered approximately 75 percent of the Department"s costs in FY 2001-02. A high recovery rate is predicted for FY 2001-02 though less than the previous year due to the economic slowdown. Approximately 90 percent of all fee revenue is generated from just five development project application types: 1) building permits; 2) conditional use approvals; 3) environmental review; 4) variances; and, 5) downtown control exceptions.

· The Department does not use a single method for determining its development project application processing fees. Some are based on project valuations, some on estimated staff costs and some on a time and materials basis. State law mandates that revenue from these fees cannot exceed the actual costs incurred in processing the applications. Most of the Department"s fees currently recover more than the related costs using the Department"s current cost estimating techniques, contrary to State law. However, all actual costs of processing applications, including direct staff time, appropriate indirect costs such as information systems support, related long range planning, and administrative support, are not properly accounted for in the existing fees. The Department needs to rationalize its fees by ensuring that all costs that contribute to application processing are included in its fees.

· The Department does not have a single integrated system for tracking staff hours and application revenues. There are discrepancies in the three sets of computerized records that now store the information needed to analyze costs and revenues by application type. Data input by staff in to the Time Accounting system is not verified or subject to quality control as it should be before being used as the basis for fees.

· The Department is subject to variations in its main revenue sources based on economic cycles. This can affect its ability to fund long-term projects such as information technology upgrades. Establishing a component of all fees that could be placed in reserve and used for known, approved future costs may be an option for solving this problem.

· Collection of special fees such as affordable housing and child care fees is not always done in a consistent and timely manner although it appears that the Department has collected the appropriate fees from all applicable projects. Most of the Controller"s analysis and recommendations regarding Special Fees are in process and should continue to be implemented.

Background

The 1988 management audit of the Planning Department identified "cost recovery and construction fees" as an area requiring attention. Four specific recommendations were made, including three for the Department and one for the Department of Building Inspection. The Building Inspection recommendation was to work with the Planning Department on a construction cost verification procedure for fees that are based on estimated cost of construction. The three recommendations for the Planning Department involved implementing cost recovery fees to cover actual costs incurred for individual cases, instituting tighter controls on staff timekeeping records, and working with the Department of Building Inspection on the verification procedure. Verifying the estimated construction cost is an ongoing process. However, a cost recovery fee has not been created and the need for tighter controls on staff timekeeping records remains.

A study conducted of Department fees in 2000¹ yielded a number of findings and recommendations pertaining to the Department"s revenues. Key recommendations included:

For this management audit, an analysis was conducted of the Department"s revenues and fee structure and the extent to which the Department is recovering its actual costs through fees.

Fee Revenues

Department fee revenues have covered most Department costs in the last two fiscal years. As shown in Exhibit 10.1 fee revenues were approximately $10.2 million in FY 2000-01 and $8.8 million in FY 1999-00. For the current fiscal year, FY 2001-02, annual fee revenues were budgeted to be $9,765,000 but are now estimated to be approximately $6,965,000, less than budgeted due to a slowdown in the economy.

Fee revenues were approximately 79.8 percent of actual expenditures in FY 1999-00 and 75.2 percent in FY 2000-01. Based on the first seven months of FY 2001-02, this rate will decrease to an estimated 62.1 percent, even with the Department"s planned expenditure reductions of approximately $2.8 million, as shown in Exhibit 10.1

Exhibit 10.1
Fee Revenues and Actual Expenditures
FY 1999-00 - FY 2001-02

Fee revenues are comprised primarily of the fees paid for all the different types of development applications processed by the Planning Department. There are 45 different fees charged by the Department for its various development project applications (see fee schedule included as Attachment B). These include seven different fees for building permit applications and nine different fees covering the various stages and types of environmental review. The Department also has eight other fees on its fee schedule for miscellaneous costs such as photocopying, subscriptions to the Planning Commission agenda, and others.

The last major adjustment to application fees was in 1996. On January 1, 2002 some increases were adopted to insure consistency between the Administrative and Planning Codes that had gone unnoticed for several years. A fee surcharge adjustment became effective March 1, 2002.²

Quality control procedures might have prevented such a timing gap for consistency of regulations and the mechanism employed to administer them. By way of comparison, the Department of Building Inspection publishes a Cost Schedule (building valuation data) for use in determining permit and related fees.³ The Schedule is prepared by DBI"s Technical Services Division based on construction cost data reported by a contracted Valuation Service in accordance with provisions of the Building Code.

Out of the Department"s 45 development project application fees, five account for approximately 90 percent of the Department"s fee revenues. These fee categories are building permits, environmental review, conditional use, downtown control exceptions and variances. These five fee categories contributed $9.1 million of the $10.2 million collected in fee revenues in FY 2000-01 and $7.9 of the $8.8 million collected in FY 1999-00, as shown in Exhibit 10.2.

Exhibit 10.2
Five Major Sources of Department Fee Revenues
FY 1999-00 and 2000-01

As shown in Exhibit 10.2, there is variation from year to year in the mix of fee revenues from these five categories with Downtown Control Exceptions accounting for a bigger percentage in FY 2000-01 as compared to FY 1999-00 when environmental review comprised a larger share of total revenues. These differences reflect different stages of project timing on larger scale multi-year projects. In spite of variations, these five categories continue to be the source of most of the Department"s fee revenues.

For the first seven months of FY 2001-02, comparable fee revenue was $4.4 million, again comprised primarily of the same five fee categories discussed above. Exhibit 10.3 shows the results for the first seven months of FY 2001-02. As can be seen, the mix has again changed with downtown control exceptions accounting for only 2.9 percent of total fee revenues and variances and conditional uses increasing their share of the total. As in previous years, these five fee revenues accounted for slightly over 90 percent of total fee revenues in the first half of FY 2001-02.

Exhibit 10.3
Top Five Permit Fee Revenues
First Seven Months of FY 2001-02

The breakdown of fee revenues for FY 1999-00 through FY 2001-02 is shown graphically in Exhibit 10.4.

The Department"s fees are a combination of flat fees, valuation-based fees and time and materials fees. Flat fees are single amounts charged for certain types of applications or services. Valuation-based fees are determined by the project"s estimated construction costs. Time and materials charges can be imposed in instances where the cost of processing the application exceeds the amount of the initial fee charged. Some fees are a combination of flat fee or valuation-based fee and time and materials. Of the five major fee categories shown in the tables above, only Downtown Control Exceptions is a flat fee. The others are valuation-based or a combination of valuation-based and time and materials. Several environmental review fees are in place including flat fees, valuation-based fees, combinations of these two and time and materials.

Exhibit 10.4
Revenue Comparison
FY 1999-00 to FY 2001-02

State requirements regarding planning fee cost recovery

Whatever type of fee is charged, State law mandates that planning agencies charging fees for development project application processing can only charge the "estimated reasonable cost of providing the service for which the fee is charged."⁴ Another relevant State law provision is that,

The Planning Department tracks staff hours by case and case type, allowing for a comparison of costs and actual revenues by most fee types. The results of such an analysis are shown in Exhibit 10.4. As shown, the Department as a whole appears to be recovering fee revenue in excess of its estimated costs of processing development project applications. In FY 2000-01, the net recovery was $4.2 million greater than estimated costs of approximately $3.8 million. In FY 1999-00, the difference was approximately $2.9 million. The high fee recoveries reflect an extremely strong economic period during which there was a great deal of construction and development activity in San Francisco and the valuation of construction increased significantly during that time. The fees producing the greatest over-recovery are primarily those that are valuation-based: building permits, conditional use, variances and environmental review.

As shown in Exhibit 10.4, certain application types did not recover their full costs during the last two fiscal years. Discretionary Review cases, for example, were the single largest source of under-recovery for both years reviewed, with an under-recovery of $492,800 in FY 2000-01 and $210,951 in FY 1999-00. However, all under-recoveries were more than offset by over-recoveries, particularly from building permit, conditional use, variance, and downtown control exception applications.

To make the comparison shown in Exhibit 10.4, an hourly rate of $81.97 was applied to the number of planner staff-hours reported for each application type. This is the same approach used by the Department for its fee-related cost calculations. It is the mid-point of a Planner III"s salary multiplied by 2.27 to account for indirect costs such as administrative support services.

Exhibit 10.4
Comparison of Planning Department Costs and Revenues
By Fee Type

Department"s methods for determining planning fees

The varying levels of over- and under-recovery raises the question of how fees are determined by the Department. Since the costs estimated are for planner hours and a share of indirect costs, it is reasonable to assume that over or under-recoveries should be reasonably equal between fee types. However, since different bases are used for different types of fees, this is not the case. Valuation-based fees increase as the cost of construction increases. If Department costs do not increase at the same rate, an over-recovery situation occurs. If Department costs increase at a rate greater than flat fee increases, an under-recovery can occur.

The Department does not use a consistent methodology to identify its costs and set fees for all application types. The existing fee structure has been in place for some time based on different approaches used at different times in the past and has never been comprehensively reviewed and modified so that a consistent approach is established for all fees. Basing fees on the construction value of a project is not unreasonable in that larger projects with higher construction costs probably cost more to process than small home remodels. However, increases in construction costs and valuations may be unrelated to Department costs increases. A more rational approach that would better comply with the intent of State fee law would be to identify actual historic costs for processing each type of application, add actual indirect costs that are directly attributable to application processing and set fees accordingly.

This approach could be relatively easily implemented by the Department because it already collects the base data needed to determine actual costs of processing development project applications--staff time. Staff planners are required to record their time each day, by project, in the Department"s Time Accounting System. As a result, the system records actual staff hours by individual case and application type. When combined with caseload numbers, this data can be summarized to determine average hours and cost per case by type of application.

To determine the actual total costs of application processing, appropriate shares of indirect costs such as those for support staff, information systems maintenance and equipment, the Administration division, and even a portion of Citywide Policy and Analysis division need to be identified and allocated to the application processing function. Currently these costs are spread among all planner staff equally without regard to which division and function is the cause of which costs. A proportionate share of countywide indirect costs such as Board of Supervisors and Department of Human Resources costs should also be allocated to the application processing function to come up with the total cost of this service.

One problem with implementing this approach to Department fee setting is that the sources of information needed for this analysis are not integrated. The Department"s Time Accounting system tracks staff time by case but revenues are tracked in a separate computer application maintained by the Department"s Finance staff. The Finance staff maintains its own database of application caseload but without staff hours. The different databases do not record their data according to a consistent set of application types.

The audit team found discrepancies in Department records that report on or at least address fee revenue and caseload, even in cases where the source data is the same. The information technology infrastructure is in place at City Planning; however, quality assurance and quality control procedures need to be established to ensure data integrity.

These variations in caseload and time record keeping explains some of the gaps in information in Exhibit 10.4 where costs are shown for some application types without corresponding revenue amounts or revenues are shown, but not costs. While none of the missing data would change the net results of over-recovery, the information should be collected in a consistent fashion for all application types. The most significant missing data is that of the entire Major Environmental Analysis division. The Department has no environmental review caseload numbers in either the Time Accounting or Finance Division databases for this division. Though environmental review fees collected amounted to approximately $1.7 million in FY 2000-01, it is not possible to determine average costs per case without caseload numbers. The Department needs to establish an integrated time and cost tracking system that accounts for all application types, tracks caseload numbers, and tracks actual revenues.

Effect of economic cycles on fee revenues

Even with a rationalized cost accounting system in place, the Department could still over- or under-recover its costs in some years based on fluctuations in the economy and the timing of application activity. As discussed above, the Department is forecasting a decline in fee revenues for FY 2001-02 due to a slowdown in construction and economic activity. Exhibit 10.5 presents a graphic depiction of Department fee revenues since FY 1999-00 including the downturn starting in January 2001.

One approach to this problem would be identification and incorporation of certain fixed or multi-year costs in Department fees. Costs such as approved planned future computer upgrades could be built into the fees and set aside in a reserve for that purpose until needed. Then, in the event of an economic downtown, the Department could proceed with needed expenditures. Details of such an approach would need to be worked out with the Controller and may require City Attorney input to ensure that only allowable costs are included.⁶

Exhibit 10.5
Fee Revenue Trends
Special Fees

Special fees, also referred to as development impact fees, constitute assessments on approved development projects to mitigate some of the adverse impacts from those projects, such as the need for affordable housing, child care, parks, schools and transit. The special fees currently in place in the City are shown in the Exhibit below with Planning Code reference where applicable, collection schedule and amounts collected by the Department since their inception.

Exhibit 10.6
Table of Special Fees,
Responsibilities and Collections

of the five special fees, Planning collects for three of them and only one (Affordable Housing) is required to be paid before the building permit is issued;

• Since the special fees were established in 1985, the Department has collected nearly $51 million for the three categories in which it has collection responsibility.

• the Controller"s May 30,2001 "Review of San Francisco"s Development Impact Fees" identified 13 out of 32 large office projects for which site (building) permits were issued-all of which were subject to the housing fee-and for which only two (15%) had not paid the fee (one project has paid all fees since the Controller"s report was issued); and

• fee payment is not the only option for developers under the ordinance; land, money or a combination equal to the fee can be given for the construction of affordable housing.

It appears that the appropriate fees were collected from all applicable projects, excepting one, in a timely manner and there are other fees that will be due upon the proponents" application for Certificate of Final Completion. Nevertheless, the Budget Analyst supports reinforcement of the Controller"s main recommendations, one of which is already implemented with the hiring of a fulltime analyst on November 5, 2001, to focus exclusively on tracking and collecting special fees. The Controller also recommended that the Planning Department collect all of the special fees. The key to implementing this lies within the Information Services Section where work is underway on the interface of Planning"s Parcel Information Database with the DBI"s Permit Tracking System, and with a scheduled completion date of June 30, 2002. Shown in the Exhibit below is a summary of the current status of the Controller"s recommendations.

Table 10.7
Controller"s Recommendations
For Development Impact Fees

The only new occurrence in this area is a proposal by the Treasurer to now collect fees for all City departments, including these special fees. Our recommendation takes this proposal into account without diminishing the Department"s current thrust.

Conclusion

The Department"s practices with respect to fees as well as the current fee structure can be made more rational by moving to fees based on actual costs rather than project valuations. Documentation of the fee-structure process will serve to avert litigation, render the fees defensible and provide a framework for allocating a proportional share of long-range planning costs to the fees for current development. At the same time, the Department must accelerate the completion of work in the Information Services Section to ensure adequacy of the automated data processing system to accurately track permit and special fees as well as capture the service costs for staff planners in each organizational unit. Greater efficiency in application processing and more reasonableness of fees in relation to staff activity can be obtained with possible revisions to the Discretionary Review process.

Recommendations

Based on the above findings, it is recommended that the Planning Commission:

10.1 Develop and adopt a policy that clearly delineates the overall approach to establishing and regularly adjusting the schedule of fees for planning services while specifying an approach based on total actual costs and the appropriate application of project valuation;

10.2 Direct staff to develop a method, consistent with the above policy, for establishing all fees and to propose fee adjustments that are based on actual historic staff costs for each type of development project application and all allowable and appropriate indirect costs that are directly attributable to processing applications including administrative and support costs, a portion of long range planning, and all allowable countywide indirect costs; and,

10.3 Adopt the new fee schedule when staff has completed its analysis.

Also based on the above findings, it is recommended that the Director of the Planning Department:

10.4 Immediately design and implement a method for insuring accurate capture of staff time expended on planning services within the Department"s different organizational units;

10.5 Accelerate implementation of the Controller"s recommendations pertaining to Special Fees. However, carefully review the Treasurer"s current proposal for centralized collection of all fees to ensure that the Department cooperates with the appropriate departments in implementing the process determined to be in the City"s best interest;

10.6 Determine if there are projects not included in the Controller"s sample of 32 projects that are subject to special fees and any amounts paid and due, e.g., projects smaller than 25,000 square feet in size as well as all hotel and residential development;

10.7 Enter details of all approved special fees in the Parcel Information Database at the time of project approval;

10.8 Prepare an annual Special Fees Information Report and submit it to the Planning Commission, including a comparison with the total square footage of all approved project types in the same period;

10.9 Ensure that the Parcel Information Database includes appropriate fields for fees that correspond to the fee-related fields in DBI"s Permit Tracking System;

10.10 Develop and install a quality assurance/quality control procedure to ensure that all fee related computer data entries are timely and accurately made, and with the appropriate and clearly auditable managerial approval;

10.11 Obtain input from the Controller and City Attorney and report back to the Planning Commission regarding the feasibility of placing a portion of fee revenues in a reserve fund for pre-approved, future costs such as technology system upgrades.

Costs and Benefits

Implementation costs for the above recommendations would consist primarily of staff time. The benefits would include a more rationalized approach to Department fees and greater compliance with State law in this area. It is not possible to determine if fee revenue would increase or decrease until the Department develops a method for accounting for all of its direct and indirect costs associated with development project application processing. Other benefits would include improved accountability and reporting of the collection of special fees such as the affordable housing and child care fees.

Planning Department Fee Schedule (PDF)

¹ "Planning Fee Analysis, City & County of San Francisco, June, 2000."

² The surcharge of 4.5% to cover costs of acquiring office space (Administrative Code Section 10F.1), was increased to 5%. This surcharge is imposed on all Planning application fees and is payable to DBI.

³ The version currently in use, dated January 1, 2000, is set forth in Section 107.2 of the Building Code and calls for updates in January each year, or as otherwise directed by the Building Inspection Commission.

⁴ California Government Code Section 66014

⁵ California Government Code Section 66016

⁶ State law does not allow inclusion of funding for contingencies in development application fees.

⁷ (Before)Certificate of Final Completion is issued

⁸ Collections only, through 4/18/2002

⁹ Collections only, through 4/11/2002

¹⁰ (Before)Certificate of Final Completion is issued

¹¹ Collections only, through 12/19/2001

¹² (Before)Certificate of Final Completion

¹³ (Before)Certificate of Final Completion