· In FY 2002-03, the City and County of San Francisco generated approximately $77.4 million in fee revenue, and departments estimate fee revenues will generate $81.2 million in FY 2003-04. Some of these fees are set by statute while others are set based on market rates. A significant number of these fees are cost-based.

· San Francisco City Charter Section 3.105 charges the Controller with the responsibility to provide "general supervision over the accounts of all officers, commissions, boards and employees of the City and County charged in any manner with the receipt, collection or disbursement of City and County funds." As an extension of this general mandate, the Controller has established some procedures for tracking, controlling and annually evaluating cost-based fees charged by the departments.

· Despite these efforts, the Controller's Office has not yet compiled a comprehensive fee schedule for information or control purposes, nor has the Office provided City departments with written standards or procedures to ensure that fees are annually reviewed or consistently analyzed based on generally accepted cost accounting principles. Further, no criteria have been established to guide departmental fee-setting, so that costs are accurately computed and maximum revenue is recovered.

· The Controller's Office should annually produce and maintain a comprehensive fee schedule, which can be used as a control document to ensure that fees are appropriately evaluated and submitted for consideration by the Board of Supervisors each year. In addition, the Controller should establish and disseminate written criteria, standards and procedures for cost-based fee analysis to all City Departments. Such procedures should provide methods for compiling direct costs, analyzing and applying indirect costs, and analyzing cost recovery information.

· By (a) establishing formalized control mechanisms; (b) creating formal fee development criteria, standards and procedures; and, (c) monitoring compliance and reporting to the Board of Supervisors, the City and County would be provided greater assurance that fees recover full costs, when appropriate. If a sample of only six Departments raised a total of 34 fees to full cost recovery levels, the City could generate at least $880,000 in additional fee revenues annually.

San Francisco City Charter § 3.105 charges the Controller with the responsibility to provide "general supervision over the accounts of all officers, commissions, boards and employees of the City and County charged in any manner with the receipt, collection or disbursement of City and County funds." As an extension of this general mandate, the Controller has attempted to establish procedures for tracking, controlling and annually evaluating the appropriateness of cost-based fees charged by the departments.

User fees are a significant source of City revenues. In FY 2002-03, the City generated approximately $77.4 million in fee revenue, and departments estimate fee revenues will generate $81.2 million in FY 2003-04. Because charges and fees are imposed on the public, they are regulated by State law, which requires sufficient cost analysis to ensure fees do not exceed costs, Board of Supervisors authorization, and public disclosure. The Controller, in accordance with the Charter and as chief financial officer for the City, should oversee the processes used by the department to develop, adjust, impose and charge fees.

The Controller should manage the general processes of fee development throughout the City. The Controller's Office should establish criteria and subsequent standards for the departments and maintain the administration in a formalized manner. Departments should cooperate and respond to requests and initiatives from the Controller's Office so that fees are analyzed and assessed for appropriateness on a regular basis. Managing the maintenance and administration of all City fees is an imperative function of the Controller's Office. The Controller should create and maintain a comprehensive fee schedule to regulate the process of fee development.

Master Fee Schedule

To better control and manage fee development and analysis throughout City departments, the Controller should create, publish, and actively maintain a master fee schedule of all fees assessed in the City. A comprehensive fee schedule will act as a tool to record and analyze extensive fee information. Such a control document would therefore allow administrators and policy makers to manage the fee development process with more accurate and timely information. Additionally, a master fee schedule would provide the public with quick information about fees. It is imperative the Controller establish a master fee schedule as a basis for the necessary fee analysis and review mandated by the City Charter.

Section 3.7 of the Administrative Code requires departments to submit a comprehensive schedule of fees and estimates of fee revenue with each year's budget submission, except for fees regulated by federal or State law. In the Controller's Technical Instructions for Budget Year 2003-2004, the Controller requested all departments that budget revenue from licenses, permits, fines and or service charges to complete and submit to the Controller's Office a "Form 2b." Form 2b contains a brief description of the fee, authorizing Code citation, whether the authorizing code provides for an automatic CPI adjustment, sub-object number, index code, fee per unit in previous year, estimated quantity in units for the previous year, estimated percentage of the overall cost of the service recovered in the previous year, proposed fee per unit of service, estimated quantity in units for the budget year, estimated percentage of the projected cost of the service in the budget year that will be covered by the proposed fee, the date of the last increase, and the fee prior to last increase. In the Budget Technical Instructions, the Controller stated that all departments were required to submit a completed Form 2b to the Controller's Office by Friday, January 10, 2003.

The Controller's Office was unable to provide exact receipt dates of submitted Form 2b's. However, by March 13^th, 2003, only 21 of 35 applicable departments had submitted a Form 2b to the Controller's Office. Two other departments submitted general fee information to the Controller by March 13^th, but not on the Form 2b. Instead, these two departments submitted less formal analysis and fee proposals. Out of the 21 Form 2b's submitted by March 13^th, only 14 departments included cost recovery analysis, as specifically requested on Form 2b. Cost recovery and other fee analysis was obtained from 10 departments directly by the Budget Analyst's Office, after the Controller's Office was unsuccessful in obtaining documents directly from departments.

Although all General Fund departments submit some type of schedule of their fees, whether the Form 2b or otherwise, there is no comprehensive fee schedule within the City showing the amount for all fees charged by City departments or the authority for charging each fee. Further, City departments have not evaluated fee levels on an annual or other regular basis to determine the potential for recovering costs or to compare fee levels with those charged by other jurisdictions.

Since no comprehensive fee analysis or schedule has been presented to the Board of Supervisors on an annual basis, the Board of Supervisors has not been provided a regular opportunity to consider the question of full cost recovery for many City departments. As a consequence, the Board of Supervisors' fee policies for City department activities are inconsistent. Further, policy decisions by the Board of Supervisors to determine which fees should fully recover cost and which fees should be subsidized by the General Fund or other funding sources, have not been made on a City-wide basis.

To address these issues, each year, the Controller, with the cooperation of City departments, should provide a master fee schedule with a report indicating (a) the cost of each fee service and whether fee increases are appropriate, and (b) the level of cost recovery for all fees that may be charged. Departments should then work with the Controller's Office to develop recommendations for fee changes.

Management of the Citywide Database

To maintain the Master Fee Schedule, the Controller's Office should work with Departments on an annual basis to ensure that the Master Fee Schedule is accurate and up to date. Moreover, the Controller's Office should continue to work with Departments to ensure that analysis of cost recovery is conducted for each individual fee. In addition to the Controller's general responsibilities related to San Francisco Charter § 3.105, this responsibility is consistent with City Charter § 9.102 of the, Certification of Revenue Estimates, which charges the Controller with the responsibility to review estimated revenues during the annual budget process and advise the Board of Supervisors on the "accuracy of economic assumptions ... and the reasonableness of such estimates and revenues." Keeping the Master Fee Schedule updated will ensure its continued usefulness as a centralized resource for the Board of Supervisors, the Controller's Office, the Mayor's Office, the Budget Analyst's Office, and other decision-makers.

Included in 2003-2004 Mayor's Proposed Budget, a portion of the Controller's narrative (p.130) reads "The Controller's Budget and Analysis Division is improving projection and tracking of revenues citywide, and in 2003-2004 plans to focus its analysis on fees and service charges. Templates were developed and provided in the 2003-2004 budget instructions to help city departments capture and analyze the actual cost of charges to be reviewed and updated by departments consistently and will assist the Controller in maintaining complete and consolidated information on these and all other city revenue sources." While the Controller states that analysis of fees will be a priority, it is still too early in the fiscal year to determine the degree to which the department is attaining this goal.

Cost Analysis

Included within the Controller's responsibilities of overseeing fee administration is cost analysis. As the chief financial officer of the City, the Controller's Office should be the authoritative agency in determining costs of departmental fees. However, the Controller's Office does not determine or develop the cost of fees, such determinations are left to departments. Further, the Controller's Office does not provide procedures or guidelines to City departments in terms of determining the cost of fees. Departments independently determine the cost of providing services with no training or guidance from the Controller's Office. Some departments find determining the cost of fees to be difficult.

For example, legislation to require a license for fortunetellers was proposed by the Board of Supervisors in November of 2002. The Police Department's Permits Division was charged with determining direct costs of the fortuneteller license fee. The cost of the license was calculated and submitted to the Controller by the department at least three times over the course of several months. Each time, the Controller's Office checked for the "reasonableness" and then certified the fee. However, the cost of the fortuneteller license ranged from $240 to $295 and the direct costs associated with providing a fortuneteller license ranged from $188 to $33,957 amidst the three cost submissions. Each submission was subsequently certified by the Controller's Office and forwarded to the Budget Analyst's Office for a budget analyst report. The Controller's Office was not involved with the calculation of the direct costs, they only checked it for reasonableness. Clearly, the calculation of direct costs was unreliable, if not inaccurate.

The Police Department acknowledges their staff has little experience in calculating direct costs, and often uses time and motion studies that have not been reviewed since the mid-1980s as their basis for current fee costs. With no training or expertise provided by the Controller's Office, departments must estimate costs to the best of their ability. But as in the case of the Police Department, such estimates can be highly inaccurate. Such inaccuracies can lead to over or under charging of fees.

Likewise, the Controller's Office has not established a consistent methodology for calculating indirect cost rates to be applied towards departmental fees. In some cases, the departments calculate their own indirect cost, or overhead rate and the Controller checks for the reasonableness of their rates. For the remaining departments, the Controller has three different methods for calculating departmental overhead, some of which are calculated by program, some by department. Some are calculated using budget numbers, some are calculated using actual numbers. These inconsistent methods are discussed in more detail in Section 10 of this report.

Direct and indirect cost calculations as applied to fees are currently left up to each department to determine. Some departments do not have the expertise and training required to produce sound cost methodology for their fees. The Controller should provide training, guidance and written procedures on cost analysis for departments so that all methodologies are consistent and accurate.

Cost Recovery Fee Issues

Within the Controller's general mandate of certifying revenues, management of fees must include a thorough analysis of cost recovery. However, the Controller does not conduct cost recovery analysis of fees on a regular basis, and has not established procedures for departments to conduct cost recovery analysis. Many City departments do not have their own written procedures in place to ensure that fees and charges are periodically reviewed for cost recovery, based on established cost accounting principles. Even though the Controller's Office requests all applicable departments to submit fee analysis annually, many departments do not submit the information in the correct form, or do not submit complete information. The Controller has not exercised his authority to demand the departments comply with their requirements, and therefore sufficient fee analysis is rarely completed. Further, the Controller's Office has not developed City-wide standards and has not exercised sufficient oversight over this important financial function. As a result, City fees and charges are not based on standardized criteria, are not reviewed or updated in a timely or consistent manner, and are not regularly approved by the Board of Supervisors.

Under the California Constitution and State law, City Departments may impose fees for services, but generally cannot receive more than the full cost of providing those services. Exceptions include those fees that are voluntary and not regulatory, such as golf course fees. Voluntary fees can be set at market rates and may exceed the cost of providing services. However, even for non-regulatory fees, there may be policy or programmatic reasons to establish fees at less than 100 percent of cost, which will be discussed later in this section.

As part of its annual budget review and this management audit, the Budget Analyst's Office conducted a citywide analysis of fees to determine those which are cost-based. The Budget Analyst found:

· A majority of City departments had a difficult time conducting the cost recovery fee analyses. The Budget Analyst's Office worked with the staff of City departments' to conduct the cost recovery analysis and explain appropriate methodologies. More appropriately, this should have been a Controller role. Nonetheless, during this exercise, the Budget Analyst found that departments did not have a consistent understanding of methodologies for analyzing costs.

· Several City departments that performed cost recovery fee analyses had a difficult time determining appropriate fees. A number of City departments aggregate their fees into one index code for budget purposes that include revenues for numerous fees, and may include various other revenue sources, thus making the assessment of cost recovery for any individual fee arduous.

· Several departments were unable to provide cost recovery fee analyses at all.

Many City departments were unable to provide or compute a cost recovery analysis for individual fees. Therefore, it is not clear whether departments currently possess the tools or expertise to determine those fees which fully recover costs. The departments' general difficulties conducting full cost recovery fee analyses results in an inability to fully advise the Board of Supervisors with information regarding the need for General Fund discretionary program support. The Controller should provide procedures and guidance for these departments. In the absence of such guidance, several issues can arise.

The potential exists for some City departments to be overcharging for their services. For example, in a memo dated April 15, 2003 written to the Budget Analyst from the Assessor/Recorder, department staff indicated that a cost recovery analysis of services has not been conducted. Yet, based on documentation provided by the Assessor/Recorder's Office, the FY 2002-2003 projected revenue from fees is nearly double the budgeted amount, even though the Assessor/Recorder's Office budgeted fee revenue equal to the full recovery of fees. Therefore, it appears very possible that the Assessor/Recorder's Office is in excess of full cost recovery for services. In the absence of detailed cost recovery analyses, City departments could not defend themselves against litigation that may claim that fees are generating more than the cost of providing services. Therefore, the development of a full cost recovery plan should be required and reviewed by the Controller's Office for all City departments.

There is also a significant cost to the City that results from undercharging, or not fully recovering the costs of providing services. In a small sample of nine City departments, our research indicates that City departments could collect an additional $4.2 million in revenue, assuming the selected fees were set at full cost, or 100 percent recovery. The analysis was adjusted to consider a more conservative list of 34 fees in six departments, where increases were not considerable, thus a more realistic analysis. The additional revenue in this narrowed sample of fees would still be approximately $880,000 annually for the City¹. The Controller's Office should ensure that complete cost recovery analysis is presented to the Board of Supervisors and all City Commissions that have fee-setting authority. Full cost recovery analysis is essential to understand the degree to which discretionary resources are being used to subsidize services.

However, because of limited information provided by City departments, even analysis on such a small scale is incomplete. As previously noted, many City departments have not conducted cost recovery analyses or have been unable to separate out the revenues derived from individual fees. Comparatively, in some instances where the Budget Analyst was able to conduct full cost recovery analyses, it was clear there may be legitimate policy reasons for not increasing fees to full cost recovery levels. For instance, the Board of Appeals attempted to implement a fee increase of approximately 105 percent per fee for FY 2003-2004. Such proposed fee increases would only recover approximately 29.4 percent of these costs, based on total FY 2003-2004 costs of $433,534 and fee revenue projections of $127,459. According to Board of Appeals managers, the Board of Appeals did not propose to increase their FY 2003-2004 fees to be 100 percent cost recovery because such fees would be prohibitively high. According to Board of Appeals managers, significantly higher Board of Appeals fees would discourage ordinary residents, neighborhood associations, business operators and other individuals, other than the most wealthy, from having access to the administrative review process that the Board of Appeals offers for appealing City permits and other department actions.²

Animal Care and Control fees are another example where raising fees to full cost recovery might be legal in terms of user fees, but might be against policies of the City. Currently the fee to adopt an animal is set at $10.00, which recovers only 2 percent of costs associated with assessing that fee. In order to raise this fee to 100 percent recovery, the fee would need to be increased to $519.50. Such an increase would lead to far less pet adoptions in the City, which undoubtedly would be counter to the policy objectives established by the Board of Supervisors.

In addition to the need to develop systems for full cost recovery, the City needs to safeguard against the possibility that some fees may exceed cost. State laws specifically prohibit some City departments from establishing fee schedules that are more than cost. State law mandates that the Planning Department fees for a development project application can only be set at an "estimated reasonable cost of providing the service for which the fee is charged."³ Moreover, California Government Code §66014 states "(a) Notwithstanding any other provision of law, when a local agency charges fees for zoning variances; zoning changes; use permits; building inspections; building permits...those fees may not exceed the estimated reasonable cost of providing the service for which the fee is charged." Another relevant State law provision is that:

"...no local agency shall levy a new fee or service charge or increase an existing fee or service charge to an amount which exceeds the estimated amount required to provide the service for which the fee or service charge is levied. If, however, the fees or service charges create revenues in excess of actual cost, those revenues shall be used to reduce the fee or service charge creating the excess."⁴

Therefore, State law explicitly states the Planning Department may not exceed the cost of providing the service provided for the fee.

However, as part of this analysis, the Planning Department indicated that fee cost recovery analysis has been accomplished and the Planning Department is in the process of fully implementing recommendations based on the Management Audit of the San Francisco Planning Department completed in June 2002, which recommended the Planning Commission direct staff to "develop a method ... 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 attributable to processing application including administrative and support costs ... and all allowable indirect costs." However, the Planning Department has yet to develop such methods and did not submit a Form 2b to the Controller's Office as requested. Included in their submittal for the FY 2003-2004 budget, the Planing Department proposed fee increases that resulted in cost recovery ranging up to 493 percent, clearly violating state law. The Controller's Office repeatedly stated that they were not involved with the Planning Department's FY 2003-04 fee proposals. Because the Planning Department's FY 2003-04 budget was balanced on illegal fee proposals, the Budget Committee placed $1.38 million of the Planning Department budget on reserve, pending receipt of proper fee analysis.

Based on discussions with several City departments and the Controller's Office, it is clear that the budgeting and the tracking of fee revenue makes the analysis of cost recovery exceedingly difficult. In many City departments, fee revenue is aggregated into one index code or several fees are aggregated into an index code. If revenue is aggregated, unless a detailed analysis of the individual fee is conducted, the amount of subsidy provided by the General Fund is not known.

While the Controller's Office verifies the reasonableness of revenue estimates by departments based on the departmental submissions of fee information, in some instances the Controller is to report to the Board of Supervisors and certify the revenue projections. Section 8.33.1 of the San Francisco Administrative Code, regarding County Clerk's Fees, states⁵:

No later than May 15th of each year, the Controller shall file a report with the Board of Supervisors reporting the new fee schedule and certifying that: (a) the fees produce sufficient revenue to support the costs of providing the services for which each fee is assessed, and (b) the fees do not produce revenue which is significantly more than the costs of providing the services for which each fee is assessed.⁶

Therefore, the Controller's Office should develop written procedures for fee methodology and cost recovery analysis for all City departments, including the County Clerk's Office. Such policies and procedures would ensure a consistent methodology for establishing fee schedules for departments. Moreover, providing training to City departments would ensure the methodology is accurate for fee development and all appropriate components of cost recovery are included in the analysis. Such training would also ensure that similar methodology is used throughout the City.

A full cost analysis should be completed annually according to standards and procedures established by the Controller's Office, to provide the basis for setting all charges and fees and to establish program or activity cost. Second, all charges and fees should be systematically and regularly reviewed by the Controller for consistency with the standards that he establishes. City departments are already required to submit fee information, including cost recovery analysis, with the annual budget. The Controller requires such information in a specified format, although many departments ignore the requirements and deadlines, as explained earlier in this Section of the report. It is the Controller's responsibility to obtain this fee material, and if departments are not willing to cooperate, the Controller has the responsibility to exercise his authority on city fiscal matters, either by refusing to certify departmental revenues or by going before the Board of Supervisors to obtain more authority over departmental submissions of financial data.

Based on the limited information presented by City Departments regarding full cost recovery of fees, the Budget Analyst recommends the Controller's Office assume an increased role in fee development and analysis. Full recovery of costs is a policy matter for the Board of Supervisors. As such, the Controller's Office should continue to work with City departments and provide a comprehensive fee schedule including cost recovery analysis on an annual basis to the Board of Supervisors.

Conclusion

Although City departments maintain some type of schedule of their fees, the Controller has not yet compiled a comprehensive fee schedule detailing the amount for all fees charged by City departments or analyzing cost recovery information for each fee.⁷ While City departments do not fully cooperate with the Controller's Office in submitting complete fee information on time, the Controller currently provides limited guidance or training to departments on the determination of costs for fees. Further, the Controller has not guided City departments to evaluate fee levels on an annual or other regular basis to determine the potential for recovering costs. The Controller has not provided City Departments with a consistent methodology for cost recovery analysis, rendering some City Departments potentially in violation of the California Constitution, Article 13A and State law⁸. Full recovery of costs is a policy matter for the Board of Supervisors. Without analysis conducted on each individual fee charged by the City, the Board of Supervisors is making fiscal decisions based on a partial picture.

Recommendations

The Controller's Office should:

11.1 Develop and maintain a Master Fee Schedule for all City Departments to be reviewed on an annual basis;

11.2 Develop and disseminate written procedures to City departments detailing methodologies for direct costs, indirect costs, and cost recovery analysis for fees;

11.3 Provide training to City departments on fee cost analysis methodology and cost recovery analysis;

11.4 Continue to work with Departments to ensure that analysis of cost recovery is conducted for each individual fee; and

11.5 Provide quality control by reviewing fees submitted to the Board of Supervisors for conformity with State law, City policy, and cost accounting guidelines.

City Departments should:

11.6 Work cooperatively with the Controller's Office to analyze fees, analyze cost recovery, and develop recommendations for fee changes.

Costs and Benefits

These recommendations can be accomplished within the normal management responsibilities of the organization. Our recommendations would increase the Controller's ability to analyze fee revenues and therefore, forecast more accurate revenues for the City. In a small sample of total cost recovery of fees in nine departments, we estimate that the City could generate at least an additional $880,000 annually.

¹ The Budget Analyst notes that one of the departmental fees included in this analysis is proposed for an increase, and is scheduled to be brought before the Board of Supervisors on September 17, 2003. However, this proposed fee increase is does not fully recover costs.

^{2 The proposed Board of Appeals fee increases were not approved by the Budget Committee on May 5, 2003.}

^{3 California Government Code §66014}

^{4 California Government Code §66016}

^{5 The Administrative Code contains similar provisions for the Medical Examiner's Fees (Section 8.14(b)).}

^{6 According to the Controller's Office, they fulfill these reporting requirements in the annual Revenue Letter (mandated in San Francisco Charter 9.102), which provides an opinion regarding economic assumptions underlying the revenue estimates and the reasonableness of such estimates and revisions.}

^{7 While the Budget Analyst contacted all City Departments, the response varied between City Departments.}

^{8 Such as California Government Code §54985, §54986, and §66016.}