In many cases, the city isn't looking for full cost recovery. According to an annual City Auditor's Office report, Palo Altans consistently give rave reviews to the city's recreational offerings, public subsidies or not. And a recent effort by the City Council to save money by outsourcing the city's animal-services operation ultimately fizzled because of community resistance. Clearly, many think the money is well spent.
Still, city leaders feel they can do better when it comes to cost recovery, which totals $10.7 million and does not include those fees associated with planning and development. On Tuesday evening, the City Council's Finance Committee discussed the MGT report and directed staff to draft a "fee recovery policy" that the council will ultimately consider and possibly adopt. The policy will attempt to address which services should strive to achieve "high cost recovery" (between 70 percent and 100 percent of the cost of service), which should aim for "medium" (30.1 percent to 70 percent) and which should remain "low" (0 to 30 percent). Once that policy is in place, the council plans to overhaul the municipal fee schedule for consistency with the new policy.
In some instances, the "low" cost recovery is easy to justify. Walter Rossmann, director of the city's Office of Management and Budget, used the extreme example of police calls. If the city were to start charging for police calls, a resident might be less likely to report the burglary across the street. Similarly, if the city were to significantly raise prices for fire inspections (the Fire Department's total cost recovery is 57 percent), it could deter some building owners from taking all the necessary fire-prevention measures, which could endanger both that building and neighboring properties and increase the need for future Fire Department responses.
Councilman Greg Schmid wondered Tuesday if raising the costs of approving building updates would "discourage updates in buildings that we want to encourage." He noted that the $300 fee the city currently charges for installation of automatic fire sprinklers achieves a 27 percent cost recovery. To reach 100 percent, the fee would need to be raised to $1,108.
"In these cases why should the goal be 100 percent?" Schmid asked.
For many services, it won't be. There is a reason why most departments are now at a "medium" level when it comes to cost recovery, according to Rossmann. Still, the new study suggests that the city can do a lot better when it comes to recouping costs. Rossmann said cost recovery shouldn't always be "full" but should in most cases be in the "high" range. In cases where fees would have to be raised substantially, these adjustments would be raised gradually, over a number of years.
The study looked at 650 different fees, excluding the development and planning fees, and found that the city has recovered about 35 percent of its service costs. The General Fund subsidized the other 65 percent, which came out to roughly $20 million. Some services, like the Palo Alto Municipal Golf Course, generally recoup all their costs through fees. Another 34 fees generated a cost recovery greater than 100 percent, suggesting that a reduction might be in order.
The city's attempt to create its first "cost recovery policy" isn't exactly stirring the populace yet, but it might cause some local angst next summer, when the city adopts its next Municipal Fee Schedule. The study recommends raising the city's overall cost-recovery level from 35 percent to 38 percent, which would mean the city's fee revenues would go up from $10.7 million to $11.8 million. Whether or not this effort will cause a stir will depend on which fees the council ultimately decides to raise, a decision that will occupy the Finance Committee and the full council in the first half of next year.
Councilman Pat Burt, who chairs the committee, stressed the importance of the "cost of service" study and the need to carefully think through the report's implications before proceeding with changes.
Burt rejected staff's initial recommendation to bring the new policy for cost recovery directly to the council and lobbied successfully to have the Finance Committee hold another meeting on the new study. Burt said he was worried that the city is "rushing through something of a greater concern to the community and to us as council members than may be perceived."
The council, he said, will have to think about ways to make the needed changes while remaining sensitive to community values. He voiced concerns about the council "being lulled into thinking that this will go over easy." The fees in the schedule would affect many different constituencies, from animal lovers to theater goers. Burt warned that there is an "underestimation about how this will be received in the community."
"We have residents who just deeply value living in this community and the services provided in this community," Burt said. "They assume they will continue along the lines they always have and changes to those are very sensitive matters."
Vice Mayor Nancy Shepherd agreed with Burt that the subject is an important one but said she would support checking in with the full council before having the Finance Committee get down to the nitty-gritty details of adjusting fees. But all committee members (Marc Berman is the fourth) praised the new report. Burt said it would allow the council to make decisions on a more rational and less subjective basis, though he noted that subjective decisions will still be a part of the process.
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