Fees: When given the choice, most
citizens prefer service charges and user fees over property taxes to fund municipal
(from Maine Townsman, January 1994)
by Michael L. Starn, Editor
This Maine Municipal Association publication is presented for "Classroom Use Only." Its intended use is to stimulate and aid in discussion and role playing within a classroom setting.
Service charges and user fees are the most rapidly growing source of local government revenue, according to the International City Management Association. In its 1989 publication, A Revenue Guide for Local Government, ICMA noted that local governments' shift to user fees has occurred for two primary reasons: taxpayer resistance to increased property taxes and the decline in federal and state aid to municipalities.
In Maine, communities of all sizes are moving toward, or at least exploring, user fees as an alternative to increased property taxes. In Bangor and Waterville, studies of the existing user fee structures uncovered areas where undercharging was occurring for certain types of fee-based activities and found opportunities for new or expanded user fee funding of other municipal services; in Dexter; a successful municipal golf course pays for itself and brings tourism to the community; in Jay; a proprietary transfer station and recycling center lowers the solid waste costs for this town and those that contract for services; and the town of Oakfield in southern Aroostook County, pop. 846, demonstrates how small towns can implement the user fee concept in solid waste management without a lot of public backlash.
USER FEE POPULARITY
According to the Advisory Commission on Intergovernmental Relations (ACIR), user fees are more popular than taxation for most citizens. Annually, this Washington-based advisory council to the Congress and Administration conducts a survey of public attitudes toward the three levels of government--federal, state and local. For over 10 years, that survey has consistently shown greater public support for user fees than any form of taxation to support new government services. The same survey has also consistently shown property taxes to be the least-favored method of taxation.
These two findings by ACIR validate the need for municipal officials to carefully consider the adoption of user fees to fund some municipal services. Service charges and regulatory fees are ideally suited to the "finance it yourself environment that currently pervades all levels of government.
Nationwide, studies of the application of user fees to fund municipal services have shown that their popularity and use varies by region. Municipalities in the South, West and Midwest employ user fees and service charges to a much greater extent than other areas of the country; user fees are least popular in New England. Larger communities rely more heavily on user fees than do smaller ones. In total, local governments derive about 90 cents in charges and fees to every $1 raised by taxation, according to the ICMA.
FEES OR PROPERTY TAXES
The advantages and disadvantages of user fees versus property taxes to fund municipal services need to be thoughtfully reviewed before making a choice of one or the other or a mixture of taxes and user fees. From two reports by ICMA, the previously mentioned A Revenue Guide for Local Government and the MIS Report of December 1992, the following advantages/disadvantages of user fees were gleaned.
· User fees reduce wasteful consumption of public services by heightening the public's awareness of the cost of providing a service.
· User fees, because they are based on consumption, give municipal officials a better idea of the level of service to be provided. This has the effect of reducing the tendency of government officials to expand services or facilities to meet a perceived need or increased demand.
· User fees are more equitable than taxation since they are paid by the user, not all taxpayers. Those using the service pay proportionally to the benefit they receive; those who don't use the service, don't pay.
· User fees provide a flexible source of revenue to fund specific goods and services. The amount charged as a user fee is restricted only by the demand for a service and the cost of providing it. The greater the demand (more users paying fees), the greater the revenues. Revenues from property taxes, on the other hand, do not have that direct link to the fluctuating demand for services.
· Some municipal services have an overriding public benefit that precludes user fees which would create a burden on low-income individuals. Those who are least able to pay may have the greatest need for public services, e.g., public education.
· Services which are paid for by user fees need to be quantifiable - broken down into units for pricing and the benefits should accrue only to the buyer. Public safety, for example, is mostly preventative; therefore, it would not be fair to assess it only to the users. Beneficiaries of the service would also be difficult to identify.
· Opponents of user fees feel that the existing methods of taxation already provide, or should provide, sufficient revenue to operate local government and that user fees are just a sneaky way of having "backdoor taxation."
· User fees seldom cover the entire cost (both direct and indirect costs) of a municipal service. Some fee-based services that are touted as being self-supporting may, in fact, not be.
· Some municipal services are made more expensive because of the administrative costs associated with collecting the fee.
· Unlike property taxes, user fees are not deductible from federal or state income taxes.
There are a number of legal and political issues to consider before a municipality moves to increase the role of user fees to fund municipal services. These issues should not be viewed as roadblocks to having user fees but rather as guidelines to their successful implementation.
Through case law, the courts have established some criteria upon which user fees should be based. They include:
1) The fee charged must provide a direct benefit to a party in exchange for payment in a way not shared by other members of society.
2) The fee must be optional with the party having the option of not using the government service.
3) The charge must compensate the specific government office for the provided service only: the fees received must not be collected with the purpose of raising revenues beyond the cost of the provided service.
Political impediments include the opposition of interest groups (particularly those affected most by the fee) to a service charge; the indifference of taxpayers to the negligible benefits of a lower tax burden combined with the sentiment that it's just another way to get more money for the local government; and opposition from municipal staff who fear that a service charge will adversely affect their budgets and staffing levels (demand for a service might be reduced and employees might be laid off.)
STUDYING USER FEES
Larger communities, in particular, often do not have a precise handle on the extent of their user fees. Some regulatory fees (hunting and fishing licenses, concealed weapons permits) are established under state law. Some are set by local ordinances. In some cases, municipal departments are given a great deal of latitude in setting reasonable fees for their activities.
A strategy that inventories and codifies all user fees will enable a community to get better control over this type of revenue. An annual review of all service charges and regulatory fees, preferably in conjunction with the budgetary process, is recommended.
Four or five years ago, the City of Bangor formed an ad hoc committee to review every user fee charged by the city. According to Finance Director John Quartararo, following that study some of the fees were increased substantially (building permits and other code enforcement activities); some were put on an annual adjustment cycle using the Consumer Price Index (CPI); and others were left pretty much as they had been. The net effect of these changes was an increase in user fee revenues to the city.
More recently, the City of Waterville hired a consultant to review its user fees. The consultant, Nancy Orr (now finance director for the city) did an inventory of all existing fees, categorizing them by the department that was administering the fee and under whose authority the fee was being assessed (state or local). She also made comparisons with similarly sized communities and a neighboring one to find out the extent to which user fees were being utilized to fund municipal services. She observed that Waterville fell somewhere in-between in its utilization of user fees. "I concluded that the city hadn't taken full advantage of the opportunity (to use them)."
Orr's review also found several instances where current user fees were low. Like Bangor, building permits/code enforcement were not fully compensating the city for their administrative costs.
In the Bangor and Waterville studies, solid waste was found to be a strong candidate for user fees. In both communities, however, implementation of user fees for solid waste has encountered obstacles.
In 1991, the Bangor City Council adopted a user fee for municipal trash pickup with $250,000 of anticipated revenue built into the budget. Public reaction to the idea was swift and overwhelmingly negative, causing councilors to back away from their plan. The city is presently looking into the idea of privatizing its solid waste collection.
Waterville owns and operates a regional transfer station. While the facility operates as an enterprise fund and covers all its direct costs, Finance Director Orr questions if all indirect (administrative) costs are built in. "A municipality may be conservative or liberal in its interpretation of administrative costs," says Orr
Typically, administrative costs include bookkeeping, computer services, legal services, and a portion of management and policy makers expenses. Orr says one way of calculating the correct portion of administrative costs to be charged off to a particular service is by correlating the service's budget to the municipal budget. For example, if the entire municipal budget were $1 million and the solid waste transfer station's operation was $200,000, then that service would be 20% of the municipal budget. If administrative costs totaled $100,000, you would apply the 20% to that amount to get your indirect costs ($20,000) which would be charged off as an expense to the solid waste transfer station.
MUNICIPAL GOLF COURSES
The National Golf Foundation claims that a golf course would need to be developed each day until the year 2000 to meet rising consumer demand for the sport. Laurence A. Hirsh, president of the Society of Golf Appraisers, says, "Well planned golf course development can be an excellent revenue opportunity for local governments." Hirsh goes on to say that for those communities with a documented need for new facilities, a well-conceived golf course can represent an excellent solution for local governments looking to supplement eroding tax bases while protecting and maintaining open spaces.
About 30 years ago, the town of Dexter got lucky. A 9-hole municipal golf course was practically given to them.
In 1972 a financially-troubled private golf course, with a lot of adjacent, undeveloped land around it, was taken over by the Farmer's Home Administration. FmHA offered the 155 acre piece of land, which included the golf course, to the town for one dollar. It was too good of a deal to turn down and the residents of Dexter knew it. But, when they took over the golf course and the accompanying land, few could have predicted how successful it would turn out.
Today, the Dexter Municipal Golf Course is financially self-sustaining and self-operating. According to Dexter Town Manager Steve Whitesel the golf course has been a great investment for the town.
The Dexter Muni Association, a golf club committee of course members who volunteer their time, administers the budget and hires a golf pro to handle the day-to-day management of the course. The Dexter Town Council annually approves a budget submitted to it by the golf club committee.
"Not only does it (the golf course) pay for itself," say Whitesel. "Reinvestment has occurred." The club house has been renovated, equipment has been purchased, and recently the committee hired an architect to design nine additional holes.
"It's an asset to the town," says Whitesel. "And, we don't spend a dime of tax dollars on it."
Additionally, the golf course brings a lot of people to town who might otherwise not come. "Tourism is the wave of the future up here," says Whitesel. "We want Dexter to be a place where people will stop on their way to Moosehead (or any other destination when heading North) . . . play some golf and enjoy our other recreational activities."
With grants and local money, the town has turned the land acquired with the golf course into a multi-purpose recreational area, including tennis courses, ball fields and nature trails.
PROPRIETARY TRANSFER STATION
Solid waste management is big business in Maine and across the country. About three years ago, the Town of Jay decided to get into the solid waste business to the tune of a $1.5 million investment.
Residents and town officials in Jay decided not to put "all their eggs" in the basket of the private sector or to wait on other municipalities in their area to get together in addressing the region's solid waste needs. Instead, the town decided to take charge of its own destiny by building a solid waste transfer station and recycling center.
Jay officials knew that regardless of which disposal option they selected incineration or landfillthey would still need facilities and equipment for storage, compaction, recycling, and transportation of solid waste to a disposal site.
Town officials were ready to go it alone, but a better idea surfaced why not build large enough to accommodate the needs of other communities in the region. The Town of Jay would benefit by having a greater volume of trash to dispose of (waste-to-energy facilities were paying more for large, guaranteed tonnage) and the town through contracts could share the operational costs of the facility. The contracting towns would have the advantages of not having to make the expensive investment in land, equipment, scales and manpower to build and operate a transfer station. They would simply reimburse the Town of Jay for its tipping fee (currently the trash goes to Penobscot Energy Recovery Company in Orrington) plus $20 for handling and transportation. It was a win-win opportunity.
Nine towns have contracted with Jay for the full services of the transfer station and recycling center. The tonnage fee for new contracting towns is $68.50 per ton, but under the current contract with PERC, which expires December 31, 1994, Jay pays $28.50 per ton, thus some of the earlier members pay $48.50 per ton for their contracts. A 30-day notice to terminate the contract is also an noteworthy feature showing the confidence that the Town of Jay has in its services.
Contracting towns are Canton, Livermore Falls, Livermore, Wilton, Temple, Vienna, Hartford, Fayette and Carthage. The transfer station and recycling center handles non-bulky waste (regular trash) and recyclables; the transfer station also accepts demo debris (bulky waste) but that is just a pass through contract with Consolidated Waste Services (CWS) in Norridgewock at $85 per ton.
Jay faces a couple of important decisions in the near future. Town Manager Cornell Knight says the town has to decide if it wants to allow more towns to have contracts. "We're at the point where we would need to add more employees and equipment to handle more towns."
Knight says the town is also doing a cost analysis for handling bulky waste at the transfer station instead of contracting the service out.
SOLID WASTE FEES
In the Town of Oakfield, residents pay three cents a pound to bring their trash to the transfer station. The Oakfield transfer station went on line this past October with hardly a glitch and Town Manager Candis Roy says she "was amazed at how easy the transition was."
Until 1989, the Town of Oakfield operated its own (unlicensed) landfill. Town officials knew the landfill could not continue for much longer, so the town joined the Southern Aroostook Solid Waste Disposal District which at the time was contemplating a regional landfill for communities in that area.
When relations with Southern Aroostook started to fall apart, town officials decided to lay out the town's solid waste options so that residents could play a more active role in charting their town's future. The options were to continue with SASWDD, join the Northern Katahdin Valley Solid Waste Disposal District, or go it on their own and build a transfer station just for the Town of Oakfield.
With almost unanimous support at town meeting, residents voted to build their own transfer station at a cost of $150,000 and to contract with a private hauler to transport the trash to PERC in Orrington. The transfer station included roll-off containers, balers and scales. It's open two days a week and the hauler makes a trip to PERC once every two weeks.
The tipping fee at the transfer station covers the cost of transportation and disposal; the town uses taxes to cover the operation and maintenance of the transfer station. The tipping fee has met with very little resistance from residents, according to Roy who points to the active involvement that residents had in the decision-making process.
"My advice is to give people as much information as you have, let them decide and they'll back you all the way," says Roy.