HomeMy WebLinkAboutStaff Report 3151
City of Palo Alto (ID # 3151)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 3/19/2013
City of Palo Alto Page 1
Summary Title: Cost of Service Study Follow Up
Title: Cost of Service Study Follow Up
From: City Manager
Lead Department: Administrative Services
Recommendation
This report is provided for informational purposes.
Background
Last year, the City retained the services of MGT of America (“MGT”) to assist staff in
determining the full cost of providing General Fund services for which user fees are charged (or
could be charged). The analysis will depict current cost recovery levels as well as potential areas
for increasing revenues. User fees and permits currently generate approximately $22.4 million
annually, which is approximately 15.4 percent of all General Fund revenue. The user fee
analysis will facilitate more informed decision-making processes and provide the framework for
setting fees, level of service, service delivery modes and prioritizing services that will meet the
City’s fiscal and policy goals.
In July 2012, staff presented the Finance Committee with an overview of the process for
conducting this analysis. The Finance Committee requested that, prior to bringing MGT’s draft
report back for consideration, staff provide additional information about the methodologies
utilized in this study and some examples that illustrate how the full costs and co st recovery
levels are developed. Several issues have delayed completion of MGT’s analysis, including staff
turnover and competing priorities in departments, data reconciliation and personnel changes
within MGT. Staff expects to have the full report and findings to the Finance Committee
before the end of the current fiscal year.
Discussion
Propositions 13, 218 and 26 have placed both substantive and procedural limits on cities’ ability
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to impose fees and charges. Collectively these constitutional amendments provide safeguards
against taxes being imposed without a vote of the people. Proposition 26 contains a more
general articulation of the cost of service principle and includes a requirement that the local
government bear the burden of proof that “a levy, charge, or other exaction is not a tax, that
the amount is no more than necessary to recover the reasonable costs of the government
activity, and that the manner in which those costs are allocated to a payor bear a fair or
reasonable relationship to the payor’s burden on , or benefits received from, the governmental
activity.” (Cal. Const. art. XIII C, § (e).)
The approach MGT and other consultants utilize to analyze cost recovery levels is relatively
standardized. Most fees are analyzed by building the costs of providing that particular service
from the bottom up. In some cases, however, the cost of developing the analysis at the
granular level is outweighed by the benefits for reasons that will be outlined later in this report.
For these services, consultants utilize a top down approach to developing full costs and cost
recovery levels. Both approaches require the identification of direct and indirect costs, defined
as follows:
Direct Costs are those that can be identified specifically with a cost objective (in this case,
service or program). Direct costs include “front line” staff such as building attendants, program
producers and inspectors. Their time – and compensation costs – can usually be readily
assigned to a particular fee activity or program. Any non-personnel related costs that are
incurred specifically in relation to a particular fee activity can also be classified as a direct cost.
In many cases, however, non-personnel related costs are not readily assigned to one particular
fee activity so these costs are frequently allocated as an indirect cost.
Indirect Costs are those that are a) incurred for a common or joint purpose benefitting more
than one cost objective, and b) not readily assignable to the specific cost objective (fee
service) without effort disproportionate to the results achieved. The federal Office of
Management and Budget (OMB) guidelines for cost allocation state that indirect costs should
be distributed or allocated to the benefitting cost objective “on bases that will produce an
equitable result in consideration of relative benefits received”.
Indirect costs include citywide overhead, which are also referred to as “cost plan charges”. The
methodology for allocating citywide overhead varies by and within each “sender” department
(ASD, Human Resources, City Attorney, City Auditor, City Manager, City Council, City Clerk and
Public Works/Facilities Maintenance). For example, Human Resources costs are allocated
based on the number of full-time equivalent positions in each of the receiving departments.
ASD’s OMB division costs are allocated based on operating expenses in each of the receiving
departments. In some cases, time estimates or item count from the sender department are
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used to allocate costs.
MGT recommends that the City include a use allowance in the cost plan to allocate costs for
capital assets. The City does not currently incorporate an allowance into cost plan charges.
MGT utilized the cost principles outlined in the federal OMB Circular A-87 to allocate these
costs. To sum:
1. The computation of the use allowance is based on the acquisition cost and useful life of
the assets involved.
2. The use allowance for buildings and improvements is computed based on a useful life of
50 years. Thus 2 percent of the acquisition cost can be included as an annual cost.
3. The use allowance for equipment that costs $5,000 or more is computed based on a
useful life of 15 years. Thus, 6.66 percent of the acquisition costs can be included as an
annual cost.
OMB A-87 does not allow agencies that receive federal funds to include land acquisition in the
use allowance. Inclusion of a use allowance in the full cost calculation for the Golf, Aquatic s
and Children’s Theatre programs increased the total costs for those programs by 2%, 9% and
1%, respectively.
Other indirect costs include department/division administration (managers, support staff, etc.)
and any other cost incurred for a common purpose or not easily traced to a specific fee activity.
These type of indirect costs will require policy decisions as part of the full report discussion.
Description of Methodologies Utilized in Study
Most fees were analyzed as follows (“bottom up” or fee level):
Identify and allocate staff time spent directly to support specific activities or services for
which the user fee is charged (e.g. building inspectors, plan checkers ).
Based on compensation data provided by the City, calculate direct staff costs for each
fee related activity or service. The hourly rate of compensation is then converted to a
productive hourly rate in order to recover costs associated with paid leave, meetings,
training and other time not spent directly in the provision of a particular service or
activity. Productive time varies for each individual based on availability and utilization
of paid leave and other factors. For purposes of this analysis, MGT assumed 1,600
productive hours. The range in other agencies is typically 1,500 -1,700 hours.
Compile all indirect costs and integrate with the productive hourly rate to create a “fully
burdened” hourly rate.
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The fully burdened hourly rate is then applied to time estimates provided by City staff
to develop the full cost.
Cost recovery and subsidy levels are calculated based on volume estimates provided by
City staff and revenue receipts. For example, if the full cost of providing any particular
fee service is $100 and the fees paid by the individual benefitting from the service are
$80, the cost recovery rate is 80 percent and general taxpayer funds are subsidizing 20
percent of the service.
In some cases, the potential benefits of conducting a bottom up analysis of a particular fee
are outweighed by the expense that would be incurred in developing this information. This
is almost universally the case with recreational programs, which are typically analyzed at
the program level instead of the fee level. For example, we have developed the full cost of
golf services at the program level to illustrate current cost recovery and subsidization levels.
Staff also identified the percentage of direct costs that are currently recovered, the
percentage of direct costs and CSD department overhead recovered and as well as the
percentage of full costs (i.e. direct and all indirect costs, including citywide overhead).
However, a substantial amount of effort would be required to identify and track costs at the
individual fee level (e.g. weekday daily fee, twilight, super twilight, primetime rates). The
cost of conducting such a detailed analysis would outweigh the value of this information, in
particular because elasticity of demand and local policy goals are typically factors that are
evaluated when establishing recreational fees.
The “top down” or program level analysis is conducted as follows:
Identify all direct costs (staff, supplies and materials, contracts, general expenses, etc.)
for the program. For purposes of capturing full costs, non -operating costs such as debt
service are included as a direct cost when applicable.
Allocate division, department and citywide overhead (indirect) cos ts. MGT allocated
these indirect costs as follows:
o Division overhead is allocated to each program within the division based on the
ratio of program direct expenses to division direct expense. For example, direct
expenses for Golf are approximately 29.5 percent of the total direct expenses for the
Open Space/Parks/Golf division. Thus, 29.5 percent of the division overhead was
allocated to the Golf program.
o Department overhead is allocated to each program based on the ratio of program
direct expenses to total department direct expenses. Direct expenses for the Golf
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program represent approximately 6.6 percent of the total direct expenses for CSD.
Thus, 6.6 percent of the department overhead was allocated to the Golf program.
o Citywide overhead expenses (“cost plan charges”) are allocated using three
different methodologies. Public Works’ custodial and facilities maintenance costs
are allocated based on square footage. Central service department costs (CAOs,
Human Resources, ASD,) are allocated using the same percentage basis used to
allocate department overhead to individual programs. And the use allowance for
capital expenses is assigned to each program based on assets acquired in support of
that program (e.g. the cost of acquiring pool heaters is assigned to the Aquatics
program)
Once full costs (all direct and indirect) are calculated, cost recovery levels are
presented in a manner to depict percent of direct costs recovered as well as percent
of direct and indirect (full) costs.
Attached are three examples that illustrate the process for calculating full costs and cost
recovery levels at the program level.
Fees for Use of Government Property
Unlike fees for services rendered, fees charged for the use of government property, including
park and recreational facilities, are exempt from Proposition 26 (“No Hidden Taxes”). As a
result, public agencies are permitted to set fees for use of these facilities as well as equipment
rentals at any price the market will bear. This exemption applies to green fees, cart and other
equipment rental fees for Golf services.
Timeline/Next Steps
MGT’s complete draft report will be presented to the Finance Committee for discussion before
the end of the current fiscal year. Staff will also be conducting separate cost analyses o n non-
fee related services, such as Human Services and “back room” operations (finance and human
resources). Once preparation of the FY 2014 Operating Budget is complete, staff will develop a
scope of work, tentative timeframes and any resource impact analysis for each of those studies
and return to the Finance Committee for discussion. Staff is requesting feedback on the three
examples and approach to incorporate into the final draft report.
Attachments:
Attachment A: Cost of Service Study Follow Up Samples (PDF)
ATTACHMENT "A"
GOLF FY 2012 Adopted FY 2012 Actuals Difference
DIRECT COSTS Operating:
S&B - .97 FTE (1)$139,203 $129,586 -$9,617
Contract (2)$1,552,863 $1,431,868 -$120,995
Misc. (3)$399,295 $327,645 -$71,650
Non-Operating:
Debt Service $559,539 $499,074 -$60,465
GF Loan Repay $94,849 $0 -$94,849
TOTAL DIRECT COSTS $2,745,749 $2,388,173 -$357,576
INDIRECT COSTS CSD Division Overhead (4)$0 $60,325 $60,325
CSD Dept Overhead (5)$0 $194,493 $194,493
Citywide Overhead (6) General $41,455 $210,654 $169,199
Citywide Overhead (7) Custodial/Fac Maint $0 $73,025 $73,025
Facility/Use Allowance (8)$0 $58,567 $58,567
TOTAL INDIRECT COSTS $41,455 $597,064 $555,609
TOTAL FULL COSTS $2,787,204 $2,985,237 $198,033
REVENUES Fee Revenues $2,857,850 $2,624,748 -$233,102
Other Revenues (9)$157,320 $95,393 -$61,927
TOTAL REVENUES $3,015,170 $2,720,141 -$295,029
Net Profit/ Loss 227,966$ (265,096)$ (493,062)$
PERCENT COST RECOVERED Direct Cost 110%114%n/a
Direct Cost + Division/Dept OH n/a 103%n/a
Full Cost (Direct + All Indirect)n/a 91%n/a
(1) .60 FTE Regular; .37 FTE Temporary/Hourly
(2) Golf maintenance, management fees, credit card fees, cart/club rentals
(3) Allocated charges, rents/leases, water, supplies/materials, general expenses
(4) Allocated based on ratio of Golf direct expenses to total direct expenses for OS/Parks/Golf Division
(5) Allocated based on ratio of Golf direct expenses to total direct expenses for the Department
(6) Allocated based on ratio of Golf direct expenses to total direct expenses for the Department
(7) Custodial/Maintenance cost plan charges allocated based on square footage
(8) Calculated based on acquisition cost and useful life of asset
(9) Proshop & restaurant lease, restaurant utilities, interest income (debt service)
FY 2012 Adopted FY 2012 Actuals Difference
DIRECT COSTS Operating:
S&B - 11.34 FTE (1)$418,794 $458,518 $39,724
Contracts $15,000 $11,903 -$3,097
Supplies, Materials, and General (2)$38,500 $42,093 $3,593
Misc. $0 $2,188 $2,188
TOTAL DIRECT COSTS $472,294 $514,702 $42,408
INDIRECT COSTS CSD Division Overhead (3)0 $30,577 $30,577
CSD Dept Overhead (4)$0 $40,316 $40,316
Citywide Overhead (5) General $0 $43,666 $43,666
Citywide Overhead (6) Custodial/Fac Maint $0 $35,211 $35,211
Facility/Use Allowance (7)$0 $62,153 $62,153
TOTAL INDIRECT COSTS $0 $211,923 $211,923
TOTAL FULL COSTS $472,294 $726,625 -$254,331
REVENUES Fee Revenues $400,550 $501,164 $100,614
Other Revenues $0 $0 $0
TOTAL REVENUES $400,550 $501,164 $100,614
Net Profit/ Loss (71,744)$ (225,461)$ (153,717)$
PERCENT COST RECOVERED Direct Cost 85%97%n/a
Direct Cost + Division/Dept OH n/a 86%n/a
Full Cost (Direct + All Indirect)n/a 69%n/a
(1) 1.24 FTE Regular; 10.1 FTE Temporary/Hourly Based on 50 year useful life
(2) Rescue and training equipment, safety supplies, uniforms, minor facility maintenance , etc.
(3) Allocated based on ratio of Aquatics direct expenses to total direct expenses for the Recreation Division
(4) Allocated based on ratio of Aquatics direct expenses to total direct expenses for the Department
(5) Allocated based on ratio of Aquatics direct expenses to total direct expenses for the Department
(6) Custodial/Maintenance cost plan charges allocated based on square footage
(7) Calculated based on acquisition cost and useful life of asset
Aquatics
FY 2012 Adopted FY 2012 Actuals Difference
DIRECT COSTS Operating:
S&B - 9.79 FTE (1)837,005$ 864,834$ 27,829$
Contracts (2)131,679$ 225,554$ 93,875$
Supplies, Materials, and General 194,789$ 112,168$ (82,621)$
Misc. 2,762$ 32,490$ 29,728$
TOTAL DIRECT COSTS 1,166,235$ 1,235,046$ 68,811$
INDIRECT COSTS CSD Dept Overhead (3)-$ 48,241$ 48,241$
CSD Dept Overhead (4)-$ 96,740$ 96,740$
Citywide Overhead (5) General -$ 104,779$ 104,779$
Citywide Overhead (6) Custodial/Fac Maint -$ 207,998$ 207,998$
Facility/Use Allowance (7)-$ 16,768$ 16,768$
TOTAL INDIRECT COSTS -$ 474,526$ 474,526$
TOTAL FULL COSTS 1,166,235$ 1,709,572$ 543,337$
REVENUES Fee Revenues 330,100$ 360,304$ 30,204$
Other Revenues (8)-$ 80,000$ 80,000$
TOTAL REVENUES 330,100$ 440,304$ 110,204$
Net Profit/ Loss (836,135)$ (1,269,268)$ (433,133)$
PERCENT COST RECOVERED Direct Cost 28%36%n/a
Direct Cost + Division/Dept OH n/a 32%n/a
Full Cost (Direct + All Indirect)n/a 26%n/a
(1) 6.05 FTE Regular; 3.74 FTE Temporary/Hourly
(2) Costumes, stage set building materials, show royalties, equipment, rental fees, etc.
(3) Allocated based on ratio of Childrens Theatre direct expenses to total direct expenses for Arts & Sciences Division
(4) Allocated based on ratio of Childrens Theatre direct expenses to total direct expenses for the Department
(5) Allocated based on ratio of Childrens Theatre direct expenses to total direct expenses for the Department
(6) Custodial/Maintenance cost plan charges allocated based on square footage
(7) Calculated based on acquisition cost and useful life of asset
(8) Donations / Contributions
Children's Theatre