Fee Structure Methodologies

1. Fee Structure Methodologies CALAFCO 2010 Annual Conference October 7, 2010

2. Fee Structure Methodologies Presentation of various methodologies and the legal requirements for establishing a nexus. Rich Bottarini and Scott Browne will present their understanding of fee structures and explain the legal requirements which must be considered, highlighting the importance of transparency, fairness, and ample justification in this process.

3. GeneralObservation Most LAFCOs have comprehensive and clearly-articulated fee schedules and policies. Since 2001, more pressure on LAFCOs by cities and districts to fund LAFCO operations from fees.

4. Overview • Elements of a Fee Schedule • How Important are Fees? • What is Your Existing Policy? • LAFCOs’ Fee Structures • Determining Your Hourly Rate • Direct Costs • Indirect Costs • Flat, or Fixed, Fees v. Time & Materials Fees

5. General Goal of Most Fee Schedules and Studies The purpose of most fee studies is to determine the full cost of operations and the maximum fees that may be assessed, given actual expenditure requirements. This does not mean that a fee will be charged; it documents only what can be legally charged.

6. Full Cost “Full cost” includesall legitimately eligible direct and indirect costs associated with providing each service, including direct support costs from other divisions, plus overhead.

7. Elements of A Fee Schedule The more complete fee schedules include: • Identification of Action or Application • Amount of Deposit or Fee • Description of Charges • Deposit Updates/Replenishments • Waivers • Due and Payable Prior to Finalization of Application • Staff Charge-Out Rates lafco

8. How important Are Fees? Not very!! Well, it depends on whether you are paying the bill. • 2007 CALAFCO Survey found: • Average budget recovery by fees was around 12.88% • Highest recovery reported rate was 45% by Plumas. • Lowest reported was 0-1% by Inyo, Alpine and Stanislaus. • 30 of the 58 LAFCOs responded. • Sonoma LAFCO recovery rate in 2007 was 10%. • Example: LAFCO fees collected in 2009 saved the Bennett Valley Fire Protection District $96.30 out of a District budget of $680,000.

9. What is your existing policy? Does your Commission have a Fee Policy? Does it: • Provide guidance on collection – timing and deposits? • Articulate the relationship of fees to services provided? • Provide for waivers? • Does it include a annual review or CPI Adjustment? • Allocate revenues to offset apportionments to funding agencies? • Set a cost recovery goal? • Is your fee policy in the Fee Resolution?

10. Example: El Dorado LAFCO 2.2 LAFCO FEES • 2.2.1 Application of Fees • (a) Starting with February 7, 2007, the Commission shall review fees every two years and adopt a fee schedule for the purpose of recovering the costs pursuant to the Cortese-Knox-Hertzberg Act (§56383(a) ,§56384, §66016). See Section 7.2, Fee Schedule. • (b) The schedule of fees shall not exceed the estimated reasonable cost of providing the service for which the fee is charged and shall be imposed pursuant to §66016 and §56383. • (c) No petition shall be deemed filed until the fee has been deposited (§56383(c)). • (d) Any individual or entity that requests a LAFCO initiated study or service review of special district changes of organization or reorganization shall be responsible for required fees. Fees are due immediately after LAFCO acts to initiate the study. LAFCO will encourage cooperatively developed fee sharing agreements for LAFCO initiated multi-agency service reviews.

11. Types of Fees • Time and Material: Fee based on hourly rate applied to applications X actual number of hours worked • Flat, or Fixed, Fee: Fee based on a reasonable estimate of the cost of providing the service • Variations: Most common variation is the fee based on acreage or on number of parcels.

12. Summary of LAFCO Fee Structures Recent Survey of LAFCOs’ Fee Schedules – Predominant Types of Fees • 22 - Time and Material • 11 – Flat, or Fixed, Fee based on time studies • 9 - Variations – Acreage or parcels • 9 - Combinations Most are combinations of time and material, fixed fees and acreage. Few are true to one methodology.

13. Basic All fee schedules start with a staff hourly rate structure.

14. How do you determine your hourly rate? Direct Costs Direct costs are staff salaries and benefits (labor) directly related to the applications function, supported by time estimate studies. Salary and benefits are converted into productive hours so that vacation and leave time are not factored into the direct costs. For example, a full time staff person represents 2,080 paid hours per year, of which 1,800 hours are considered to be “work hours.” To account for breaks, meetings, etc. that are not technically “billable hours,” discount “work hours” by 300, or about 14%, to arrive at the 1,500 “billable hours.” Indirect Costs Indirect costs represent all costs that are neither direct costs nor excluded costs. Examples of indirect billable costs are staff time spent in training, or general office operations, services & supplies cost, such as office rent, and lastly, the calculated overhead. To get an indirect cost rate, total the indirect costs of salaries & benefits and services & supplies and divide it by the total direct salary and benefits (labor). The rate is in the form of the percentage of the direct costs. Other Costs Cost of the legally required “constitution” – Spheres of Influence and Municipal Service Reviews

15. First, direct costs Direct costs are staff salaries and benefits (labor), directly related to the applications function. Salary and benefits are converted into productive hours so that vacation and leave time are not factored into the direct costs. For example, a full time staff person, represents 2,080 paid hours per year, of which 1,800 hours are considered to be “work hours”. To account for breaks, meetings, etc. that is not technically “billable hours”, the auditor discounted the “work hours” by 300, to arrive at the 1,500 “billable hours”. The Auditor then calculated an “indirect” percentage cost portion for those hours, by dividing 300 by 1,800 to arrive at the 16.7% indirect cost portion. How do you determine your hourly rate?

16. Direct Costs and Indirect Rate

17. Continued

18. The second factor is the indirect rate. Indirect costs represent all costs that are neither direct costs nor excluded costs. Examples of indirect billable costs are staff time spent in training, or general office operations, and services & supplies cost, such as office rent, and lastly, the calculated county overhead. To get an indirect cost rate, the Auditor totaled the indirect costs of salaries & benefits, and services & supplies and divided it by the total direct salary and benefits (labor). The rate is in the form of the percentage of the direct costs. The rate is in the form of the percentage of the direct costs. Many agencies use the A-87 calculations. How do you determine your hourly rate?

19. Direct Costs and Indirect Rate

20. To calculate the billing rates, the Auditor determined the direct salary and benefits costs for each staff member and divided it by the number of service hours per year. That calculation provides the direct rate. To get the total rate with indirect costs (overhead), the auditor takes the hourly rate and multiplies it by the Indirect Cost Rate (the percentage of direct costs) and adds that amount to the original hourly rate. How do you determine your billing rate?

21. Are there other costs? Yes Cost of the legally required functions – Spheres of Influence and Municipal Service Reviews. These are documents that form the basis of all decisions.

22. LAFCOs are Independent Hourly Rates Differ: Executive Officer: • Range from $60 to $200 per hour • Average Executive Officer charge rate is $121 per hour based on a sample of 22 Executive Officers Clerks: • Range from $35 to $150 per hour • Average Clerk charge rate is $71 per hour based on a sample of 18 Clarks Findings of Recent Survey

23. LAFCOs are Independent Some call it long-term planning, others maintenance of the “constitution;” however it is described, the law requires LAFCO to maintain Spheres of Influence and conduct Municipal Service Reviews. Some cities and counties charge a General Plan maintenance fee on all planning applications or building permits to cover the cost of updating the General Plan. Four of the LAFCOs surveyed recently charge a Sphere of Influence maintenance fee on all applications. Why is the fee permissible? Based on the law, approvals can be challenged and the challenges upheld if the basic requirements of the law have not been met. That Other Factor

24. LAFCO as a: Concerns -Time and Materials The applicant pays the deposit and………. • The Commission requests annexation of extra properties to meet Commission goals. • Neighbor decides to run up the bill. • The neighbor requests a reconsideration (LAFCO does not have appeals) • Who pays? • The applicant or the appellant?

25. LAFCOs are Independent Many consultants recommend, wherever appropriate, the adoption of flat, or fixed, fees instead of variable Time and Material (T&M) fees. The four primary benefits of flat fees are: • Flat fees are easier for customers to budget, which helps applicants to plan their expenses. • Flat fees are easier for the staff to describe to customers, resulting in less customer confusion as to the actual costs of a project. • Staff may cease tracking their time and expenses associated with individual projects, which frees up significant time that would otherwise be burdened as an administrative overhead. • Flat fees tend to recover more of the actual cost than time and material fees, because staff typically under-report time on their tracking systems. Why Flat, or Fixed, Fees

27. LAFCOs are Independent Although many consultants recommend the adoption of flat, or fixed, fees instead of variable Time and Material (T&M) fees, four primary reasons not to use flat fees are: • Flat fees do not cover the cost of large or controversial projects. • The neighbor who is a “time bandit,” is there a method to switch mid- stream? • The methodology is easier to challenge, in that they are only estimates. • Samples may be too small to develop a reasonable cost estimate. Why Not Flat, or Fixed, Fees

28. SCHEDULE OF PROCESSING FEES Annexations and Detachments Acreage Fee Less than 5 $ 640 5 to 10 $ 890 10 to 25 $ 1,265 25 + $ 2,625 Not Recommended Fee Structure

29. Who is responsible to pay? Agreements to Pay

30. Why charge fees? Flat or fixed Fees? Who pays for reconsideration? Discussions

31. Sonoma LAFCO Website: www.sonoma-county.org/lafco California Association of Local Agency Formation Commissions Website www.calafco.org Sonoma LAFCO: 575 Administration Drive, Room 117-D Santa Rosa, CA 95403 (707)565-2577, Fax: (707) 565-3778