State and local governments use charges and fees to help fund services. When certain services provided especially benefit a particular group, then governments should consider charges and fees on the direct recipients of those that receive benefits from such services. However, many governments provide subsidies to various users for policy reasons, including the ability of residents or businesses to pay. Well-designed charges and fees not only reduce the need for additional revenue sources, but promote service efficiency.
Setting user charges and fees can be difficult. Items to consider when developing charges and fees should include:
- What are applicable laws and statutes regarding charges and fees?
- Are formal policies in place articulating pricing factors or rationale for any subsidies?
- What is the full cost of providing the service (both direct and indirect)?
- Are rates periodically reviewed and updated?
- Are long-term forecasts and plans consistent with the decision-making in the rate setting process?
- How will the public be involved in the fee-setting process, and how will the public be informed of the result?
The Government Finance Officers Association (GFOA) supports the use of charges and fees as a method of financing governmental goods and services. Concerning the charge and fee setting process, GFOA makes the following recommendations that governments should:
1. Consider applicable laws and statutes before the implementation of specific fees and charges.
2. Adopt formal policies regarding charges and fees. The policy should:
- Identify the factors (affordability, pricing history, inflation, service delivery alternatives, and available efficiencies) to be taken into account when pricing goods and services.
- State whether the jurisdiction intends to recover the full cost of providing goods and services. Set forth under what circumstances the jurisdiction might set a charge or fee at more or less than 100 percent of full cost. If the full cost of a good or service is not recovered, then an explanation of the government's rationale for this deviation should be provided.
- Outline the considerations that might influence governmental pricing decisions. Such policy concerns might include the need to regulate demand, the desire to subsidize a certain product, competition with private businesses, economic development, elasticity of demand for the particular service, and visibility of the service to the community.
- The specifics of how the fees and charges will be levied and collected should be a consideration when developing policy.
3. Calculate the full cost of providing a service in order to provide a basis for setting the charge or fee.
- Full cost incorporates direct and indirect costs (including operations and maintenance), overhead, and charges for the use of capital facilities. Examples of overhead costs include: payroll processing, accounting services, computer usage, and other central administrative services.
- One useful tool for calculating service costs is Activity Based Costing (ABC). ABC assigns costs to the activities required to deliver a service and can be more accurate than traditional costing methods.
- The associated costs of collection need to be addressed.
4. Review and update charges and fees periodically based on factors such as the impact of inflation, other cost increases, adequacy of cost recovery, use of services, and the competitiveness of current rates.
- By updating fees on a periodic basis, this may help smooth charges and fees over several years rather than having uneven impacts. Periodic review of the service demand and competition is also recommended to ensure that the appropriate quality and price point of the service continues to meet actual demand. The review should be performed in conjunction with a look at alternatives for cost reduction.
- Benchmarking individual fees and charges with those charged by comparable or neighboring jurisdictions can guide a governing body when setting rates; it can also differentiate service levels to reveal service or pricing options.
5. Utilize long-term forecasting in ensuring that charges and fees anticipate future costs in providing the service.
- If the charges will recover costs associated with other long-term plans, such as a multi-year capital plan, a longer-term service fee plan should be consistent, recognizing the plan may be amended to reflect changing conditions in the future.
6. Provide information on charges and fees to the public.
- There should be opportunities for citizen feedback, particularly when new rates are introduced or when existing rates are changed. This includes the government's policy regarding full cost recovery, subsidies, and information about the amounts of charges and fees (current and proposed), both before and after adoption, and the anticipated impact of the new fee on providing the service in future years.
- Best Practice: Measuring the Cost of Government Service (2002).
- Best Practice: Managed Competition as a Service Delivery Option (2006).
- Best Practice: Alternative Service Delivery: Examining the Benefits of Shared Services (2007).
- Best Practice: Long-Term Financial Planning (2008).
- Best Practice: Public Participation in Planning, Budgeting, and Performance Management (2009).