CITY OF VANCOUVER

ADMINISTRATIVE REPORT

 

Date:

October 28, 2004

 

Author:

Rick Scobie

 

Phone No.:

604-873-7399

 

RTS No.:

04637

 

CC File No.:

1758

 

Meeting Date:

December 2, 2004

TO:

Standing Committee on City Services and Budgets

FROM:

Directors of Development Services and Support Services in consultation with the General Manager of Engineering Services, Director of Legal Services, General Manager of Fire & Rescue Services, Director of Current Planning, Chief Building Official, Director of Licensing and Inspections, Director of Social Planning, Director of Real Estate Services, Manager of the Housing Centre and Director of Finance

SUBJECT:

Specific Application Fee Increases to Achieve Recovery of Costs Incurred

RECOMMENDATION

GENERAL MANAGER'S COMMENTS

The General Manager of Community Services RECOMMENDS approval of A, B and C, noting that the fee increases will more fully capture the corporate costs incurred as tabulated through the comprehensive, inter-departmental fee review completed earlier this year.

The General Manager supports the analysis undertaken in Community Services and elsewhere in the corporation to conclude the fee review, particularly in the absence of project-specific or process-specific data on costs incurred. This shortcoming may be overcome in future with new information technology to support the City's application/permitting processes. This will be the subject of a future report to Council.

CITY MANAGER'S COMMENTS

The City Manager RECOMMENDS approval of A, B and C.

COUNCIL POLICY

It is Council policy that fees and charges be established on the basis of the cost of providing the associated services or at market level where the service is provided in a market environment.

SUMMARY

This report summarizes the comprehensive, corporate fee review undertaken for thirteen services most commonly pertaining to property use, development and building.

In 2003, revenues from the application/service fees collected in Community Services totalled $17.569 M. When various subsidies historically provided to certain projects in order to achieve public objectives are valued as benefits-in-kind, revenues increase to $19.014 M. These subsidies are specifically addressed in the report to enable Council to understand the nature and magnitude of continued subsidy.

The fee review also indicates City costs incurred amounted to $22.575 M but it may be unreasonable to incorporate some inferred and corporate overhead costs. Excluding these would reduce total costs that might reasonably be recovered from applicant fees to $20.4 M. The specifics of these inferred and corporate overhead costs are also provided so Council may choose whether to include/exclude all or some of them from cost recovery.

If subsidies as described are to be maintained, and some inferred and corporate overhead costs excluded, the revenue shortfall to recover cost expenditures amounts to $1.386 M ($20.4 M minus $19.014 M.). The review identified this $1.386 M. revenue deficit as attributable to particular services: rezoning applications, subdivision applications, strata title conversion applications, development applications, and some administrative services.
Subsequent analysis has been concluded to enable identification of particular fee categories that would warrant adjustment to recover the calculated deficits in subdivision applications, strata title conversion applications, and some administrative services. These specific fee increases are recommended.

Analysis has not yet concluded to enable identification of particular rezoning and development application fee categories that would warrant adjustment in order to recover deficits in rezoning and development application services. Specific fee increases will be reported to Council once analysis is concluded.

PURPOSE

This report seeks Council approval for substantial increases in various specific application fees to more fully reflect the real costs of service provision based on a corporate assessment.

BACKGROUND

On July 22, 2004, Council approved by-law amendments to various fee schedules applicable to many of the permit application and other related services centred in Community Services and most particularly in Development Services. These amendments, enacted on September 14th, introduced an inflationary increase to existing fees for 2004 of 2.5%. This inflationary increase was the latest of inflationary fee increases, generally undertaken annually since fees for different types of application services were last reviewed in more detail.

There has never been a comprehensive review of the full array of application fees that commonly deal with City review and approval processes related to activity occurring on property (i.e., not street). In previous reviews, selected types of applications were reviewed with varying degrees of analysis of total City costs incurred, typically focussing on the department most involved in service delivery and then adding a percentage increase to reflect "corporate overhead" charges. Some types of applications, such as building and sign permit applications, have not been reviewed for over twenty years.

In 2003, staff initiated a more comprehensive review, asking all City departments typically engaged with Community Services departments in providing these application review services to identify their costs so these may be more accurately reflected in, and recovered by, the application fees charged.

DISCUSSION

This report discusses the fee review in the following sub-sections:

· scope of services for which the fees were reviewed;
· fee review methodology;
· explicit and implicit fee subsidies that diminish fee revenue;
· cost elements that might reasonably not be included for cost recovery; and
· fee adjustments recommended to specific fee categories, by application type, to achieve corporate cost recovery.

Fees Reviewed

Thirteen different types of fees related to property use, development and building were encompassed in the comprehensive, corporate fee review completed early this year. They are listed in Appendix B.

Included in the foregoing were all corresponding inspection services to ensure initial compliance with the permit issued. Not included are subsequent inspection (usually complaint-based) and any related enforcement/prosecution activities, if required. They are not a normal outcome or process requirement and are not cost-recoverable through the application fees levied. They will continue to incur City costs that are supported through the operating budget.

Also not included is the $1,000/unit residential demolition permit charge, revenue from which ($984,000 in 2003) funds the Tenant Relocation Assistance program and all other services provided by the Housing Centre. This was not included since it would require a different model than used for reviewing other fees.

The comprehensive fee review identified types of services where revenues generated were significantly less than necessary to recover the corporate costs incurred. For some of these services the fees are established to offset the costs to the City in processing permit applications to ensure compliance with various City by-laws and/or provincial statutes. Some application fees relate to processes that seek to change the by-law regulations that apply (e.g., rezoning, subdivision reclassification). In other instances, fees are levied for information or administrative services related to historical permit, inspection and other site-specific background, or document reproduction.

Specifically, this report addresses the following services where revenues are significantly deficient to recover corporate costs incurred:

*excluding rezonings processed in advance of existing staff availability, using temporary project staff paid for by the applicant on a cost-recovery basis.

Fee Review Methodology

Many staff in different departments within Community Services are involved in some activity for which there is an associated revenue by way of a fee charged. In 1999 Community Services required all of its staff engaged in any revenue generating service to identify the percentage of their total time spent on revenue-generating work, and to further allocate this percentage amongst identified 'fee for service' activities. With this input we calculated individual direct staff costs (wages) and indirect costs (fringe benefits; pro-rated printing, temporary help and consultant expenditures). To these accumulated totals we then allocated a pro-rated portion of Community Services' overhead (management, and support services) and applied a simplistic 5% surcharge to reflect corporate services that supported this work. This exercise in determining what it costs Community Services to generate the revenues paid to the City indicated that total Community Services' costs were fully recovered by total revenues generated.

In recognition that some of our revenue generating services also engage staff in other parts of the City organization, our recent fee review looked more broadly at overall costs to the whole City corporation. Community Services updated its 1999 data and more fully examined costs that might be attributable to "corporate overhead", replacing the earlier 5% surcharge with pro-rated costs attributable to Corporate Services (3.8%) and City Government (1.7%). We also incorporated and pro-rated to each revenue-generating service some costs that theoretically should also be tallied for cost recovery through application fees. These "inferred" costs include space, phones and computers. We then shared our methodology and asked other Departments for companion information.

Clearly, different application services involve different departments beyond Community Services, and to varying degrees. The data received from others confirmed that Engineering Services was a major contributor to several of our services, notably development applications, rezoning, subdivision and building/drain tile applications. Others, such as Legal Services, Parks and Recreation, Fire and Rescue Services and Real Estate Services incurred lesser total costs.

While revenue amounts generated from each of the reviewed services are directed to and readily obtained from SAP accounts, there is no data base to assist in tabulating the costs associated with providing any or all of these services. The methodology used in our fee review to arrive at our costs has therefore required some educated but nonetheless strong assumptions to be made as we proceeded, including an assumption in the first instance that all staff reasonably estimated their time spent on individual revenue generating services.

Our fee review has concluded that City costs incurred in providing the thirteen services examined amounted to $20,400,000. Revenues generated totalled $19,014,000, leaving a shortfall of $1,386,000. Both the cost and revenue figures require further discussion as to what we have and have not included, as outlined in the next sections.

Explicit and Implicit Fee Subsidies

Notwithstanding the current Council policy of full cost recovery for services provided, over the years Council has implicitly - and in some cases explicitly - chosen to subsidize certain projects due to identification of a compelling public purpose. Staff have identified six such subsidies:

Staff believe the application fee for Child Day Care Facilities is reasonable, relative to many other development application fees, since the controversy associated with this use has tended to diminish, resulting in a lesser level of staff time in processing than in the past. By comparison, Social Service Centres encompass a diverse array of specific uses, virtually all of which tend to generate great controversy and, correspondingly, a considerably high level of staff resources in the application process. Recent examples include the safe injection site, public health clinics, 'Dusk 'til Dawn', and NAOMI. The Triage proposal on Fraser Street and the Youth Services Centre proposal on Burrard Street are current examples.

Given the number of development applications each year for Social Service Centre, staff have estimated that the deficit in service cost recovery from the application fee revenues amounts to about $50,000, which is then paid from the City's operating budget.

This raises both philosophical and built form issues that staff believe should be avoided, favouring continued cost recovery application fee deficits paid by the operating budget. Although the number of projects seeking amenity bonusing varies from year to year, staff estimate that the revenue deficit in development application processing related to amenity bonusing amounts to about $52,000 per year.

The introduction of the Heritage Revitalization Agreement (HRA) mechanism in the early-1990s added additional scope and complexity to heritage projects. Now, negotiation also encompasses compensation for building restoration, and this compensation may take the form of zoning variances (including use) and subdivision variances, all of which typically require a duly advertised public hearing and entail considerably more legal agreements. The legislation authorizing HRAs makes no specific provision for the establishment of application fees. Nonetheless, application fees may be counter-productive since the City is frequently pursuing heritage retention/restoration with an owner who may not be so inclined. Even if compensation for fees that might be imposed could be provided by extra floor area or other variance negotiated as part of an HRA, the up front, out-of-pocket application fees would be an impediment to the heritage interests of the City. Staff have estimated that collectively, development and subdivision applications involving heritage projects entail an annual subsidy (application revenue deficit) of about $536,000. The costs not recovered through application fees are paid from the City's operating budget.

The estimated annual explicit and implicit subsidies described above total $1,445,000. On the premise that these subsidies should be retained, using standard accounting practise this amount has been added to the total of City revenues received, as payments in kind, in delivering the array of services addressed in this report. In maintaining these subsidies and not recovering them through application fees, the actual costs incurred would continue to be paid from other revenue sources funding the City's operating budget.

Cost Elements Not Included for Cost Recovery

The City cost figure of $20,400,000 derived from the comprehensive fee review does not include corporate overhead of $1,177,000 or inferred costs of $999,000.

Corporate overhead consists of:

$812,000 in support charges attributed to Corporate Services. This represents a pro-rated share of financial services, information technology, facilities design and management, business support and risk and emergency management; and

$365,000 in support charges attributed to City Government, comprising pro-rated shares of the annual budgets for Human Resources, City Clerk's Office, City Manager's Office, Equal Employment Opportunities, Mayor and Councillors.

Inferred costs consist of:

a modest $15/sq. ft. rental charge for staff office space, although there is no such budget expenditure as the staff providing the services reviewed are principally located in the East Wing or the main City Hall, both of which have been paid for years ago;

monthly phone service, which Corporate Services did not incorporate into its overhead charges. [Charges for telephone 'hardware' acquisition/replacement were included in costing as departmental overhead]; and

personal computer use/replacement, since provision of personal computers is not part of departmental budgets or incorporated into Corporate Services' budget, but independently funded through the Information Technology Replacement Plan.

Overall Fee Adjustments Required

The chart in Appendix 2 summarizes the revenues and corresponding costs incurred, within CSG and elsewhere in the corporation, for the six fee revenue service types where increases are warranted to recover the $1,386,000 shortfall in cost recovery. In summary, these six service types are:

SERVICE TYPE

COSTS ($,000)

REVENUES ($,000)

SHORTFALL ($,000)

       

REZONING

$1,466

$1,138

$328

SUBDIVISION

$528

$272

$256

STRATA CONVERSION

$84

$1

$83

DEVELOPMENT APPLIC.

$7,123

$4,205

$2,918

PLANS & MISC.

$158

$115

$43

FILE RESEARCH

$165

$125

$40

Rezoning, subdivision and strata conversion applications are voluntary and affect a minority of projects but yield significant financial gains for the successful applicant. Staff believe these types of applications should have fees appropriately increased to fully recover the associated revenue shortfalls.

The last two public service types listed utilize City records and data generally to provide information to those contemplating property acquisition and wishing background information the City may have on file, such as copies of approved plans, uses approved under previous permits, outstanding orders or enforcement actions. To the extent these services are not for the purpose of seeking a permit or other City approval required for applicant to proceed, they are information services our customers voluntarily choose to use. They utilize City data/ records that should be marketed with fees appropriately increased to fully recover costs incurred.

The development application revenue shortfall is the most deficient at over $2.9 M. Development application fee increases to achieve full cost recovery are possible but not recommended, for several reasons. Firstly, development permits are not voluntary; most property initiatives require the owner/developer to obtain a development permit. Secondly, our development application fees are the highest in the lower mainland and while market factors continue to make Vancouver a highly desirable environment in which to live and conduct business, significantly higher development application fees would mitigate this and have the tendency to cause some to look elsewhere. Thirdly, there is limited (but unknown) elasticity in development application fees. To the extent development application fees already cause some to proceed to use/develop property without the required development permit, higher fees may increase the incidence. Development applications sought after the fact also tend to be much more problematic than had the application been pursued beforehand, given the applicant's investment and commonly mistaken belief that the City is more likely to forgive than it is to give permission beforehand. Processing development applications submitted after the fact also consumes a much greater amount of staff time, often on a priority basis due to pending enforcement action, thus diverting staff resources from other development application processing.

On the basis of the foregoing and assuming revenues are adjusted to achieve full cost recovery in the five other service activities discussed, development application fees would need to rise only to achieve $636,000 in additional revenue to satisfy the total $1,386,000 shortfall in corporate cost recovery.

Specific Fee Category Adjustments

Having identified the particular service activities and their respective additional gross revenues to be achieved through fee increases, the staff analysis shifted to review each of the corresponding fee schedules to determine which specific fees should be increased and by how much. The task was quite straightforward for those services where there is only one or two discrete fees, such as in file research, plans and miscellaneous document copying. It has been more challenging when a service activity has a fee schedule containing numerous discrete fee categories, each corresponding to specific project characteristics. For example, how should each of the six different subdivision application fees be revised to generate $256,000 in additional annual revenue? Should some remain unchanged or be increased to a lesser extent than others? How should additional revenues for rezoning be generated amongst the diversity of fees currently differentiating different types of rezoning applications? Which of the 52 different development application fee categories should be increased?

In most cases, a fixed percentage increase to all existing fee categories within a fee type was rejected. There were two reasons for rejecting such a straightforward approach:

Consequently, each work group manager was asked to use their experience and best judgement to "re-balance" fee categories within the fee type they managed, giving a value of "1" to the application fee category that incurred the least effort and, with this as a comparator, assigning values to all other fee categories, representing the relative effort required in delivering the service.

With these results and using application numbers and revenues for each fee category from 2003, fee values were derived to produce total annual revenues that would recover the corporate City costs our earlier fee review analysis had generated. These resultant fees were then reviewed by work group managers for identification of specific fees that they believed applicants would find most unreasonable, noting the different applicant profiles associated with different fee categories. This resulted in a further iteration of the category specific fee increases.

Except for rezoning and development application fees where analysis is continuing, this work has been concIuded and is reflected in the new fee schedules attached as Appendix A, that staff are recommending. In each case, the existing fee is noted for comparison with the proposed fee. In some case, the proposed fee can be readily compared with the existing fee without the need for additional commentary. With subdivision and strata fees the schedule incorporates some substantial re-working of the fee categories themselves, so explanatory notes are also provided in the Appendix A schedules.

Once analysis has been concluded to identify adjustments that would recover additional fee revenues in rezonings and in development applications, a further report with recommended fee schedule amendments will be submitted.

Staff analysis to date has identified the amounts to be recovered of $328,000 for rezonings and $636,000 for development applications. In the report back staff will review these amounts further with respect to a number of factors including what portions of rezoning and development application processes benefit the general public (rather than applicants), what is a justifiable increase for applicants to bear (relative to other costs and past fee increases), as well as the relative allocation of increases among application types.

ALTERNATIVES/OPTIONS

Should Council not wish to retain the various subsidies discussed or wish to have fees established to recover corporate overhead and/or inferred costs as described above, staff would need to re-visit the revised revenue shortfall amount and report back with alternative fee increases. Likewise, should Council indicate a preference for different fee increases to those specifically recommended in this report, staff would report back with adjustments in additional fee revenue via reallocation of increases to specific fees as directed.

FINANCIAL IMPLICATIONS

Based on typical annual volumes of application/service requests in each of the areas where fee increases are recommended, enactment of the amendments recommended in this report should generate additional revenue of $422,000 to offset costs incurred in providing these services. This projected additional revenue should be reflected in the 2005 Operating Budget and Revenues, with appropriate reduction based on the timing of by-law enactment to bring the new fees into effect. A future report is expected to similarly identify specific fee amendments for rezoning and development applications that would recover additional annual revenues of $328,000 and $636,000, respectively, offsetting costs incurred. Depending on the timing of this future report and subsequent enactment of any new fees, there may be further effects on the 2005 budget.

PERSONNEL IMPLICATIONS

There are no personnel implications.

ENVIRONMENTAL IMPLICATIONS

There are no direct environmental implications. To the extent some of the increased fees recommended may be viewed as prohibitively expensive relative to the total value of the contemplated (re)development initiative, the contemplated project may be abandoned, forestalled or revised. This may result in sub-optimal land use and development. With respect to development applications, it could create increased incidence of work being undertaken without the required permit. If not subsequently remedied, the work may be in contravention of various City objectives, some of which relate to performance from an environmental perspective.

SOCIAL IMPLICATIONS

To the extent some of the increased fees recommended may place more of the full service costs on applicants this will shift the funding for these services away from other City revenues which could then be allocated to different purposes as chosen by Council.

IMPLEMENTATION PLAN

It is anticipated that any fee increases would be enacted as soon as possible and take effect upon enactment.

COMMUNICATIONS PLAN

Development industry groups were advised of forthcoming and anticipated significant increases in some application fee categories when notification was sent on June 25, 2004 of the then pending `across-the-board' 2.5% inflationary fee increases (approved July 22nd and enacted September 14th).

On November 2, 2004, notification letters were sent to industry groups providing a summary explanation of the fee increases to be recommended and attaching the appendix to this report which details the specific fee changes proposed. Public notices have also been posted in the East Wing, where customers obtain these services. Most recently, the City Clerk has sent copies of the complete Council report to these groups.

CONCLUSION

Completion of the comprehensive review of various fees to identify corporate costs incurred in delivering thirteen services has identified types of services where revenues are deficient in terms of cost recovery. Analysis has also identified several explicit and implicit fee subsidies, and cost elements that might reasonably not be included in cost recovery. This report recommends targeted fee increases in the six service activities where $1,386,000 of additional revenue should be achievable. Specific fee amendments are proposed in this report for four of the six services. Rezoning and development application services are still under review to identify specific fee amendments to be recommended, and will be reported on shortly. Implementation of the changes should achieve cost recovery across all thirteen service areas, increasing current total revenue of $19,014,000 to correspond to the $20,400,000 in total City expenditures.

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