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. General Observation 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” includes all legitimately eligible direct and indirect costs associated with providing each service, including direct support costs from other divisions, plus overhead.

7. 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 Elements of A Fee Schedule

8. How important Are Fees?  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. Not very!! Well, it depends on whether you are paying the bill.

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. 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. Example: El Dorado LAFCO

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. 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 How do you determine your hourly rate?

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 Budget Portion IndirectDirectIndirectExcluded Salary & Benefits Asst Executive Officer118,7270.16798,93919,7880 Executive Officer133,1630.167110,96922,1940 Secretary to the Commission71,1470.16759,28911,8580 Commissioners8,2480.50004,124 TOTAL SALARIES & BENEFITS331,285 269,19857,9644,124

17. Continued Services & Supplies COMMUNICATIONS1,5681.10401,3250 MEMBERSHIPS3,3491.00003,3490 OFFICE EXPENSE4,5001.00004,5000 POSTAGE3,0001.00003,0000 PRINTING SERVICES7501.00007500 PROFESSIONAL/SPECI4,4000.000004,400 COUNTY SERVICES22,5521.000022,5520 LEGAL SERVICES40,0000.25015,00010,00015,000 AUDIT/ACCOUNTING S3,5001.00003,5000 PUBLIC/LEGAL NOTICE3,0001.00003,0000 SMALL TOOLS3,9601.00003,9600 TRAVEL EXPENSE9,0001.00009,0000 PRIVATE CAR EXPENSE6,8001.00006,8000 DATA PROCESSING10,2001.000010,2000 UNCLM-OT-BETWEEN E1,5900.33305301,060 TOTAL SERVICES & SUPPLIES118,169 15,00082,46620,460 EXPENDITURE TOTAL449,454 284,198140,43024,584

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 140,430 Indirect Cost Rate =--------------= 52.2% 269,198

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? LAFCO Billing Rates: Executive OfficerAssistant EOCommission Clerk Direct Salary & Benefits 98,939110,96959,289 Service Hours 1,4181,7731,330 Rate (Without OH) 69.7562.5944.59 Rate (With OH) 106.1495.2467.85

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

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: 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? Concerns -Time and Materials

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

26. TaskProfessional Staff (hours)Clerk/Secretary (hours)Total (hours) Pre Application4.02.06.0 Receive application1.00.01.0 Set up files and schedule0.02.0 Send referral letters0.02.0 Prepare mailing lists0.01.0 Application check2.00.02.0 CEQA Determination0.0 Determine if the application is inhabited0.02.0 Prepare & send Certificate of Filing0.01.0 Prepare staff report and resolution16.00.016.0 Review & finalize staff report1.00.01.0 Prepare the staff report packet and mail to Commissioners, proponents and anyone requesting notice 0.02.0 LAFCO Meeting1.00.51.5 File CEQA Notice0.0 Finalize Resolution1.00.31.3 Prepare & send notice of determination to applicant0.20.50.7 Recordation of maps0.24.04.2 Send Recorded Certificate of Competition to agencies and applicant 0.02.0 Send finalized material to State Board of Equalization0.02.0 Close file and scan contents0.01.0 Total per Application26.422.348.7

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. Not Recommended Fee Structure 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

29. Agreements to Pay Who is responsible to pay?

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

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