The Brea Fee Study (Attachment B) was conducted by NBS and basically covers development related fees for service.    These fees are imposed to cover the reasonable costs to the City for processing entitlements; issuing licenses and permits; conducting inspections and other activities conducted by Planning, Building, Public Works and Fire Services.  The purpose of the study was to identify all the allowable costs for a fully-burdened rate and to ensure that the existing and proposed rates do not exceed the cost of providing services

As compared to past fee updates, the City approached this fee update through a comprehensive, professional cost of service analysis including a City-wide cost allocation plan as well as a much more complete information on direct and indirect departmental cost than in past efforts.  Essentially, the more complete information identifies allowable costs that were previously not included in the City’s fee calculations.

The results of the study show that based on budgeted costs for Fiscal Year 2016/17, the City overall is currently recovering 56% of allowable costs associated with providing these services.  To clarify, the vast majority of the City's development and construction related fees are currently administered as an hourly rate charged to a customer based on the actual time spent working on a project; however, that hourly rate itself is outdated and is not currently capturing all the allowable costs the City incurs to perform this work. In other words, while City staff are charging time spent working on projects, the current hourly rates are recovering only 56% of allowable costs.

DISCUSSION
Over the course of the past 6 months the City Council have received and reviewed the fee study information and conducted 4 separate working sessions concerning related policy issues.  The timeline below provides a recap of the Council’s work to date on the fee study:

• Jan 2016 - Oct 2017   Staff and NBS work to prepare User Fee Study
• October 19, 2017        User Fee Study delivered to City Council
• October 24, 2017        User Fee Study delivered to the Building Industry Association (BIA)
• October 24, 2017        User Fee Study delivered to Chamber of Commerce
• November 7, 2017      City Council work session on User Fee Study
• December 5, 2017      City Council work session on User Fee Study
• January 16, 2018        City Council work session on User Fee Study
• February 6, 2018        City Council work session on User Fee Study

At its last discussion on February 6, Council directed staff to set the public hearing and bring final recommendations back for its consideration.  By setting and opening the hearing, Council can receive any final information from the public, request any further information needs from staff, and finalize and adopt the fee update details.

Hourly Rate Deposit Permits (Cost Center) and Flat Fee Permits – Council’s discussions can generally be characterized as consideration of updated hourly rates for fee deposit type permits and new rates for “flat fee” type permits.

Hourly Rate Deposit (Cost Center) Permits
The City maintains three (3) hourly rates for charging developer project (Cost Center) accounts for development and construction: management; technical/professional and inspection.  The current rates were last updated in 2003 (all rates) and 2008 (inspection only).  Based on review of City agenda reports; discussions with staff and base salary information from 2003, it appears that the current rates included direct labor costs (salaries and benefits) and an overhead rate of 29% to cover certain direct non-labor costs such as services and supplies, and allocated indirect costs such as building maintenance, vehicle costs, IT costs, etc.   Since 2003, labor costs (salaries and benefits) have increased by an average of 2.4% annually. 

As discussed earlier in the report, the Brea Fee Study identifies certain allowable costs that have not been included in the City’s previous and current hourly rate calculations.  These costs are mostly indirect costs (division, department and City-wide allocated costs) and support costs (review required from internal departments for approval).  These eligible costs have been added to the City’s fee calculations as appropriate.

City Council has discussed the new proposed hourly staff rates, calculation methodologies, and goals for cost recovery at its working sessions over the past months.  As previously outlined, these new hourly rates reflect updates to the staff and overhead costs associated with development review or other permitting activities.  By applying these updated hourly staff rates, Council will be assuring the City’s General Fund is not subsidizing the costs for development processing and that those costs are directly captured by the applicant for development and permit processing related work. 

Staff Recommendation for Hourly Rate Deposit (Cost Center) Permits – Staff is recommending the City’s hourly rates be updated based on full-cost recovery.  Based on City Council comments received during the fee study workshops, a phased implementation schedule for these updates is proposed, with 50% of the hourly rate increase over current rates to be effective July 1, 2018, and the full-cost recovery hourly rates to be effective January 1, 2019. 
 
The hourly rates and effective dates outlined in Exhibits A and B to the Resolution are as follows:

 

Flat Fee Permits
In addition to discussions of the proposed updated hourly rates a main focus of the Council’s discussions has concerned the proposed updates to flat fee associated permits and processing.  As previously outlined in this report, for some specific actions the City charges a flat fee rather than an hourly rate for staff time spent working on an associated application.  These permits include actions such as a water heater permits, a temporary sign permit, and an overnight parking permit.  With each flat fee action the basis for any associated update to the fee has been the cost for providing these services (i.e. the new hourly rate).  But as a “one price” type flat fee assumptions are made on time spent by staff for the various related work activities as well as policy considerations for public benefit which may be realized by the City to encourage such permits.  These factors have led to extensive Council discussion regarding the various flat fees and work to determine the final proposed fee amounts.    

Flat Fee subsidy discussions - Importantly, the Council’s discussions have worked to reconcile any update to the individual flat fees and the amount, if any, that the City’s General Fund or other funds should be contributing to such fee rates.  The Council’s general direction to staff has been to provide less or no subsidy toward these flat fee permits where the clear benefit is to an end user rather than the general public.  Also, the Council have expressed some concern for higher flat fee permits which would be borne by homeowners which may conflict with public safety goals—that this may be a factor in final flat fee determinations.  For example, in the case of a Public Works sewer lateral connection fee, the end user of the building or tenant space is benefiting from the permit and less or no subsidy may be appropriate.  In contrast, where a homeowner may be obtaining a permit to install a new water heater the City may want to keep the cost lower as an incentive to obtain an important safety inspection to help meet public safety goals which protect our residents and neighborhoods from fire and other hazards which could result from a sub-standard water heater installation. 

Staff have developed a recommendation for the flat fees based on the Council’s collective comments and discussions to date.  Our recommendation includes three components:

• Shifting some of our permits which have historically been flat fees to hourly rate deposit (Cost Center) permits.  
• Matching a flat fee permit cost to more completely align with the full cost recovery for permit processing where the primary permit benefit is to the applicant. 
• Providing some level of subsidy for flat fee permits where such permits may benefit the general public or help achieve other City goals and policies.

A goal for this recommendation is to strike a balance among the various, sometimes competing, issues raised by Council in its discussions.  Also important was to identify a methodology for consistently applying some level of subsidy where applicable.  For those flat fee permits where a subsidy is occurring, the recommended fee generally covers labor (salary and benefit) costs and the direct non-labor and overheads are covered by the subsidy.

Staff Recommendation for Flat Fee Permits – Based on City Council workshop discussions, Exhibit A to the Resolution outlines the updates to the Flat Fee Permits.  As noted above, some prior flat fee permits are proposed to transition to hourly rate deposit (Cost Center) type permits.  Several other flat fee permits where the primary benefit is directly to the end user now reflect a fee amount to more completely capture costs for service.  And, finally, there are six flat fees which remain proposed which follow the methodology described earlier--that the proposed permit fee generally covers labor (salary and benefits) costs, with consideration to accept overhead by the City consistent with general public benefit goals.  Those six flat fees are summarized in the table below:

 

This recommendation results in reducing the overall estimated subsidy for flat fees as compared with the Council’s last discussions on February 6.  At that time, the cumulative subsidy discussed for the total flat fee permits was $237,000.  In contrast, the staff recommendation now reduces that cumulative subsidy to $ 119,000.  Critically, assuming a similar number of permits are issued, this recommendation could also realize approximately $192,000 new dollars in revenue to offset existing subsidies from our current flat fees.

Lastly, based on Fee Study Best Management Practices the Resolution includes an annual increase mechanism based on the Consumer Price Index – All Urban Consumers – for the Los Angeles/Riverside/Orange Area.   

Public Input
The City Council have received input from the Brea Chamber of Commerce, the Building Industry Association (BIA), and Southern California Edison (Edison) regarding the proposed update of fees.  The Chamber of Commerce provided oral comment to the Council at a recent meeting, expressing its desire to keep permit costs as reasonable as possible while also supporting the need to more completely capture the City’s costs for services within any newly proposed fees.  Additionally, BIA and Edison have provided written comments (Attachments 3 and 4) requesting that fees be kept as reasonably low as possible but also acknowledging the need to cover costs for services, requesting a phased implementation of any newly adopted fees, and seeking clarification of fee administrative practices and deposits.   

Staff are proposing a phased implementation of the new fees as outlined within the draft resolution which has been shared with our BIA representative.  This includes no new fees becoming effective until July 1, 2018, at which time the flat fees would be in place together with a 50% increase to the proposed hourly rates.  Then, effective January 1, 2019, the full new hourly rates would be activated.  Additionally, staff have met with Edison representatives to go over their concerns and address outstanding questions.  These items primarily dealt with deposit amounts and accounting concerning Edison projects coordinated with Public Works.  It is staff’s understanding Edison’s questions have been resolved to its satisfaction.