Audit of the City’s Process for Evaluating and Setting User Fees

The Office of Inspector General (OIG) conducted an audit of the City’s process for evaluating and setting user fees. User fees, which are a significant source of City revenue, include charges for water usage, inspections, permits, and licenses. Although the Mayor and City Council are ultimately responsible for approving user fees, the Office of Budget and Management (OBM)—a subdivision of the Mayor’s Office—manages the City’s process for evaluating and setting fees. The objective of the audit was to determine whether the City’s process for evaluating and setting user fees adhered to the City’s Financial and Budgetary Policies and to national best practices embodied in the recommendations of the Government Finance Officers Association (GFOA).

OIG found that the City does not regularly review all fees to determine whether they are set at levels designed to recover the cost of providing the services related to the fees, or to achieve other policy goals. In fact, the City is unable to state with certainty how many fees exist because it lacks a comprehensive list. As a result of this audit, OBM created a list of 301 fees, and OIG identified an additional 20 fees referenced in fee proposals submitted to OBM by other City departments, for a sum of 321 identified fees. However, it is likely that the actual number of City fees is much larger. For comparison, the City of Houston imposes approximately 1,600 fees. According to documentation provided by OBM, during the 5 budget cycles from 2013 through 2017, the City reviewed only 172 (or 53.6%) of the 321 identified fees. Moreover, for most of those 172 fees, the City conducted only a preliminary review to determine if changes to an existing fee would align with City policy or departmental missions. The City rarely conducted additional analyses, such as a full-cost analysis to determine the total direct and indirect cost of providing the service. Accurate analysis of the full cost of delivering a City service provides crucial information for the Mayor and City Council to consider in determining whether to approve related fees. Furthermore, the City does not document its rationale when a fee is intentionally set below the full cost of the service, resulting in inconsistent records supporting its fee-setting decisions. The lack of clear criteria and documentation of the rationales for these decisions may create the appearance of biased, unfair, or arbitrary decision-making.

OBM stated that the City’s irregular review results in many fee levels remaining well below the cost of service, and that, as time passes without incremental adjustments, such fees eventually require large increases that are difficult to justify to fee payers. For example, during the 2017 budget cycle the City increased the Vacations of the Public Way application fee from $50 to $1,025. Although OBM had previously told OIG that cost recovery alone was an insufficient basis for increasing a fee, OBM said that the primary rationale for this increase was that the City last adjusted the application fee in 2003, and it was clearly far below the cost of service. However, OBM did not conduct a full-cost analysis to determine the actual cost of service. And, in contrast, OBM rejected proposals from the Chicago Department of Public Health (CDPH) to raise environmental and food inspection fees, even though CDPH submitted that the fees had not been updated since the mid-1990s and were below the cost of service. In this instance, OBM told CDPH that it was “not the right time” to adjust the fees, taking into consideration the other fee and tax increases imposed by the City that year. Maintaining fees well below the cost of service may have the unintentional result of non-users subsidizing the services, in addition to causing the City to forgo revenue. GFOA notes that regular fee reviews allow governments to assess service demands, consider cost-reduction alternatives, and make comparisons to private competition.

While OBM reviewed 91 unique fee proposals submitted during the 2013 through 2017 budget cycles proposals—61 fee modification proposals and 30 proposals for new fees—the City conducted a full-cost analysis for only 3, (or 3.3%), of them. OIG’s review of two of the City’s three full-cost analyses discovered several inaccuracies, resulting in a potential $45.2 million overestimation of the cost of collecting residential refuse and a $1.0 million underestimation of the cost of the City’s vehicle booting program.

OIG also found that the City provides limited opportunities for public engagement regarding fees, contrary to GFOA recommendations. OBM stated that the City primarily provides information to the public, and solicits feedback regarding fees, through City Council budget hearings. However, the City Council process does not provide detailed information regarding fees in a timeframe sufficient for fully informed public feedback. OBM explained that individual aldermen have the opportunity to request briefings from OBM and may then hold public meetings to inform their constituents and receive feedback on fees.

OIG concluded that the City does not evaluate user fees in accordance with its Financial and Budgetary Policies or GFOA recommendations, which may result in revenue shortfalls, unintended subsidies of private beneficiaries by taxpayers, overcharging, lack of transparency, and public perception that fees are set arbitrarily. In addition, the lack of accurate full-cost analyses may prevent departments from identifying future operational efficiencies, because department leadership and City Council have no basis for knowing the actual cost of providing services to the public.

OIG recommends that OBM develop a user fee policy and accompanying procedures that adhere to GFOA recommendations, including periodic review of all City fees, full-cost analyses to support consideration of fee changes, and more opportunities for transparency and public feedback regarding fees. We further recommend that OBM develop procedures to ensure that future full-cost analyses accurately account for all direct and indirect costs.

OBM agreed with our recommendations to develop a user fee policy, create a complete list of all City fees, and establish a schedule for periodic review of fees. Specifically, OBM stated it is drafting a policy “based on current practices and GFOA’s recommendations.” Furthermore, OBM stated it intends to “provide a more uniform definition” of user fees and require departments to “conduct a thorough review” to ensure that the City identifies “all existing fees and the current fee structures.” Once it has a complete list of fees, OBM will develop a multi-year review schedule to provide “more frequent reviews of citywide fees[.]”

OBM disagreed with OIG’s recommendations to enhance public transparency, support fee proposals with full-cost analyses, and consider developing an alternative cost allocation plan (CAP) to support future full-cost analyses.