OIG Audit Finds City User Fees Are Set Without Knowledge of Full Cost of Services

The Office of Inspector General (OIG) has issued an audit report of the City’s process for evaluating and setting user fees, which include charges for water usage, inspections, permits, and licenses and are a significant source of City revenue. 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 the services related to the fees or achieve other policy goals. Moreover, the City is unable to state with certainty how many fees exist because it lacks a comprehensive list.

The audit concluded that the City does not evaluate user fees in accordance with its Financial and Budgetary Policies or Government Finance Officers Association (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 regular and 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. The audit additionally found that the Office of Budget and Management (OBM), which manages the fee evaluation and setting process, potentially overestimated the net annual cost of residential refuse collection by $45.2 million and underestimated the net annual cost of vehicle booting by $1 million. 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 new fees or fee increases.

OIG recommends that OBM:

  1. Develop a user fee policy and accompanying procedures that adhere to GFOA recommendations.
  2. Create a complete list of all City fees and establish a schedule for periodic review.
  3. Develop procedures, such as templates and instructions for departments, to ensure that all fee proposals are supported by full-cost analyses that accurately account for all direct and indirect costs of City services.
  4. Consider incorporating long-term forecasting in its process for evaluating and setting fees.
  5. Consider launching a pilot program to assist a subset of City departments in conducting their own full-cost analyses to submit alongside fee proposals. Using the lessons learned, design any changes needed to implement the practices Citywide.
  6. Provide more information regarding fees to the public and present more opportunities for public feedback regarding fees.
  7. Ensure that future full-cost analyses accurately account for all direct and indirect costs, as recommended by GFOA.
  8. Consider developing an alternative Cost Allocation Plan (CAP), or revising the current CAP, to support future full-cost analyses.

OBM agreed with OIG’s recommendations to develop a user fee policy, create a complete list of all City fees, and establish a schedule for periodic review. 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 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 CAP to support future full-cost analyses.

“A rigorous, transparent process for evaluating and setting fees is a critically important tool for assuring that the City is able to meet numerous program and policy objectives,” said Inspector General Joe Ferguson. “City Council should determine how much fee-based programs should be subsidized by taxpayer dollars using full-cost analyses.”

The full report can be found online.

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