As cities and counties stretch every dollar to meet growing demands, user fees have quietly become a cornerstone of public finance—accounting for over $570 billion in revenue nationwide.¹ But what exactly goes into setting those fees fairly? In a recent conversation, MGT fiscal experts Patrick Dyer and Diana Hancock pulled back the curtain on the mechanics and meaning behind user fee studies. They shared real-world insights on how local governments can better understand their costs, avoid general fund strain, and make data-backed decisions that stand up to scrutiny.
- Patrick, can you explain what user fee studies are and why they are important in the SLED market? A user fee study is essentially an evaluation of the full cost of all activities supported by fees at a city, state, or educational institution. An activity qualifies as a user fee if it benefits an individual, a limited number of people, or the requester of a service, and thus does not need to be funded by taxes or general funds. In most states, such items may incur a fee as long as there is a reasonable estimate of the fee and its amount does not exceed the full cost of providing the service. Examples of user fees include building permits, parks and recreation youth programs, fire prevention inspections, planning fees, charges at animal shelters, and restaurant inspections. These charges are associated with specific requests for services, allowing local agencies to impose a fee on the customer.
- Patrick and Diana, what are some common challenges organizations face when conducting user fee studies?
- Patrick: If an agency, whether large or small, has not reviewed or analyzed the costs of providing its services in several years, the fees charged often do not reflect the full cost of those services. For instance, if a building inspection for a hot water heater was priced at $110 five years ago, but during that time employee salaries, retirement benefits, and medical care expenses have increased, the original fee no longer covers the actual cost of the service. Consequently, the local agency must use general funds or another financial source to bridge the gap between the collected fee and the current cost of the service. MGT often steps in to conduct such analyses, which may reveal that the fees need to be doubled or tripled. One challenge is that the longer agencies delay this analysis, the more difficult it becomes to charge the public appropriately. Politically, it can be contentious because while determining full cost is a factual process, setting charges is a policy decision. Elected officials are rarely in favor of significantly increasing public fees. Therefore, regularly reviewing and updating fees to match incurred costs makes implementation smoother and ensures accuracy.
- Diana: Additionally, conducting a fee study, particularly for agencies that have not done so in many years, requires substantial time investment from the staff. The process can take months and necessitates collaboration between consultants and departmental staff who provide the fee-based services. Developing accurate time estimates for fee-related services can be particularly challenging if there has been no recent examination. In some cases, departments may need to research the origins and justifications for existing fees. MGT can assist by guiding agencies through various approaches to developing these time estimates.
- Diana: Additionally, conducting a fee study, particularly for agencies that have not done so in many years, requires substantial time investment from the staff. The process can take months and necessitates collaboration between consultants and departmental staff who provide the fee-based services. Developing accurate time estimates for fee-related services can be particularly challenging if there has been no recent examination. In some cases, departments may need to research the origins and justifications for existing fees. MGT can assist by guiding agencies through various approaches to developing these time estimates.
- Patrick, how do user fee studies impact the overall financial planning and sustainability of a SLED institution? Recent analysis of user fee activities can impact discretionary spending. For instance, if a planning department’s $2,000,000 budget is fully covered by fees, the operation costs are met. However, if fees only cover $1,600,000, the city council must supplement $400,000. This money could be better spent on new programs, community projects, or infrastructure upgrades. Sustainable funding from fees ensures departments are supported by those driving their activities—mainly developers who benefit from construction projects. It’s fair that developers, not taxpayers, pay for permits, inspections, and reviews related to their projects.
- Patrick, can you share a successful case study where user fee studies significantly improved cost recovery in general fund health? At the end of 2024, Santa Cruz, California, reviewed its fee schedule for the first time in years. Through a four to six-month MGT project analyzing departments like fire planning and public works, cost recovery recommendations were made, increasing revenues by $1.4 million. The city council chose to implement full cost recovery immediately due to budget pressures, bypassing the phased approach. This decision ensured fiscal sustainability, with plans to update fees regularly to address rising labor costs and inflation.
- Diana, what methodologies do you typically use when conducting a user fee study? The methodology is straightforward: multiply hourly rates by the time spent providing services. First, we calculate a fully burdened hourly rate, which includes salaries, benefits, and overhead costs like office space and supplies. We interview staff for time estimates on providing services. The cost to the city or county is the time spent multiplied by the hourly rate. After multiple drafts, revisions, and agreements, we confirm the true costs. In the recommendations phase, we set policies based on benchmarking peers’ fees to ensure they are not too high or too low. This helps agencies present fee changes confidently. The simplified formula is fully burdened hourly rates times time spent, plus benchmarking for guidance.
- Patrick, what trends do you see emerging in the field of user fee studies and how should organizations adapt to those trends? There are numerous trends, some of which are influenced by typical cyclical patterns. However, we have observed an increase in new fees related to accessory dwelling units, fast-tracking affordable housing units, technology fees enabling agencies to build reserves and upgrade their permitting systems and technological infrastructure, and general plan surcharges. Many cities engage in detailed five-year plans for housing units and long-range planning, and developing a comprehensive cost calculation to recover these expenditures is a service frequently requested by our proactive clients.
The pandemic prompted a significant shift in business operations from in-person transactions to electronic transactions, leading to a rise in credit card use among many of our clients. We assist in reviewing and crafting mechanisms for handling merchant fees and credit card transactions because payment processors typically deduct a percentage from all transactions, ranging between 2% to 4% for most local governments. Ensuring that these charges are passed on to the customers utilizing credit cards has become a notable trend.
We are also evaluating data from our State, Local, and Education (SLED) clients to establish legally defensible surcharges so that customers not using credit cards are not unfairly burdened with these costs, ensuring we do not charge more than what banks are charging customers. In recent years, there has been a diminished appetite for subsidies (not charging full cost or price). Due to budget pressures and economic uncertainties, many agencies pursue full cost recovery. For fiscal sustainability, taxes cover community-wide benefits, but agencies aim to charge customers the full cost of services such as restaurant inspections, fire prevention inspections, animal adoptions, or renting classrooms or sports fields at schools or parks departments.
Our SLED market clients seek to recover the entire cost of providing services, ensuring no financial opportunities are overlooked. Nevertheless, exceptions exist for nonprofit groups; several proactive clients have established fee waiver programs offering a 50% reduction for individuals meeting specific demographic, income level, or other criteria determined by the agency. Our clients assess the full cost of these services and intentionally allocate funds to support these fee waivers.
- Patrick and Diana, how do you involve stakeholders in the user fee study process to ensure transparency and acceptance?
Patrick: It is crucial to involve stakeholders and policy makers early. Outreach with the community, especially property developers and construction companies, is essential so that they know transparency is important to us. We must be clear with clients about our methodology and costs, as years without a study can lead to significant fee increases due to inflation. Additional outreach, such as customer surveys, provides valuable feedback and if included in budgets can prove to be a critical part of the study.
Diana: During stakeholder meetings, clarifying that we help agencies recover costs, not profit, minimizes pushback. Developers understand the necessity of reviewing fees after long periods. When councils or boards adopt new fees, it’s important they know outreach was conducted, ensuring stakeholder acceptance. The development community trusts MGT’s national expertise and compliance with the law, ensuring third-party validation of best practices.
- Patrick, can you discuss the role of technology and data analytics in enhancing the accuracy and efficiency of user fee studies? Technology plays a central role in many building permit fee schedules, with government and SLED agencies often implementing technology surcharges to address evolving technological needs. In recent years, remote inspections and electronic processing of plans and permit applications have become standard practices, thanks to these forward-thinking agencies that established technology surcharge fees to update their infrastructure.
There are advanced systems available in the cloud that can better serve customers, although such systems typically require significant investment to implement. Utilizing an efficient permitting system provides several critical benefits, including detailed management data on activity volume, time tracking, and fee inventories. Additionally, it gathers valuable customer information, including payment histories, enabling us to prototype projects effectively, particularly when evaluating multi-family residential project valuations. With newer systems, agencies can extract more comprehensive information, allowing MGT to accurately perform full cost calculations or justify fee structures.
- Diana, what advice would you give to organizations that are just starting to implement user fee studies? Organizations investing both time and money in a user fee study must know it’s a long process. At the end of this long process, MGT advises them to keep pace. We recommend updating fees every 3-5 years based on inflation indicators like COLA, CPI, or the construction cost index. Our studies show the benefits of covering actual service costs which gives the community a stronger financial foundation.
Throughout the conversation, Dyer and Hancock emphasized one resounding message: user fee studies are not just technical exercises—they’re essential tools for financial transparency and equity. By engaging stakeholders early, leveraging technology, and aligning fees with actual service costs, agencies can create policies that are both legally sound and publicly defensible.
If your organization is considering a user fee update or starting from scratch, MGT’s team is ready to guide you through the process.
Reference: Tax Policy Center. n.d. How Do State and Local Revenues from Charges Work? Accessed April 8, 2025. https://taxpolicycenter.org/briefing-book/how-do-state-and-local-revenues-charges-work.
