USER CHARGES AND FEES:

FINANCING LOCAL SERVICES – DO LOCAL GOVERNMENTS REALLY COVER THE COSTS?

 

Research Protocol Developed by

NISPAcee Public Sector Finance and Accounting Research-Working Group (WG V)

Year 2003/2004

 

 

 

This research protocol for Working Group V (Public Sector Finance and Accounting) is intended to continue and deepen the analysis and comparative knowledge of how local public finance has evolved in the transition countries over the past decade. The WG V topic for this annual conference, user charges and fees, is one which to date has not attracted much attention of researchers, and for which cross-country comparative information has not yet been developed. The general background briefly discusses the context of user charges and fees in Central and Eastern Europe. The expected content of the country papers is then described in Section II. In the Appendix, there is a short theoretical presentation on key aspects of user charges and fees, based on the fiscal literature, which also serve as a guideline for authors as they develop their papers.

 

 

I. General background on user charges and fees in Central and Eastern Europe

 

Over the past decade, there has been extensive research on national and local tax issues in Central and Eastern European countries. This is partly related to the major reforms of tax systems which have been undertaken, in response to the conditions and needs of a different economic structure. Tax revenues are the most significant resource of national governments, and the effectiveness of their framework and administration is subject to the scrutiny of international financial institutions.

 

User charges and fees, given their apparently lower share in national and local government revenues, have not yet attracted the sustained attention of the research community in the region. Furthermore, the list of user charges and fees, depending on the country, can be quite extensive and disparate, with only a small number accounting for proportionately significant revenues. In cases where user charges have been analyzed, it has generally been in the context of the reform of specific public services sectors (i.e., water and wastewater, solid waste, public transport).

 

One of the key aspects of the transition has been the process of decentralization; a process which is more or less advanced, depending on the country. Local governments now play a key role in the provision of local public services (either as direct providers or as regulators) and in consequence, key categories of user charges and fees are now under their authority and responsibility.

 

However, there is greater disparity in the administration and collection of user charges and fees. Full information on revenues is not available only through the analysis of sub-national government accounts. In particular, for user charges and according to the organization of service provision, revenues may be recorded in the accounts of private companies contracted by the public sector, in the accounts of companies wholly or partly owned by the local government(s) or by departments within the local government administration.

 

One aspect to consider is how user charges and fees could evolve in CEE, particularly with the high burdens of tax and social insurance payments. Trends over the past two decades, particularly in Anglophone countries (i.e., U.S., Australia, New Zealand) have shown that the share of user charges and fees in total sub-national government revenues has increased, while the share of taxes has registered a corresponding decline. The extension of new public management (NPM) practices throughout Western Europe, to focus on economy, efficiency and effectiveness of public services management has led to greater competition and forms of service provision, which in turn has also led to an increased reliance on user charges and fees for the financing of public services.

 

Up to the present, greater attention has been paid to reform of the tax framework. The next fiscal “construction site” for CEE may well be more comprehensive reviews of the framework, administration and pricing of user charges and fees, with greater attention to cost recovery.

 

 

II. Structure of country studies

 

The country studies should cover the range of issues as detailed below. Nevertheless, they are not exclusive. The extent to which the issues are presented may vary from the protocol, and other issues included, according to the characteristics of the specific country case and the academic freedom and judgment of the researchers. Description is necessary, but not sufficient, and a thorough analysis of major issues and findings should be considered an inherent part of the study. It is also expected that the authors will formulate policy proposals that are suitable for implementation of the particular country.

 

Each country study should include an exhaustive annotated bibliography, including material published in the language of the country, as well as other languages (English, Russian, German, French, etc.).

 

The country study, which will be published as a chapter in an edited book, should comprise the following sections:

 

1. Introduction (1-2 pages)

 

The introductory section of each country study should provide brief information about the present status of the sub-national government system, and indicate the stage of development of the system:

§         the key reforms have already been adopted and the system is in a period of consolidation / adjustment;

§         future key reforms still to be decided, adopted and/or implemented; or,

§         lessons and experience of the first phase of decentralization are leading to a major review of the system.

Describe the current territorial organization, and indicate if recent changes have taken place, are under discussion and analysis or are impending.

 

 

2. Local Government at a Glance (1-3 pages)

 

This section should present the share of general public sector and of sub-national government spending in GDP, and consider as well the share of  local government in the general public sector. It may be useful to illustrate these data and depict the main trends. If the graph is to be produced, then it is useful to plot the movement of the inflation rate, to enable a reader to have a grasp to what extent local expenditures and inflation moved together (that is in opposite directions).

 

This section should describe the authorities and competencies of sub-national governments (and of the different levels, if there is more than one level). A distinction should be made between own (original) responsibilities of local governments and functions delegated by the central government.

 

This section should also describe the supervisory powers of the central government over local government and the nature of this oversight (legal vs. opportunity, ex ante vs. ex post, direct intervention vs. recourse through the court system).

 

 

3. Local Government Finance: An Overview (3-4 pages)

 

The presentation of local government finances should include a review of sub-national government revenues and expenditures and their trends since 1990-91, including a description of the legal framework and the de facto implementation (situation in practice). The stability and predictability of the local government finance system should also be critically examined and assessed. For example, have there been frequent changes in sources and definitions of local resources; if so, have these changes been related to changes in local responsibilities / functions, or to general readjustment of public sector / government financing needs.

 

In this section the authors are to describe the nature of the relationship between the central government and sub-national level governments in fiscal issues.

 

On the revenue side, the presentation should include all own local taxes, central taxes shared with local governments, transfers, user charges, fees, other sources of revenue (from property, interest, etc.).

 

For the analysis of expenditures, if possible, review expenditures by economic classification, distinguishing between operating – salaries/social insurance, operating/maintenance, transfers, etc. – and investment, as well as by sector – administration, transport, water, environment, housing, education, health, social, etc.

 

The analysis should explain the most important forms of financing capital expenditures and of the financing of deficit (how is a deficit defined). Are local governments authorized to borrow funds, what are their authorities and limitations in respect to borrowing, and how is the local government debt market structured.

 

 

4. Legal framework for user charges and fees levied by local governments and its implementation (5-7 pages)

 

This chapter should focus on the basis on which local governments may levy user charges and fees. The description should consider the key laws, and how the legislation has evolved since the transition. The author should comment on the coherence of the legal framework, as well as its unity/dispersion (are user charges and fees subject to several laws, dispersed widely in legislation) and its stability (is the legislation frequently amended, how do such amendments affect the coherence of the framework). Comment as well on the coherence / logic of the definition of user charges and fees, as distinct from taxes.

 

This chapter should provide a comprehensive list of user charges and fees which are levied, based on the typology proposed in the Appendix (service fees – user charges – specific benefit charges).

 

If there is more than one level of local government, explain which level is authorized to levy which user charges/fees.

 

This section should describe the authorities of local governments in respect to user charges and fees, in terms of base, rates, administration (registration, assessment, collection) and enforcement. Indicate if changes have been made in the legislation in respect to the authorities of local governments (greater or less authority).

 

Describe in detail the legal framework for setting rates of user charges and fees, including any oversight by central regulatory bodies. Does the legislation include cost recovery principles. For certain fees, are there fixed national rates, or rate scales within which local government may set the local rate, or other mechanisms.

 

 

5. Revenues generated by user charges and fees (4-6 pages)

 

This section should situate the revenues generated by user charges and fees within the context of total local revenues and of own local revenues and the trends in these revenues since 1990-91.

 

In addition, provide data sets on revenue generated by the individual charges and fees, for the period 1990-2002, and analyze how these revenues have evolved (in current and constant prices). Based on the trend which is identified, analyze the stability and predictability of revenues from user charges and fees.

 

If the rates of user charges and fees are set in the law, is there a process/rules for reviewing and updating these rates? Have they been updated, and if so, how often? What impact (if any) has this implied for the evolution of revenues from user charges and fees.

 

Describe how the management of public services and the organization of collection of user charges and fees impacts on the data available. Does the data presented capture the full information on these revenues If not, what is missing and why.

 

Analyze any specific issues and problems in regard to administration, collection and enforcement of user charges and fees. Describe the main issues, causes. Is there an estimation of the leakage of revenue. Propose recommendations and options for improving the situation.

 

 

6. User charges and cost recovery : a critical analysis (5-7 pages)

 

User charges imply that the pricing should ensure cost recovery. Fees should ensure that there is some benefit between the payer and the service provided. The critical analysis should consider the extent to which regulations and practices enable (or prevent) cost recovery, and what has been the impact the modifications/reform (if any) of the system on this aspect.

 

How has public policy defined the purpose of user charges and fees. In practice, how have user charges and fees been applied (consider justifications and negative points as described in the Appendix).

 

Has the system evolved toward reviewing and identifying costs? Is so, how successful has this reform been in improving revenues and public services. If improvement of cost recovery has not been a focus of reform of user charges / fees, describe the obstacles to reform / modernization of these sources of revenues.

 

Evaluate the cost effectiveness of the administration of user charges and fees (perhaps including short case study of 1-2 representative local governments).

 

 

7. Summary, conclusions and policy recommendations (2-4)

 

In this section, the authors will provide a brief overview of the paper, including a summary of the most important conclusions and policy recommendations. What are the suggested policy options which may be taken by central and local governments which could improve the framework for user charges and fees, increase local government capacity and provide better services for citizens.

 

 

Appendix: Theoretical (Framework) Background

 

The notions of tax and fee are defined in the fiscal literature. Briefly, a tax is defined as a payment for a general government service for which the taxpayer does not receive a quid pro quo. Tax revenues ensure the financing of common public goods, for which it is often not possible to identify the specific beneficiaries, as the good is accessible to all.

 

A fee or charge represents direct payment for a service or at least, represents a connection between the payment and the users of the service. Although the terms fee and charge are often used interchangeably, a distinction can be made between the terms:

 

A user charge is a voluntary payment (to the extent that an individual uses a service voluntarily), with a particular benefit received by the individual. This implies that it is feasible to exclude someone from consuming the service. The pricing should be set to recover all or part of the cost of the service.

 

A fee is related to public need to regulate certain activities, usually related to health or public safety, where the price of the fee is not necessarily related to the cost of providing a service, nor to the volume of usage, but represents payment for a permission or authorization.

 

A typology of user charges and fees generally includes three categories, which include:

 

Public policy literature has identified justifications for levying user charges / fees, as well as reasons not to levy them. Potential purposes of user charges/fees are:

 

The application of user charges and fees should also take into consideration these points:

§         they cannot be used solely as a revenue-enhancing device;

§         the cost of their administration may be disproportionate to the revenues which they yield;

§         charges and fees which are excessive may reduce goods provided by the private sector or encourage illegal activity to avoid paying high costs associated with these charges and fees.

 

User charges and fees can be evaluated according to several fiscal principles: equity, efficiency, adequacy and administration.

 

Evaluating for equity takes into consideration two principles: the benefits principle and the ability to pay principle. The benefits principle considers whether the taxes people pay are in line with the services received from the government

There are two aspects to the ability to pay principle. First, horizontal equity, whereby people with the same ability to pay should pay the same amount, with the implication that the user charge will be a heavier burden for heavy users of a service. Second, vertical equity, that people with different abilities to pay should not pay the same amount. Generally, poorer families devote a larger share of their income to basic services; rather than retaining lower rates across the board, an equitable and efficient system should consider selective rate reductions, or the use of direct social assistance benefits to ensure that the truly poor are able to pay for essential public services.

 

The analysis of efficiency takes account of both consumption and production of services. Thus user charges may seek to encourage the conservation of scarce resources. Efficiency of the production and operation of a service may also be improved, if user charges and fees represent the primary source of financing of the service.

 

Adequacy covers the question of the amount of revenues (are the revenues generated by user charges and fees sufficient to cover the costs of the services provided), their elasticity (do the revenues increase in line with inflation and income) and their stability (do people adjust the use and volume of use of services in response to price increases, or are user charges and fees price insensitive).

 

Evaluating the administration of user charges and fees would take into account registration (identification of users), assessment (identifying the price charged and the quantity used), collection (what is the system, how it is organized, how do exemptions enter into play), and enforcement (how can payment be enforced if someone doesn’t pay, what penalties and fines can be applied).

 

 

Bibliography

 

Coleman, Michael and Michael G. Colantuono. “Local Fiscal Authority and Stability: Control and Risk in California City Revenues”, in Western City – League of California Cities. August 2003.

 

National Conference of State Legislatures. 29, July, 1999. The Appropriate Role of User Fees and Charges in State and Local Finance. Foundation Fiscal Partners, Phase V. Washington.

 

Syracuse University, Maxwell School. Lecture 11: User Charges and Lotteries. From Public Budgeting Course. Fall 2003. Syracuse.

 

The Treasury, Government of New Zealand. 2002. Guidelines for Setting Charges in the Public Sector. Wellington.

 

Ulbrich, Holley H. “Financing Government: Using Fees and Charges”. In South Carolina Policy Forum Magazine, Spring 1997.

 

Von Maravic, Patrick and Christoph Reichard. “New Public Management and Corruption: IPMN Dialog and Analysis”, in International Public Management Review. Volume 4, Issue 1, 2003.

 

Worcester Regional Research Bureau. June 19, 2003. The Use and Abuse of User Fees and Charges. Report No. 03-04. Worcester.

 

World Bank Institute. Local Revenues – User Charges (Topic 7.2). Intergovernmental Fiscal Relations and Local Financial Management Program. Washington.