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.
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).
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.