Alternative revenue sources in Ontario: assessing and implementing user charges.

• Author: Scandlan, Gary
• Position: Includes related article

Determining the cost per unit of the program is essential for setting user charges at a level that will allow all or a portion of costs to be recovered.

Ontario municipalities have experienced considerable difficulty in preparing and adopting budgets in recent years. The economic recession coupled with business and economic adjustments, associated in part with global economic changes and free trade policies, has necessitated the need for increased spending in some service areas such as social assistance. At the same time, taxpayers in general have been seeking property tax reductions or zero increases. The local government dilemma was further compounded by cutbacks in transfer payments from senior levels of government.

With these challenges being faced by Ontario municipalities, the Association of Municipal Clerks and Treasurers of Ontario (AMCTO) and the Municipal Finance Officers Association of Ontario (MFOA) joined forces to develop a working document on revenue alternatives to property taxation. The purpose of this manual is to provide guidance to municipal officials in assessing nontax revenue sources and encouraging the implementation of policies in this regard.

The report, Assessing and Implementing Alternative Revenue Sources, reviews the goals of a revenue policy, provides a summary of the legislative authority for adopting various revenue sources and a review of revenue reform policies being pursued within Ontario, provides a historic analysis of revenues generated by Ontario municipalities, presents a list of nontax revenues by service or program presently in use by Ontario municipalities, presents a review process for municipal programs and user charges, defines the various types of costs to be considered in developing charges, and provides a methodology for computing various user fees and charges.

This article, excerpting a chapter of the AMCTO and MFOA report, concentrates on the process for analysis, approval, implementation and administration of user charges. These excerpts are reprinted with permission from the report as published by the Association of Municipal Clerks and Treasurers of Ontario and the Municipal Finance Officers Association of Ontario.

Identifying Cost and Need

The fundamental basis for user charges is to recover all or a portion of the costs incurred by a municipality for a particular service. The concept of usage fees or charges in its simplest form as follows:

cost/unit of measure = fee per unit

The unit of measure represents the method by which the cost is to be recovered. For services or programs such as recreational programs, the unit of measure is often the number of people participating in the program. For programs which utilize facilities, the unit of measure is often usage time (e.g. per hour, per day).

The concept of cost is often difficult to measure. Costs may be subcategorized as direct costs, indirect costs and capital asset costs. Each of the costs can be identified as gross or net costs (net of grants, subsidies and other contributions). The complexity of arriving at the cost is dependent upon the type of service being examined. There are various cost-measurement techniques available. This section provides a general approach to costing.

There are three basic cost categories: direct cost, indirect cost and capital asset cost. Direct costs would be those costs directly attributable to undertaking the program. Indirect costs would be defined as an overhead cost or proportionate share of municipal administration which manages the program. These costs are often overlooked or expressed as a percentage of direct cost and are commonly referred to as overhead burden rates.

Capital asset cost would include items such as buildings, equipment, furnishings, etc. These costs are less easy to quantify in a municipal setting than m the private sector, as municipalities are required to prepare their financial statements based on fund accounting. This accounting method accounts for the expenditure to acquire the asset and, if debenturing is used to pay for that acquisition, the debt charges are recovered in future years' operating budgets. Since the value of the capital asset is not reported on the municipality's financial statements, many municipalities do not keep adequate...