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New DBI Fees in Effect
by Vivian L. Day
Thanks to recent approvals by Mayor Gavin Newsom, the San Francisco Board of Supervisors and the Building Inspection Commission—and with the overwhelming support of its most frequent customers—effective September 2, 2008, the San Francisco Department of Building Inspection is providing its professional services for plan review, permit issuance and inspections under revised and updated fee tables. Details are available on the DBI website at www.sfgov.org/dbi under the link to “New Fee Tables.”
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Overall, fees are increasing between 20% and 30%, with significant decreases in some categories affecting smaller home-owner building projects. With a bottom-line negative impact of nearly $11 million under the old rates, this is a clear indication of how much the department has been underrecovering its costs of services for the past 16 years. To minimize the gap that grows annually with the Consumer Price Index, as well as to reflect the impact of inflation and other economic realities on professional services, the department will henceforth conduct fee studies every three to five years.
The department had not reviewed its fee structure since 1992, when it was still a bureau within the Department of Public Works and when DBI established its first code fee schedule. In 2002, the department sought and received approval for a very limited update of the fee table. That update included certain increases to hourly rates included in the tables, but for the most part, basic permit fees remained the same. In 2004, the Board of Supervisors approved two additional fees: one for the removal of front lawns and gardens to regulate the proliferation of expanded driveways, and a second one imposing a surcharge on pre-1979 apartment houses and hotels to cover costs for lead abatement.
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In January 2008, DBI initiated a comprehensive review of its fee structures with the goal of updating fee levels to reflect accurately current and new business practices, and to provide increased transparency to the public. This new fee study, conducted by the Matrix Consulting Group, documented clearly that the former permit fees were not reflecting the actual cost of providing DBI’s services. In fact, a 2003 County Civil Grand Jury report noted that, “DBI is vulnerable to a legal challenge to the manner in which it determines permit and inspection fees because it cannot justify these fees on the basis of actual costs.” The cost of services study was also necessary because customers and stakeholders are demanding higher levels of service, and these demands affect the department’s bottom-line operating costs, fees and staffing levels.
The new fees are a critical component in DBI’s ongoing efforts to provide better customer service, and to establish an accurate baseline from which to measure the department’s ability to deliver quality services at fair and reasonable costs. The study enabled us to assess what level of service we are providing customers and whether this service level is being paid for from the fees we collect. As a non-general-fund-sponsored city department, we have a responsibility to recover the real costs of doing business and to ensure that fees are levied fairly at rates that pay for the department’s operations. While DBI is a public service organization, and does not generate “profits,” the new fee tables enable us to balance expenditures with revenues generated—a basic principle of economic viability that must be sustained if we are to succeed in making local government more effective and efficient.
Policy Issues
As part of its fee study, DBI identified a number of salient policy principles that affect the services it provides to the public. The most important policy issues include:
- the need to simplify the fee tables to make them more transparent and understandable to the public (this means consolidating fee levels to make the tables easier to read, understand and apply);
- the desire to make fees affordable for small projects, while at the same time ensuring that the department covers its cost of providing permit processing and issuance, plan review and inspection services;
- the strategic need to implement appropriate new fees that address any new and enhanced services outlined in the Department’s 2008 Business Process Reengineering recommendations and agreed-upon performance measures;
- the need to identify and delineate fees that would fund future enhancements in the service levels provided as ongoing changes are implemented; and
- the decision to eliminate fees that are obsolete, duplicative or that unnecessarily complicate the permit application and issuance process. Reinspection fees for plumbing and electrical permits are one example; most of this work is now part of the basic inspection fee.
Fee Study Highlights
The objective of DBI’s 2008 fee study was: to document the overall cost of doing business; to identify the revenues associated with those costs; and to obtain the unit costs for all fee-supported services in the department, including all direct and indirect costs.
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The consultants compared actual costs with revenues collected; determined where costs were not supported by fees; and collapsed the existing fee table into a simpler, easier to understand, structure. Overall, the fee study revealed that DBI had been underrecovering its costs by roughly 29%, or nearly $11 million, measured in FY 07/08 budgeted dollars.
General building permit costs were being underrecovered by 20%. Plumbing permit costs were underrecovered by 90%. Electrical permit costs were underrecovered by 109%. Housing Inspection Services’ costs were underrecovered by 60%. Records/Reports of Residential Building Records (3R Reports) were underrecovered by more than 200%.
Summary of Fee Adjustment
Based on the consultant’s fee study and the policy principles identified, DBI proposed and the Board of Supervisors approved a new fee ordinance that was signed into law by the mayor on July 18, 2008. Below are highlights of DBI fee adjustments that became effective on September 2, 2008.
Overall, permit fees are increasing by an average of about 29%. Fees for general building permit costs, including plan review and building inspections, are increasing by around 20%.
We have established new fixed-fee categories for plumbing and electrical permits and associated permit fees. Thus, the basic permit fee for a bathroom or kitchen remodel is increasing to $160 each for plumbing and electrical, and these fixed fees guarantee a minimum service level for each category.
We are increasing the hourly rate for department services to $104 for support services; $170 for inspection services; and $187 for plan review services. DBI’s new rates are now in line with the Oakland and San Jose markets, neighboring Bay Area cities that were included in the fee study and survey. For comparison purposes, Oakland charges an hourly rate of $191 for plan review services, while San José charges an hourly rate of $173 for these same services.
Budget Implications
Because the fee tables have not changed in 16 years, the department’s revenue sources have not kept up with the cost of providing services. In FY 06/07, the department incurred a shortfall of $7,151,652, resulting in a draw from its fund (or “reserve”) balance of $14,302,675 at year-end.
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In FY 07/08, DBI budgeted $40,363,037 in revenues, and $47,412,429 in expenses, for a budgeted deficit of $7,049,372, which would have depleted the unrestricted fund balance. However, through careful management and higher than expected revenues, the projected deficit is expected to be around $1 million, with a remaining unrestricted fund balance of around $6 million.
For FY 08/09, without fee increases, the projected deficit would have reached more than $10 million, or far more than our reserves. Thus, passage and implementation of DBI’s fee adjustments were essential to our ability to balance the new fiscal year’s budget.
Cost Recovery
The department’s underrecovery of costs is summarized in Table 1. The estimated costs of our newly completed Business Process Reengineering (BPR) service recommendations are included to give an accurate total cost for the final fee adjustments.
As can be seen, the Housing Inspection Division is underrecovering cost by $2.5 million. Currently, the Housing Inspection Division performs inspections of one and two family dwellings (R3 Occupancies) in response to local housing code complaints from the public and other city agencies. The department’s cost to respond to complaints and inspect R3 residential housing is more than $2 million, and no fee revenue is collected for provision of this service. In addition, the Housing Division’s Code Enforcement Outreach Program (CEOP), which funds five community-based agencies (including SFAA) to work with landlords and tenants, costs a total of $579,757 annually and no fee revenue exists to offset this cost.
During the fee study, we reviewed the policy issue of whether existing apartment and hotel license fees should be increased to cover these costs, as these fees also have not changed in many years. Because the cost of R3 inspections is significant, to recover such a large shortfall, a 50% increase in apartment and hotel license fees would have to be enacted. Furthermore, simply establishing a fee to recover costs on inspection of R3 residential housing is a complex public policy issue that needs to be fully analyzed.
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Given all the policy issues involved in this area, we plan to address the underrecovery of costs in the Housing Inspection Division in the coming year, and may propose separate clean-up fee legislation following this analysis and its recommendations.
DBI’s fee consultant also identified costs in customer service as unrecoverable from fees. Approximately $1.1 million is considered unrecoverable. This cost is attributed to the retrieval of public information from the DBI archives. Because public record laws in California govern what fees can be charged for furnishing public information, government agencies are not allowed to charge for staffing costs in providing public information. Consequently, the fee consultants determined that more than half of all customer service costs are considered unrecoverable from fees.
Hourly Rates
DBI’s hourly rates have long been seriously underpriced, particularly when viewed within the context of the Bay Area market. The original hourly rates from 1992 were only based on direct personnel costs, and did not include nonpersonnel budget amounts—nor did the rates include department wide support costs or overhead. The consultants calculated overhead rates for each of the inspection disciplines, engineers and office support staff, and these ranged from a low of $92 per hour for housing clerical staff to a high of $311 per hour for engineers. For the newly adopted fee legislation, DBI blended overhead rates for plan review, inspection and office support. The new rates are: $187 per hour for plan review, $170 per hour for inspection services and $104 an hour for support.
These rates are reasonable and in line with Oakland and San José. For comparison purposes, Oakland charges an hourly rate of $173 for support services, while San José charges an hourly rate of $114.
While more details and examples of how DBI’s costs have changed are available on the website, www.sfgov.org/dbi, under the “Fee Study” link, Tables 2 through 5 illustrate the changes.
A note: even though the fee consultant’s analysis demonstrated that DBI is substantially underrecovering its costs in the residential permit categories, to keep permit fees affordable for small residential alterations, the new fees are lower than was recommended.
The Big Picture
DBI is in the process of reinventing itself in order to meet the increasing demands of its customers, mandates for reform and reorganization from the mayor and the Board of Supervisors, and up-to-date business practices. No area captures these overarching yet fundamental changes more explicitly than the critical relationship between what it costs the department to provide its professional services and the fees levied to cover these costs.
For far too many years—more than 16, in fact—DBI ignored the rapidly changing economic realities occurring throughout the Bay Area, California and the nation, and simply had not analyzed its business costs and revenues generated to pay for these business costs. With this first-ever cost of services fee study within the department, which follows immediately upon our newly-completed Business Process Reengineering comprehensive review of the city’s entire development review process, we are clearly identifying the foundation elements required to rebuild the department into one that is more efficient, customer-friendly and customer-responsive, effective, accountable and transparent.
As readers can see from the bottom-line details laid out in DBI’s fee study report and in the newly effective fee tables, we are now in a position to recover the costs of our professional services in today’s tough economic environment. With the national and statewide economic softening of the building and construction industry, these fee adjustments represent more accurately and fairly the value of the services we provide—and give us the financial tools needed to produce a balanced budget capable of sustaining the professional positions we must have to fulfill our responsibilities.
Like the BPR analysis, DBI’s fee adjustments give us the essential and accurate market information we require. With these thoroughly researched and documented studies, and with the new fee legislation, DBI has the “roadmap” required to move the department away from what has often been a frustrating past for both employees and customers, and instead move toward a more streamlined, efficient and effective building safety organization.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Vivian L. Day is acting director of the Department of Building Inspection. Copyright © 2008 by Black Point Press. All rights reserved.