Thursday, June 24, 2010

Cities Slap Fees on Everything: Flailing Desperation and Financial Hara-Kiri

Cities are jacking up fees and inventing new ones at a furious pace. Is this what they mean by "financial innovation"?

San Francisco is often a trend-setter. Now it's blazing a new path to financial Hara-Kiri (seppuku to purists) via new fees to residents, employers and visitors.

S.F. weighs fees to close budget gap:

Pet owners in San Francisco who want the city to euthanize their cat or dog may soon have to pay $25 for the service that now is free.

Drivers at fault in an accident may for the first time face a charge from the Fire Department to clean up things like broken glass and spilled gasoline.

Faced with a staggering $483 million budget deficit heading into the new fiscal year, Mayor Gavin Newsom and his department administrators hope to plug part of the gap with fees - by imposing new ones and increasing those already on the books.

Can you fill a $483 billion deficit in a massive $6.5 billion budget by nickel-and-diming your captive residents and visitors? S.F. aims to try. Here is a partial list of new fees and increased fees:

Euthanize your beloved pet (dog or cat): $25

Clean up glass from auto accident: $498 (driver at fault pays)

Register your burglar alarm system: $35

"False alarm" fee if police respond to false security alarm: $217

Reserve picnic table in city park: $15

Paramedic service (on scene): $365

Ambulance service: $1,642

Street artist permit: $15 if art is free, $150 if it's for sale, $250 for velvet depictions of Elvis or dogs playing poker.

Mime permit: $25 ($15 surcharge if mime breaks silence)

Toilet facilities in city parks: $2 per flush ($2 surcharge if you leave seat up)

Food service permit for caterers: $150 per event

Dispose of deceased cat or dog: $20

Admission fee to the Botanical Garden in Golden Gate Park: $7 for tourists (residents can still enter for free)

Fee for tourists to visit City Hall rotunda: $5

Wholesale tax on alcohol: $15 million a year

Alcoholic drink fee (added to bar tab): $1

Latte surcharge (regular coffee remains untaxed): $1

Excise tax on medical marijuana sold in the city: 20%

911 call service: $50 (please pay in cash to responding officers)

Mugging report fee (to file report that you've been mugged): $15

Sidewalk table permit fee (for restaurants): $125 annually per table

Junk food fee (donut surcharge): $1 per dozen glazed, $2 for croissants

Fee to enter rose garden in city park: $5

Wi-fi router fee: $25 annually

Business license inspection fee (to compensate city for checking that your business license is up to date): $125

Beggar-free sidewalk fee: (businesses who want their sidewalks free of beggars pay for "premium service", compensating beggars to sit elsewhere) $500 per 50 linear feet of sidewalk.

Stolen auto recovery fee: $200 if police locate your car and it hasn't been stripped, $100 if it has been stripped.

Use of city streets fee (paid annually by all residents): $25 per housing unit.

Fee for dogs "doing their business" in city parks: $20 per month, and $5 per use if owner doesn't pick up dog poop.

Demonstration permit: $1,000 for orderly demonstration, $5,000 for disorderly demonstration, $25,000 for riot.

Permit to wear shorts (tourists only): $5, payable at hotel.

OK, some of these are made up. Some are made up but so similar to real fees proposed by the city that you will have a hard time ascertaining which are spoofs and which are real. There is a "theatre of the absurd" flavor to the entire exercise of calculating what residents cost the city, and thus what residents should pay.

What does the city do with the $6 billion it already collects and spends?

There is a sense of flailing desperation in the pathetically meager sums which the city expects to raise from these fees, for instance: Botanical garden fee approved.

The new $7 fee for visitors is expected to raise $250,000. The budget deficit is $483 million. There appears to be some cognitive dissonance in these two numbers.

Booze tax expected to raise $15 million. The justification for this new wholesale tax is the city pays for alcohol-related accidents and diseases.

$15 million is a decent sum, but it isn't going to make much of a dent in a nearly half-billion dollar deficit in the city budget.

Here's a "revolutionary" thought: how about tackling the causes of the structural deficits instead of stripmining residents, tourists and employers with "death by a thousand cuts" junk fees?

Perhaps desperate city politicos forgot, but an excellent report laid out the causes and solutions in detail during the last recession in 2003.

A few highlights from the report:

The San Francisco budget grew by 70 percent between 1996 and 2003—three times faster than inflation, from $2.9 billion in 1996 to $4.9 billion in 2003. The 2010 budget is $6.5 billion, a 33% increase in seven years that is almost double the 17% percent rise in total inflation of that time span.

The city has more than 32,000 employees. From 1996 to 2003, its workforce grew by 30% while population grew by only 7%. That is one city employee for every 25 residents. Police and fire protection costs per resident are double other major cities such as San Diego.

More than 30% of city employees make in excess of $100,000 in 2009 (not including benefits). According to the report, pay scales are roughly 20%-30% higher than comparable regional compensation.

The unprecedented rise in the stock market saved the city $100 million in pension payments in the late 1990s, a stellar performance which was then baked into future revenue expectations. The stock market has essentially treaded water from 2000 to 2010, and now the promises made in an era of lavish stock market returns in the city pension funds must be paid out of the dwindling general fund.

A recent report, Pensions Beyond Our Ability to Pay revealed that the city will have to increase its contributions to its employees’ pensions by over 50 percent by 2011. Due to the demographics of an aging Baby Boom-heavy workforce, half of the city’s workforce will be eligible for retirement in the next five years.

Source: The City-Journal.

The diagnosis:

1. The city has 30% more employees than it can afford

2. The city pays them 30% more than comparable wages

3. The city made pension and benefit promises based on an unprecedented stock market bubble

The solution:

1. Cut 1/3 of city workforce

2. Cut the pay of the remaining workforce by 30%

3. Reduce pension payouts to whatever the current pension plan can spin off (i.e. 4% annual return on the current fund) and eliminate further pension contributions by the city (employees are free to contribute out of their own paychecks)

Did anyone think through the incentives and disencentives these fees create? Who is going to call the city now to dispose of the poor dead dog in the street? Who will pay the $20 fee? Nobody.

In a fender-bender, who will drive off and not file a police report, knowing that the city will try to nail them for $500 to clean up the broken glass?

Who will decide not to visit San Francisco now that's it too expensive? Who will decide not to go the Botanical Gardens now that it costs $7 ($15 per family)?

What cities find (apparently to their surprise) is these fees raise far less money than they estimated. People decide they can lay out a blanket and have a picnic without paying the city a "reserve a picnic table" fee. Street artists will simply flaunt the permit law because they can't afford the fees or feel that it is a rip-off.

Get real, San Francisco. The population has risen by a few percent while your city budget has doubled in a decade. Yes, inflation accounted for perhaps 20% of the rise; so what about the other $2.5 billion increase?

There is a positive feedback to these junk fees and higher taxes. The more you squeeze residents, tourists and employers, the more incentives you give residents and employers to leave and tourists not to visit (or stay outside the city and just make a quick visit, spending as little as possible).

Note to S.F. Tourist Agency--the euro has plummeted from $1.60 to $1.20. The U.S. is no longer a "cheap" destination.

That leaves fewer captives to bear the ever-rising costs, so you must burden the remaining residents at ever higher rates, increasing the incentives to bail out. That's positive feedback.

What you will end up with is a city of very wealthy people living in protected highrises and posh enclaves and a populace dependent the city/State/Federal Savior State. The middle class and the employers will have been driven out by your frantic drive to raise impossible sums of money to assuage your vocal protected fiefdoms of city employees and all those contractually dependent on the unsustainable and soon-to-be bankrupt city.

You are committing financial Hara-Kiri, apparently without knowing it.

Your only real hope of raising $500 million is to levy a $5,000 per person "lucky you live in San Francisco" annual fee on the 100,000 wealthy and upper-middle class residents of the city. But be sure to tell them that the fee increases by $2,500 a year, so they better count on paying $10,000 a year for the privilege of living in S.F. by 2012.

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