Opinion: Pricing services — lessons to be learned


As the Great Recession continues to impact local governments, we are seeing the effects of the various shortcuts that have been taken in the way we pay for services. When prices do not accurately reflect costs, serious budget problems can occur. Here are some examples.
The City of Boulder is considering raising fees for recreation facilities and classes so as to more accurately reflect the real costs. Since these fees were previously subsidized, when sales taxes drop, shortfalls occur. Increasing fees seems a legitimate solution, but this economic necessity may not match the socially desirable outcome of having more people participate in these activities.
The city is also looking at raising water rates. The rates, which are now pretty close to being cost-based, have actually induced conservation, which what was the intent. But the effect is that the utility is now running an operating deficit. Why? The reason is that most of the costs the utility incurs are fixed, like labor and repairs, not variable, like power and chemicals. So while charging based on an increasing per-1000 gallon block rate works well to inspire conservation, revenues shrink faster than costs when ratepayers conserve. Trying to provide a rate that is both an incentive as well as cost-accurate is tough; it would require a complete rate and financial redesign utilizing charges and credits on fixed assets, a large subject unto itself.
Boulder County has run into a different problem with its rural subdivision roads. Although there is a dispute as to exactly what the agreements and policies are, the underlying issue is that, by and large, county services are paid for mostly by city residents who also pay city taxes, simply because that is where most of the people are. To make it more complicated, residents in unincorporated areas contribute to cities through sales tax, although, for example, sales tax on auto purchases goes to the county only. The resulting equity issues have never been satisfactorily resolved, at least to my knowledge, and remain a complication for both levels of government.
The Boulder Valley School District is considering a “mill levy override” tax to fill some of its budgetary holes. This “override” notion represents the culmination of many changes in how schools are financed, at least here in Colorado. There once was a time when local districts provided most of their own funds, so some districts were richer and some poorer, depending primarily on the local property tax base. Then the Colorado Supreme Court decided that all schools had to provide equal education, and a formula was adopted that reflects the fact that per-pupil costs vary across the state. In parallel with “equalization,” the state gradually ended up taking over much of the funding responsibility. Meanwhile, in 1996 the legislature outlawed school impact fees, ensuring that the impacts of new development were paid for by current citizens, not the developers and land speculators that were profiting from the growth. When this unfair tax burden is combined with the “equalization” restrictions on using local taxes to actually pay for better local schools, voters` enthusiasm for universal education is dampened, especially in an economic downturn.
Electric utilities charge customers based on “average cost pricing.” This means that the sources of increased demand (new development and existing customers who increase usage) never face the ever-increasing costs of new power plants, because these costs are “averaged” in with the costs of the older, cheaper plants. To make matters worse, no one actually faces the capital cost up front. For example, to power 10 new 100-watt light bulbs on a 24/7 basis actually costs very roughly $1,500-$2,000 in new power plant, transmission, and distribution capacity. If builders had to pay that amount to be allowed to install these 10 light fixtures, wouldn`t they think a lot more carefully about making the most efficient choice?
Finally, RTD is also running a deficit and is considering raising fares, but fares cover little of RTD`s total costs. Cars, RTD`s “competition,” also pay very little of the cost of roads. And transportation impact fees to pay for the huge regional capital costs associated with new development are non-existent. This creates another spaghetti-tangle of subsidies, perhaps even harder to unravel than any of the above.
Although the Great Recession is a painful experience, perhaps it will provide an incentive to reevaluate the way we price the services that we have come to count on.


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