Part 4: Administering fees and levies

Setting and administering fees and levies for cost recovery: Good practice guide.

4.1
In this Part, we discuss:

Clear documentation of decisions, charging system, and revenue and costs

4.2
A public organisation that charges fees or levies should have:

  • documentation of its charging system;
  • an appropriate cost-allocation methodology and process;
  • for each charge-setting or review exercise, a clear audit trail showing its assessment of costs incurred and forecast demand, the drivers of cost and how it has considered them, and how it has determined the level of fees or levies; and
  • a record of how it considered the principles and questions in this guide. The extent and level of detail will depend on the scale and significance of the good or service and their cost.

4.3
The documentation of your charging system should describe the legal authority and rationale for charging fees or levies, and the scope of those fees and levies. It should also describe other sources of revenue (such as from the Crown) and your approach to calculating fees or levies.

4.4
Having the information referred to in paragraph 4.2 documented means you can show external reviewers, stakeholders, and fee and levy payers that you have a robust and reasonable process for identifying the costs of your activities and for setting fees and levies.

Monitoring revenue from fees and levies

4.5
Once fees or levies are set, you should monitor and record the revenue generated and the associated costs of producing the good or providing the service. This should help ensure that your financial management practices support statutory compliance. Memorandum accounts are one way of doing this.

4.6
We recognise that there are other methods of monitoring and recording revenue generated and costs incurred. The most important point is that whatever method you use has enough transparency to identify any surpluses or shortfalls relating to individual charges so that you can address these.

Using memorandum accounts

4.7
To properly account for your charging practices, you need to know how much revenue your fees and levies generate relative to costs. Memorandum accounts are one method of recording this information.

4.8
Memorandum accounts allow organisations to monitor the annual surpluses and deficits that result from a specific charging regime, with the expectation that the account will trend towards zero over time.13 They support practices for charging and reporting on fees and levies, and show when you should review fees and levies.

4.9
The Treasury’s guidance notes:14

Departments must use memorandum accounts to record the accumulated balance of surpluses and deficits incurred in the provision of third party, fully cost-recovered outputs.

Memorandum accounts should be used wherever:

  • third parties are to be charged for services provided on a full cost-recovery basis;
  • refunding surpluses or levying short-falls through a contractual arrangement is costly or impractical; and
  • the benefits of preparing a memorandum account clearly outweigh the compliance costs involved.

4.10
We agree with this position. In our view, it is good practice for public organisations to use memorandum accounts whenever possible.

4.11
You should set fees and levies to recover costs in the short to medium term. However, in most instances, the costs incurred and revenue received will vary from what was forecast for the period. Forecasts are unlikely to be completely accurate.

4.12
Memorandum accounts can track the recovery of costs over time. The requirement to use memorandum accounts recognises that some smoothing between periods will be needed.

4.13
If you use memorandum accounts, it is good practice to:

  • consider whether to establish separate memorandum accounts for fees or levies with different authorising statutes and, if you have many different charges, make sure you have adequate records and monitoring for each individual fee or levy;
  • show, for each account or line item, an opening balance, the movements (income, costs, and other adjustments) during the period, and a closing balance (which will indicate whether over- or under-recovery is occurring);
  • explain the characteristics of each account, such as the review period and any limits on recovery, and provide the basis for charging; and
  • if over- or under-recovery is occurring, explain what you are doing to smooth year-by-year variations in the fees or levies charged.

When to operate multiple memorandum accounts

4.14
Some public organisations are responsible for administering multiple fees and levies.

4.15
Memorandum accounts generally show only the headline balance and whether there is a surplus or deficit. They do not necessarily explain what is causing the surplus or deficit.

4.16
Managing multiple fees and levies through a single memorandum account can increase the risks of cross-subsidisation (see Part 3). This is because you might inadvertently recover a deficit from, or return a surplus to, a group of fee and levy payers who did not contribute to that deficit or surplus.

4.17
In our view, you should, where practical, use separate memorandum accounts to manage fees and levies that are authorised under different statutes and that have different requirements and review periods.

4.18
This will minimise the risk that charging practices are unlawful because the different statutory requirements of different fees or levies have been confused. It will also provide fee and levy payers with more confidence that you are following those requirements – including regularly reviewing fees or levies, or complying with limits on the recovery of deficits.

Understanding memorandum account balances

4.19
If you are managing multiple fees and levies under a single memorandum account, you will need to understand, at a more detailed level, how those fees or levies contribute to the overall account balance.

4.20
For example, revenue or expenditure from one type of fee or levy might dominate. As long as the revenue for that fee or levy does not generate a significant deficit or surplus, the memorandum account will appear to balance within acceptable limits. However, this might mask a significant imbalance with other fees or levies managed in the same account.

4.21
Therefore, it is important that you have a good and well documented understanding of movements in the revenue for each fee and levy managed under the memorandum account. This means that you can review and adjust fees or levies in a timely way when surpluses or deficits related to specific charges occur – regardless of the overall balance of the account.

Forecasting for deficits and surpluses

4.22
Fee and levy revenue and expenditure are highly unlikely to be completely in balance. Consequently, memorandum accounts are almost always likely to be in either surplus or deficit.

4.23
Regular forecasting will help you see when memorandum accounts are heading too far into either surplus or deficit. You will then need to understand what is driving the change in forecast and whether you need to make any changes to the current fees or levies.

4.24
Your forecasting of costs and revenue needs to be detailed enough that, as well as it providing the overall account balance, you can anticipate movements from specific fees or levies.

Understanding service performance

4.25
In our view, you should also collect non-financial service performance information about the goods or services that you are charging for. This information can indicate long-term changes in service use/revenue and/or service costs that might lead to future surpluses or deficits.

4.26
Non-financial service performance information is a useful indicator of whether the goods or services that you are charging for are meeting the needs of fee and levy payers. If they are not, fee and levy payers might question current service levels (and costs) and whether they meet expectations.

4.27
Fee and levy payers and their representatives are also increasingly asking for non-financial service performance information (for example, number of service requests, timeliness of response, accuracy of response, or satisfaction of service recipients) to help them understand the value for money of what they receive.

4.28
We consider that this is best practice and a good way to provide transparency and accountability for your performance.

Monitoring and reviewing fees

4.29
Regularly monitoring and reviewing fees or levies is critical so that you:

  • do not have to write off large deficits;
  • minimise equity risks associated with recovering historical costs from future service users or returning historical surpluses to future service users; and
  • provide service users with certainty and relative stability in the price they pay for goods or services, as opposed to irregular and large increases in fees or levies.

4.30
It is important that you regularly monitor the performance of fees or levies and act when necessary. This is important regardless of whether there is a legislated review period for the fee or levy.

4.31
You will need to regularly monitor the status of memorandum accounts, underlying costs, service mix, other influences, and associated fees and levies. This will help you avoid situations where you fail to meet a statutory limit on recovering historical deficits, which could lead to you having to write off large deficits. It will also help you avoid having to make substantial changes to fee and levy levels after reviewing them.

Reporting to, and engaging with, fee and levy payers

4.32
Public organisations are expected to regularly engage with fee and levy payers and provide regular reporting.15 Historically, public organisations engaged with fee or levy payers periodically (during consultation on a review of charges). However, in recent years, expectations of public organisations’ levels and frequency of engagement and reporting have increased.16

4.33
Fee and levy payers expect more regular (such as annual or bi-annual) reporting on:

  • actual and forecast changes in the underlying costs and what is behind any changes to those costs;
  • the status of memorandum accounts (and how specific fees or levies are performing against cost-recovery objectives);
  • performance of the goods or services funded by fees and levies; and
  • future projections of costs and revenue, and service-improvement initiatives.

4.34
Public organisations are expected to have ongoing relationships with representatives of fee and levy payers. You are also expected to provide regular reporting on matters such as changes in:

  • services – for example, the need to manage new or emerging risks, facilitate increased demand, or take advantage of technology;
  • costs – for example, increased labour costs from concluded pay negotiations or increased capital costs from implementing technology;
  • cost allocation – for example, changes in the attribution of overhead components to reflect new or increased/decreased delivery of various goods or services, or changes in which activities are attributed to levies;
  • service performance – for example, increases or decreases in the number of units delivered because of changes in demand behaviour and performance against any agreed service standard; and
  • government policy – for example, to address an emerging or increasing risk.

4.35
Reporting periods should be meaningful and determined in consultation with fee and levy payer representatives. They should recognise that there is both a benefit and a cost involved in reporting.

4.36
Engagement and greater transparency enable fee and levy payers to manage their demand for goods or services. For example, if fee and levy payers can understand why there is an increase in the costs associated with services delivered to manage risks, they might be able to take steps to address those risks to avoid a fee or levy increase.

4.37
More engagement might also support a smoother fee or levy review. It might also allow reviews to be timed more appropriately, instead of simply occurring at regular intervals. Transparency will mean that businesses or fee and levy payers can anticipate reviews and plan for them in advance.

4.38
In our view, developing ongoing relationships with fee and levy payers and adopting a regular monitoring and reporting cycle should help mitigate any challenges with formal public consultation and contribute to transparency, accountability, and ongoing improvements.

13: For more on expectations for memorandum accounts, see The Treasury (2017), Guidelines for setting charges in the public sector, paragraph 6.5.

14: For more on the design of a cost-recovery regime, see The Treasury (2017), Guidelines for setting charges in the public sector, Part 6.

15: See “Developing a cost recovery proposal” at treasury.govt.nz.

16: See The Treasury (2017), Guidelines for setting charges in the public sector, section 2.5.