Many federal agencies charge fees for their services: applying for a patent, conducting inspections at ports of entry, and getting a passport are just a few examples. These fees are an important source of revenue for agencies, but there is often confusion about how to set and update fees. Some are crying out for the book, Fee Setting for Dummies. Here’s our version.
User Fee requirements apply to any activity involving the provision of a service or thing of value to non-federal recipients for which a fee, royalty, rent, or other charge is imposed. Setting the appropriate fee is primarily based on an analysis of the historical costs of specific services, but agencies also need to consider expected future costs, anticipated workload changes, and the program’s policy objectives. Key factors to understand when establishing or updating user fees include:
- Fee Authority: Some fee programs obtain the authority to collect fees from legislative authorization specific to their program. The authorization language can specify the services for which fees will be charged, costs to be included or excluded, and the users to be charged. Other fees are established by federal agencies (subject to approval by the Office of Management and Budget) using general fee setting authority under the Independent Offices Appropriation Act.
- Use of Fee Revenue: Depending on the specific fee authority, some fee programs retain some or all of their fee collections to fund the associated program/services. However, fees established under the Independent Offices Appropriation Act generally cannot be retained by the program or agency; they must be sent to the United States Treasury.
- Reserve: A reserve can provide funding stability to cover fluctuations in revenue and costs, and to pay for future capital investments. Authority for a reserve is typically established in the law that authorizes the fee program. In addition, the appropriate size of the reserve can vary by program, depending on factors such as the degree of fluctuation in revenues and costs, size of the program, and need for capital investment.
Office of Management and Budget Circular A-25, User Charges, is the primary source of requirements for fee setting in the Federal Government. While Circular A-25 is intended to apply to fees established under the Independent Offices Appropriation Act, it also applies to statutory fee authority, as long as the Circular A-25 requirements do not conflict with the statutory authority. Where there is a conflict, the statutory authority takes precedence.
While Circular A-25 contains a number of provisions, we focus on the following key aspects:
- Special Benefit: A fee can be charged where an agency identifies a “special benefit.” As stated in Circular A-25, “When a service (or privilege) provides special benefits to an identifiable recipient beyond those that accrue to the general public, a charge will be imposed (to recover the full cost to the Federal Government for providing the special benefit, or the market price).”
- Full Cost: Circular A-25 states “user charges will be sufficient to recover the full cost to the Federal Government,” and provides a detailed description of direct and indirect costs that are appropriate for determining full cost. However, Circular A-25 does allow exceptions to the full cost requirement for agencies to achieve specific policy goals. For example, the fee for filing a patent application is less than the cost to conduct the associated processing, search and examination costs. This is done to encourage filing of patents, which is seen as an important factor for encouraging innovation that supports a vibrant economy.
- Biennial Fee Review: Circular A-25 states agencies should review their fees every two years. This requirement is also stated in the Chief Financial Officers Act of 1990.
In addition to the requirements in statute and Circular A-25, the Government Accountability Office (GAO) provides guidance to federal agencies regarding the general philosophy, requirements, and considerations involved in establishing fees. This guidance is included in the GAO report, Federal User Fees: A Design Guide (Report Number GAO-08-386SP).
Based on our experience at Grant Thornton, federal agencies encounter the following issues:
- An extended period of time between fee reviews, which conflicts with Circular A-25 guidance and can have a significant, negative impact on revenue.
- Lack of transparency for stakeholders, which limits the understanding of the methodology and information used to set fees.
- Identifying all relevant costs to be included to achieve full cost, including expected future costs and imputed costs.
- For those fee programs with authority to have a reserve, the fees should be set to establish and maintain the appropriate reserve level.
The federal discretionary budget (spending outside of mandatory entitlement programs) has come under increasing scrutiny and pressure over the last several years, putting severe pressure on many agencies’ budgets. Agencies and programs with authority to get reimbursement for their services through user fees have an opportunity to side-step those budget pressures and strengthen their capacity to serve their customers. Only by taking advantage of that opportunity will agency leaders ensure they have sufficient resources to maximize program performance and invest in innovative new services and products.