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August 2012 · Volume 94 · Number 7

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Costs Reasonably Borne

by Doug Ayres

[Adapted from the book Consumer Government via the Art of Full Disclosure]

This article’s title is unique to California now but some day, hopefully, it will be known and recognized nationally. The major intent of the article is to imbed the theory behind the phrase, the definitions of it, and the process for determining and dictating recognition of it, and then spread it across the budgeting, accounting, and governmental public reporting landscape of America.

Economic Underpinning

In the particular case of California's Proposition 4, through careful research and a highly specific and widely distributed Drafters' Intent1 document, little about the proposition was left to speculation. Such problems still pester the original that was titled Jarvis' Proposition 13 but not with Proposition 4, which was the "Spirit of 13" revenue limitation amendment.

The Proposition 4 definitional document was masterminded and mostly authored by Craig Stubblebine, a brilliant graduate-level professor of economics at the Claremont colleges. I had numerous targeted and personal conversations with Dr. Stubblebine and was able to secure considerable insight into the driving thought patterns, reasoning, theories, and intentions of the initiatives' authors, including responses to a lengthy list of specific questions about definitions of, extent of, and intended workings of that title phrase, costs reasonably borne. In other words, the definitive "constitutional legal intent.”

There also was opportunity to run my ideas by educator and author Peter Drucker in Pomona, California, and Professor Drucker was intrigued. Others signing the Drafter's Intent document were James P. Kennedy, director, Taxation Department of the California Chamber of Commerce; Kirk West, executive vice president, California Taxpayers' Association; and Dugald Gilles, vice president, governmental relations, California Association of Realtors. Daniel G. Nauman was counsel to the Proposition 4 drafting committee.

It is ironic that the behind-the-scenes researcher and ultimate front man for both the Jarvis and Gann organizations was Jon Coupal, son of Joe Coupal. The senior Coupal was then city manager of Portland, Maine, and the president of the International City Managers Association in 1965.

A Primer

Following is a primer of what this pioneering type of highly specific and precisely aimed citizen initiative provides. A basic requirement of the then-new approach to setting tax rates and types, fees, and determination of who pays for what was the dictated determination of costs reasonably borne for all governmental services, products, and projects within California—and still is. Here are the essentials.

The following list of governmental costs is from Proposition 4. The definitions, per Intent document (see footnote 1), could and should be applicable to all governmental jurisdictions in all 50 states. Such usage would assure true and full-cost compilations and be especially useful in making decisions relative to privatization, out-sourcing, contracting, service abandonment or tax or fee/rate increases, thus assuring taxes and other government revenues are not used to subsidize those not explicitly designated to receive such subsidy.

These full-cost definitions must be applied to both the governmental and private sides to accumulate full costs for the delivery of a service, good, or project.

A. All reasonable costs appropriate for the continuation of the service over time. (Allocated over all services, goods produced, and projects.) 2

  1. Personnel Costs:
    1. Salaries and wages.
    2. Employee benefits.
    3. Insurance and retirement.
  2. All applicable maintenance and operation costs.
  3. Overhead and administration.
  4. Start-up costs.
  5. Costs for future capacity. (Essentially ignored due to lack of definitional terminology, but still open for interpretation.)
  6. Capital replacement expenses
  7. Expansion of services costs (Again, essentially ignored due to lack of definitional terminology, but still open for interpretation.)
  8. Repayment of related bond issuances.

B. Total amount of revenue generated from the fee or charge.

  1. To be validly treated as a license, fee or charge, a governmental imposition must be exacted in exchange for a direct benefit received by the payer.3
  2. The charge must be for a service or products provided directly to the payer and not for a service or product generally enjoyed by the community at large. (Pay special attention to this proviso No. 2 and the following No. 3.1.)
  3. A tax is a general imposition on a broad cross-section of the citizenry for a general governmental purpose.

A Basic Tenet

The 69-page Drafters’ Intent document is unique in that the absolute constitutional intent of the authors is clearly provided. Personal conversations with the primary author of the booklet further expanded on and solidified the Intent author's goals and definitions for me.

The Intent treatise specifically was aimed at the legislature and the courts. It was developed to assure careful implementation and subsequent interpretation guidance for Proposition 4 implementation. That this constitutional amendment and its detailed back-up instructions were lost in the contention and mists of the California Gray Davis and Arnold Schwarzenegger era budget deficits and partisan legislative battles is unfortunate. And still is not used by the now-third Jerry Brown gubernatorial administration.

Here for the first time is a requirement to implement a business-derived, basic, and full-costing system for determining the worth of governmentally provided services, goods, and projects. But it is yet to be fully understood or implemented. Perhaps my book Consumer Government via the Art of Full Disclosure will aid in achieving that Spirit-of-13 goal, not only for California governments but also spread to other jurisdictions and other states. Such is necessary to reach decision points about what array and what level of public services are to be provided, and by whom, and at what true cost and rate. Thus "running government like a business."

More Basics

The basic idea of the total cost and revenue allocation system required by California Constitution Article XIIIB is to assure that taxes are exclusively used for services provided "the community at large" and that fee, charge, and license revenues are exclusively used to pay for "direct benefit" services, goods, and projects. Thus taxation is limited by the definitions and growth formulae contained in Article XIIIB.

Moving On

Now that full costs reasonably borne have been divulged, discussed, and analyzed in depth, the reader should understand the complexity of and necessity for using true costs to achieve full disclosure to the consumer public. And also acquire the inherent ability to address the lack of revenue sufficient to deliver the quality and breadth of public services that the public expects.


Endnotes

1Summary of Proposed Implementing Legislation and Drafters Intent with regard to Article XIIIB of the California Constitution (Proposition 4, November 6, 1979); Spirit of 13, Inc.; 1980, California Chamber of Commerce, P.O. Box 1736, Sacramento, CA 95808; Attention: Tax Department.
2All appropriations of the governmental jurisdiction must be allocated to all its services, goods produced, and projects. The division between "proceeds of taxes" and revenue from "fees and charges" are specifically enumerated as to category and treatment in the document referenced as footnote 1.
All revenues of the jurisdiction must be listed with great specificity to assure it is not a "tax" and does not exceed the "costs reasonably borne" in providing the service, producing the good, or accomplishing the project. The division between "proceeds of taxes" and revenue from "fees and charges" are specifically enumerated as to category and treatment in the document referenced as footnote 1.
3All quotations and statements hereinafter in this chapter are from the document referenced by footnote 1, unless otherwise noted.

Douglas Ayres, a retired manager and a 65-year member of ICMA who resides in Sedona, Arizona (dougsedona@esedona.net), is author of Consumer Government via the Art of Full Disclosure published in 2012. (Copies can be ordered at http://bookstore.trafford.com, $17.48 plus postage or from Douglas Ayres, 10 Thunder Road, Sedona, Arizona 86351, $25.) This article is adapted from Ayres’ book, pages 15–22.





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