August 10, 2004

SUBJECT: Business License Process Improvement Project

REPORT IN BRIEF

During deliberations on the FY 2003/2004 Budget, Council directed staff to examine the Business License Tax application and renewal processes to find ways to reduce the cost of the Business License Processing fee. This report describes the various elements involved in the business licensing process and identifies the full cost of providing the services. The report discusses the process improvement project that has been completed relating to the issuance and renewal of a Business License Tax certificate in Sunnyvale, including the history of this project and the potential areas examined to reduce processing costs. Staff has examined the current process, as well as potential improvements such as renewals via the Web, changes in timing of the renewal process, and other additional use of technology. Certain changes would require an amendment to the Municipal Code. This report provides four options for changing the processing fees or the renewal cycle. Staff is recommending that the Council either: 1) retain the current annual renewal cycle and increase fees for new licenses to recover full costs of service or 2) change to a two-year renewal cycle and set fees for both new and renewal licenses to recover full costs of service.

All businesses that operate or are located within Sunnyvale are required to obtain an annual business license from the City. The Business License Tax was adopted in 1968 and the last tax increase occurred in 1976. The Business License Tax is based either on the business’ number of employees or the number of housing units available for rent by the business. The tax ranges from $10 to $300 for businesses located within Sunnyvale and from $35 to $325 for businesses located outside City limits. The lowest tax is $10 for businesses located in Sunnyvale with one to five employees and the maximum tax is $325 for businesses located outside of Sunnyvale with 146 or more employees. Our tax structure is one of the lowest in Santa Clara County. Revenue from the Business License Tax has been averaging about $240,000 each year. The Business License Tax cannot be increased without voter approval.

Currently, our Municipal Code states that the Business License Tax is an annual tax. All business licenses expire in December of every year. Renewals are usually sent out in November and licenses become delinquent if not paid on or before January 31.

At the June 10, 2003 Council meeting, the City Council approved the implementation of two new fees: a processing fee for new business license applications and a processing fee for all business license renewals. The proposed fee was set at $27.00 for new applications and $17.00 for renewals, based upon a time and motion study conducted by Finance staff during FY 2002/2003. The budget projected that approximately $157,000 in revenue from processing fees would be collected in FY 2003/2004.

Unlike the Business License Tax, which is solely for revenue purposes and cannot be increased without voter approval, the Business License Processing Fee is a charge for the service of handling an application or a renewal of a business license. As such, the fee should be calculated and reviewed each year to ensure that it is covering the cost of the service but no more.

Since last fiscal year was the first year of collecting these new fees, staff did not have a complete year of revenue history for projecting receipts for FY 2004/2005 and beyond. Based on our receipts as of March/April of 2004, we forecasted a slight reduction in receipts from these processing fees. We then used this as a basis to forecast our revenues for FY 2004/2005 and beyond. In the meantime, a number of late payments for last fiscal year were processed during April, May and June, and for FY 2003/2004 actual fee revenue is closer to our original estimates than we anticipated. Below is a table that shows budget and actual receipts for FY 2003/2004, the FY 2004/2005 budget, and our revised projections for FY 2004/2005:

Licensing Fee Revenues, Budget vs. Actual FY 2003/2004 and FY 2004/2005

	Budget FY03/04	Actual FY 03/04	FY 04/05 Original budget	FY 04/05 Revised estimates	FY 04/05 Products
New licenses	$36,990	$44,195	$27,800	$40,500	1,500
Renewals	120,700	115,935	114,021	119,000	7,000*
Total	$157,690	$160,130	$141,821	$159,500	8,500

*Approximately 8,500 renewals are sent out, with about 7,000 renewing annually

Staff believes that the revised projections will be the most accurate going forward, and we will be using these for our financial analysis of the various alternatives that we have identified.

The primary work activity for business licensing is contained in the Treasury/Cash Management Program (744), activity 744001. Major functions include issuing bills for renewals and receiving payments, processing applications for new businesses, maintaining the licensing system, and answering customer inquiries. Additional hours are expended in the Community Development Department to review business license applications for land use and zoning conformance. These hours are contained in the Development Services Program, Provide Land Use and Zoning Information Service Delivery Plan. For purposes of this process improvement project, staff assumed that the Council would wish to have the Community Development Department continue the land use and zoning review.

Below is a table showing the current budget for these activities and the full cost of providing these services:

Business Licensing Costs Budgeted FY 2004/2005

	Dollars	Hours	Products
Finance Department/Treasury
Activity including program allocation	$109,305	986	8,500 licenses
Department allocation	14,748
Total Finance Cost	$124,053
Community Development Cost	$22,123	427
Total Departmental Costs	$146,176
*Citywide overhead @ 10%	14,618
Total Costs	$160,794	1,413

*The City does not currently have an approved federal overhead cost rate. For this analysis a 10% rate is assumed. It is likely that the actual rate would be substantially higher.

Based on the hours and dollars budgeted for the business licensing activity in FY 2004/2005, the projected actual receipts from Business License Processing Fees are essentially recovering the City's full costs for providing the services.

However, the budgeted hours are not representative of the real costs of performing the licensing services. As part of the budget reduction package for FY 2003/2004, Council approved a reduction in hours for the Business License activity in the Finance Department. This amounted to a reduction of approximately 600 hours. The primary reason that the hours were reduced was because we believed we could improve the renewal process through potential improvement opportunities. While staff was able to reduce the total number of hours required for business license activities, it was not possible to reduce by the full 600 hours anticipated. For the FY 2003/2004 renewal cycle, it was necessary to use volunteers to assist with the processing of renewals in order to keep up with the workload. Approximately 200 hours of volunteer time were utilized as well as 180 management hours beyond the 40-hour workweek. Neither the volunteer hours nor the additional management hours were reflected in the costs charged to the Business License activity for FY 2003/2004.

Based on the information above, and assuming that the "free" hours from volunteers and management overtime will not be available at the levels utilized last year, we have calculated the total hours needed to perform the business license function within the Finance Department under the current system. The table below contains those calculations:

Actual Finance Department Business License Costs, By Function

Function	Dollars	Hours	Products
Bill and collect renewals	$36,774	693	8,500*
Establish and collect new businesses	20,470	493	1,500
Maintain licensing system	61,000
Answer customer inquiries	7,474	180
Dept. and program charges	23,887
Total Finance Costs	$149,605	1,366

*Approximately 8,500 renewals are sent out, with about 7,000 renewing annually

Staff has revised the total cost estimates for the business license activity on a citywide basis using this revised Finance Department information, as shown on the table below:

Revised Total Costs for Business Licensing Based on FY 2004/2005 Dollars

	Dollars	Hours	Products
Total Finance Cost	$149,605	1,366	8,500
Community Development Cost	$22,123	427
Total Departmental Costs	$171,728	1,793
*Citywide overhead @ 10%	17,173
Total Costs Citywide	$188,901

*The City does not currently have an approved federal overhead cost rate. For this analysis a 10% rate is assumed. It is likely that the actual rate would be substantially higher.

As can be seen from the information above, the projected revenue for FY 2004/2005 of $159,500 is lower than projected full citywide costs by about $29,000.

In order to determine the amount that the new and renewal Business License Processing Fees would need to be increased to recover full costs, staff analyzed the various costs included in the tables above to identify which are related to the new license process and which are attributable to the renewal process. This analysis is shown in the table below:

Business License Processing Costs, By New and Renewal

Function	New	Renewal
Bill/collect renewals		$36,774
Establish/collect new businesses	$20,470
Answer customer inquiries	2,491	2,491
Maintain licensing system*	10,765	50,235
Comm. Dev. Zoning & Land-use review	22,123
Total direct costs	$55,849	$89,500
Allocated costs	16,549	27,002
Total costs	$72,398	$116,502
Products	1,500	7,000
Cost per license	$48	$17

As can be seen above, in order to recover full costs for new licenses, it would be necessary to increase the Business License Processing Fee from $27 to $48. Renewals would remain the same at $17.

During the deliberations on the FY 2003/2004 Budget, Council inquired what process improvement activities the Finance Department had considered to reduce the processing fees and when the Finance Department would be prepared to bring recommendations back to the Council. Staff responded that they were looking at alternatives (including allowing renewals via the Web and two-year renewals to deal with the staff reduction and new processing fees) and would report back to Council before the next renewal period in January 2004. Any staff recommendations for change would be brought back to Council for consideration.

Staff came back to Council on January 13, 2004 to request more time to work on reducing the renewal processing fee and the process improvement study to evaluate potential solutions to effectively process the business license renewals in upcoming years with the reduced staff.

During FY 2003/2004 the Deputy City Manager worked with Finance Department staff to develop recommendations to improve the processes used to issue and renew business licenses. At this time, there is little or no opportunity to generate significant, additional cost savings through further work hour reductions, given the remaining work hours assigned to this activity as discussed above. Therefore, the project focused on other potential opportunities for cost reductions and/or revenue increases.

The scope of work for this process improvement project identified three objectives: to redesign the process and any sub-processes, to increase Business License Tax revenues, and to provide a Report to Council (RTC) to present findings and recommendations. Project staff completed a process map outlining the steps completed by staff in issuing an initial business license to a business either located in or operating in Sunnyvale, and the steps involved in renewing a business license. The process map identified several potential ways these processes could be improved. Some key process improvement areas that staff has focused on include: allowing renewals via the Web, changes in technology, and changes in the timing of the renewal process.

For a number of years the City utilized a very rudimentary business licensing software system that became functionally obsolete. To replace this system, the City purchased the Hinderliter, de Llamas & Associates (HdL) business licensing software package late in August 2001 and went live with this system in April 2002. HdL has no current capability to issue renewals via the Web. HdL is looking into this functionality but is just in the preliminary stage of gathering information. One of their concerns is network security since allowing renewals via the Web would involve allowing businesses to change their business information (number of employees, mailing address, etc.) as part of the renewal process. Staff does not believe that the vendor will have the web feature in a usable form in the foreseeable future. Staff also checked with the Information Technology Department who informed us that they would not have the capacity to make such a program change at this time.

The other issue is that allowing the renewal of licenses over the Web would result in an increase to operating expenses because of the Merchant processing charges associated with accepting credit card payments over the Web. Currently, our credit card processing charges average about 2.5% of the transaction. Even though allowing renewals via the Web would shift some of the workload to the business owner, it is anticipated there would not be any substantive savings since staff would still need to verify the information provided by the business owner and any changes made to the licensing information. Additionally, staff would either have to allow payment by credit card on the Web or handle the payments through a separate bill. In the former case, Business License Processing Fees would need to be increased to offset the credit card fees. The option of billing separately for the payment would not save any time or effort since the number of steps involved are the same or slightly greater.

The new business licensing system contains substantially more information than the previous system. As mentioned, the previous business licensing system was very rudimentary and difficult to navigate. A business could only be located in the system if the system was queried by entering the business name or business address exactly as it shows in the system. You could not query the system if you did not know the exact business name or address. Even directional street addresses (N. Mary, W. El Camino Real) had to be exact.

The new system allows staff to find businesses by querying on partial business name or owner name, or approximate street location. The system also contains payment history for several years, including payment date and payment amount, while the old system would overwrite any previous payment data when a new payment was posted. The HdL system also provides a breakdown of tax, penalties, and processing fees assessed.

Business information is entered on various separate screens of the application. Staff therefore explored whether a "front end" could be added to the system to allow for faster input and therefore reduce costs. Finance and Information Technology Department staff conducted a time and motion study to compare the time involved with setting up a license in the old system with that required in the new system and concluded that such a revision would not result in significant improvements to the speed of inputting data. The problem lies with the amount of data, not the speed of input. As stated above, however, the additional data is important for accurate and complete information regarding business and payment history.

Staff also looked into various alternatives to the timing of the renewal process in order to deal with the staff reduction and attempt to save costs. The current process calls for all business licenses to be renewed annually in December. This means that the Accounting Technician in Finance processes all renewals basically at the same time, with the result that there is a huge volume of work within a very short period. Initially, it seemed that scheduling renewals on a quarterly basis would spread the workload out and possibly reduce processing costs. Staff explored this option with HdL and determined that it would cost about $10,000 for programming changes to the business license application. At this time staff believes that the added programming costs outweigh the benefits for this option.

However, staff has also explored the idea of two-year renewals. There are approximately 7,000 business license renewals processed annually, based on the current 8,500 businesses in the database.

Currently, licenses are issued for one year. Allowing everyone to renew their license every two years would create the same workload problems with the reduction in staff that we currently have except that it would only occur every two years. In order for this alternative to be workable, it would be necessary to stagger the renewal schedule so that half of the licenses expire in one year and half expire the next year. Implementation of this option would require a one year transition period wherein half of the businesses would receive a one-year license for the first year only, and then would be on a two-year renewal cycle after that. The remaining half of the businesses would receive a full two-year renewal. Beginning the second year, the workload would be balanced with alternating two-year expiration periods.

For example, in December of 2004 all businesses in the database will receive a renewal form. Currently there are about 8,500 active records in the business database that would receive renewal notices. Historical experience has shown that about 82% of these are still in business (about 7,000), while about 18% represents turnover (1,500). Under the two-year renewal proposal, approximately one-half of the businesses would receive a one-year license. The other half would receive a two-year license. In December 2005, the businesses with the one-year license would now renew their license for a two-year term. The end result would be that every year, beginning in FY 2005/2006, total licenses paid would now be 5,000 instead of 8,500 (1,500 new applications and 3,500 renewals).

When the two-year cycle is fully implemented, beginning in the second year, staff would only be processing about 50% of the previous renewals and savings in hours would occur. The actual hours and dollars for all business licensing activities would then be as follows:

Costs of Business Licensing When Two-year Renewal Process Fully Implemented

Function	Dollars	Hours	Products
Bill and collect renewals	$18,387	347	*3,500
Establish/collect new businesses	20,470	493	1,500
Maintain licensing system	61,000
Answer customer inquiries	4,982	120
Dept/program charges	19,919
Total Finance Cost	$124,758		5,000
Community Development Cost	$22,123	427
Total Departmental Costs	$146,881	1,387
*Citywide overhead @ 10%	14,688
Total Costs	$161,569

*It is expected that the City would bill 4,250 renewals and collect about 3,500.

It should be noted that maintenance of the licensing system is a "fixed cost" that would not be reduced by going to a two-year cycle. Additionally, while certain of the other functions would be reduced somewhat, they would not be reduced by half. It is estimated that responding to customer inquiries would be reduced by approximately one-third since the majority of calls that are received have to do with new applications and general informational inquiries. Also, departmental and program charges include things such as space rental, computers, telephones, central clerical support, etc. which must be maintained regardless of the processing volume.

Staff has performed the same analysis to allocate the costs of the various functions to the new or renewal process, based on a two-year renewal cycle. These costs are shown on the table below:

Business License Processing Costs by New and Renewal Two-Year Renewal Cycle

Function	New	Renewal
Bill/collect renewals		$18,387
Establish/collect new businesses	$20,470
Answer customer inquiries	2,491	1,246
Maintain licensing system	18,300	42,700
Comm. Dev. Zoning & Land-use review	22,123
Total direct costs	$63,384	$62,333
Allocated costs	18,070	17,783
Total costs	$81,454	$80,116
Products	1,500	3,500
Cost per license	$54	$23

Again, in order to recover full costs of providing new or renewal processing with a two-year renewal cycle, it will be necessary to charge $54 for the new license and $23 for renewals. The fiscal impact on a new business under this option over a two-year period would be an increase of $10 ($27 + 17 = $44 vs. $54) under the current fees. However, when compared to the new full cost fees for the one year option, this is actually a savings of $11 over the two years ($48 = 17 = $65 vs. $54).

The fiscal impact on a renewal business would be a savings of $11 over a two-year time frame ($17 X 2 = $34 vs. $23). It should be noted that some businesses may object to paying up front for two years, and some may go out of business before the two years is completed and thus not enjoy the full benefits.

When implementation of this option was complete, moving to a two-year renewal cycle would provide for the "smoothing" of the workload beginning in the second year after implementation and allow for a reduction of 406 hours in the renewal process.

Based on the analyses described above, staff has identified a number of options for changing the business license process in addition to retaining the current approach. These are:

1. Increase the new Business Liscense Processing Fee from $27 to $48 to ensure that full cost of the service is recovered and maintain the existing annual renewal cycle.

2. Keep the existing fees and go to a two-year renewal cycle for business licenses.

3. Increase the existing fees for new businesses to $54 and to $23 for renewals to ensure that full cost of the service is recovered and go to a two-year renewal cycle for business licenses.

4. Keep the existing fees and maintain the annual renewal cycle.

The fiscal impact of each of these recommendations is discussed in detail in the Fiscal Impact section of this Report to Council.

Fiscal Sub-element Action Statement 7.1A.1I: Establish user charges and fees at a level closely related to the cost of providing those services.

As discussed earlier, the projected revenue for FY 2004/2005 as approved in the adopted budget for processing fees is approximately $141,000. Based on FY 2003/2004 actual receipts we are now projecting that the processing fee revenue will be approximately $160,000.

Each of the alternatives identified below assumes that the budget for the Business Licensing activity will be increased to the actual level necessary to perform the functions within service level outcomes. This would involve adding 380 hours of clerical support to the Treasury program at an additional cost of $16,413 annually. Because of vacancies this year, staff believes that resources can be reallocated within the existing Finance Department budget. It would be necessary to adjust the budget beginning in FY 2005/2006.

Alternative 1 as identified by staff would be to maintain the existing annual renewal schedule and increase the processing fees for new businesses to recover full costs of the services. This would result in the new business processing fee going from $27 to $48 and the renewal fee remaining at $17. Based on the number of new and renewal licenses that were issued in FY 2003/2004, staff has prepared the following fiscal analysis of this alternative:

Fiscal Analyis of Licensing Revenues Under Full Cost Scenario

	Revised fee	No. of licenses	Est. revenues
New	$48	1,500	$72,000
Renewal	$17	7,000	$119,000
Total			$191,000

As can be seen, this alternative would produce revenue approximately equal to our total costs as identified for the services which are $188,901.

Alternative 2 as identified by staff is to keep the existing fees and go to a two-year renewal cycle for business licenses. This alternative would result in a loss of approximately $59,500 in annual revenue to the General Fund. If Council were to select this option, expenses in another area would need to be decreased or alternative revenues found.

Alternative 3 as identified by staff is to go to a two-year renewal cycle for business licenses and increase the existing processing fees to ensure full recovery of costs. This alternative would require the new business fees to increase from $27 to $54 and the renewal fees to increase from $17 to $23.

Under this scenario, the impact to the new business over a two-year period would be that instead of paying $27 for the first year and $17 for the second, the cost would be $54 for the two years, or an increase of $10 above existing fees. This increase, however, reflects the fact that a new application is actually more expensive to process than the current fees would indicate. In fact, when compared to Alternative 1, which raises the new business application fee to $48, this option actually saves a new business $11 over the two years ($48 + $17 = $ 65 vs. $54).

Under this scenario, the renewal fee for a two-year cycle would go from $17 to $23. The impact to the business would be that instead of paying $34 in a two-year period, the business would pay $23 for a two- year license. Again, the business would enjoy an $11 savings over a two-year period under existing and proposed fees for an annual renewal cycle.

It should be noted that our small, home-based businesses may not desire to pay the larger fee for two years in spite of the overall savings. These represent the large majority of our businesses in the database.

Alternative 4 as identified by staff is to keep the existing fees and maintain the current annual renewal cycle. Revenue at the existing rate is estimated to be $159,500 for FY 2004/2005. Actual expenses on a full cost basis are estimated to be $189,000 and on a departmental direct cost basis are estimated to be $172,000. Thus, keeping the status quo would not result in complete recovery of costs.

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk’s Office.

• Approve Alternative 1 to recover full cost of service by increasing the Business License Processing Fees for new licenses from $27 to $48 and retaining the renewal fee at $17.

• Approve Alternative 2 to retain the existing fees and go to a two-year renewal cycle for business licenses.

• Approve Alternative 3 to increase the processing fees for new businesses to $54 and for renewals to $23 to recover full costs of services and go to a two-year renewal cycle for business licenses.

• Approve Alternative 4 to keep the existing Business License Processing Fees and maintain the current annual renewal cycle.

• Approve some other alternative.

It is staff's recommendation that Council consider either Alternative 1 or Alternative 3.

Prepared by:

Therese B. Balbo
Finance Manager

Prepared by:

Mary J. Bradley
Director of Finance

Approved by:

Amy Chan
City Manager