June 8, 2004

SUBJECT: PROPOSED EMERGENCY 911 CALL AND RESPONSE FEE

REPORT IN BRIEF

As part of last year’s budget process, the City Council directed staff to conduct further research on several cost recovery fees to close the previously identified structural budget gap, including a fee for the provision of emergency 911 telephone services. The City provides emergency 911 call taking and response (dispatch) services for public safety emergencies through the operation of the Communication Center, at an approximate annual direct cost of $2.8 million. The California Constitution enables local governments to recoup the full cost of service through the exaction of fees (as opposed to the enactment of new taxes), without triggering the voter approval requirements of Proposition 218.

With assistance from local telephone service providers (telecom providers or phone companies), and in conjunction with several working groups comprised of city officials from most jurisdictions in Santa Clara County, staff has completed the analyses necessary to bring forward this cost recovery fee for Council consideration. The fee would be assessed upon every non-exempt telephone access line in the City, including wireless telephones, and would be collected and remitted by all telecom providers with Sunnyvale customers. The fee amount would be $1.27 per telephone access line and would recover approximately 83% of direct program costs. This fee amount would be well below the Bay Area average of $2.04.

At least four agencies in the Bay Area have adopted the fee. At least 10 others in the area are considering implementation. The Cities of Cupertino and San Jose have recently presented the fee to their Councils and are proceeding with the ordinance adoption process. Though many jurisdictions have enacted or are pursuing this fee, it is not without potential legal challenges, mainly from telecom service providers.

At this time staff recommends that Council approve the fee in concept as identified here. Should the fee be approved in concept, staff would proceed by drafting an ordinance to amend the Sunnyvale Municipal Code and return to Council for the first reading at the earliest possible date. With Council approval, the recommended items in this report, and any subsequent changes, would be incorporated into the draft ordinance. According to the major service provider, SBC, 120 days would be needed to implement the fee upon adoption of the ordinance. This is 30 days longer than the minimum CPUC requirement.

BACKGROUND

During last year’s budget process, the City Council approved approximately $13.6 million in budget reductions and approximately $1.4 million in revenue enhancements to close the then estimated $15 million structural budget imbalance. Several programmatic areas were identified where the opportunity existed to recover the full and reasonable cost of providing services to the public, including emergency 911 call and response services provided by the Department of Public Safety (See RTC 03-154, May 6, 2003). Based on very limited information regarding the number of citywide phone lines (plus an assumed exclusion of cellular phones), and an estimated fee amount that was well below current "market rate," staff initially estimated a conservative cost recovery amount of approximately $250,000. At the time of the May 6, 2003 City Council meeting, the actual Sunnyvale 911 services eligible for cost recovery were unknown, pending further research. Based on information received from telecom service providers, we now know that there are at least 183,000 phone lines in the City. In addition, staff estimates that approximately $2.8 million in direct program costs are eligible for cost recovery. This does not include indirect costs such as department or citywide overhead, although these types of expenses can arguably be recovered. At a fee amount of $1.27 per access line, it is expected that 83% of these direct costs would be recovered. This level of cost recovery ensures that fee revenues received are not applied to emergency 911 services provided to exempt subscribers, as further described below.

Generally, cities have the authority to impose cost recovery fees under Article XI, Sections 7 and 9, of the California Constitution. The emergency 911 fee would fall into a category called "user fees." Such constitutional authority to enact user fees is backed by case law where these types of cost recovery fees have withstood legal challenges. Fees are distinguished from taxes in several important respects. Most importantly, fees do not require voter approval to be enacted. Second, the amount of the fee may not exceed the estimated reasonable cost of providing a particular service or facility for which the fee is charged. Third, fee revenue can only be used for the service for which the fee was enacted. Lastly, the service or facility for which a fee is charged must bear a relationship to the person or entity paying the fee.

In 1993 the City and County of San Francisco became the first agency in California to implement a cost recovery fee for emergency 911 service provision. Initially, their fee was enacted to recover capital costs incurred to construct a new emergency communications system and facility. Subsequent amendments allowed for the recovery of operational costs (except personnel costs) and made the fee permanent. Elsewhere in the Bay Area, the County of Santa Cruz, and the Cities of Santa Cruz and Watsonville have adopted the fee, though initiative petitions will be placed on the November 2004 ballot to accept or reject the fee in Santa Cruz County and Watsonville. In Santa Clara County, the cities of San Jose and Cupertino have presented the fee to their councils for implementation. It is expected that several other cities in the County will soon be moving forward, including Los Gatos and Mountain View. In April 2004, the Santa Clara County Board of Supervisors voted not to adopt such a fee for their unincorporated areas. A number of other cities across the State are considering fee implementation as well.

In an effort to coordinate on a regional basis to minimize redundancies and adopt consistent codes, many cities in Santa Clara County including Sunnyvale are participating in joint meetings sponsored by the Assistant City Manager’s Association. Similar groups have been established by Attorneys, Finance Officers and Police Chiefs within the County. In addition, a meeting will be scheduled in the near future with SBC, wireless telecom providers and city representatives to discuss the potential issues surrounding fee implementation.

In December 2003 Sunnyvale staff held an initial meeting with SBC officials to discuss the fee implementation process, and to obtain the information necessary to calculate the fee amount, including SBC’s number of access lines and exempt accounts. Once a decision is made to move forward with implementation, staff will again meet with SBC to discuss the provisions of the draft ordinance.

EXISTING POLICY

Fiscal Management Sub-Element Policy 7.1A.1 Revenue Base: Maintain a diversified and stable revenue base for the City; Action statements 7.1A.1i Establish user charges and fees at a level closely related to the cost of providing those services.

DISCUSSION

The Sunnyvale Department of Public Safety Communication Center handles all 911 calls for emergency police, fire, and medical services for the City of Sunnyvale at an annual direct program cost of $2.8 million. The dispatchers provide a vital link between the caller and the officers in the field. As the Communication Center provides services directly to the community, the cost of such service is eligible for cost recovery through imposition of the Emergency 911 Call and Response Fee.

The proposed fee would be assessed as a flat monthly amount on every land-based and cellular non-exempt telephone line with a Sunnyvale billing address, based on the availability of the 911 service to every phone user. This includes single access lines and multiple access lines known as "trunk lines," "super-trunk lines" and/or "hi-capacity lines." Based on information received from the California Public Utilities Commission (CPUC), trunk lines carry between 5-10 single access lines, or an average of 7.5. Accordingly, these bundled lines would be charged a monthly fee 7.5 times that of a single access line. This averaged factor is consistent with the number used by other jurisdictions who have implemented or will be implementing the fee. Information provided by telecom providers suggests that hi-capacity and super-trunk line consist of at least 18 separate trunk lines. Accordingly, these bundled lines would be charged a monthly fee 135 times that of a single access line, or 18 times 7.5. This proportionality approach is consistent with the fee structure of the City and County of San Francisco and other jurisdictions.

Though there is no legal requirement that mandates exemptions from governmental fees for certain telephone service subscribers, it is recommended that the following exemptions be granted from the fee: Universal Lifeline service customers, payphones, non-profit tax-exempt hospitals, and non-profit tax-exempt schools. Government agencies would be exempt as well. For Lifeline customers, who are exempt from the State 911 surcharge, granting an exemption would be in line with the rationale for establishing the lifeline service, e.g., providing discounted rates to low income and elderly customers to ensure phone access during emergencies.

It is currently estimated that 17.4% of all phone lines in the City would be exempt from the fee. Granting exemptions to these groups would reduce annual fee revenue by approximately $485,000. To the extent the Council wishes to add or delete exemptions, the per access line charge would not be impacted. Rather, the amount of fee revenue received would decrease or increase accordingly.

While such exemptions would be appropriate public policy, and consistent with the approach taken by other jurisdictions, it should be noted that the City must absorb the proportionate share of operating costs devoted to exempt users. In other words, the fee cannot be increased for non-exempt users to replace the revenue lost by granting exemptions to certain groups. This provision would be incorporated into the fee ordinance.

To the extent there are businesses in Sunnyvale that have multiple hi-capacity lines, the potential exists for those companies to incur substantial annual fee costs over and above their proportional use of the 911 system. Therefore, it is recommended that an annual fee cap be implemented and set at $25,000 per individual subscriber on a "per account, per location" basis. Although it is known that there are 66 super-trunk lines in the City, the number of accounts impacted is unknown. (For reference, San Jose has recommended an initial fee cap of $35,000 based on the approach used by San Francisco, but will need to adjust the amount once a new system is installed that will be able to determine call frequencies of different locations.)

A complicating factor is that phone companies may not be able to administer a cap due to billing system limitations. If a cap is imposed, City staff would likely have to administer it through a rebate program or some other means. Staff will continue to work with phone service providers to clarify this issue so that it can be incorporated into the ordinance.

Article XI, section 7 of the California Constitution enables local governments to recoup the "full" cost of providing a facility or service, including indirect costs. As staff gathered information from other jurisdictions implementing the fee, it became apparent that each agency has different cost recovery needs. Some cities are seeking to recover operational costs, including maintenance, personnel, training and equipment replacement expenses; some are seeking to recoup capital costs associated with constructing new communications facilities. Some cities are seeking to recover both capital and operating costs. It follows that different methodologies are being employed to calculate costs eligible for recovery, as well as the percentage of costs that will be recovered.

While it is the City’s past policy and practice to set fees at a level that obtains full cost recovery, including indirect costs, staff recommends a narrower approach based on direct service provision and support. These costs are comprised of 100% of the salary and benefits of all public safety dispatch staff, and approximately 24% of the Communications Manager’s salary and benefits for a total budgeted amount of $2,057,001 for FY 2004/2005. Also included are internal service charges and applications support for Communications Center equipment, and internal service charges for facilities (based on building square footage), for a total of $729,122. The largest telephone provider (SBC) has also requested a small administrative fee equaling $3,483. Therefore the total eligible annual recovery costs equate to $2,789,606. Service costs that have been excluded from cost recovery calculations are Department and City overhead, and ongoing training and support activities such as electronic/audio reports and data requests. With the removal of the total annual exempt costs of $485,392, the City would recover up to $2,304,215 annually. Attachment A details the cost calculations.

According to data staff received from the various telephone service providers, there are approximately 112,036 single access lines and 2,622 trunk/super-trunk lines. Staff has been unable to confirm the number of cellular phones with the wireless service providers, and has used an estimate of 43,333 based on the assumption that one-third of the population has cellular phones.

By converting the trunk and super-trunk lines to single access lines (using the averages previously mentioned), staff determined an estimated total of 183,449 single access lines in the City. Next, the total number of lines was divided into the eligible cost recovery amount of $2,789,606, and then divided by 12 months to obtain the single line fee amount of $1.27 (Attachment B). Each trunk was counted as 7.5 access lines and each super-trunk or hi-capacity line was counted as 18 trunk lines. As can be seen in the table below, the proposed fee per single access line is approximately 62% less than the Bay Area average of cities who have adopted or are in the process of adopting the fee.

Fee Comparisons
Jurisdiction	Single Line Fee	Trunk-Line Fee
San Francisco	$1.75	$13.13
San Jose	$1.75	$13.13
County of Santa Cruz	$1.47	$11.03
City of Santa Cruz	$3.49	$26.16
Watsonville*	$2.00	$18.00
Cupertino	$1.80	$13.50
Average of other cities:	$2.04	$15.83
Sunnyvale	$1.26	$9.53

*Watsonville is considering a per residence charge and a cap of $18.00 per super-trunk line.

As has been indicated by the service providers, the number of access lines fluctuates, sometimes substantially, on a regular basis. This would necessitate periodic review to ensure the proper number is being used. Regular review would also be undertaken to calculate eligible recovery costs. It is recommended that this review be conducted annually and provision be made to include the proposed fee in the Master Fee Schedule to better facilitate the periodic review process.

As indicated earlier, there has been some opposition to the fee, mainly from the telephone service providers. The County of Santa Clara brought a proposal for an Emergency 911 fee of $2.21 to its Board of Supervisors in April. The Board elected not to implement the fee. One of the main arguments presented to the Board by SBC was that the County’s proposed fee excluded cellular phones which SBC viewed as unfair and prejudicial to their business.

Landline telecom service providers initially argued that the fee would put them at a competitive disadvantage if cellular phones were not included in fee calculations. More recently, providers have argued that the fee is a tax subject to the voter approval requirements of Proposition 218. The City Attorney believes that the fee meets all the requirements of a "user fee" as allowed under applicable State law. The larger providers have also argued that cities are unlikely to pursue fee enactment with the various smaller companies that provide telecom services. Should Council adopt the fee, all telecom providers with Sunnyvale customers will be required to collect and remit the fee.

To counter the fairness argument, staff recommends inclusion of cellular phones at the outset, even though many wireless calls are currently routed to Sunnyvale by the California Highway Patrol (CHP). While some cellular callers are initially directed to the CHP, the call is immediately transferred to the Sunnyvale Communication Center for service once the caller’s location has been determined. As the call is still funneled through the 911 system to the Sunnyvale Communication Center for service, staff is confident that inclusion of cellular telephone service in the assessment of the fee is appropriate. To date, two major cellular providers are routed directly to the Sunnyvale Communication Center, with others scheduled for direct routing by the end of June 2004. Though federal law mandates that all cellular phone providers link callers directly to the Public Safety Answer Point (PSAP) appropriate for the location of the caller, due to the complexity and expense of the technology the deadline for compliance has been continually pushed out. The City of Sunnyvale is ready to accept direct linkage of cellular 911 calls whenever the outstanding providers are able to master the technology.

As a final note, it is also recommended that provision be made in the ordinance to apply the fee to emerging technologies such as Voice over Internet Protocol (VoIP), to the extent such technologies will at some point be utilized to access the emergency 911 system. As the telecom industry continues to rapidly evolve, it would be prudent to address the future inclusion of new technologies to the extent they are expected to replace traditional means of placing phone calls.

FISCAL IMPACT

Given the 120-day implementation requirement, the earliest effective date of the proposed fee would be November or December 2004. It is estimated that fee revenues could total approximately $1.3 million in FY 2004/2005 if the fee is fully implemented by November 2004, and roughly $2.3 million annually thereafter, unless the cost recovery methodology and/or the exemption methodology is modified. Revenues received from the fee would be deposited in a special fund to be used exclusively for the eligible cost recovery amount.

The actual fee collection rate will vary as the number of access lines fluctuates constantly as does the exemption percentage estimates. The fee will be re-calculated periodically to allow for changes in number of access lines and service provision costs.

The City will carry the portion of service provision costs attributable to exempt customers. Based on the current data, it is estimated the amount of exempt costs equals $485,000.

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. Staff also met with SBC representatives in December 2003.

ALTERNATIVES

1. Council approve the fee in concept as proposed and direct staff to return with the draft ordinance to amend the Sunnyvale Municipal Code.

2. Council approve the fee in concept as proposed, with modifications, and direct staff to return with the draft ordinance, as modified, to amend the Sunnyvale Municipal Code.

3. Council does not approve the fee in concept.

RECOMMENDATION

Staff recommends the Council approve Alternative #1.

Prepared by:

Peter Gonda
Sr. Management Analyst, Department of Finance

Reviewed by:

Mary J. Bradley
Director, Department of Finance

Reviewed by:

Robert Bradshaw
Acting Director, Department of Public Safety

Approved by:

Amy Chan
City Manager


Attachments
A. Eligible Cost Calculations (.pdf format)
B. Fee Calculations (.pdf format)