Federal User Fees: A Design Guide
Published: 2008-05-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government will need to make the most of its resources to meet the emerging challenges of the 21st century. As new priorities emerge, policymakers have demonstrated interest in user fees as a means of financing new and existing services. User fees can be designed to reduce the burden on taxpayers to finance the portions of activities that provide benefits to identifiable users above and beyond what is normally provided to the public. By charging the costs of those programs or activities to beneficiaries, user fees can also promote economic efficiency and equity. However, to achieve these goals, user fees must be well designed. GAO was asked to study how user fee design characteristics may influence the effectiveness of user fees. Specifically, GAO examined how the four key design and implementation characteristics of user fees--how fees are set, collected, used, and reviewed--may affect the economic efficiency, equity, revenue adequacy, and administrative burden of cost-based fees. GAO reviewed economic and policy literature on federal and nonfederal user fees, including prior GAO work, and used relevant case examples to illustrate different types of design elements and the impacts they may have.
section_title: What GAO Found
paragraphs: Setting user fees according to the beneficiary-pays principle can promote equity and economic efficiency. For cost-based fees, the extent to which a program provides benefits to the general public versus users and the cost of providing those benefits should, theoretically, guide how much of total program costs are paid for by user fees and the amount each user pays (see figure). Although this principle provides a useful guideline for setting fees, strictly following the principle is not always desirable or practical. The primary challenge of determining when and how to collect a fee is striking a balance between ensuring compliance and minimizing administrative costs. In some cases, the collection systems of another agency or a nonfederal entity, such as a private sector enterprise, may be leveraged, as when the airlines collect passenger inspection fees. Determining how fees will be used is a balancing act between Congressional oversight and agency flexibility. Congress gives agencies various degrees of access to collected fees. For example, fees may be dedicated to the related program or may instead be deposited to the general fund of the U.S. Treasury and not used specifically for the related program or agency. In addition, fee collections may be subject to appropriation or obligation limits, which increase opportunity for oversight but may limit agencies' ability to quickly respond to changing conditions. Agencies must substantively review their fees on a regular basis to ensure that they, Congress, and stakeholders have complete information. Reviews provide information on whether the fee rates and authorized activities are aligned with actual program costs and activities, may provide opportunities for stakeholder input, and can help promote understanding and acceptance of the fee.

section_title: Letter
paragraphs: The federal government will need to make the most of its resources to  meet the emerging challenges of the 21st century. As the nation continues  to change in fundamental ways, a wide range of needs and demands have  emerged, for example, evolving defense and homeland security programs,  increasing global interdependence, and advances in science and  technology. At the same time, our current long-term simulations of the  federal budget show ever-larger deficits. As funds become increasingly  scarce and new priorities emerge, policymakers have demonstrated  interest in user fees as a means of financing new and existing services.
Total federal user fees are in the hundreds of billions of dollars annually  and growing. According to Office of Management and Budget (OMB) data,  total fee collections increased 69 percent from $138 billion in fiscal year  1999 to $233 billion in fiscal year 2007. Even after adjusting for inflation,  fee collections grew 39 percent. During this time period, total user fee  collections varied from 6.4 to 7.6 percent of total federal spending (gross  outlays).
User fees can be designed to reduce the burden on taxpayers to finance  the portions of activities that provide benefits to identifiable users above  and beyond what is normally provided to the public. By charging the costs  of programs or activities to identifiable beneficiaries, user fees can  promote economic efficiency and equity just as prices for private goods  and services can do in a free and competitive private market. However, to  achieve these goals, user fees must be well designed. You asked us to  study how user fee design characteristics may influence the effectiveness  of user fees. Specifically, we examined how the four key design and  implementation characteristics of user fees—how fees are (1) set,   (2) collected, (3) used, and (4) reviewed—may affect the economic  efficiency, equity, revenue adequacy, and administrative burden of the  fees.
There are various ways to design user fees to encourage greater efficiency,  equity, and revenue adequacy and reduce the administrative burden on the  agency and payers of the fees. We examined fees using criteria that have  often been used to assess user fees and other government collections,  specifically taxes.
Efficiency: By requiring identifiable beneficiaries to pay for the costs of  services, user fees can simultaneously constrain demand and reveal the  value that beneficiaries place on the service. If those benefiting from a  service do not bear the full social cost of the service, they may seek to  have the government provide more of the service than is economically  efficient. User fees may also foster production efficiency by increasing  awareness of the costs of publicly provided services and therefore  increasing incentives to reduce costs where possible.
Equity: Equity means that everyone pays their fair share, but the  definition of fair share can have multiple facets, in part because  beneficiaries and users may not be the same as discussed in the section  “Setting User Fees.” Under the beneficiary-pays principle, the beneficiaries  of a service pay for the cost of providing the service from which they  benefit. Under the ability-to-pay principle, those who are more capable of  bearing the burden of fees should pay more for the service than those with  less ability to pay.
Revenue adequacy: Revenue adequacy is the extent to which the fee  collections cover the intended share of costs. It encompasses the extent to  which collections may change over time relative to the cost of the  program. For the purposes of our work, revenue adequacy also  incorporates the concept of revenue stability, which generally refers to the  degree to which short-term fluctuations in economic activity and other  factors affect the level of fee collections.
Administrative burden: This is the cost of administering the fee,  including the cost of collection and enforcement, as well as the  compliance burden (the administrative costs imposed on the payers of the  fee).
These criteria interact and are often in conflict with each other; as such,  there are tradeoffs to consider among the criteria when designing a fee.  Every fee design will have pluses and minuses, and no design will satisfy  everyone on all dimensions. The weight that different policymakers may  place on different criteria will vary, depending on how they value different  attributes. To that end, understanding the tradeoffs associated with  different aspects of a fee’s design can provide decision makers with better  information and support more robust deliberations about user fee  financing. The criteria, questions, and illustrative examples presented in  this guide are designed to aid policymakers in thinking about issues to  consider when designing new user fees and redesigning or updating  existing fees.
The questions and tradeoffs discussed in this guide relate to cost-based  user fees—including some dedicated excise taxes (i.e., those that have a  “user pays” aspect to them, such as the federal gas tax)—for which private  beneficiaries are discernable. They generally fall into two broad  categories: (1) business-type transactions, such as recreation fees for  parks and fees for grazing on federal land and (2) regulatory transactions,  such as food inspection and immigration fees and fees for regulating the  nuclear energy industry. Certain types of fees have particular design  elements, such as setting market-based fee rates or insurance premiums,  which are outside the scope of this review.
To address our objectives, we reviewed economic and policy literature on  federal and nonfederal user fees, including our prior work on user fees. To  illustrate different types of design elements and the impacts they may  have, we used relevant case examples found in the literature, including our  past reviews of user fees, in particular our recent reviews of the  Department of Homeland Security’s (DHS) U.S. Customs and Border  Protection (CBP), U.S. Army Corps of Engineers (Corps), and U.S.  Department of Agriculture (USDA) fees. We used data on total federal user  fees and gross outlays for fiscal years 1999 through 2007 presented in  OMB’s Analytical Perspectives and adjusted those figures for inflation  using a fiscal year, chain-weighted gross domestic product (GDP) price  index.
We performed our work from February 2007 through May 2008 in  Washington, D.C. and Boston, Massachusetts.
subsections: section_title: Background
paragraphs: User financing—in the form of user fees, user charges, or excise taxes on  certain products—is one approach to financing federal programs or  activities. User fees assign part or all of the costs of these programs and  activities—the cost of providing a benefit that is above and beyond what is  normally available to the general public—to readily identifiable users of  those programs and activities. Because user fees represent a charge for a  service or benefit received from a government program, payers may  expect a tight link between their payments and the cost of providing  services and have expectations about the quality of the related service.
subsections: section_title: Definition of User Fees
paragraphs: For the purposes of this guide we use the term user fees to include user  fees as well as excise taxes with a “user pays” element. Examples include  those imposed on motor fuels, tires, and heavy vehicles that accrue to the  Highway Trust Fund, from which Congress appropriates funds for federal  highway and transit programs. Similarly, Federal Aviation Administration  (FAA) activities are funded in part by excise taxes assessed on airline  tickets, aviation fuel, and certain cargo. A highway toll may also be  considered a user fee because it is related to the specific use of a  particular section of highway. The boundaries between fees and taxes are  not always clear and the tradeoffs among design elements presented in  this guide can be relevant to both.
In general, a user fee is related to some voluntary transaction or request  for government goods or services above and beyond what is normally  available to the public, such as a request that a public agency permit an  applicant to practice law or medicine or construct a house or run a  broadcast station. Taxes, on the other hand, arise from the government’s  sovereign power to raise revenue and need not be related to any specific  benefit, and payment is not optional; when Congress imposes taxes, it  need not consider benefits bestowed by the government on an individual  but may base taxation solely on an individual’s ability to pay. The Supreme  Court has ruled that a tax is “an enforced contribution to provide for the  support of government.” The legal distinction between a “fee” and a “tax”  can be complicated and depends largely on the context of the particular  assessment. Whether a particular assessment is statutorily referred to as a  tax or a fee is never legally determinative. Instead, federal courts will  examine the structure and the context of the assessment’s application.
Fees vary in the degree to which they can be considered truly voluntary  because the availability of reasonable substitutes varies. For example, to  enter certain national parks, one must pay an entrance fee. The fee is  voluntary to the extent that there are alternatives to national parks for  outdoor recreation, for example, state, county, or private parks and  recreation facilities. In contrast, people who want to operate radio stations  have no similarly close alternative and must obtain a license from the  Federal Communications Commission and pay a fee for that license.
section_title: Authority to Charge Fees
paragraphs: Agencies derive their authority to charge fees either from the Independent  Offices Appropriation Act of 1952 (IOAA) or from specific statutory  authority. IOAA provides broad authority to assess user fees or charges on  identifiable beneficiaries by administrative regulation. User fees assessed  under IOAA authority must be (1) fair and (2) based on costs to the  government, the value of the service or thing to the recipient, public policy  or interest serviced, and other relevant facts. Fees collected under this  authority are deposited in the general fund of the U.S. Treasury and are  generally not available to the agency or the activity generating the fees.  Unless otherwise authorized by law, IOAA requires that agency regulations  establishing a user fee are subject to policies prescribed by the President.  OMB provides such guidance to executive branch agencies under this  authority through Circular No. A-25. The Circular establishes federal  guidelines regarding user fees assessed under the authority of IOAA and  other statutes, including the scope and types of activities subject to user  fees and the basis upon which the fees are set. It also provides guidance  for executive branch agency implementation of fees and the disposition of  collections.
In many instances, Congress has provided specific authority to federal  agencies to assess user fees—in agency authorizing or appropriations  legislation, for example. Legislation authorizing a user fee may enact a  specified rate or amount to be assessed or may stipulate how the fee is to  be calculated, such as a formula; the method and timing of collection; and  the authorized uses of the fee collections, which may be broadly or  narrowly defined. The amount of a fee may be set to partially or fully  recover costs or may be set according to some other basis (e.g., market  value). Specific authorizing statutes may even grant the agency broad  discretion to set and revise fee rates without Congressional approval—that  is, solely through the regulatory process—based on various factors.  Specific user fee statutes should be construed consistent with IOAA and  OMB Circular No. A-25 to the extent possible as part of an overall  statutory scheme.
section_title: Setting User Fees: Determining Beneficiaries and Allocating Costs
paragraphs: Of the four components of implementing a user fee, setting the rate of the  fee is perhaps the most challenging because determining the cost of the  service is often quite complex and requires consideration of a range of  issues (see fig. 1).
subsections: section_title: To What Extent Does the Program Benefit Both the General Public and Users?
paragraphs: In theory, the extent to which a program is funded by user fees should  generally be guided by who primarily benefits from the program, though,  as we discuss later, the extent to which a program benefits users or the  general public is not usually clear cut. This is known as the beneficiary- pays principle. Under this principle, if a program primarily benefits the  general public (e.g., national defense), it should be supported by general  revenue, not user fees; if a program primarily benefits identifiable users,  such as customers of the U.S. Postal Service, it should be funded by fees;  and if a program benefits both the general public and users, it should be  funded in part by fees and in part by general revenues. As shown in figure  2, the beneficiary-pays principle can promote equity by assigning costs to  those who both use and benefit from the services. First, as shown on the  left side of figure 2, the extent to which a program provides benefits to the  general public versus users should guide the proportion of total program  costs that are paid for by general revenues versus user fees. Second, as  shown on the right side of the illustration, the cost of providing the  benefits to each user should be determined and assigned through user  fees. Figure 3 depicts selected federal programs funded according to this  principle.
Secondary beneficiaries of a program generally are not considered in this  examination. For example, consumers of new prescription drugs are  secondary beneficiaries of prescription drug reviews, which provide a  primary benefit to the drug sponsors. Similarly, fees should be charged to  the direct user, even if that payer then passes the cost of the fee on to  others. The entities that bear the burden of a fee—what economists call  the incidence of the fee—are not necessarily those who legally must pay  the fee. Fees may be passed along to others through price changes, as the  fee may change the price of one good relative to another and therefore  affect the allocation of resources. How prices change—and therefore the  incidence of the fee—depends on (1) how responsive market supply and  demand are to price changes (price elasticity) and (2) market conditions  that affect an entity’s ability to control prices. The ability of payers to  pass along the fee does not necessarily change the economic efficiency  effects of the fee but can affect its perceived equity and the transparency  of the fee.
User fees set under the beneficiary-pays principle can also enhance  economic efficiency by ensuring that resources are allocated to the most  highly valued use, as users make adjustments to their consumption of the  service based on their costs and benefits. For example, setting a Food and  Drug Administration (FDA) fee for new prescription drug applications too  high could discourage the development of new drugs. On the other hand,  setting the fee too low induces overuse of agency resources and services.  To the extent a fee is voluntary, user fees based on a program or service’s  total costs may also act as a market test and can help ensure that the  benefits of the program are at least as great as its costs.
Under the beneficiary-pays principle, the government may wish to charge  some users a lower fee or no fee to encourage certain behaviors that  provide a public benefit, such as advancing a public policy goal (e.g.,  promoting free trade). For example:    Potential profits from the development of “orphan” drugs—those that  treat rare diseases—are limited by the small size of their market, and  therefore drug companies may be reluctant to invest in them; such  drugs are exempt from the FDA prescription drug application fee to  encourage their development.  Imports from certain least developed countries are exempt from CBP’s  Merchandise Processing Fee (MPF), which both addresses their ability  to pay and may help promote their economic development. DHS  officials noted that in other cases MPF exemptions have been used as a  tool to negotiate free trade agreements; an exemption may be extended  as a concession for the reduction of import tariffs on certain U.S.  goods.
Low-income taxpayers are exempt from the $150 application fee for the  Internal Revenue Service’s Offer in Compromise (OIC) program—a  program for taxpayers unable to fully pay their tax liabilities—to make  the program more accessible and encourage participation.
Although user fees can promote one facet of equity—the beneficiary-pays  principle—they may run contrary to another facet—the ability-to-pay  principle. To the extent that user fees are a substitute for funding through  general tax revenues, they may be less progressive than taxes and  therefore shift additional burden on those less able to pay. Fees (or taxes)  that are proportionally more burdensome for low-income than high- income individuals are said to be regressive. To address this concern, the  design of a fee may consider the ability of a user to pay, for example, by  exempting low-income users or scaling fees by some measure of ability to  pay.
In certain cases user fees may not be the most equitable, efficient option  for funding a program. Examples include fees for    government programs intended to provide a benefit based on need or  merit, such as the Department of Housing and Urban Development’s  Section 8 housing voucher program (which assists low-income families,  including the elderly and the disabled);    competing sectors within an industry (e.g., modes of transportation) if  the other sectors are not subject to similar fees; and    new industries that face high initial costs and may need government  support until they can become self-sustaining.
Abrupt imposition of new or substantially increased user fees could have  unintended consequences. For example, in May 2007, U.S. Citizenship and  Immigration Services (USCIS) published a new fee schedule that raised  fees effective July 2007 for immigrant and naturalization benefit  applications by an average of 88 percent. Large numbers of applicants filed  for benefits before the increase took effect, which contributed to a surge  that exacerbated USCIS’s backlog of applications. In cases like this,  transitional measures such as grandfather clauses or phasing in increases  might help address concerns about the adverse effects of the abrupt  imposition of a fee, while implementing the beneficiary-pays principle  gradually. However, as is the case with exemptions, the benefits of  transitional measures must be balanced with the likelihood of reduced  efficiency and equity gains and increased administrative costs.  Furthermore, delaying a fee increase may also have adverse effects on an  agency’s operations. In some cases, new or increased user fees may also  cause decreases in the value of privately owned assets. We have previously  reported on how user fees can result in such capital losses, as well as ways  of determining when, how much, and to whom compensation for these  losses should be paid.
Although the beneficiary-pays principle is a useful guideline for assigning  costs, determining a program’s beneficiaries and the extent to which a  program benefits users, the general public, or both is not usually clear cut.  For example, in prior work we found that National Park Service (NPS)  staff reported that they did not want to raise federal grazing fees assessed  on ranchers, even though these fees were lower than fees charged by other  government agencies and private landowners, in part because grazing not  only benefits ranchers but also benefits parks—for example, by  controlling vegetation. In another example, USDA food safety inspections  benefit the meat and poultry industries as well as the general public:  inspections improve consumer confidence in the safety of those food  products and the companies can advertise their products as USDA  inspected, which may enhance the perceived quality. The inspections also  benefit the general public by preventing the spread of communicable  diseases carried by meat and poultry products, but it is difficult to quantify  that public health benefit and consequently the extent to which the  program should be covered by user fees versus general revenues.
Fees can be practical, equitable, and efficient only when the users can be  identified and charged for the service or program. Sometimes, however, it  may be difficult to identify specific users or to collect fees from them,  making it difficult to follow the beneficiary-pays principle. NPS, which can  identify and verify some users, also collects fees from air tour operators  that fly over certain national park units. However, in prior work we found  that because NPS could not verify air tour activity over the parks, it relied  on operators to voluntarily report their air tours and pay the required  fees. Some tour operators paid and some did not, resulting in inequities  and less-than-owed fee collections.
section_title: What Mechanisms Help Ensure the Fee Will Cover the Intended Share of Costs over Time?
paragraphs: Fee collections should be sufficient to cover the intended portion of  program costs over time. Although the costs of any particular program  may rise or fall, there is a general concern that fees may not keep pace  with increases in costs because of factors such as inflation. For example,  in recent testimony we noted that revenues to support federal highway  and transit funding are eroding in part because the federal motor fuel tax,  which is set at the fixed amount of 18.4 cents per gallon, has not been  increased since 1993. Therefore, the purchasing power of fuel tax  revenues has eroded. To address these concerns, OMB Circular No. A-25  directs agencies to set fees as percentages of some appropriate base rather  than fixed dollar amounts whenever possible. However, fees set at a  percentage rate of some value (the basis) will not remain aligned with  program costs if the value of the basis does not rise and fall in line with  changes in the program costs. For example, in recent years the Harbor  Maintenance Fee (HMF), which is assessed at a rate of 0.125 percent of the  value of commercial cargo, has resulted in substantially higher collections  than spending because the growth in the volume and value of commercial  cargo has exceeded increases in harbor maintenance spending. As a result,  HMF collections exceeded expenditures by over $506 million in fiscal year  2007. Thus, regardless of whether a fee is set at a flat dollar amount or a  percentage rate, regular reviews and updates of the fee are necessary to  ensure that the fee remains aligned with program costs (see final section  of this guide, “Reviewing User Fees: Providing Information on Costs and  Program Activities and Facilitating Stakeholder Support”).
On the other hand, fee payers and other stakeholders may be concerned  that, over time, the portion of program costs covered by general revenues  will decline. This concern may be well founded; in prior work on fee- reliant agencies, we found that increased user fee collections sometimes  appeared to have replaced appropriated funds. This substitution can be a  particular concern when new or increased fees are assessed to augment  total funding for a service or program. For example, part of the rationale  for FDA’s Prescription Drug User Fee Act (PDUFA) fees was to increase  FDA resources for—thereby decreasing the processing time of—new drug  applications. To assuage fee payers’ concerns that fees might not be used  to increase the level of an existing service—but instead simply be used as  a substitute for funding from general revenues—a fee statute may provide  a kind of maintenance of effort (MOE) requirement in terms of general  revenues funding. For example, in any year, FDA may only collect and  spend PDUFA fees when Congress has appropriated from general  revenues a certain amount specifically for FDA new drug application  reviews. Such provisions, however, can have unintended consequences.  In prior work we reported that according to FDA officials the spending  baseline for the drug review program reduced available resources for  other activities, such as reviewing over-the-counter and generic products  and inspecting medical product manufacturing facilities. Increased  reliance on fees as a source of funding may lead to a misalignment  between the beneficiaries of a program and the sources of funding for the  program and can have significant implications for agencies.
section_title: How Should Program Costs Be Determined and Assigned to Users?
paragraphs: Assigning costs requires (1) determining how much a program costs and  (2) determining how to assign program costs among different users. As the  beneficiary-pays principle is useful in guiding decisions about how  program costs are divided between the general public and users, it can  also guide how program costs are assigned among users. Basing fees on  the cost of providing the program or service from which a user benefits  enhances equity, as measured by the beneficiary-pays principle, as each  user pays for the cost of services actually used. As discussed above, fees  set following the beneficiary-pays principle also generally promote  economic efficiency, as users take into account the “price” of a service  when deciding how much of the service to consume.
subsections: section_title: How Much Does the Program Cost?
paragraphs: To set fees so that total collections cover the intended share of program  costs, a reliable accounting of total program cost is important. To obtain  such an accounting, it is necessary to determine which activities and costs  should be included and which should not. Unless the authorizing  legislation specifies costs that should be included or excluded, agencies  should follow OMB guidance. OMB Circulars No. A-25 and No. A-11  instruct agencies to include all direct and indirect costs when determining  full cost, including but not limited to personnel costs, including salaries  and benefits such as medical insurance and retirement; physical overhead;  consulting; material and supply costs; utilities; insurance; travel; rents or  imputed rents on land, buildings, and equipment; management and  supervisory costs; costs of collecting and enforcing fees; research;  establishment of standards and regulation; and imputed costs. In prior  work we found inconsistent implementation of this guidance. Some fees  designed to cover the full cost of a program include all direct and indirect  costs, but others do not. The power marketing administrations, for  example, include all direct and indirect costs—including the cost of  employee retirement benefits paid by the Office of Personnel  Management—when setting their electricity rates. On the other hand, in  recent work, we found that USDA’s Animal and Plant Health Inspection  Service (APHIS) did not include certain indirect and imputed costs when  calculating the Agricultural Quarantine Inspection (AQI) fee rate.
Fees should also be set and adjusted to cover the intended share of costs  over time, which means agencies must project and consider future  program costs. For example, in 2006 USDA’s Food Safety and Inspection  Service set fee rates through fiscal year 2008 for its meat, poultry, and egg  products overtime inspection services. The fee rates for each year  included adjustments for inflation and employee pay raises, so that future  fee collections were projected to grow with program costs. When more  than one agency implements—and therefore incurs costs related to—a fee  program, those agencies should work together to agree on a method for  estimating future costs and collections. APHIS and CBP, for example, used  different forecasting assumptions related to the AQI fees. In response to  our recent work, the agencies now use common assumptions.
Whether fee rates will be set using average cost or marginal cost is also an  important consideration when setting fees. Setting fees at a rate equal to  the marginal cost of providing the service or product to the user  maximizes economic efficiency. In part because it is often difficult to  measure marginal cost, fee rates are sometimes set based on average cost.  The AQI fees are intended to cover total program costs; to set these fees,  APHIS projects program costs for different inspection types (e.g., air  passenger, commercial aircraft, and commercial vessels) and divides each  by the total projected number of each type of payer. That is, each airline  pays the same fee per arrival to cover the costs related to inspecting  aircraft.
When marginal costs are measurable but are low relative to the fixed costs  of the program, setting the fee at marginal cost will lead to collections less  than total costs. In these cases, users may be charged more than marginal  costs or the program may be funded in part through general revenues.  One option is to create a two-part fee consisting of (1) a flat fee to cover  fixed costs and (2) a usage-based fee to cover marginal costs. For  example, the marginal cost of providing electricity (i.e., operating power  plants and maintaining transmission lines) is small compared with the  costs of building power plants and transmission lines; thus, electricity  consumers could be charged a flat monthly charge plus a charge that  would vary based on their consumption.
If a fee is to recover the costs associated with an agency program or  service or some portion thereof, it is critical that agencies record,  accumulate, and analyze timely and reliable data relating to those costs,  consistent with applicable accounting standards. Many agencies,  however, lack reliable cost data. For example, we previously reported  that DHS’s U.S. Immigrations and Customs Enforcement lacked adequate  cost data to determine the portion of costs related to international air  passenger immigration inspections, a fee-funded activity. Because  generating and maintaining reliable cost data can be expensive, agencies  must consider the costs of implementing, maintaining, and using financial  management systems when determining the level of cost detail they need.  Recognizing this, OMB Circular No. A-25 notes that program cost should  be determined or estimated from the best available records of the agency  and that new cost accounting systems need not be established solely for  this purpose. Still, unreliable cost information can skew fee-setting  decisions, so management needs reliable cost information to ensure that  user fees recover the intended share of costs. As such, each agency should  determine the appropriate level of detail for its cost accounting processes  and procedures.
section_title: How Should Program Costs Be Allocated across Users?
paragraphs: If the cost of providing a service varies for different types of users, the fee  may vary (a user-specific fee) or be set at an average rate (a systemwide  fee). All other things being equal, user-specific fees promote equity and  economic efficiency because the amount of the fee is closely aligned with  the cost of the service. Systemwide fees may be higher or lower than the  actual cost of providing a service to certain types of users. As a result  there may be cross-subsidies across users. For example, we recently  reported that FAA’s current funding structure raises concerns about equity  and efficiency because users pay more or less than the costs of the air  traffic control services they receive and therefore may lack incentives to  use the national airspace system as efficiently as possible. Because user- specific fees require agencies to track the costs of providing service to  different users, these fees are often more costly to administer than  systemwide fees. Fees charged to vessel operators for overtime  immigration inspections are user specific. The fee is only assessed when  the vessel operator or its agent requests an overtime inspection. The  amount of the fee varies depending on the number and pay grade of the  inspectors and the amount of time spent on the inspection. We recently  reported that this structure increases the fee’s administrative costs.  According to CBP estimates, the cost of processing and billing the fee was  26 percent of related collections in fiscal year 2007. In contrast, the  commercial vessel AQI fee is a systemwide fee. Vessel owners/operators  pay the $492 fee regardless of whether or not the ship is actually inspected  by an agricultural specialist and regardless of the agricultural risk posed  by the vessel. In managing these types of trade-offs between the benefits  and drawbacks of user-specific versus systemwide fees, several factors  may be important to consider.  1.  The purpose of a program: Systemwide fees may promote a policy  goal such as helping to support national systems. For example, despite  variation in the amount of maintenance dredging needed at different  ports, the HMF is imposed uniformly at all ports at which shipments  are subject to the fee in order to support a national port system. This  means that users of naturally deep draft ports that require little  dredging (e.g., Seattle) in effect subsidize users of shallower and river  ports (e.g., New Orleans). A user-specific fee may be more desirable if  the fee is seen as a way to support individual entities or locations or  when maximizing economic efficiency outweighs the desire to support  a national system through the imposition of a uniform fee.  2.  The amount of the fee: If the fee is small relative to other costs that  a user faces, it may be less important to have a user-specific fee with  different rates. For example, several ships’ agents we spoke with noted  that carriers rarely question federal vessel inspection fees, in part  because the fees are such a small part of a commercial vessel’s overall  expenses that they do not affect business decisions.  3.  The amount of cost variation among users: If there are numerous  different groups of users and a small cost variation among them, the  efficiency gains of a user-specific fee may be overwhelmed by the  added administrative costs. Conversely, if a program has a relatively  small number of user groups and the cost of providing the service to  those groups differs significantly, then user-specific fees might be both  beneficial and feasible.
Some fees include provisions for exemptions, waivers, and caps to  promote certain policy goals and these provisions affect how program  costs are allocated among users. As discussed previously, exemptions can  promote one kind of equity by factoring the users’ ability to pay into the  fee rate formula. However, as with systemwide fees, such provisions may  also increase cross-subsidies between users. Exemptions and caps may  also raise equity and efficiency concerns. For example, shipments into  certain ports are not subject to the HMF, which may make these ports less  costly to use than ports that are subject to the HMF. Shippers may have an  incentive to use a port that might otherwise not be the most cost-efficient  port to use, so the HMF as designed may create competitive advantages  and disadvantages among ports. Stakeholders at HMF ports argued that  the exemption is inequitable and can diminish a port’s ability to compete.  For example, officials at the port of Boston told us that they believe that  one importer moved its operations from Boston to the port of  Quonset/Davisville in Rhode Island where shipments are not subject to the  HMF to avoid paying the fee. Similarly, officials from ports located near  international borders reported that the HMF disadvantages them relative  to nearby foreign ports. Seattle port authority officials consider the HMF  to be a “punitive assessment” because they said it decreases Seattle’s  competitiveness against nearby Canadian ports (which do not charge the  fee). The officials noted that the port of Vancouver actively promotes itself  as not charging the HMF and said this partly explains why the port of  Vancouver is growing faster than the Seattle port.
Reliably accounting for the costs and benefits associated with such  provisions is important in order to ensure that these provisions are  achieving the intended results. In fully-fee-funded programs, if some users  are exempt from paying fees, total fee collections cannot cover total  program costs unless other users pay a higher fee to cover the costs of the  exempted users. For example, commercial and private vessels are both  subject to agricultural quarantine inspections, but private vessels are  exempt from the AQI fees. In prior work we found that the costs of these  private vessel inspections are included in the AQI fee charged to  commercial vessels. Thus commercial vessels are paying for the cost of  inspecting private vessels. An alternative to cross-subsidization would be  to pay for the costs of providing services to exempt entities through  general revenues. In this way the policy goal is attained and the general  public, rather than other users, make up the cost of exempt users or  discounted fees.
Finally, like user-specific fees, fee exemptions and caps can increase  administrative costs to the agency because the agency must carefully track  when fees are due and from whom rather than simply charging everyone.  Commercial vessel operators are generally assessed a $437 customs  inspection fee when they arrive at port, but the fee is capped at $5,955 per  calendar year. This is approximately 13.6 payments. This means that CBP  has to calculate the point at which the vessel has reached the cap and is no  longer subject to the fee. We recently reported that the cap increases  CBP’s administrative costs and the potential for errors. This issue was  particularly problematic in 2007 because a fee increase took effect on  April 1, 2007, so vessels arriving before and after that date paid two  different rates. Since the fee cap applies to payments received within a  calendar year, it was even more difficult for CBP to calculate the total  amount paid and determine if a vessel had reached the cap.
section_title: Collecting User Fees: Balancing Compliance with Administrative Costs
paragraphs: The primary challenge in determining when and how to collect a fee is  striking a balance between ensuring compliance and minimizing  administrative costs (see fig. 4).
subsections: section_title: At What Point Should the Fees Be Collected?
paragraphs: Fees can be collected (1) at the point of sale before the service is  provided, as airline passenger fees are paid when a ticket is purchased;   (2) at the point of service, as when visitors enter a national park; or   (3) after the service has been provided, for example when the agency bills  the user for a service, as with overtime vessel inspections. Collecting the  fee at the point of sale or point of service may decrease administrative  costs since billing becomes unnecessary. However, point-of-sale/point-of- service collections do not always ensure low administrative costs since  other practices can considerably complicate a point-of-sale/service  collections system. For example, commercial vessel customs inspection  fees are collected by inspectors at the time of inspection, usually in the  form of a check. We recently reported that because these collections are  not automated, they are administratively costly. When an agency collects  fees on the spot rather than billing for services (e.g., the national parks  system), the agency may have less work to do in tracking who has paid  and who has not, thus reducing administrative tasks associated with  ensuring compliance. However, internal controls for fee collections are  still necessary.
In some cases, collecting the fee at the point of service would present  challenges that make doing so impractical. For example, if CBP collected  fees from international air passengers at the airport, as is the practice in  some other countries, inspection wait times for passengers would likely  increase. For some fees, users are billed for services. This may create  additional administrative costs since agency billings for services provided  can add an extra step to the process. In some instances agencies are able  to reduce their cost of collecting fees by using electronic payments or  lockboxes or enabling users to prepay their fees, thus reducing payments  from many to perhaps one time per year. Commercial trucks entering the  United States, for example, are subject to a $5.25 AQI fee, payable upon  arrival. However, the owner or operator of the truck can prepay the AQI  fee annually and receive a truck transponder that covers all entries for the  calendar year, which enables CBP to inspect the truck and then wave the  driver through, rather than taking the time to collect the fee at each  crossing. This prepayment reduces the administrative costs for both the  agency, which may collect an annual payment instead of payments for  every inspection, and the payer, who can make one payment per year  rather than paying at each crossing.
section_title: Can Leveraging Existing Collections or Compliance Systems Decrease Administrative Costs?
paragraphs: In some cases, it makes sense for the agency to coordinate the collection  or audit function with a third party. Specifically, when an entity or  industry (e.g., shippers) is assessed multiple user fees there may be  opportunities for one agency to collect on behalf of others. For example,  HMF collections are used by the Corps for harbor operations and  maintenance costs, but the fee is collected by CBP because CBP has the  administrative structures in place to collect other fees and duties assessed  on the value of imported goods. It is less costly for the government and  payers of the fee for CBP to collect the fee as part of the formal entry  process than it would be for the Corps or another entity to establish a new  collections process. This cost saving occurs because CBP already values  cargo for the assessment of duties so there is no duplication of effort. We  recently reported that customs brokers with whom we spoke said that this  system for collecting the HMF assessed on imported goods works well, is  efficient, and imposes minimal administrative costs. It may also make  sense for agencies to coordinate fee collections when multiple federal  agencies administer similar programs. For example, the Bureau of Land  Management (BLM) manages grazing programs operated on both BLM and  Department of Energy lands. Similarly, consolidating the audit function  of related fees within one agency or department can lessen the  administrative costs of auditing them. For example, the audit function for  the customs, immigration, and AQI user fee remittances by air carriers was  consolidated under a memorandum of understanding between APHIS, the  former U.S. Customs Service, and the former Immigration and  Naturalization Service before the three related inspection functions were  consolidated under CBP. In some instances, as when CBP collects the  HMF on behalf of the Corps, the agency is compensated for its cost of  collecting the fee.
In some cases, a nonfederal entity such as a state government or private  sector enterprise has an existing infrastructure that can collect the fees.  Passenger inspection fees, for example, are collected by airlines and cruise  lines along with ticket fares; the collections are then remitted to CBP.  However, when a private party takes over the collection function, ensuring  compliance may become more complicated, contributing to administrative  costs. Agencies may use audits to monitor and enforce compliance with  the requirement to remit fees. CBP audits airlines and cruise lines to  ensure that they are collecting and remitting the inspection fees as  required. There are a range of other tools that can encourage compliance  in these situations, for example, bond requirements and rewards and  penalties. However, we have previously reported that to be effective,  rewards and penalties must meet specific criteria, that is, they must  provide optimal incentives and must correspond with performance.
section_title: Using User Fees: Balancing Congressional Oversight, Agency Flexibility, and Stakeholder Expectations
paragraphs: Congress determines to what extent an agency may access (obligate and  spend) fee collections. On the one hand, when the use of fee collections is  not dedicated to the related program or agency, Congress has greater  flexibility to make decisions about allocating resources and play an active  oversight role. While some maintain that the merits of a program, rather  than its ability to generate fees, should influence federal funding decisions,  dedicating fee collections to the program that generated the fee and giving  the agency authority to obligate and expend the fees readily and decide  how the collections will be used enhance the agency’s flexibility and  ability to respond quickly to changing conditions. Some have suggested  that agencies will have less motivation to collect and users to pay if the  fees are not credited to the activity that generated the fee. The extent to  which this is the case is unclear. Further, this may be dealt with by  engaging stakeholders—both in and out of government—to help improve  their understanding of the purpose and design of the fee. In designing a  fee, Congress has various mechanisms it can use to strike a balance  between flexibility and oversight (see fig. 5).
subsections: section_title: What Are the Statutory Controls on Agency Use of Fee Collections?
paragraphs: Agency use of fee collections is determined by Congress. If fee collections  must be annually appropriated to an agency before the agency may  obligate and expend such collections, an agency has less independence in  using them than fees that are permanently appropriated. Requiring an  appropriation increases opportunities for Congressional oversight on a  regular basis. Expenditures from the Harbor Maintenance Trust Fund  (HMTF), for example, are subject to annual appropriation, enabling  Congress to annually determine the level of federal spending on harbor  maintenance rather than automatically equating spending with total fee  collections. Although the HMTF had a balance of almost $4 billion at the  end of fiscal year 2007, the Corps obligated $798 million and $910 million  from the fund in fiscal years 2006 and 2007, respectively. The level of  spending from the HMTF reflects Congressional priorities, possibly  including reduction of the overall federal budget deficit. Some  stakeholders said, however, that there is a backlog of harbor maintenance  needs and that the misalignment between the amount of fee collections  and expenditures undermines the credibility of the fee.
Conversely, a fee may be designed to give the agency authority to use  collections without additional Congressional action; this design may  enable the agency to respond more quickly to customers or to changing  conditions. For example, the authorizing statute makes USDA  Agricultural Marketing Services (AMS) fees directly available to the  agency without further Congressional action. A 1999 USDA report on user  fees noted that because AMS’s services are voluntary and because the  agency is financed largely through user fees, AMS has a strong incentive to  develop services for which the industry is willing to pay. The report also  asserts that if AMS did not retain these fees, innovations in service  delivery would generate no financial return for the agency. Further, the  report stated that expanded agency discretion for the use of fee  collections will have the greatest effect in agencies with substantial  discretion for adjusting the types and amounts of services they provide.  Creating a structure for oversight becomes even more important when  agency discretion to use fee collections is expanded.
Permanent authority for fee collections also increases agency flexibility.  With permanent authority, funds are available until expended, which  enables agencies to carry forward unexpended collections to subsequent  years and match fee collections to average program costs over more than 1  year. Such carryovers are one way agencies can establish reserve  accounts, that is, revenue to sustain operations in the event of a sharp  downturn in collections. For programs in which fees are expected to cover  program costs and program costs do not necessarily decline with a drop in  fee collections, a reserve is important. For example, the AQI fee statute  gives APHIS permanent authority to use the collected fees and APHIS  maintains a reserve in case of emergency. According to APHIS, the reserve  is necessary because the AQI program is funded solely through user fee  collections. However, with permanent spending authority, agencies may  have less incentive to limit total collections to total costs.
Whether a fee program is designated as mandatory or discretionary within  the budget context may affect the federal budget process more broadly.  Mandatory programs are subject to “pay-as-you-go” (PAYGO) rules if they  are in effect. Under such budget rules, increases in mandatory spending  or decreases in revenue must be deficit neutral, that is, they must be offset  by a decrease in mandatory spending or an increase in revenue. For  example, if the rate of the HMF, which is classified as a mandatory  governmental receipt, were reduced and total collections decreased,  Congress would have to offset the lost revenues to comply with PAYGO  rules. This requirement has in the past led to situations in which  extensions of expiring fees are used to offset increases in unrelated  programs. Programs that are classified as discretionary are affected by  applicable discretionary spending limits under the Concurrent Budget  Resolution. Because some fees are classified as discretionary spending,  they must be considered in discretionary spending calculations.
Whether fees are designed so that collections are received directly or on a  reimbursement basis also affects agency flexibility. The former offers the  advantage of making funds immediately available to an agency, increasing  its flexibility to plan and respond to changing conditions. The AQI fee  collections are shared between CBP and APHIS, but only APHIS has  authority to use its portion of the collections directly. According to APHIS,  having the funds automatically available is useful because it facilitates the  ability to keep pace with workload demands and respond quickly to  unplanned needs. CBP’s portion of the AQI fee collections—as well as its  portion of the Immigration User Fee—is set up as a “reimbursable  account,” wherein the agency must spend other appropriations and apply  for reimbursement. This design means it takes longer for CBP to get fee  collections than for APHIS. According to CBP, this “reimbursable”  arrangement results in less flexibility and a greater administrative  burden. Similarly, issues may occur when a program has large up-front  costs (e.g., to develop an information technology system or purchase a  capital asset). Fees collected over subsequent years to cover those costs  would need to be either transferred to the U.S. Treasury’s general fund or  “saved” for future capital expenditures, depending on the statutory  authority, because they cannot be used to reimburse appropriations made  in a prior fiscal year.
section_title: How Broadly or Narrowly Are the Authorized Uses of the Fee Collections Defined?
paragraphs: How broadly or narrowly Congress defines the authorized uses for the fee  affects agency flexibility. For example, the AQI fee statute makes the fee  collections available to cover the costs of providing agricultural quarantine  inspection services and administrative costs related to the fee. The  customs inspection fees, however, are only available to reimburse  appropriations for a limited, prioritized set of activities. Congress may  also limit agency flexibility in the use of the fees by directing the agency to  use the fees at the location where the fees were collected. NPS had a now- expired pilot program under which 80 percent of fee collections were  retained and used by the park where they were collected.
Statutes that narrowly limit how fees may be used could reduce  Congress’s and an agency’s flexibility in making resource decisions and  reduce the agency’s ability to adjust to changing priorities or program  needs. The previously referenced NPS program is an example. We  reported that restricting use of the 80 percent of fee collections from the  NPS program to the sites at which they were collected created funding  imbalances. This restriction resulted in some high-revenue sites having  more revenue than needed to meet priority needs and contributed to a  backlog of priority needs at lower-revenue sites. Restrictions on use of  fees may fail to keep pace with program needs over time as activities that  support the service change. This can result in authorized activities that are  misaligned with actual service or program activities. We recently reported,  for example, that CBP officials said that since the terrorist attacks of  September 11, 2001, the merchandise processing program has a greater  focus on security than was the case in previous years. Although the  increase is understandable, it has led to a situation in which activities  associated with merchandise processing, including screening and  inspecting conveyances and inspecting vessels and containers, are not  reimbursable by the Merchandise Processing Fee (MPF), even though CBP  views these activities as part of the merchandise processing service, the  cost of which is offset by MPF collections. Recalling the earlier  discussion in this guide about public versus private benefits, if it is  determined that a portion of merchandise processing activities primarily  relates to national security—benefits that primarily accrue to the general  public—a case could also be made that the corresponding costs be funded  by general revenues.
Finally, although narrowing the authorized uses of a fee in statute may  facilitate Congressional oversight, it can also increase agency  administrative costs. Ensuring proper use of fee collections may require  collecting more detailed cost data at a greater cost to the agency. For  example, we recently reported that CBP must track the time CBP officers  spend on authorized activities for several of its inspection fees. To help  address a concern that timekeeping was taking time away from officers’  inspection duties, CBP implemented a standard process for tracking time  in early 2007. The process includes estimating the amount of time officers  conducting different functions (e.g., vessel or passenger inspections)  spend on different activities, including customs, immigration, and  agricultural quarantine inspections.
These challenges mean that statutory fee authorities that make fee  collections available for obligation and expenditure for limited purposes  may require more frequent review and updating for the authorized  purposes to remain aligned with program needs.
section_title: Reviewing User Fees: Providing Information on Costs and Program Activities and Facilitating Stakeholder Support
paragraphs: By providing program information to agencies, stakeholders, and  Congress, reviews can improve transparency, help ensure that fees remain  aligned with program costs and activities, increase awareness of the costs  of the federal program, and therefore increase incentives to reduce costs  where possible (see fig. 6). Reviews can also provide an opportunity to  solicit stakeholder input on the fee and the programs it supports.
subsections: section_title: How Is the Fee Updated?
paragraphs: Fees that are not reviewed and adjusted regularly run the risk of  undercharging or overcharging users, raising equity, efficiency, and  revenue adequacy concerns. Fee rates may be adjusted by the agency (i.e.,  by regulation) or by Congress (i.e., by legislation) depending on the statute  authorizing a fee.
When fees are adjusted by an agency through the regulatory process, fees  may be updated more frequently than fees adjusted by legislation and this  may improve the ability to keep fee collections aligned with changes in  program costs. APHIS, for example, periodically updates the AQI fees  through the regulatory process to ensure that collections are aligned with  the costs of the program. However, in past reviews stakeholders have  expressed distrust and concern about fee rates set by regulation because  agencies that retain fee collections may have incentives to artificially  inflate the costs of the user fee program. This risk may be reduced, and  tools for Congressional and stakeholder oversight enhanced, if the agency  clearly reports its methods for setting the fee, including an accounting of  program costs and the assumptions it uses to project future program costs  and fee collections.
On the other hand, when fees are specified and adjusted by legislation,  Congress has more tools with which to play an active oversight role, but  the fees may not be updated as frequently because of competing legislative  priorities and other factors. For example, a fee for registering aircraft with  FAA has been an insignificant amount since the 1960s. Fees set by statute  can, of course, be regularly adjusted. Such Congressional reviews and  updates may be triggered in several ways, including a sunset provision.  FDA prescription drug fees, for example, are authorized for 5 years at a  time. A sunset provision, however, may not guarantee that a fee will be  adjusted to reflect changes in program costs. Although the MPF includes a  sunset provision, the maximum and minimum fees, which are set in  legislation, have not been adjusted since 1995.
Congress may provide strict guidelines within which an agency may set  fees through a regulatory process that may depend on further  Congressional action. For example, the 2007 prescription drug user fee  authorizing legislation set base fee revenue amounts for fiscal years 2008  through 2012. For each year after 2008, the law permits FDA to adjust the  base fee revenue amounts to account for inflation and workload, and to  set fees annually through the regulatory process so that total projected fee  collections will approximate the revenue levels set in statute.
section_title: How Often Is the Fee Reviewed and What Information Is Included in the Review?
paragraphs: To ensure that Congress, stakeholders, and agencies have complete  information about changing program costs and whether authorized  activities align with program activities, agencies must substantively review  and report on their fees on a regular basis. When a fee’s authorizing statute  does not specify review and reporting requirements, and for fees that  derive their statutory authority from IOAA, the Chief Financial Officers  (CFO) Act of 1990 and OMB Circular No. A-25 provide for biennial fee  reviews that include recommendations about adjustments to the fees, as  appropriate.
The regulatory process is also used to provide information on fees to  Congress and stakeholders and to solicit stakeholder input. When an  agency has authority to adjust a fee through the regulatory process, it  should make substantive information about recent and projected program  costs and fee collections available to the public through notices in the  Federal Register. For example, in 2004 APHIS set the AQI fee rates for  fiscal years 2005 through 2010. It published the new fee rates, along with  descriptions of the costs of the program, projected program costs and fee  collections, and the assumptions it used to make those projections, in the  Federal Register. Similarly, USCIS notified the public of proposed fee  adjustments in the Federal Register. The notice provided information on  the program’s workload and the agency’s methodology for determining  program costs, including a list of program activities, how it accounts for  the cost of providing services to users exempt from the fees, and its  assumptions about inflation. For fees set in regulation, agencies must  solicit stakeholder input by requesting comments in the Federal Register.  This provides an opportunity for stakeholders to comment on proposed  regulatory changes—via written communication, not face-to-face  conversations. As the passenger facility charge user fee was  implemented, for example, stakeholders provided comments regarding the  fee, many of which ultimately were addressed in the final design of the fee.  Nevertheless, we previously reported that nonfederal stakeholders have  said that relying solely on notice and comment through the Federal  Register is insufficient for obtaining stakeholder input. In the past, APHIS  solicited stakeholder comments as it adjusted the AQI fee, but it updated  the fee using an interim final rule that took effect prior to the end of the  comment period. Although an interim final rule does not preclude an  agency from making changes to the final rule, stakeholders said that  APHIS did not take their comments on the AQI fees into account because  comments were not solicited before the change was implemented and  because no changes to the fee were made during final rule making. Based  on guidance from OMB, APHIS is no longer updating its fees using interim  final rules.
Whatever the means for disseminating information about the fee, if the  review is not comprehensive, it may not provide sufficient information to  assess whether a fee needs to be changed. For example, we recently  reported that the information on the MPF in CBP’s biennial fee review was  insufficient to either project fee collections or to provide assurance that  the amount of the fee was aligned with program costs. This was the case  because the review lacked projections of future MPF collections, the  effects of exemptions, and changes in import demographics. We noted that  without this information, CBP is not able to either determine if the  amount, structure, or authorized uses of the fee should be changed or  comment on the need for any changes to the fee statute. CBP’s review  noted that a detailed analysis of the current and estimated future effects of  MPF exemptions, changes in import demographics, and a reliable cost  estimate for processing merchandise are needed.
section_title: What Role Do Stakeholders Play in the Fee Reviews?
paragraphs: Transparent processes for reviewing and updating fees help assure payers  and other stakeholders that fees are set fairly and accurately and are spent  on the programs and activities Congress intended. Also, because user fees  represent a charge for a service or benefit received from a specific  government program, payers may expect a tight link between payments  and the cost of providing services and have expectations about the quality  of the related service. Effectively communicating with stakeholders  involves sharing relevant analysis and information as well as providing  opportunities for stakeholder input. In past user fee reviews, we have  reported that agencies that do not communicate with stakeholders miss  opportunities for meaningful feedback that could affect the outcome of  changes in fees and program implementation. Providing for stakeholder  input may affect their support for and acceptance of the fee, and may  contribute to improved understanding about how the fees work and what  activities they may fund. Payers may also expect to participate in decisions  about the provision of the service, including its form or quality. For  example, in prior work on a proposed user fee for FAA services, we found  that some stakeholders stated that if user fees are adopted, users should  have more input into FAA’s operations, citing the “user pays, user says”  concept. Soliciting stakeholder input is particularly important because  government is often a monopoly supplier—that is, alternatives are limited  so some fees are not fully voluntary—users cannot “vote with their  dollars” as freely as they can in a competitive private market.
Agencies can accommodate payers’ and stakeholders’ input in various  ways. The authorizing legislation of some but not all fees stipulates that  the agency solicit stakeholder input in certain forms, including an advisory  committee. The immigration inspection fees statute, for example,  directed the Attorney General to establish an advisory committee, whose  membership consists of entities subject to the fees, to advise the agency  on the performance of the inspectional services and the level of fees. As  we recently reported, the legislation that authorized the HMF did not  establish an HMF advisory committee, although it did establish an  advisory committee for a similar user-funded program for new work  construction and rehabilitation on inland waterways. PDUFA requires  FDA to work with stakeholders, including representatives from consumer,  patient, and health provider groups and the pharmaceutical and  biotechnology industries, to develop performance goals for the FDA  prescription drug review program.
It is important, however, that actions are taken to ensure that fee  programs do not become solely beholden to stakeholder interests. Where  Congress and fee payers agree on priorities, there may be no conflict  between oversight and accountability to Congress on the one hand and  accountability to fee payers on the other. Where Congressional and fee  payer priorities differ, however, the agency may be under greater pressure  to satisfy the demands of fee payers, particularly when a fee is voluntary.  For example, although the FDA performance goals may be consistent with  PDUFA’s goal to improve FDA application processing times for new  prescription drugs, a Congressional Research Service report on the fees  cited some critics as saying that giving the pharmaceutical industry a role  in setting program performance goals creates conflicts of interest and  gives the industry too much influence over FDA actions. We previously  identified several promising practices for forming and managing federal  advisory committees that could better ensure that committees are, and are  perceived as being, independent and balanced. These practices include   (1) obtaining nominations for committees from the public, (2) using  clearly defined processes to obtain and review pertinent information on  potential members regarding potential conflicts of interest and points of  view, and (3) prescreening prospective members using a structured  interview.
section_title: Concluding Observations
paragraphs: The normative principles outlined in this guide are meant to present a  framework for considering user fee design. Any user fee design embodies  trade-offs among equity, efficiency, revenue adequacy, and administrative  burden. Focusing only on the pros and cons of any single design element  could make it difficult to achieve consensus on a fee’s design. Instead,  policymakers will ultimately need to balance the relative importance they  place on each of these criteria and focus on the overall fee design.
There are always exceptions to any rule, however; as such, there will  undoubtedly be cases in which policy considerations outweigh normative  design principles. Nevertheless, the criteria, questions, and illustrative  examples presented in this guide present real issues that policymakers  must face when designing or redesigning user fees. See appendix I for a  summary of key questions to consider.
section_title: Agency Comments
paragraphs: We provided a draft of this guide to the Director of the Office of  Management and Budget and the Secretaries of Homeland Security,  Defense, and Agriculture for review. We received technical comments  from each agency, which we incorporated as appropriate.
We are sending copies of this guide to interested Congressional  committees as well as the Director of the Office of Management and  Budget and the Secretaries of Homeland Security, Defense, and  Agriculture. In addition, this guide will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this guide, please contact me  at (202) 512-9142 or irvings@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this guide. GAO staff who made major contributions to this guide are  listed in appendix II.
section_title: Appendix I: Key Questions
paragraphs: (We note that some of these questions may overlap.)
subsections: section_title: Section I: Setting User Fees
paragraphs: 1.  To what extent does the program benefit the general public and  identifiable users?  a.  Does use of the program by certain users, or for certain types of  uses, provide a public benefit, for example, by advancing a public  policy goal?  b.  What is the users’ ability to pay?  c.  To the extent that the fees are used to replace funding by general  revenues, what is the impact on the distribution of the burden of  financing the program?  d.  What would be the impact of a fee on users’ competitiveness with  others that would not be subject to the fee?  e.  Is a similar service provided by the private sector? If so:
Will private producers be subject to unfair competition if the  fee is not set to recover the full costs of the service?
Should their charges be a reference point in setting fees?  f.  For programs that have not been paid for by fees in the past, has  the value of the program been capitalized into private assets? If so:
Could transitional measures be used to address these  concerns?  2.  How will the fee be linked to the cost?  a.  Does the agency have timely and reliable cost data to link the fee  to program costs?  b.  Will the fee recover full or partial costs?  c.  Will the fee structure include exemptions or reduced fees?  d.  Will the fee be set as a percentage rate or as a fixed dollar amount?  e.  If the fee varies, will fee minimum amount, maximum amount, or  both be set?  f.  Will the fee structure be user-specific or systemwide?
Is the amount of the fee small or large relative to other costs  that the user faces?
Are there numerous different groups of users?
Is the cost variation among the different groups of users large  or small?  g.  Does the program have high fixed costs?
Is a two-part fee structure, with a flat rate plus a fee based on  usage, appropriate?  3.  How will the fee be structured to cover the intended share of program  costs over time?  a.  Are fee collections projected to change over time in relation to the  cost of the program due, for example, to inflation?  b.  To what degree will short-term fluctuations in economic activity  and other factors affect the level of fee collections?  c.  Will the fee design include a maintenance of effort requirement?
section_title: Section II: Collecting User Fees
paragraphs: 1.  What mechanisms are available to ensure payment and compliance  with requirements while minimizing administrative costs?  a.  To what extent do payment and compliance mechanisms impose  administrative costs on the agency, the payers, or both?  b.  Do rewards and penalties for compliance correspond to  performance?  2.  Is there an agency or other entity that already collects or audits fees  from the users?  a.  How will compatible policies and procedures and regular  communication be established?  b.  How does coordination affect the administrative costs of fee  collection for the agency and payers?  c.  Will collection by another entity affect compliance with fees?
section_title: Section III: Using User Fees
paragraphs: 1.  What degree of access will the agency have to collected fees?  a.  Will the fees directly support the related program or agency or be  deposited to the general fund of the U.S. Treasury?  b.  Will agency access to fees be subject to Congressional  appropriation?  c.  Will the budget execution of fee collections be through  reimbursement, or will the agency receive fee collections directly?  d.  Will the amount of spending be tied to the amount of collections?  e.  Will the fee be categorized as mandatory or discretionary?  2.  How broadly or narrowly will the activities for which fee collections  can be used be defined?
section_title: Section IV: Reviewing User Fees
paragraphs: 1.  Will the fee be updated through legislation or by agency regulation?  2.  How frequently will fees be reviewed and updated?  a.  Will legislation include a sunset provision to trigger fee updates?  b.  Will legislation direct the agency to submit regular fee reviews to  Congress, different from the biennial fee review required by the  Chief Financial Officers Act of 1990?  3.  What mechanisms will be used to gather stakeholder input?  a.  Will the agency establish an advisory committee?  b.  Will proposed changes to the fees be published for comment in the  Federal Register?  c.  What safeguards will be used to prevent the agency from becoming  beholden to fee payers/stakeholders?
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: Jacqueline M. Nowicki (Assistant Director) and Susan E.M. Etzel managed  this assignment. Jessica Nierenberg, Kathleen Padulchick, and Amy  Rosewarne made key contributions to this guide. Jay Cherlow, Denise  Fantone, Chelsa Gurkin, Terrance N. Horner, Susan Offutt, Alessandra  Rivera, and Jack Warner also provided assistance. In addition, Pedro  Briones, Carlos Diz, and Sheila Rajabiun provided legal support, and  Donna Miller developed the guide’s graphics.