It was just after midnight when Molly Kossow, a resident of the unincorporated Menlo Oaks area of Menlo Park, went to register her daughter for gymnastics and received the disappointing news that the class was completely full. Disappointed that his daughter would not be able to participate in her local city program (that she had taken before) with her school classmates, Molly's husband Jon sent a letter of inquiry to the City Council. After seeing a copy of Jon's letter to the City Council, I contacted the Kossows in an effort to jointly gather information and take a closer look at the impact of the current fee structure is having on unincorporated 94025 residents and to see if changes would benefit both city revenue and the sense of community in Menlo Park.
Currently, there are two categories of registrants for Menlo Park city programs: residents and non-residents. Non-residents pay an extra 35% per class/ program that they wish to sign up for and are also subject to a 1 week waiting period for signups, giving incorporated residents their opportunity to first fill the class. The entire 35% surcharge goes to the city. Menlo Park considers unincorporated 94025 residents to be "non-residents" because, even though they live and shop within Menlo Park, they don't pay city fees. Roughly 17% of the property taxes they pay go to San Mateo County to pay for police services, etc. Their property taxes do, however, support the Menlo Park public school system, and the gymnastics class the Kossow's were trying to get their daughter into was designed for school-aged children. To be clear, even though a portion of the property tax paid by unincorporated 94025 residents flows to Menlo Park schools, they might as well be living in San Jose when it comes to enrolling in classes or camps.
I reviewed the activity guides and talked to the community services managers of Palo Alto, Redwood City and San Carlos and was surprised to learn that the 35% surcharge Menlo Park charges is approximately double what those local cities charge non-city residents. They average 15% for their non-resident surcharge. Even more intriguing was the fact that they treat their unincorporated residents as residents when it comes to signing up for classes and do not have any waiting periods. Palo Alto even permits Stanford, California residents who have children in the Palo Alto Unified School District to have resident status when signing up for programs. While one of their parks (Foothills) is limited to Palo Alto residents, unincorporated residents with the Palo Alto zip code are permitted. Los Altos does differentiate between incorporated and unincorporated, but only levies a flat $18 surcharge for each program. When I asked the community services heads from Palo Alto, Redwood City, and San Carlos the reasons why they chose to treat the two groups of residents the same, they gave two reasons: difficulty in managing the registration process (parsing within the same zip code) and the importance in creating a sense of community within the city.
Creating a sense of community is a highly worthwhile goal for a city government. Another important goal, however, is fiscal responsibility. On the heels of a comprehensive 2008 user fee study, Menlo Park adopted a complete "cost recovery" model, which prioritizes the city's financial health. The Community Services department has put a very deliberate focus on making programs self sustainable through the application of user fees versus receiving General Fund subsidies. Their efforts have been highly successful. Today, "youth programming" (which includes youth services, gymnastics and contract classes for kids) boasts a funding source split of General Fund / charges for services ratio of -18%/118%, -22%/122%, and -8/108% respectively. (This is much higher than adult classes and aquatics, which both have ratios of 35%/65%.)
Problems With The Current Structure
While the focus on cost recovery is a fiscally responsible thing to do, there are some unintended consequences that are having negative effects.
First, the 35% surcharge plus the penalty of a delayed registration wait time for unincorporated residents makes it difficult for unincorporated 94025 families to access and afford programs. A reasonable surcharge makes sense to make up for the lack of property tax revenue, but the delayed registration requirement serves as a penalty. With no "preferential" status in other cities, unincorporated 94025 residents are subject to being locked out of popular city programs altogether. For young families on a tight budget, the exorbitant cost of a 35% surcharge makes extracurricular activities through their city financially beyond reach.
That leads to 'a masked' problem for the city; Menlo Park may actually be losing out on potential revenue from those families who are forced to participate in another city's program or to not participate at all. Redwood City's relatively new SportsHouse programs have become quite successful. In a conversation I had with one of the program owners, he indicated anecdotally that many of their participants are from unincorporated areas of Menlo Park - families who found Menlo Park's programs too costly. That's lost opportunity with revenue leaving the city.
The third problem is the negative impact on Menlo Park small business owners. While Menlo Park certainly has many popular programs with waitlists-- gymnastics chief among them-- other programs have found the 35% surcharge negatively impacts their program capacity (and therefore is a lost opportunity for city revenue). Conversations with a number of the small business owners who run programs in Menlo Park confirm that the onerous size of the city's surchargeparticularly on unincorporated residents of Menlo Park who live within the key target market for these businessesnegatively impacts their revenue potential. For example, according to Kris Quintana, owner of a large martial arts program that holds classes at the Burgess Recreation Center, maximum capacity of her program is 160 students. Their current enrollment count is 82, just 51% of capacity. In breaking down her class rosters, Quintana states, "all told, I count 45 students who told me they would not be able to continue due to price. Most of these are Los Lomitas students who I had when they were in the lower level, less expensive classes. Once they hit the higher-level classes, that 34% surcharge had a huge impact. If we added them back in, we'd have 127 students and would be running at 79% capacity. That would not only better support my business, but would mean greater revenue to the city." Quintana so believes that the 35% is hurting her business that she has recently arranged to eat the cost herself; she will be lowering the percentage and paying for it out of her own pocket. It's clearly not an ideal solution, but it's a gamble she feels she has to make until a real solution can be found.
Interestinglynot all small businesses are being required to charge the 35% surcharge. Menlo Swim and Sport non-pool related classes (e.g. triathlon, fit classes, tennis) and camps do not carry the surcharge. When asked why that small business owner was not required to have the 35% surcharge (again, all of which goes to the City), the City responded that they had explored the possibility of those classes carrying the non-resident surcharge in 2011 but decided not to require the vendor to implement them, in part, due to the "potential negative impacts to business". This confirms our conclusion that the fees are discouraging business, reducing overall revenue and thus damaging rather than productive. Regardless of that, a consistent rationale and lower fees should be applied to all businesses especially where capacity is low and vendors have indicated the surcharge is part of their low participation problem.
That takes us to the next stepcrafting a win-win solution.
Getting To A Win- Win Solution
There are multiple ways the city can approach the fee issue. If the fees were cut in half for all non-residents and applicable to all classes and camps without the unfair imposition of a registration-waiting period, participation would rise, businesses would benefit and revenues would flow into the city. Maintaining a larger surcharge for non-94025 residents, but reducing the one for unincorporated Menlo Park could similarly achieve this result. Yet another approach might be to have unincorporated residents pay an annual fee. Incorporated Menlo Park residents pay approximately $130 per year / per household into the Community Services budget that comes out of the General Fund. Unincorporated 94025 residents could pay an annual surcharge or "program fee" to make up for their portion of the city's 1.6M resident contribution to the Community Services budget. In return, they could then have "resident" status in applying and playing for classes. Not only would the city make money off that annual fee, but also it might actually incent families to take MORE classes within the city to make that investment worthwhile. That increases volume and brings greater revenue to the city.
Getting to the right solution will take more analysis. The first step will be a willingness on behalf of the city to consider the opportunities.