Audit highlights ‘misalignment’ and ‘deficiencies’ in Vancouver’s permitting program cost recovery model

A report on Vancouver’s permitting program cost recovery model was released Thursday, highlighting a “misalignment” that, by the auditor’s analysis, prevented the city from accurately determining the level of cost recovery over a 77-month period.

Spearheaded by the city’s auditor general Mike Macdonnel, four city departments were included in the report, which aimed to determine whether the recovery model was designed and applied to ensure costs of services were recovered and projected reserve fund balances were sufficient to stabilize future operations.

Covering a period from January 2016 to June 2022, the audit did not examine permit processing times, whether the correct permitting fees were charged and collected, the efficacy of the city’s current transition from cash to earned revenue financial statement reporting, or other non-development and building-related permits for which the city may collect fees.

The city’s approach to setting permit fees “generally complied” with statutory and legal requirements and the cost recovery model included relevant cost components, as per the report. However, it found the model was not designed and used to ensure the full cost of services was recovered.

The report notes the city set permit fees based on misaligned cost and revenue components until 2021 which, as a result, prevented it from accurately determining the level of cost recovery for the permitting program during the audit period.

The city estimated a program deficit of $11.9 million for 2021.

The auditor highlights improvements in 2022, further noting the city will still have to use funding from sources outside the permit fees to complete processing of outstanding applications.

The cost to complete outstanding permits could not be reliably estimated because of “deficiencies” in the city’s data.

“The city tried to manage the program so that all costs were recovered, but due to data deficiencies it didn’t achieve this objective,” Macdonnel said in a statement.

“As a result, revenues from other sources will be needed to pay for the completion of outstanding permit applications. We also found unplanned cross-subsidization between permit categories – something we believe should be managed proactively and transparently.”

Cross-subsidization occurs where fees collected for one category of permit exceed the cost of processing those permits, effectively subsidizing the cost of other permit categories where fees are less than the cost of processing.

The report includes eight recommendations, which go as follows:

• The city should annually review and document its fees for subdivision permits and rezoning applications against the actual cost of processing those applications to ensure the fees charged do not exceed the average cost of processing similar applications.

• The city should establish and document clear, detailed guidance for the permitting program.

• The city should accurately calculate the projected and actual level of permit fee cost recovery using earned revenues and adjust permit fees accordingly to ensure it meets its full cost recovery objective.

• The city should annually calculate the projected cost of unprocessed permit applications and compare it to the deferred revenue balance.

• The city should develop guidance on the appropriate target level of cost recovery for each permit category at the permit by-law level. Then, the city should assess the level of cost recovery for each permit category against the target and recommend city council adjust fees which would – by the auditor’s analysis – improve the city’s fee-setting ability and support public transparency.

• The city should publish additional information about the permitting program including the reserve opening balance, net surplus/deficit, closing balance for the year, and levels and sources of subsidization.

• The city should enhance the cost and revenue components of its cost recovery model to enable more effective analysis by adding a breakdown of costs by factors such as development type, size, or complexity that aligns with the defined permit categories as well as revenue projections that consider future economic factors, the city’s development plans, and industry trends.

• The city should develop cost and revenue projections that extend beyond one year in order to support analysis of the permitting program’s long-term self-sufficiency.

“I would like to express my gratitude to the auditor general's office for their high level of professionalism and patience throughout the audit process,” said the city’s chief financial officer, Patrice Impey.

“The audit process was executed with inclusiveness, transparency, and was well received by all the impacted staff teams.”

The office of the auditor general was established by city council in late 2020 with the self-proclaimed mandate of assisting council in holding itself and city administrators accountable for the quality of stewardship over public funds, and for achievement of value for money in city operations.

As for Macdonnel, he made $252,518 in the first full year at the newly-minted role, putting him in the top 15 wage earners employed by the city.

Immediately prior to his current role as auditor general, Macdonnel was board chair of the United Way of Southern Vancouver Island.