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Home My WebLink About2021-06-08; City Council; ; Credit Card Fees Meeting Date: June 8, 2021 To: Mayor and City Council From: Scott Chadwick, City Manager Staff Contact: Cheryl Gerhardt, Finance Manager cheryl.gerhardt@carlsbadca.gov, 760-602-2468 Subject: Credit Card Fees District: All Recommended Action • Receive a report regarding the considerations of implementing a fee to recover credit card transaction costs • Schedule a public hearing on adding a 2% credit card fee for transient occupancy tax, business license tax and development fee payments to the city’s Master Fee Schedule for 3 p.m. on July 13, 2021 Executive Summary On March 16, 2021, the City Council directed staff to consider and present options for potentially implementing an administrative fee for credit card transaction costs. This report provides the council with such options. Staff recommend the option under which the city would charge a 2% credit card fee on all transient occupancy tax, business license and development fee payments made by credit card, for the reasons detailed below. If the council wishes to charge such a fee, it would first need to schedule a public hearing on the matter under California Government Code Sections 66016-66019. A resolution scheduling a public hearing to consider the recommended option is included as Exhibit 1. Discussion As a part of an internal audit on the transient occupancy tax, or TOT, the city’s internal auditor recommended staff consider options for potentially implementing an administrative fee for credit card transactions and present them to the City Council for its consideration. The internal auditor’s report had identified that: • The city does not currently charge an administrative fee to anyone making payments to the city by credit card, including TOT payments, although it has the authority to do so.1 1 Government Code 6159 permits the city to "impose a fee for the use of a credit or debit card or electronic funds transfer, not to exceed the costs incurred by the agency or agent in providing for payment by credit or debit card or electronic funds transfer." June 8, 2021 Item #14 Page 1 of 7 The city pays a fee to process all credit card payments, including those by hotels that choose to pay TOT via credit card. • The city regularly receives TOT payments by credit card for some hotels and a number of short-term vacation rental properties. • The internal auditor reviewed bank records to estimate how much the city is paying to process credit card payments for TOT and found the city had paid an average effective fee of 2.35% of gross dollar value of credit card payments processed at the Faraday Center in calendar year 2020. The city also accepts credit cards for payment for a broad range of services, including building permits, recreation class registration, utility bills and the business license tax. In calendar year 2020, the City of Carlsbad collected $20.2 million in payments for various fees via credit card and paid approximately $328,000 in transaction and interchange fees. Value of transactions paid by credit card About 59% of the dollar value of all credit card transactions goes for utility bills, for water, waste removal and wastewater service. The next largest volume is the 28% for transactions paid to the city cashier, which includes TOT payments and other fees, such as parking citations, or any other in-person payment. Recreation fees represent 8% of credit card payments, while business license tax and permit fees amount to 5%. Most of the dollar value that is paid in person is for TOT. Other agency comparisons A survey of other agencies shows that comparable cities do not charge credit card fees or, if they do, credit card fees are only charged for certain transaction types. Many of the cities that do charge a credit card convenience fee said they are passing on surcharges from credit card networks. Staff surveyed nine comparable cities in the region and elsewhere in Southern California, asking whether they collected fees for utility payments, TOT, developer fees, business license fees and recreation programs. We found: • The cities of Encinitas, San Marcos, Huntington Beach, Long Beach and Pasadena do not charge any fees for the use of credit cards. • Oceanside and Escondido also do not collect credit card fees for utility, TOT, developer or business license fee payments, but they impose credit fee surcharges for recreation programs. • Oceanside also has a $25,000 limit on credit card transactions. • Poway charges a fee of $4.95 per credit card transaction for utility payments, but limits transactions to $400. Business license fees can be paid via credit card and are not charged a transaction fee. Poway does not accept credit card payments for TOT and developer fees. Recreation programs can be paid for with a credit card and a $1.50 transaction fee is charged. Utility, 59% Cashier, 28% Parks & Rec., 8% Bus lic. tax & permits, 5% June 8, 2021 Item #14 Page 2 of 7 • Twentynine Palms had the broadest fee structure of the cities surveyed. It charges: o A 3% fee on all utility, TOT and developer fee credit card payments over $5,000 o A 2.5%-3% on business license payments made via credit card Utility bills The city’s utility billing system accepts online payments via credit cards, as well as autopayments from credit cards. For this volume of transactions, it’s preferred to offer many payment options to increase collections. Many customers prefer paying by credit card for a variety of reasons. Credit card fees are included as a cost of service when the city periodically performs a cost of service study. Each utility rate is established to fully recover the cost of providing the service; therefore, the cost of credit card fees is already passed to the customers. TOT, business license tax and development fees TOT, business license tax and development fees are paid monthly, annually and as needed by the respective business or resident and can be large in value. The city’s General Fund absorbs and subsidizes the banking fee for these fees paid by credit card. In the past, the city has limited credit card transactions to a maximum of $5,000 to discourage large transactions from being paid by credit card. In recent years this limit was eliminated to encourage convenience and online transactions. Library and recreational fees Like utility fees, recreation and library fees are comprised of many small dollar value transactions. The city’s libraries offer many payment forms, such as cash and credit cards, and have never charged a credit card fee. Conversely, the Parks & Recreation Department’s online registration system, which automates the registration process, accepts only credit card payments. Other payment options are accepted when transactions occur onsite. The department considered imposing an additional and separately charged credit card fee, but ultimately the separate charge was not added after discussing with other agencies. Options The city is allowed to subsidize the credit card transaction fees for its customers or recover its costs for these fees as long as it is separately stated. The pros and cons of charging an additional credit card fee, and of recovering the cost, varies across each transaction type: utility, TOT, business license and development, and library and recreation. Staff provide the following options for recovering the cost of credit card transaction fees for the council’s consideration: 1. Do not change the city’s current method of cost recovery for credit card transaction fees. Pros • Encourages the use of online bill payment, which reduces staff time to process checks and cash payments as well as return payments • Increases collections by offering a variety of payment options Cons • The General Fund absorbs the cost of credit card fees on General Fund-related transactions June 8, 2021 Item #14 Page 3 of 7 2. Recover the city’s cost of credit card transaction fees for utility services. Pros • Although each transaction is individually insignificant because transaction values are small, those customers paying with a credit card benefit more than those paying by another method because credit card fees are included in the city’s cost of service study Cons • May lead to an increase in overdue accounts due to a change and the inconvenience of not being able to pay with a credit card without a fee • May lead to more customers paying with checks, which require more staff time to process 3. Recover the city’s cost of credit card transaction fees for TOT, business license fee and development fee payments. Pros • The current subsidy provided could be used for other city needs Cons • The additional cost may discourage payment via credit card and may be costlier or less convenient for some fee payers 4. Recover the city’s cost of credit card transaction fees for library and recreation fees Pros • The subsidy currently provided could be used for other city needs, although many of these services are already provided at a subsidized level and the costs are minimal due to low transaction value Cons • The fee may discourage patrons • May lead to more customers paying with another method, which is less secure and may require more staff time to process If the City Council desires to recover a portion of the cost to the city for credit card transaction fees, there are a multitude of methods to recover the city’s cost: A. Set the credit card transaction fee recovery rate as a flat amount. Pros • Cost would be transparent to customers Cons • Some customers may incur fees in excess of the cost to the city, which is not allowed under state law B. Set the credit card transaction fee recovery rate as a percentage of the transaction value. Pros • Cost would be transparent to customers, although slightly more difficult to calculate • Cost recovery would more closely align with the cost to the customer Cons • Customers desiring to pay for large transactions with a credit card may be discouraged June 8, 2021 Item #14 Page 4 of 7 If this method is desired by the City Council, staff recommend setting the recovery rate at 2% of the transaction value because the fees vary by credit card type, and 2% limits the risk of overcharging individual customers. Staff recommends Option 3.B, to charge a 2% credit card fee on all TOT, business license tax and development fee payments. This would allow the city to recover credit card fees on taxes and development fees and is feasible to implement. Fiscal Analysis Depending on which option or options, the City Council chooses, the fiscal impact to the General Fund ranges from $0 to approximately $130,000. Next Steps If the City Council wishes to consider adopting the credit card fee as recommended by staff and approves the resolution in Exhibit 1, a public hearing on the matter will be held at the City Council meeting on July 13, 2021. If the City Council adopts the fee, it will go into effect no sooner than sixty days after adoption. Environmental Evaluation (CEQA) In keeping with California Public Resources Code Section 21065, this action does not constitute a “project” within the meaning of the California Environmental Quality Act in that it has no potential to cause either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, and therefore does not require environmental review. Public Notification and Outreach Public notice of this item was posted in accordance with the Ralph M. Brown Act and it was available for public viewing and review at least 72 hours prior to the scheduled meeting date. Exhibits 1. City Council resolution June 8, 2021 Item #14 Page 5 of 7 RESOLUTION NO. 2021-140 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD, CALIFORNIA, SETTING A PUBLIC HEARING FOR 3 P.M. ON JULY 13, 2021, TO CONSIDER ADDING A TWO PERCENT CREDIT CARD FEE FOR TRANSIENT OCCUPANCY TAX, BUSINESS LICENSE TAX AND DEVELOPMENT FEE PAYMENTS TO THE MASTER FEE SCHEDULE WHEREAS, as part of an internal transient occupancy tax audit, the City of Carlsbad's internal auditor recommended staff consider options for potentially implementing an administrative fee for credit card transactions and present them to the City Council for consideration; and WHEREAS, the City Council received a report from staff on credit card transaction fee options on June 8, 2021; and WHEREAS, staff has proposed the City Council add a 2% credit card fee for transient occupancy tax, business license tax, and development fee payments to the City Of Carlsbad Master Fee Schedule; and WHEREAS, the City Council has determined it is in the public interest to consider adopting the proposed fee; and WHEREAS, before determining whether to adopt the proposed fee, California Government Code Sections 66016-66019 require the City Council to schedule and hold a public hearing to receive oral and written comments on the proposed fee. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California, as follows: 1.That the above recitations are true and correct. 2.That a public hearing to consider including a 2% credit card fee for transient occupancy tax, business license tax, and development fee payments in the City of Carlsbad Master Fee Schedule will be held at the City Council meeting on July 13, 2021 at 3 p.m. 3.That the City Clerk is directed to provide notice of the public hearing in the manner required by California Government Code Sections 66016-66019. I/ // /I /I June 8, 2021 Item #14 Page 6 of 7 PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of Carlsbad on the 8th day of June, 2021, by the following vote, to wit: AYES: Blackburn, Bhat-Patel, Schumacher. NAYS: Hall, Acosta. ABSENT: None. MATT HALL, Mayor Won Vtitif BARBARA ENGLESON, City lerk (SEAL) June 8, 2021 Item #14 Page 7 of 7 Credit Card Fees Cheryl Gerhardt, Finance Manager June 8, 2021 Recommended Action •Receive a report regarding the considerations of implementing a fee to recover credit card transaction costs •Set public hearing to add a 2% credit card fee on all transient occupancy tax, business license tax and development fees to the city’s Master Fee Schedule for 3 p.m. on July 13, 2021 Background •As a part of the Transient Occupancy Tax (TOT) internal audit, the city’s internal auditor provided the recommendation to consider options for potentially implementing an administrative fee for credit card transactions and present it to the City Council for its consideration Value of Transactions Paid by Credit Card Utility 59% Parks & Rec 8% Cashier 28% Bus lic Tax & Permits 5% 4 Total = $328,000 Considerations •Other agencies •Public/private benefit •Amount of transaction •Volume of transactions •System capabilities 5 Alternative Options Considered •Option 1: Do not change city’s current method of cost recovery for credit card transaction fees •Option 2: Recover city’s cost of credit card transaction fees for utility services •Option 3: Recover the city’s cost of credit card transaction fees for TOT/business license/development •Option 4: Recover the city’s cost of credit card transaction fees for library and recreation fees •Method A: Flat amount •Method B: Percentage of transaction value Recommended Action •Option 3 –Credit card fee on all transient occupancy tax, business license tax and development fees •Method B –2% fee Questions