Federal User Fees: A Design Guide (29-MAY-08, GAO-08-386SP).	 
                                                                 
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.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-386SP					        
    ACCNO:   A82220						        
  TITLE:     Federal User Fees: A Design Guide			      
     DATE:   05/29/2008 
  SUBJECT:   Administrative costs				 
	     Cost accounting					 
	     Cost analysis					 
	     Cost control					 
	     Economic analysis					 
	     Economic development				 
	     Economic growth					 
	     Federal agencies					 
	     Federal regulations				 
	     Fees						 
	     Financial analysis 				 
	     Financial management				 
	     Internal controls					 
	     Program evaluation 				 
	     Program management 				 
	     Strategic planning 				 
	     User fees						 
	     Program goals or objectives			 
	     Program implementation				 

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GAO-08-386SP

This is the accessible text file for GAO report number GAO-08-386SP 
entitled 'Federal User Fees: A Design Guide' which was released on May 
30, 2008.

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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

May 2008: 

Federal User Fees: 

A Design Guide: 

GAO-08-386SP: 

GAO Highlights: 

Highlights of GAO-08-386SP, a report to congressional requesters. 

Why GAO Did This Study: 

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 
feesï¿½how fees are set, collected, used, and reviewedï¿½may 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. 

What GAO Found: 

Setting user fees: 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. 

Collecting user fees: 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. 

Using user 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 agenciesï¿½ ability to quickly respond to 
changing conditions. 

Reviewing user fees: 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. 

Figure: Simplified, Hypothetical Example of Assigning Costs to 
Beneficiaries: 

[See PDF for image] 

This figure contains a pie-chart and the following descriptive 
information: 

Types of beneficiaries of a federal program: Public beneficiaries 
(general public): 60%; 
- Services paid with general revenue; Private beneficiaries (users): 
40%; 
- Services paid with user fees: User A: 8% (payer); User B: 12% 
(payer); User C: 20% (payer). 

The amount of the fee reflects the cost of providing the service, which 
differs among the three users. In this example, no users are exempt 
from the fee, so all ï¿½usersï¿½ of the service are also ï¿½payersï¿½ of the 
fee. 

Source: GAO. 

[End of figure] 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-386SP]. For more 
information, contact Susan J. Irving at (202) 512-9142 or 
[email protected]. 

[End of section] 

Contents: 

Letter: 

Background: 

Setting User Fees: Determining Beneficiaries and Allocating Costs: 

Collecting User Fees: Balancing Compliance with Administrative Costs: 

Using User Fees: Balancing Congressional Oversight, Agency Flexibility, 
and Stakeholder Expectations: 

Reviewing User Fees: Providing Information on Costs and Program 
Activities and Facilitating Stakeholder Support: 

Concluding Observations: 

Agency Comments: 

Appendix I: Key Questions: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: Questions to Consider When Setting User Fees: 

Figure 2: Simplified, Hypothetical Example of Assigning Program Costs 
to Beneficiaries, Including Users: 

Figure 3: Examples of Federal Programs with Different Levels of Funding 
from User Fees: 

Figure 4: Questions to Consider When Designing How User Fees Will Be 
Collected: 

Figure 5: Questions to Consider When Designing How User Fees Can Be 
Used: 

Figure 6: Questions to Consider When Designing How User Fees Will Be 
Reviewed: 

Abbreviations: 

AMS: Agricultural Marketing Services: 

APHIS: Animal and Plant Health Inspection Service: 

AQI: Agricultural Quarantine Inspection: 

BLM: Bureau of Land Management: 

CBP: U.S. Customs and Border Protection: 

CFO: chief financial officer: 

Corps: U.S. Army Corps of Engineers: 

DHS: Department of Homeland Security: 

FAA: Federal Aviation Administration: 

FDA: Food and Drug Administration: 

GDP: gross domestic product: 

HMF: Harbor Maintenance Fee: 

HMTF: Harbor Maintenance Trust Fund: 

IOAA: Independent Offices Appropriation Act of 1952: 

MOE: maintenance of effort: 

MPF: Merchandise Processing Fee: 

NPS: National Park Service: 

OIC: Offer in Compromise: 

OMB: Office of Management and Budget: 

PAYGO: pay-as-you-go: 

PDUFA: Prescription Drug User Fee Act: 

REA: Federal Lands Recreation Enhancement Act: 

USCIS: U.S. Citizenship and Immigration Services: 

USDA: U.S. Department of Agriculture: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

May 29, 2008: 

Congressional Requesters: 

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. 
[Footnote 1] 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.[Footnote 2] 

* 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.[Footnote 3] 

We performed our work from February 2007 through May 2008 in 
Washington, D.C. and Boston, Massachusetts. 

Background: 

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. 

Definition of User Fees: 

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.[Footnote 
4] 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.[Footnote 5] 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.[Footnote 6] 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." 
[Footnote 7] 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. 

Authority to Charge Fees: 

Agencies derive their authority to charge fees either from the 
Independent Offices Appropriation Act of 1952 (IOAA)[Footnote 8] 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.[Footnote 9] 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.[Footnote 10] 

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.[Footnote 11] 

Setting User Fees: Determining Beneficiaries and Allocating Costs: 

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). 

Figure 1: Questions to Consider When Setting User Fees: 

[See PDF for image] 

This figure is an illustration of questions to consider when setting 
user fees, as follows: 

Questions to consider: 

* Who benefits from the program? 

* What mechanisms help ensure the fee will cover the intended share of 
costs over time? 

* How should program costs be determined and assigned? 
ï¿½ How much does the program cost? 
ï¿½ How should program costs be divided among users? 

Sources: GAO (information); PhotoDisc and Comstockï¿½ (images). 

[End of figure] 

To What Extent Does the Program Benefit Both the General Public and 
Users? 

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.[Footnote 12] 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. 

Figure 2: Simplified, Hypothetical Example of Assigning Program Costs 
to Beneficiaries, Including Users: 

[See PDF for image] 

This figure contains a pie-chart and the following descriptive 
information: 

Types of beneficiaries of a federal program: Public beneficiaries 
(general public): 60%; 
- Services paid with general revenue; Private beneficiaries (users): 
40%; 
- Services paid with user fees: User A: 8% (payer); User B: 12% 
(payer); User C: 20% (payer). 

Source: GAO. 

Note: Though not shown in this example, fees may include exemptions, so 
that some ï¿½usersï¿½ of the program are not ï¿½payersï¿½ of the fee. The cost 
of providing the service to exempt users may be paid for with general 
revenues or by the fees of other users. 

[End of figure] 

Figure 3: Examples of Federal Programs with Different Levels of Funding 
from User Fees: 

[See PDF for image] 

This figure contains an illustration of examples of federal programs 
with different levels of funding from user fees, as follows: 

National defense: 
National defense benefits the general public. Therefore, it is fully 
supported by general revenues, rather than user fees. 

FDA prescription drug reviews: 
FDA prescription drug reviews benefit drug sponsors and the public. 
Therefore, they are supported in part by general revenues and in part 
by user fees. 

U.S. Postal Service: 
Postal services directly benefit users sending letters or other mail. 
Therefore, they are almost fully supported by user fees, rather than 
general revenues.[A] 

Sources: GAO (information); images: PhotoDisc (right and left), Dynamic 
Graphics (center). 

[A] The U.S. Postal Service gets a small proportion of its funding from 
general revenues for costs of providing free mail for the blind and 
overseas voting. 

[End of figure] 

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.[Footnote 13] 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.[Footnote 14] 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.[Footnote 15] 

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. 
[Footnote 16] 

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.[Footnote 17] 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.[Footnote 18] Some 
tour operators paid and some did not, resulting in inequities and less- 
than-owed fee collections. 

What Mechanisms Help Ensure the Fee Will Cover the Intended Share of 
Costs over Time? 

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.[Footnote 19] 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.[Footnote 20] 
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.[Footnote 21] 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.[Footnote 22] 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.[Footnote 23] 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. 

How Should Program Costs Be Determined and Assigned to Users? 

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. 

How Much Does the Program Cost? 

To set fees so that total collections cover the intended share of 
program costs, a reliable accounting of total program cost is 
important.[Footnote 24] To obtain such an accounting, it is necessary 
to determine which activities and costs should be included and which 
should not.[Footnote 25] 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.[Footnote 26] 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.[Footnote 27] 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.[Footnote 28] 

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.[Footnote 29] 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.[Footnote 30] 

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.[Footnote 31] 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.[Footnote 32] 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.[Footnote 33] 

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.[Footnote 34] 
Many agencies, however, lack reliable cost data.[Footnote 35] 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.[Footnote 36] 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. 

How Should Program Costs Be Allocated across Users? 

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.[Footnote 37] 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.[Footnote 38] 
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.[Footnote 39] 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.[Footnote 40] 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.[Footnote 41] 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.[Footnote 42] 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. 

Collecting User Fees: Balancing Compliance with Administrative Costs: 

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). 

Figure 4: Questions to Consider When Designing How User Fees Will Be 
Collected: 

[See PDF for image] 

This figure is an illustration of questions to consider when designing 
how user fees will be collected, as follows: 

Collecting Fees: 

Questions to consider: 

* At what point should the fees be collected? 

* Can leveraging existing collection or compliance systems decrease 
administrative costs? 

Sources: GAO (information); PhotoDisc (images). 

[End of figure] 

At What Point Should the Fees Be Collected? 

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.[Footnote 43] 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[Footnote 44] 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.[Footnote 45] 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. 

Can Leveraging Existing Collections or Compliance Systems Decrease 
Administrative Costs? 

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.[Footnote 46] 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.[Footnote 47] 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.[Footnote 48] 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.[Footnote 49] 

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.[Footnote 50] 

Using User Fees: Balancing Congressional Oversight, Agency Flexibility, 
and Stakeholder Expectations: 

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.[Footnote 51] 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). 

Figure 5: Questions to Consider When Designing How User Fees Can Be 
Used: 

[See PDF for image] 

This figure is an illustration of questions to consider when designing 
how user fees can be used, as follows: 

Using fees: 

Questions to consider: 

* To what extent is agency access to fee collections limited? 

* To what extent are the activities for which the agency may use fee 
collections limited? 

Sources: GAO (information); PhotoDisc (images). 

[End of figure] 

What Are the Statutory Controls on Agency Use of Fee Collections? 

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.[Footnote 52] 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.[Footnote 53] 
The level of spending from the HMTF reflects Congressional priorities, 
possibly including reduction of the overall federal budget 
deficit.[Footnote 54] 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.[Footnote 55] 

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.[Footnote 56] 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.[Footnote 57] 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.[Footnote 58] Mandatory programs are subject to "pay-as-you-go" 
(PAYGO) rules if they are in effect.[Footnote 59] 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.[Footnote 60] 
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. 
[Footnote 61] 

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.[Footnote 62] 
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. 

How Broadly or Narrowly Are the Authorized Uses of the Fee Collections 
Defined? 

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.[Footnote 63] 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.[Footnote 64] 

Statutes that narrowly limit how fees may be used could reduce 
Congress's and an agency's flexibility in making resource decisions 
[Footnote 65] 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.[Footnote 66] 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.[Footnote 67] 
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. 

Reviewing User Fees: Providing Information on Costs and Program 
Activities and Facilitating Stakeholder Support: 

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. 

Figure 6: Questions to Consider When Designing How User Fees Will Be 
Reviewed: 

[See PDF for image] 

This figure is an illustration of questions to consider when designing 
how user fees will be reviewed, as follows: 

Reviewing fees: 

Questions to consider: 

* How is the fee updated? 

* How often is the fee reviewed and what information is included in the 
review? 

* What role do stakeholders play in the fee reviews? 

Sources: GAO (information); PhotoDisc (images). 

[End of figure] 

How Is the Fee Updated? 

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.[Footnote 68] 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. 

How Often Is the Fee Reviewed and What Information Is Included in the 
Review? 

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[Footnote 69] and OMB Circular No. 
A-25 provide for biennial fee reviews that include recommendations 
about adjustments to the fees, as appropriate.[Footnote 70] 

The regulatory process is also used to provide information on fees to 
Congress and stakeholders and to solicit stakeholder input.[Footnote 
71] 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.[Footnote 72] 
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. 
[Footnote 73] 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[Footnote 74] 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.[Footnote 75] 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.[Footnote 76] 

What Role Do Stakeholders Play in the Fee Reviews? 

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.[Footnote 77] 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.[Footnote 78] 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.[Footnote 79] 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.[Footnote 80] 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.[Footnote 81] 

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.[Footnote 82] 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.[Footnote 83] 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. [Footnote 84] 

Concluding Observations: 

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. 

Agency Comments: 

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 [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this guide, please 
contact me at (202) 512-9142 or [email protected]. 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. 

Signed by: 

Susan J. Irving: 
Director for Federal Budget Analysis: 
Strategic Issues: 

List of Requesters: 

The Honorable Bennie G. Thompson: 
Chairman: 
The Honorable Peter T. King: 
Ranking Member: 
Committee on Homeland Security: 
House of Representatives: 

The Honorable Charles B. Rangel: 
Chairman: 
The Honorable Jim McCrery: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

[End of section] 

Appendix I: Key Questions: 

(We note that some of these questions may overlap.) 

Section I: Setting User Fees: 

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 II: Collecting User Fees: 

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 III: Using User Fees: 

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 IV: Reviewing User Fees: 

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? 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Susan J. Irving, (202) 512-9142 or [email protected]: 

Acknowledgments: 

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. 

[End of section] 

Footnotes: 

[1] These are data on "user charges," which OMB defines as fees, 
charges, and assessments levied on individuals or organizations 
directly benefiting from, or subject to regulation by, a federal 
program or activity. 

[2] See GAO, Understanding the Tax Reform Debate: Background, Criteria 
& Questions, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-
1009SP] (Washington, D.C.: September 2005). 

[3] The price index values we used are averages of quarterly indexes 
from the Department of Commerce, Bureau of Economic Analysis' National 
Income and Product Accounts, table 1.1.4, last revised January 30, 
2008. 

[4] The Congressional Budget Office has defined user charges as fees or 
taxes that are based on benefits individuals or firms receive from the 
federal government or that in some way compensate for costs they might 
impose on society or its resources. See Congressional Budget Office, 
The Growth of Federal User Charges (Washington, D.C.: August 1993). For 
budget purposes, we define user fees as fees assessed on users for 
goods or services provided by the federal government. See GAO, A 
Glossary of Terms Used in the Federal Budget Process, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-734SP] (Washington, D.C.: 
September 2005). 

[5] See GAO, Aviation Finance: Observations on the Current FAA Funding 
Structure's Support for Aviation Activities, Issues Affecting Future 
Costs, and Proposed Funding Changes, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-1163T] (Washington, D.C.: Aug. 1, 2007). 

[6] National Cable Television Ass'n v. United States, 415 U.S. 336, 341-
42 (1974). 

[7] United States v. La Franca, 282 U.S. 568, 572 (1931). 

[8] IOAA is codified at 31 U.S.C. ï¿½ 9701. 

[9] See [hyperlink, 
http://www.whitehouse.gov/omb/circulars/a025/a025.html]. 

[10] OMB Circular No. A-25 does not apply to the activities of the 
legislative and judicial branches of government or to mixed ownership 
government corporations as defined by 31 U.S.C. ï¿½ 9701. 

[11] For more information, see GAO, Principles of Federal 
Appropriations Law, vol. 4, 2nd ed., [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-01-179SP] (Washington, D.C.: March 2001). 

[12] Programs that primarily benefit the general public are generally 
nonexcludable, that is, there is no practical way of preventing someone 
from benefiting from the program, and nonrival, that is, once the 
program is in operation, there is no additional cost of providing it to 
more people. 

[13] A drug sponsor is the person or entity who assumes responsibility 
for the marketing of a new drug, including responsibility for complying 
with applicable provisions of laws, such as the Federal Food, Drug, and 
Cosmetic Act and related regulations. The sponsor is usually an 
individual, partnership, corporation, government agency, manufacturer, 
or scientific institution. 

[14] See GAO, Tax Policy: Effects of the Alcohol Fuels Tax Incentives, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-97-41] 
(Washington, D.C.: Mar. 6, 1997). 

[15] In prior work on tax systems, we found that transparent tax 
systems enable payers to know their own tax burden and the tax burden 
of others, irrespective of who legally must pay the tax (see 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-1009SP]). 

[16] See GAO, Congressional Attention Is Warranted When User Charges Or 
Other Policy Changes Cause Capital Losses, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO/PAD-83-10] (Washington, D.C.: 
Oct. 13, 1982). 

[17] See GAO, Livestock Grazing: Federal Expenditures and Receipts 
Vary, Depending on the Agency and the Purpose of the Fee Charged, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-869] (Washington, 
D.C.: Sept. 30, 2005), and National Park Service: Opportunities Exist 
to Clarify and Strengthen Special Uses Permit Guidance on Setting 
Grazing Fees and Cost-Recovery, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-355R] (Washington, D.C.: Feb. 9, 2006). 

[18] See GAO, National Parks Air Tour Fees: Effective Verification and 
Enforcement Are Needed to Improve Compliance, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-06-468] (Washington, D.C.: May 
11, 2006). 

[19] See GAO, Surface Transportation: Preliminary Observations on 
Efforts to Restructure Current Program, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-478T] (Washington, D.C.: Feb. 
6, 2008). 

[20] This study examined the overall fee collections of 27 agencies 
from fiscal year 1991 through fiscal year 1996. See GAO, Federal User 
Fees: Budgetary Treatment, Status, and Emerging Management Issues, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-98-11] 
(Washington, D.C.: Dec. 19, 1997). 

[21] MOE requirements help ensure that program funding from existing 
sources remains at or near historic levels before funding from other 
sources may be received. For example, federal grant programs may use 
MOE requirements to ensure that grants to state or local governments 
are used to supplement, rather than supplant, state and local program 
funding. 

[22] The specified amount is the amount appropriated for the program in 
fiscal year 1997, adjusted for inflation as defined in statute. 

[23] See GAO, Food and Drug Administration: Effect of User Fees on Drug 
Approval Times, Withdrawals, and Other Agency Activities, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-02-958] (Washington, D.C.: Sept. 
17, 2002). 

[24] This does not apply when the government, not acting in its 
capacity as sovereign, is leasing or selling goods or resources (e.g., 
offshore oil leases) or is providing a service (e.g., leasing space in 
federally owned buildings). Under these business-type conditions, OMB 
Circular No. A-25 guidance directs agencies to base user fees on market 
prices. Market rates are intended to promote economic efficiency and 
allow the private sector to compete with the government without 
disadvantage. If user fees do not cover the full costs of a service 
that is also privately produced, those private producers may be placed 
at a competitive disadvantage. Although reliable program cost 
information is not needed to set a market-based fee, the agency would 
still need this information to effectively manage the program, as 
discussed in Statement of Federal Financial Accounting Standards No. 4, 
Managerial Cost Accounting Concepts and Standards for the Federal 
Government (July 31, 1995). 

[25] For more information on accounting for program costs, see GAO, 
Managerial Cost Accounting Practices: Implementation and Use Vary 
Widely across 10 Federal Agencies, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-679] (Washington, D.C.: July 20, 2007); Managerial 
Cost Accounting Practices: Leadership and Internal Controls Are Key to 
Successful Implementation, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-1013R] (Washington, D.C.: Sept. 2, 2005); and Human 
Capital: DOD Needs Better Internal Controls and Visibility over Costs 
for Implementing Its National Security Personnel System, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-851] (Washington, D.C.: July 
16, 2007). 

[26] Imputed costs of an agency are costs of goods or services incurred 
on behalf of the agency that are paid by another federal entity, such 
as certain retirement benefits paid to retirees by the Office of 
Personnel Management. 

[27] See, for example, Bonneville Power Administration, 2007 Annual 
Report (Portland, Ore.: November 2007). 

[28] See GAO, Federal User Fees: Substantive Reviews Needed to Align 
Port-Related Fees with the Programs They Support, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-321] (Washington, D.C.: Feb. 
22, 2008). 

[29] Agencies must use realistic inflationary indicators if they want 
to reasonably estimate future program costs and better align future 
collections with those costs. OMB Circular No. A-94, which provides 
guidance to agencies on benefit-cost analysis for federal programs, 
notes that future inflation is highly uncertain and recommends that 
when a general inflation assumption is needed, agencies use the rate of 
increase in the GDP deflator from the administration's economic 
assumptions for the period of the analysis. 

[30] See GAO, Federal User Fees: Key Aspects of International Air 
Passenger Inspection Fees Should Be Addressed Regardless of Whether 
Fees Are Consolidated, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-1131] (Washington, D.C.: Sept. 24, 2007). 

[31] Marginal cost is equal to the cost of providing an additional unit 
of the good or service. 

[32] There will be some loss of economic efficiency in either case: 
user fees set above marginal cost and taxes--that is, general revenues-
-both result in some loss of economic efficiency. See [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-1009SP]. 

[33] For more information on pricing for federal services, see GAO, The 
Congress Should Consider Exploring Opportunities To Expand And Improve 
The Application Of User Charges By Federal Agencies, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO/PAD-80-25] (Washington, D.C.: 
Mar. 28, 1980). 

[34] According to Statement of Federal Financial Accounting Standards 
No. 4, reliable information on the costs of federal programs and 
activities is crucial for effective management of government 
operations, which includes setting user fees. 

[35] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-679]. 

[36] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1131]. 

[37] Unless fees are perfectly user specific, some users will pay a 
higher proportion of the costs they impose and some users will pay a 
lower proportion of their costs. In the case of a fee that is not user 
specific and recovers full program costs (i.e., does not use general 
revenue funding), some users will pay more than the costs they impose, 
essentially cross-subsidizing other users, who will pay less. See, for 
example, GAO, Assigning Air Traffic Control Costs to Users: Elements of 
FAA's Methodology Are Generally Consistent with Standards but Certain 
Assumptions and Methods Need Additional Support, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-76] (Washington, D.C.: Oct. 
19, 2007). 

[38] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1163T]. 

[39] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-321]. 

[40] However, exemptions may only effectively address ability-to-pay 
concerns if exempted entities are aware of the exemption and have the 
capacity to make use of it. For example, a study by the Taxpayer 
Advocate Service found that nearly half of taxpayers below the poverty 
level, who should have been eligible for a waiver of the OIC fee, did 
not submit the form required to obtain a waiver. See Taxpayer Advocate 
Service, National Taxpayer Advocate: 2007 Annual Report to Congress, 
vol. 1 (Washington, D.C.: Dec. 31, 2007). The Internal Revenue Service 
revised the OIC application form and instructions in February 2007, and 
they now contain several references to the fee waiver. 

[41] According to Corps officials, shipments into the port of Quonset/ 
Davisville are not subject to the HMF because its harbor channel is not 
a federal channel and no federal funding is used for maintenance 
dredging of the channel. 

[42] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-321]. 

[43] OMB Circular No. A-25 guidance states that fees should be 
collected in advance of or at the point of service, unless 
appropriations and authority are provided in advance to allow 
reimbursable services. Regardless of the method of collection, the 
guidance requires agencies to ensure that the requirements of OMB 
Circular No. A-123 (Internal Control Systems) and appropriate audit 
standards are applied to fee collections. 

[44] Lockbox services are provided by banks, which receive and process 
fee payments made by check or cash and send payment information to the 
agency. 

[45] For fiscal year 2008, the fee for the prepaid AQI truck 
transponder is $105, 20 times the per arrival fee. 

[46] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-321]. 

[47] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-869]. 

[48] With the creation of DHS in 2003, the customs, agricultural, and 
immigration inspections of international airline passengers were 
integrated into one program led by DHS's CBP. 

[49] As outlined in OMB Circular No. A-25, the costs of administering 
and collecting the fee should be included when calculating the cost of 
the program and included in the fee rates when the fee is intended to 
recover full costs. 

[50] See GAO, Grants Management: Enhancing Performance Accountability 
Provisions Could Lead to Better Results, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-06-1046] (Washington, D.C.: Sept. 
29, 2006). 

[51] Fees assessed by an agency under the authority of IOAA, rather 
than under a specific authorizing statute, must be deposited to the 
general fund of the U.S. Treasury and are not reserved for the agency 
or program that generated the fees, unless otherwise authorized by law. 

[52] There are two types of offsets: offsetting collections and 
offsetting receipts. Offsetting collections are authorized by law to be 
credited to expenditure accounts (in effect, a negative expenditure) 
and are not subject to further Congressional appropriation before an 
agency may obligate the collections; an annual appropriation act may 
include limitations on the availability of obligation of these 
collections. Offsetting receipts are offset against gross outlays; are 
deposited in receipt accounts, which are generally dedicated to a 
specific purpose; and must be appropriated before they are available 
for obligation. However, most trust fund offsetting receipts are 
permanently appropriated and, therefore, can be used without subsequent 
annual appropriation legislation. A third type of collection, 
governmental receipts, is not offset against outlays and whether its 
use is subject to appropriation depends on the specific authorizing 
legislation for the collection. See [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-734SP] and [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/AIMD-98-11]. 

[53] Because of the way the appropriation was structured, if the Corps 
were to obligate additional funds from the HMTF, it would have to 
reduce, by the same amount, obligations for other Corps programs. For 
example, in fiscal year 2006, Congress appropriated almost $2 billion 
for the Corps' operation and maintenance program. This $2 billion 
included amounts available for projects eligible for funding from the 
HMTF. If the Corps decided to increase spending on operation and 
maintenance of harbors and channels that is eligible for funding from 
the HMTF, the Corps would have to reduce funding for other operation 
and maintenance programs that are not eligible for funding from the 
HMTF, such as flood and storm damage reduction projects and aquatic 
ecosystems restoration. 

[54] Trust fund surpluses add to the unified budget totals (increasing 
a surplus or reducing a deficit) and any trust fund deficits subtract 
from them. See GAO, Federal Trust and Other Earmarked Funds: Answers to 
Frequently Asked Questions, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-01-199SP] (Washington, D.C.: January 2001). 

[55] As noted in [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-
199SP], federal trust funds do not necessarily operate in the same way 
as trust funds in the private sector. Specifically, designation as a 
trust fund does not in and of itself impose a greater commitment on the 
federal government to carry out that specified activity over other 
government activities. However, the label trust fund may lead the 
public to expect a greater commitment, setting up unrealistic 
expectations. Stakeholders may expect that earmarked revenues--whether 
they are in a trust fund, special fund, or the general fund--will be 
spent because the revenues are there, regardless of the need for the 
spending at the moment or the priority that would otherwise be given 
such spending. 

[56] OMB Circular No. A-25 notes that it may be appropriate for an 
agency to seek multiyear or no-year spending authority if the program 
depends on user demand that is irregular or unpredictable. 

[57] U.S. Department of Agriculture, Economic Research Service, User- 
Fee Financing of USDA Meat and Poultry Inspection (Washington, D.C.: 
March 1999). 

[58] Mandatory spending refers to budget authority that is provided in 
laws other than appropriation acts and the outlays that result from 
such budget authority. Congress controls spending for these programs 
indirectly by defining eligibility and setting the benefit or payment 
rules, rather than directly through appropriation acts. Discretionary 
spending refers to outlays from budget authority that are provided in 
and controlled by appropriation acts. 

[59] Although statutory PAYGO expired in 2002, both chambers of the 
110th Congress imposed PAYGO through their rules. 

[60] For example, recently enacted legislation extended trade 
adjustment assistance programs--programs for workers and farmers 
adversely affected by increased imports--for 3 months. The legislation 
provided offsets, including a 1-week extension of the expiration of 
customs inspections fees, to make the legislation comply with PAYGO 
rules under Congressional budget enforcement procedures. See Pub. L. 
No. 110-89, 121 Stat. 982 (Sept. 28, 2007). 

[61] The budget resolution sets a cap, called a 302a allocation, on 
total appropriations for the Appropriations Committees. In turn, the 
Appropriations Committees provide caps, or 302b allocations, to their 
subcommittees. If a subcommittee were to exceed its 302b allocation, 
another subcommittee would have to allocate less. The section 302 
allocations refer to relevant sections of the Congressional Budget and 
Impoundment Control Act of 1974. 

[62] The Immigration User Fee Account is used to reimburse any expenses 
incurred in providing immigration inspection and pre-inspection 
services. Reimbursements are made on a quarterly basis. This has been a 
problem for CBP, since it has to use appropriations to cover initial 
costs and then later get reimbursed, raising concerns about revenue 
adequacy and administrative burden. Because CBP is reimbursed by USDA/ 
APHIS on a bimonthly basis for its inspection activities, the APHIS fee 
raises similar concerns. 

[63] In this instance, although Congress limited agency flexibility by 
limiting the use of fee collections, it did so in a way that did not 
closely link the fee to the program. Specifically, not all of the 
activities authorized to be funded by the custom fee are associated 
with conducting customs inspections, and not all customs inspection 
activities can be covered by user fee collections. In a recent user fee 
review, we learned that this created the misimpression among 
stakeholders that fees were being misused. See [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-1131]. 

[64] Congress authorized the pilot program, called the Recreational Fee 
Demonstration Program, in 1996. See GAO, Recreation Fees: Management 
Improvements Can Help the Demonstration Program Enhance Visitor 
Services, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-10] 
(Washington, D.C.: Nov. 26, 2001). 

[65] Congress always maintains autonomy, as it can change authorized 
activities through legislation. Nonetheless, Congress has more 
flexibility as to how to use fee collections that are deposited to the 
general fund of the U.S. Treasury. 

[66] To address these concerns and other issues, Congress passed the 
Federal Lands Recreation Enhancement Act (REA) in 2004. REA replaced 
the pilot program with new fee authority that increased agency 
flexibility for the expenditure of fee collections. Though, in general, 
REA requires that the collecting unit retain a minimum of 80 percent of 
fee collections, the agency may reduce the percentage allocation to as 
little as 60 percent if it determines that the collections at a given 
unit exceed its reasonable needs. See GAO, Recreation Fees: Agencies 
Can Better Implement the Federal Lands Recreation Enhancement Act and 
Account for Fee Revenues, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-1016] (Washington, D.C.: Sept. 22, 2006). 

[67] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-321]. 
According to CBP, the agency has initiated a comprehensive review of 
its costs and activities related to merchandise processing, as well as 
MPF collections. 

[68] The current House reauthorization bill, H.R. 2881, calls for 
substantial fee increases. See [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-1163T]. 

[69] The CFO Act requires an agency's CFO to review, on a biennial 
basis, the fees, royalties, rents, and other charges for services and 
things of value and make recommendations on revising those charges to 
reflect costs incurred. 31 U.S.C. ï¿½ 902(a)(8). 

[70] OMB Circular No. A-25 provides that each agency will review user 
charges biennially. These reviews will include (1) assuring that 
existing charges are adjusted to reflect unanticipated changes in costs 
or market values and (2) a review of other programs within the agency 
to determine whether fees should be initiated for government services 
or goods for which it is not currently charging fees. It also states 
that if imposing such fees is prohibited or restricted by law, agencies 
will recommend legislative changes as appropriate. Further, the 
Circular instructs agencies to discuss the results of the user fee 
reviews and any resulting proposals in the CFO annual report required 
by the CFO Act. This reporting may be done in agency performance and 
accountability reports. 

[71] Under the Administration Procedures Act, general notice for 
proposed rule making is published in the Federal Register. After such 
notice is published, an agency must provide an opportunity for 
interested parties to comment. 5 U.S.C. ï¿½ 553 (b), (c). 

[72] In addition, each summer APHIS publishes an annual reminder notice 
of upcoming user fee changes in the Federal Register. 

[73] Executive Order 12866, Regulatory Planning and Review, requires 
agencies to provide the public with meaningful participation in the 
regulatory process, including an opportunity to comment on proposed 
regulations, which in most cases should include a comment period of not 
less than 60 days. 

[74] Passenger facility charges are passenger fees that airlines 
collect and remit to airports. Airports use the fees to fund FAA- 
approved projects that enhance safety, security, or capacity; reduce 
noise; or increase air carrier competition. 

[75] See GAO, Reexamining Regulations: Opportunities Exist to Improve 
the Effectiveness and Transparency of Retrospective Reviews, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-791] (Washington, 
D.C.: July 16, 2007). 

[76] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-321]. 

[77] See GAO, Aviation Finance: Observations on Potential FAA Funding 
Options, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-973] 
(Washington, D.C.: Sept. 29, 2006). 

[78] Our prior work found that federal advisory committees play an 
important role in shaping public policy by providing advice on a wide 
array of issues. See GAO, Federal Advisory Committees: Additional 
Guidance Could Help Agencies Better Ensure Independence and Balance, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-328] (Washington, 
D.C.: Apr. 16, 2004). However, neither IOAA nor OMB Circular No. A-25 
includes a requirement for agencies to establish an advisory committee 
or solicit stakeholder input related to their user fees. 

[79] The Immigration and Naturalization Service User Fee Advisory 
Committee was first established in 1986. The Homeland Security Act of 
2002 transferred the immigration inspection functions to the newly 
created CBP in DHS, and the committee was renamed the Airport and 
Seaport Inspections User Fee Advisory Committee. 

[80] The purpose of this Inland Waterways Users Board is to make 
recommendations on program priorities and spending. 

[81] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-958]. 

[82] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-98-11]. 

[83] See Congressional Research Service, The Prescription Drug User Fee 
Act (PDUFA): Background and Issues for PDUFA IV Reauthorization 
(Washington, D.C.: Apr. 30, 2007). 

[84] See GAO, Federal Advisory Committee Act: Issues Related to the 
Independence and Balance of Advisory Committees, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-611T] (Washington, D.C.: Apr. 
2, 2008). 

[End of section] 

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