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Two-tiered user fees

I sent the following email to Penticton Mayor Dan Ashton regarding two-tiered user fees for recreational assets owned by the City of Penticton:

-----Original Message-----
From: "Michael Brydon"
To: "Dan Ashton"
Subject: Two-tiered recreation fees

Hi Dan,

I was just catching up on my reading following a couple of weeks of vacation and was alarmed to read a story in the Herald (12 Mar, 2009) about the City of Penticton "scrambling" to implement a two-tiered recreation fee. I inherited a binder from Ron Perrie entitled "Sub-Regional Recreation" that discusses the current situation in which 23% of those who register for programs with the City of Penticton's Recreation Department are not residents of the City. Documents in the binder argues for "fairness" in shouldering the burden of subsidies for these programs.

This is all well and good; however, the economics in the binder are a bit too simplistic. In attempting to define "fairness", the authors of the document correctly recognize that residents from rural areas benefit from Penticton's recreation programs and thus from Penticton taxpayer subsidies. However, the authors fail to recognize the economic spillovers from such programs and thus ignore an entire class of beneficiaries. The resulting allocation scheme can thus make no claim to being fairer than the scheme it replaces. The spillovers in question take the form of increased economic activity for local businesses-businesses that with very few exceptions are located on the valley floor and pay taxes to the City of Penticton.

To illustrate, assume that 23% of my son's hockey team lives outside the City of Penticton. Assume as well that the cost of minor hockey exceeds its revenues and that the City of Penticton subsidizes the program by an amount equal to (say) $100K per year. According to the prevailing economic reasoning, non-residents should pay "their share" of this subsidy: 23% of $100K = $23K collected through supplemental non-resident fees. However, each age division in Penticton minor hockey hosts at least one tournament and each tournament brings (say) 100 families. These families buy Penticton gas, stay in Penticton hotels, and eat in Penticton restaurants. Unlike the demand for food and lodging created by subsidized activities during the summer (e.g., the triathlon, film shoots), demand created by winter hockey tournaments does not displace existing tourist demand. Instead, spending attributable to minor hockey benefits multiple Penticton businesses during their slowest season of the year. Yet, these business beneficiaries do not appear in the "fair" allocation advocated in the Sub-Regional Recreation document. Instead, the document simply ignores business beneficiaries and proposes to allocate the cost of the subsidy based only on the ratio of resident/non-resident participants.

Clearly, no truly fair allocation is possible until the benefits to Penticton businesses are fully quantified. To complicate matters, the extent of the spillovers generally varies depending on the recreational activity. Although Penticton's swim clubs hold multiple meets throughout the year, my guess is that the economic impact of these meets is less than that of hockey tournaments. At the other extreme, the massively expensive South Okanagan Events Centre was sold to voters based on promises of increased economic activity for local businesses (boosted of course by meaningless multipliers). Although the actual spillovers associated with facilities like the SOEC tend to be less that anticipated, the basic point is this: It is clearly inconsistent for the City of Penticton to tout the business benefits of so-called foreign demand in some cases (e.g., the SOEC) while bemoaning free-riders in others (e.g., minor hockey).

As a more practical matter, it is easy to imagine scenarios in which two-tiered fees could end up hurting Penticton residents. The cost of most recreation programs is fixed, not variable. Thus, if non-resident participants drop out due to increased fees, the cost per resident participant will have to increase to offset the loss. In the case of Penticton minor hockey, player enrollment is already so low at the Atom level that it is no exaggeration to say that the association needs non-resident players in order to be viable. In summary, no one is against fairness. But the justification for two-tiered fees requires a more sophisticated accounting of economic benefits to be compelling to residents of Area F. As noted in my previous message, Area F residents have demonstrated the willingness to contribute to shared infrastructure. But it would be nice if we were invited in as full participants up front, not forced in after the fact.

My two cents,

Michael Brydon
Director, Area F
Regional District of Okanagan-Similkameen
(250) 809-2563

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