A note on an alternative cost allocation system for municipal service units

Abstract

The deciding factor for operating a governmental project either as an independent, self-supporting municipal enterprise insulated from political influence or as a special revenue fund financed by tax levies is whether the amount of revenue generated covers the operating costs of the project. Cost allocation issues play an important role in this decision since the development of an acceptable user charge requires calculations of the full-cost per unit of service. If not properly understood and applied, these issues can produce unfair rates, which in turn may lead to wars between the city government and the communities it serves. To understand the role of cost allocation in developing fair rates for a municipal enterprise's services, this article selects the most common public unity, the municipal water and sewer services, in particular, the Detroit Water and Sewer Department (DWSD). DWSD is one of the largest municipal enterprises in the United States and many of its pricing practices are typical of those followed by many cities in the United States. After presenting and illustrating the current DWSD's cost allocation and pricing procedures to highlight the unfair pricing incidents, the article proposes a modification to the current system that avoids these unfair pricing issues.