Fire Districts

by Lynn R. Harvey

Professor and Extension Specialist,
Department of Agricultural Economics, Michigan State University

Introduction

Providing fire protection is generally considered a basic service function of township government. In some cases, it represents the single largest expenditure category in the township budget. Producing and providing fire services can be separated into several distinct policy issues: how fire services are to be organized?; who produces the service?; how the service is to be financed?; and how costs are to be distributed in the case of a joint arrangement?.

This article explores the concept of the organization and evaluation of fire districts as one alternative in the provision of fire services. However, before delving into the internal workings of a fire district, a brief discussion of the policy issues surrounding fire services is in order. Over my 20 years of providing educational and technical assistance to Michigan local governments, I have found that the waters do indeed get muddied when officials fail to separate the production and provision policy questions associated with a variety of services, especially fire services. [Readers are encouraged to review On-Call Fire Departments: The Township Board's Responsibilities, by G. Lawrence Merrill, a MTA Publication, for an excellent primer on township fire services.]

Separate Production From Provision

The production of fire services, similar to police, ambulance, sewer/water and other services, is a separate function relative to the provision of fire services. The ability to separate the provision of fire protection services from the production of fire services opens up a variety of acquisition and production options with self-production being among one of those choices.

Organization of Fire Protection Services

Given a choice, most local units of government would prefer to be self-producers and providers of fire service. However, due to the high fixed cost of fire services and local budget constraints, many local units are forced to either buy or sell protection services through a contractual relationship with a neighboring unit or establish a joint production arrangement with an adjacent unit. Units choosing to be self-producers of fire services often find themselves saddled with high costs and excess fire protection capacity. Excess capacity costs a unit money, therefore incentives are present for the unit to sell fire services to a neighboring unit of government as a means of lowering the fixed costs of fire services. [While the discussion is targeted to public entities, private sector production of services such as fire, police, ambulance, sewer and water services, face the same problem of high fixed costs.]

Legal Basis

How a township organizes to provide fire protection services is a separate question from financing the services. "Organizing" refers to the statutory basis for the organization and the selected method of producing and providing fire services.

Public Act 33, 1951 (MCLA 41.801 et seq) [Recodification of statutes resulted in P.A. 81, 1989 replacing the 1951 statute, same MCLA number applies.] serves as the basic enabling statute for townships, cities and villages under 15,000 population. The statute enables units to establish, maintain and operate fire departments for the provision of fire protection within their jurisdiction or for contracting to provide fire protection. The act further authorizes the creation of a joint fire administrative board, permits the purchase of fire suppression equipment, allows the creation of a special assessment district and for the levying and collecting of special assessments. The term Fire District has its origination within PA 33, 1951.

The 1951 statute permitted self-production and provision of fire services, provision through a contractual relationship, and provision via a joint production relationship.

A later statute, P.A. 102, 1990, amended P.A. 33, 1951 by adding a section to the fire protection statute that permitted units to establish by ordinance a "fee for service" charge,more on this issue later.

Two other statues, Urban Cooperation Act P.A. 7, 1967 (Extra Session) MCLA 124.501-124.512 and the Intergovernmental Transfers of Functions and Responsibilities Act P.A. 8, 1967 (Extra Session) MCLA 124.531-124.536, can be used as the enabling statute(s) by units buying and selling fire services or entering into joint production relationships. While the two intergovernmental acts can be used for organizing fire services, the acts do not contain financing provisions.

Fire Authorities

The term "fire authority" should not be confused with a "fire district." An authority is a designated special purpose unit of government. The creation of a fire authority is authorized by the Emergency Services Authority Act, P.A. 57, 1988 (MCLA 124.601-124.614). The act permits two or more municipalities to join together to produce and provide emergency medical services, fire protection or police protection. Unlike a special assessment district that permits a unit to include only a designated portion of the unit in the special assessment district, when an authority is established, the entire political jurisdiction must be included.

The act also requires establishing article of incorporation, appointment of officers and functions as a distinct unit of government. Creating a fire authority requires approval by voters of participating units provided that the authority is financed by a property tax levy (20 mill maximum). [Preliminary discussions for establishing the Macomb Metropolitan Fire District that would include Harrison Charter Township plus five cities proposes organizing under P.A. 57, 1988.]

Fire District

The term "fire district," as used by local officials, is often attached to a variety of fire service arrangements. The term may be used when two or more units establish a joint fire authority. For example, the Macomb Metropolitan Fire District, cited previously, while called a "fire district" would actually be a "fire authority" based on the proposed organizing state statute, P.A. 57, 1988.

Two or more units, may form a joint or consolidated fire department under P.A. 33, 1951 but refer to the arrangement as a fire district since the funding of the service is accomplished through the establishment of a special assessment district.

A township purchasing fire service from two different fire departments may refer to their fire district, a geographical designation of the area included in the special assessment district. For example, a township may establish Fire District A and Fire District B referring to two separate special assessment districts.

As used in the article, a "fire district" refers to a method of finance and not an organizational option (single production unit or joint arrangement or consolidated department or buy/sell arrangement).

Establishing a special assessment district for fire protection services is generally initiated for purposes of financing fire protection services. Local governments in Michigan utilize special assessment districts for the provision of a variety of services including fire, police, sewer/water, sidewalks, street lighting, curb and gutter, and solid waste collection, to name a few.

State law permits the creation of a special assessment district either by township board resolution or by citizen petition signed by at least 10 percent of the property owners of land in each affected unit to be included in the district [MCLA 41.801(4)]. The question of raising money by special assessment must be submitted to the electors of the proposed district by the township board or boards at a general or special election. All general purpose units of government (cities, village, townships and counties) are empowered to establish special assessment districts.

Readers at this point may ask, "why not request a special purpose millage for fire protection instead of going though the creation of a special assessment district?" If the question of financing fire services by special millage is approved by voters, the millage is levied against all real and personal property. Whereas with a special assessment district, the levy is only applied against real property, personal property is excluded. Additionally, if a special assessment fire district is created that only includes a portion of the township, residents within the district are the only ones who pay the tax. For example, it is not uncommon for a township in order to obtain adequate fire protection coverage throughout the township secure services from more than one fire department. A township may elect to establish a special assessment district as a means of paying for fire services in one area or establish two separate districts. By establishing two special assessment districts, differential levies would be possible if production/provision costs vary between the districts.

Past practice may also dictate that special assessments are the preferred means of financing services. The perception by some is that a special assessment is a "fair" way to pay for the service, those that benefit from a service pay for the service. Note that I did not use the term "equitable", a discussion of the difference between fair and equitable will follow later in article.

Creating a fire district may make sense in situations where the township board(s) decide to borrow needed capital to finance fire suppression equipment or build a fire hall. Establishing a special assessment fire district permits the issuance of special assessment bonds. If funding capital costs through borrowing is anticipated, the ballot question should be developed indicating the board's intent.

The creation of a Fire District is applicable whether a unit is engaged in self-production and provision, joint production arrangement or contracting services from a neighboring fire department since the creation of the district represents a financing tool for local units. [Readers are encouraged to review Special Assessments: A Technical Manual, Michigan Township Association publication, for a more detailed "how to guide" on special assessments.]

Financing Fire Protection Services

Earlier in article it was suggested that the issue of financing fire protection services was a separate and distinct issue from organizing fire services. Just as townships have several options available in securing fire services (self-production, joint production, contracting or a combination thereof), units also have options on financing the service. How a local unit pays or generates revenue to support fire services is a separate issue from how costs for fire services are allocated among units participating in a joint or contractual arrangement.

As one reviews the variety of financing arrangements utilized by local governments for the production and provision of fire services, no clear preferred pattern emerges. Local units utilize general fund appropriations, special millages, special assessment districts, and services fees or combination thereof to generate the revenue to support fire and emergency services.

The use of property tax millage, be it special voted millage or special assessment millage has its advantage in the ease of administration, certainty of yield, and general understanding on the part of local officials of the property tax. Problems arise in the relationships of payments by landowners to benefits received. Landowners with substantial open space land (agricultural producers) tend to pay a greater proportionate share of fire protection costs relative to single family residences.

Increasingly, local units are utilizing service fees to recapture fire production/provision costs. A 1990 statute, P.A. 102, amended P.A. 33, 1933 and authorized local units to collect fees for emergency services (fire, police and ambulance) providing that the local governing board adopted an ordinance providing for such collection. Service fees may be assessed for fire runs and ambulance calls even if the service is funded via special millage. Townships have found that the adoption of the service fee ordinance for fire calls is a means to enhance local revenue for fire services as well as a tool to reduce the pressure on the local property tax. While local units may find that collecting 100 percent of billed fees is difficult, collection rates in the 55-65 percent range are a norm for service fees. Some local officials express reservations about the adoption of the service fee ordinance arguing that taxpayers are being taxed double (property tax and service fee), however, most homeowners insurance policies contain a rider covering partial or full costs incurred for fire calls. Therefore it can be argued that homeowners are already paying for the insurance coverage and third party billing is appropriate. Third party payments (insurance carriers) will probably becoming increasingly relied upon in the future to support local emergency service provision.

Distribution of Cost Shares

The decision between two or more local units to jointly produce fire protection services is arrived at with less disagreement relative to the question of how to share or allocate fixed and variable costs involved in fire protection production. Over the years I have had the opportunity to arbitrate disputes among local units involved in a joint production arrangement. Parties involved generally agree that a joint production arrangement make economic and political sense, but somehow when it comes to sharing production costs, less agreement can be found. Officials often ask, "what makes a good agreement?". The answer may seem flippant, although that us not my intent, but my response is "whatever two parties can agree to." In my judgement quite often cost sharing agreements do not make economic sense but the arrangement has been arrived at through achieving political consensus.

Readers are encouraged to review chapters 4 and 9 of G. Lawrence Merrill's publication On-Call Fire Departments: The Township Board Responsibilities which provides an excellent overview of the various cost distribution formulae. Chapter 9 discusses a "cost-weighted-formula" to share fire production costs that this author has used with local fire production units that incorporates the concept of population, state equalized value and usage. The factors were chosen to reflect potential incidence (population), value of property to be protected (SEV), and past consumption of fire services (thee year rolling average of usage as measured by hours at the fire scene (times) personnel involved (times) fire equipment dispatched. [See "Buying and Selling Fire Protection", by Lynn R. Harvey, 34 Ag Hall, Michigan State University, E. Lansing, MI 48824, request Agricultural Economics Staff Paper No. 93-4, January 1993.] The value of the "cost-weighted formula" is the transparency of the method of cost sharing. The formula is adjustable on an annual basis and attempts to capture the factors that contribute to fire protection consumption. The formula weights are applied against both the fixed and variable costs.

Single Production versus Joint or Consolidated Departments

Reference was made earlier in article that units, if given an choice, would prefer to produce fire services themselves versus entering into a joint or contractual relationship. Such a preference is understandable since transaction costs increase with joint, consolidated and contractual fire service provision. Transaction costs refer to the costs associated with reaching an agreement when two or more units are involved. These costs take the form of meeting time, legal costs, negotiation time, reporting, and oversight. Research has shown that single production units generally have higher costs compared to joint or contractual production arrangements. The higher costs are due to the associated fixed costs of generating the needed fire suppression capacity, such as, buildings, fire trucks and supporting equipment. Once the capacity is in place a department may find that they have excess capacity, that is, in order to have available the needed capacity in equipment and personnel, the department has the capacity to respond to additional demand.

Costs of joint or consolidated fire departments tend to be lower (assuming price gouging is not part of the equation) due to the ability to spread fixed costs over a larger service area. Buy/sell) arrangements also tend to have lower fire protection costs since the producer (seller) is selling excess capacity thus providing the buyer protection at a cost less than the costs of self-production. Buy/sell arrangements also permit a local unit to purchase the amount of fire protection needed. This is especially critical for rural townships that in order to provide adequate protection may have to purchase service from two different departments due to location of residences relative to fire department locations.

The cost of producing fire services is only one factor in considering fire protection provision options. The quality of fire service is an important factor. The quality of fire protection refers to response time and the technical ability (skill) of fire personnel to suppress fires once they occur.

Response time is function of location of the fire hall relative to the population requiring fire services. Not everyone can live next to the fire department, obviously the further a residence is from the fire hall the greater the opportunity for a residence to sustain damage to structure and individual costs in terms of loss are higher. Response time is also influenced by full time versus volunteer personnel, congestion, such as number of intersections, traffic lights, width of streets, pedestrian traffic, and time of day, to name a few.

The quality of fire suppression is also related to the skill and training of fire personnel. Today's fire protection personnel training is extensive and costly which may account why it is more difficult to recruit and train volunteers. However, the training pays dividends to property owners since not only is personal safety enhanced, both for the fire fighters and individuals at the scene of the response call, but property losses tend to be with skilled fire personnel.

Politics vs Economics

The organizational form of fire protection is essentially a political decision. While discussion is often focused on costs or the desire to lower costs, the bottomline is generally based on politics. A joint or contractual production of fire services may have the potential to lower the costs of fire services for all involved but if the two units of government are unable to agree to a joint relationship, potential cost savings are not captured.

The perception of some officials that a joint, consolidated or contractual arrangement for fire service will result in the loss of control. Control is a negotiable factor in a contract or arrangement for fire service. Administrative fire boards offer the potential to minimize the control issue and to provide policy oversight to fire service operations (see Merrill op. cit.).

Concluding Comments

The formation of a "fire district" is generally implemented for purposes of financing fire services. The district concept can be used for both single unit fire protection production, a joint operation or by a local unit attempting to generate revenue to purchase fire services from a producing unit.

The role of local officials is the separation of policy issues. How we organize fire services is a distinct issue from how a unit generates revenue to support fire services. Additionally, how costs are distributed among participating units in a joint agreement or a contractual relationship is a separate issue from both organization and finance.