Professor Steve Goldsmith interviews co-authors Jean-Pierre Dubé, Bryan Glenn, and Shayne Kavanagh about their new report Segmented Pricing for Fines and Fees, which encourages cities to rethink their approach to revenue.
In this episode Professor Steve Goldsmith discusses the new report Segmented Pricing for Fines and Fees with co-authors Jean-Pierre Dubé, Bryan Glenn, and Shayne Kavanagh. Part of the broader Rethinking Revenue project, they discuss how cities can actually improve revenue collection, while increasing equity in fines and fees, by identifying right pricing.
Music credit: Summer-Man by Ketsa
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Betsy Gardner:
Hi, this is Betsy Gardner, Senior Editor at the Harvard Kennedy School and Producer of the Data-Smart City Pod. Since we started this podcast, we've had great support from our listeners. And to make sure that you don't miss an episode, please find us under the new Data-Smart City Pod channel wherever you listen. Make sure to subscribe so you get each episode, and thanks for listening.
Stephen Goldsmith:
Welcome back. This is Stephen Goldsmith, professor of Urban Policy at the Harvard Kennedy school. Another one of our podcasts, this one on an enormously important subject as how we should think about fines, penalties, and rethinking revenue in America cities. We have with us a distinguished, really distinguished and interesting group of participants. Bryan Glenn, the CEO of SERVUS, JP Dubé, the professor of Marketing at the University of Chicago Booth School of Business, and Shayne Kavanagh, the Senior Manager of research at GFOA. Really great group of individuals and a really important subject. Welcome gentleman. Thanks for being with us. Let me start by helping frame the issue. So, we've worked with a large number of city officials and they all talk about equity, but they think about equity in different ways. I was a District Attorney before I was a mayor and observed the number of individuals who lost their jobs through brief days in the local jail, right?
Because they couldn't earn enough money to pay. And eventually they didn't keep up their car. They lost their car, they lost their job, whatever. So there's been a fair amount of research on license suspensions and the like, and the effect on people's opportunities in life. So let's just start with, how should we think differently about taxes, fees, and fines, and you have great paper on rethinking revenue. You specify the differences. So talk to us a little bit. Do the definitions, make a difference? Do the goals of fines, fees, penalties, and taxes make a difference. How should our audience think about that?
Shayne Kavanagh:
Well, thanks Stephen for that question. I think there's a couple ways to think about this is... First of all, as you mentioned, there's taxes, there's fines and there's fees. But we can break that down even further, right? Into imposed fees versus user fees, right? So an imposed fee might be an example of a court fee, right? Where it's a non-voluntary service. That person comes into contact with government and then is asked to pay a fee to cover that non-voluntary service. But then there's your user fees would be something like say, going to the building department or getting a permit or pulling a business license where it's a voluntary service that you're getting from the local government. I think rethinking each of these areas has to be done in the context of that specific revenue and what it's trying to achieve. So just for example, in our topic here today, fines are meant to act as a disincentive for a particular behavior, right?
So that's going to be very different than say a fee where it's essentially recovering a cost for a service that people value. So looking at the purpose, understanding the purpose is going to be the first step towards thinking about the right way to price that service. And at least to your second question, which is about equity and in the rethinking revenue project, we are thinking about fairness as an important criteria for rethinking revenue. And fairness can be broken down into an equity concept, which is essentially ability to pay. But also something that goes along with that is a proportionality concept, which is essentially saying that people are asked by a society to pay their fair share of taxes to support their local government. So how do we balance those two things in a revenue structure? And I think it's very exciting about segmented pricing, is it really threads the needle between these two conceptions of fairness?
Stephen Goldsmith:
Why did you pick the phrase segmented pricing? Make sense to me, it's not a term of art in the average city. So where did that word come from? And what do you mean to go by that word?
Bryan Glenn:
I'm Bryan and am the CEO of SERVUS. So segmented pricing I think is something that we landed on through conversations we were having with advocacy groups, as well as some local municipalities. What I've learned is governments are very skillful at saying no, and they don't know how to get to yes, very easily. And so through working with the folks at the Center for Municipal Finance at the Harris School of Public Policy, as well as just talking through Shayne and some other folks at GFOA, we've learned how not to scare finance officers by saying certain buzzwords, right? And so we've talked about fairness briefly, but I suspect if you would put us all in a room and each one of us were asked to define fairness, we would all out with different definitions. And so segmented pricing was our way of boiling down, instead of saying targeted pricing, because targeted is a scary word for a lot of people.
And especially when you talk about algorithmic bias, that from the criminal justice system has already been snuffed out as a culprit among inequity. And so we've tried to put this as palatable as possible for folks so that they can say, "All right, segments I can see that." We have different segments within our population. And even within low income, there are different segments. So a person with three kids who's living at the poverty line is totally different than someone living in a homeless halfway house or something of that nature. All these folks are different. That's how I thought about it. But as JP could probably attest to segmented pricing at large is a much bigger topic and he can explain that. So...
Stephen Goldsmith:
So JP, I have a question for you. Several centuries ago when I was the mayor of Indianapolis, I was concerned that our golf courses were underpriced and my home was picketed by senior golfers as part of the process. So we agreed that they could play golf at their current price, even though everyone else paid more, but they could only play on Wednesday and Thursday afternoons with that price, they'd have to pay a premium otherwise. So is that segmented pricing? Did I get that right? Or is that wrong? And is that story have any relevance to what you guys are talking about?
Jean-Pierre Dubé:
That is segmented pricing, but what makes the topic of segmented pricing a little complicated is that there's more than one way to segment a market. So the first way we normally think of segmentation, it's usually the one that irks the most, the adverse responses with concerns of fairness is when you literally charge different people, different prices for exactly the same consumption experience. So for example, if you go to the movies and you're under 12, you get a child's discount. If you're a senior citizen over 65, you get a senior's discount. And everyone in between pays the full rack rate, right? It's the same seat to the same showing of the same movie. So that's the usual way we think of segmentation. It's actually also one of the more uncommon ways to segment.
The more common way to segment a market is what you just described. We actually don't tell people what they're going to pay. What we do instead is we give them a choice, right? We create what firms would call a product line. So like good, better, best. So imagine in the golf world, we're going to create two versions of the golf product. There's golf at peak hours when the weather's perfect and the day is convenient and it's the most desirable to play. And then there's golf at the off hours when it's not as pleasant, not as convenient to play. And we'll charge high price for peak hours, we'll charge low price for low hours, but it's totally up to the buyer, which one they want to buy. If you want a discount, come after hours. If you want to come during the prime time of the day, then you have to pay full price. And we see this used in cars. We see this used in services. So they're both forms of segmentation. There's just different degrees of how we segment the market.
Stephen Goldsmith:
I've been troubled recently, but not recently, for a while about underpricing parking, right? I know we have some aversion to cars generally, but it feels like if we have one price for parking then folks who have more money are almost... You could think about that almost as if we're subsidizing them because we're underpricing the cost of consumption of the curb. So let's apply segmented pricing to the parking world. What would that look like?
Bryan Glenn:
If I may. What I think is, this is a great opportunity for cities to take a real look at how revenue flows in from particular streams. And when you mentioned parking, parking's a great example of something that everybody does. And since everybody does it, you have to realize that it's going to impact people in different ways. Well, segmented pricing essentially in our minds in a perfect world, would insulate the lower income folks while allowing the city to continue its regular business practices with those folks who can pay more. And though this is a deeper policy discussion. Those municipalities could actually increase the static price of what everybody else pays in the general population while still insulating those lower income folks so that they wouldn't be hurt.
So we'd like to think of it in terms of discount buckets or reductions. So a lot of cities have amnesty plans and they're very familiar with that concept. But let's have an amnesty plan with variable rates, so to speak. So a 50% off, a 70% off and maybe a deep 80 or 85% reduction for folks who are truly impoverished. And that's the way I kind of like to think about segmented pricing in terms parking tickets.
Jean-Pierre Dubé:
Well, I think that one of the challenges we have right now in society with the exception of taxation, where we've already accepted that people pay differential amounts in taxation, we have personalized taxes right now. There we call it progressive taxation. But when we go to other aspects of the economy, whether it's goods and services, or in this case fines or municipal fees, there's a very muddled and vague notion of what's fair. For most people what's considered fair is that everyone gets confronted with the same offer. So for example, if I'm shopping for a car, everyone gets charged the same price for a car. If I'm confronted with a parking space, everyone gets charged the same price. But it's a weird way to think of fairness because what we really want to be thinking about is the fairness of the allocation. Ultimately, we shouldn't care what the offer is.
What we ultimately care about is how we allocate parking. And if we think about a fair allocation of parking, well then of course, if we charge everyone the same price for a parking spot, people with more income are going to have an unfair advantage in getting that. And so it becomes a really strange question when you listen to, especially civic leaders, arguing that a uniform rate for a fine or a fee is more fair because they're defining fairness as the offer, even though there might be a very unfair allocation of the benefit. So like it’s only a small number of people get access to parking in a world where parking is very expensive. And in a world where we charge differentially for people based on means or socioeconomic status, we have a more equitable allocation of the parking benefit itself. So I think that serves or only answers why would we consider segmented pricing of parking? It's to make sure we have an equitable allocation of the access to parking benefits and services, as opposed to an equitable or fair distribution of the offer itself.
Stephen Goldsmith:
Yes. I thought one of the lines in the paper particularly appealed to me, is the line that the ethics of public service commits public officials to treat people fairly and produce good results for of the community. And I think introducing the concept of public service ethics into the conversation is very appropriate and powerful. Shayne?
Shayne Kavanagh:
Yeah. So the GFOA Code of Ethics, I think is unique amongst professional associations. That our code of ethics is basically centered around increasing your reputation for trustworthiness. And fairness is super important to being trusted, right? And so, I think a traction to segmented pricing is that it... To JP point, it brings in a more nuanced perspective to fairness and helps the local officials start to think about how they can connect their public service pricing strategies to the ethics of fairness.
Stephen Goldsmith:
And we don't have too much longer, but I have a number of questions. But before I ask the questions, let me just... So one line in the paper I disagreed with. So I know there's multiple of you and only one of me. So this is very dangerous to suggest I don't agree. But you say the goal is not to charge anyone higher price. Let's just stay with parking because it's easy to understand. In order to hit that right point, right? We have to charge some people a higher point, right? Or it's not a fair system. Some people we want to charge lower to, but doesn't the conversation also include raising the price to individuals to kind of fit the right price point?
Shayne Kavanagh:
Yeah. Thank you Stephen. So the point we are making in the paper is that, it's true that you could apply segmented pricing to people at the higher end of the income scale. And in fact, that's happening in places in Western Europe. The point we are making in the paper is we believe the most potential for this is at the lower end at the income scale. So we are simply focusing our analysis on the lower end of the income scale because we feel that's where the most good will happen.
Stephen Goldsmith:
I've had conversations with cities generally on the subject, maybe not presented as sophisticated as the paper does, where you get a little pushback which is, we do now have a capability to design a system, pay by app or otherwise where individuals with certain demographics could have special rates, it's technologically possible. The cities then pushed back with, "Well, we get a lot of parking revenue. We couldn't afford to discount our rates." Talk to us about actually how that's misguided, in the sense that better calibrated pricing will actually produce more revenues. I thought that was a very appealing narrative in the paper.
Bryan Glenn:
Sure and I'll take a quick stab at it. So this is essentially why I asked JP to come along is because, without actually analyzing the rates in figuring out what can people actually afford to pay. You don't know how close to optimal pricing an actual city's fine or fee may be. Let's continue down the road of a parking or parking ticket. If a city is using a nominal static $50 fee or fine for parking in the wrong place, you don't know how many people can actually afford to pay that $50 unless you take a deeper dive into what's the attrition rate, how many folks actually pay within the first 30 days. There's just a bunch of data that I think hints at, and actually gives a better clue as to where we should be looking to how to address this problem.
And so this may not perfectly answer your question, but in terms of segmented pricing, particularly when you're thinking about folks who are being charged different rates, when you are able to do that, you are able to actually hit the demand curve in a way where, especially in the economy, well, let's just say demand shifts. So right now we have the economy going in all sorts of ways where we have inflation coming. Well, we don't know what the interest rates are going to do to some of these things. And so you just don't know how folks are being affected. And I think an individualized approach really allows cities a lot of levity to be able to do the things and accomplish the goals they want to accomplish.
Stephen Goldsmith:
JP, why don't you jump in here and then Shayne, as you both respond to my questions. They help provide examples other than parking do you think are the ripest areas for attention, please?
Jean-Pierre Dubé:
Yeah. The analogy that makes sense for fines and fees is demand. Bryan used the word demand. It's a word that irks public officials, because they don't think of fines and fees as products or services that are sold. But the reason demands... The idea of consumer demand makes sense as an analogy, is that the individual has some discretion over whether or not they pay. And if whether it's because I can't afford or I'm not interested or I'm not scared by the fee. The bottom line is we've observed that as prices for fines and fees go up, fewer people pay and we see delinquency rates go up, which tells me as an economist, there's something similar to a demand curve, call it a propensity to pay. And we see that in all sorts of markets. I've studied consumer goods markets, business to business markets. And we see the law of demand there too. As you raise the price, fewer people buy and pay. Similar to as I raised the fine, we're going to see more delinquencies.
And the way public finances worked in a lot of cities in recent years as we've seen budget shortfalls compensated by increased fines, is an assumption that consumers are going to pay regardless. In the world of economics we'd say, there's this inelasticity in demand that people aren't very sensitive to the prices. That demand will be the same whether the price is very high or very low, and it's simply not true. So what Bryan brought me on board for this to apply the same kind of empirical tools and conceptual thinking that we would apply to a standard consumer goods market to try and think about the optimization of a municipal price of a finer fee. And this optimization is about balancing. How much money do we get from each paying customer and how many paying customers do we get? And that's the part that gets ignored. I might have fewer paying customers at a higher price. Paradoxically, to a civic leader we might actually collect more revenues at a lower price.
Stephen Goldsmith:
What are the most powerful arguments? And if you were in front of a group of 50 city officials, where and how would you tell them to start?
Bryan Glenn:
So I really think that as city officials you need to acknowledge that you're providing a public benefit to folks. You have very few levers to pull for revenue. And even with that being said, the money that you have coming in is generally mostly spent up. And so whatever discretionary budget you have for your programs that you really want to do, your mayors or your city councils, those sorts of things, you're going to need revenue for that. And I think that too many finance departments are stretched and will try to take on a version of this or an amnesty plan on their own. And when you talk about pricing, because that's what this is, it's a very complex issue. And you need folks who understand the economy and understand pricing and understand how and what motivates people to pay.
And so for me, it's very easy. We're looking at this not only on a smaller level, but even at a macro level with the cities that we'd love to bring on board, that we think there is a lot of additional value that could be added by studying all of these in tandem with each other, as opposed to just looking at one city. So I think that's a huge benefit to a city that we might be able to add through segmented pricing.
Stephen Goldsmith:
Good. Thank you very much, Shayne.
Shayne Kavanagh:
Sure. Yeah. Well, I think we're at a very... We'll call it unique historical juncture, right? Where there is a... I say unprecedented focus on fairness and public finance. But the same time, cities have a very unique opportunity with ARPA funding, right? Where there's breathing room. But this is not going to last forever and we will, probably soon enough, be back to the point where cities are thinking about where are we going to get our revenue from? And segmented pricing is a really unique opportunity to do both, right? We're going to increase the fairness of our revenues, but at the same time we're also going to strengthen our revenue system by developing a pricing structure that charges the people the price they can afford and no more and no less, right? So those two things together are how you get to this concept of maximizing our optimizing revenue, but also having a revenue system that optimizes fairness at the same time.
Stephen Goldsmith:
Excellent. Thank you. JP please close this up.
Jean-Pierre Dubé:
Sure. Absolutely. Our discussion is largely about the upside to municipalities of trying to apply economic tools on a more regular basis when they're designing their policies for fines and fees. I've been teaching and practicing pricing now for 22 years. And in my experiences with companies, sometimes big established companies who feel that they've already understood everything there is to know about pricing. We've run field experiments and found optimization can improve their profits sometimes by as much as 60 to 70%. And in a one recent study where we implemented a personalization scheme, which was built with AI and machine learning, we had more than 80% improvement in profits. And at the same time, an increase in the size of the customer base being served. So this is exactly what the municipality should want to see. More revenues, but at the same time more compliance with the payment system. So it seems like a win-win, no delinquencies and people being chased by collectors and at the same time municipal finance improves.
Stephen Goldsmith:
So thank you very much. This is Steve Goldsmith with another podcast. I want to thank Bryan Glenn, CEO of SERVUS, Jean-Pierre Dubé, the professor of Marketing at the University of Chicago Booth School, Shayne Kavanagh from Senior Manager of Research for GFOA. A Terrific paper that everyone should read on rethinking revenue, even more important than reading the is rethinking revenue coming up with more equitable and fair ways to impose fines and fees in a way that will improve behaviors. I think actually make the fiscal situation better and make quality of life improve as well. So thank you very much, gentlemen, for joining us for this important conversation.
Jean-Pierre Dubé:
Thank you.
Bryan Glenn:
Thank you.
Shayne Kavanagh:
Thank you.
Betsy Gardner:
If you liked this podcast, please visit our us at datasmartcities.org, or follow us @datasmartcities on Twitter. And remember to subscribe at the new Data-Smart City Podcast channel on Spotify, Apple Podcasts, or wherever you listen. This podcast was produced by me, Betsy Gardner, and hosted by Professor Steve Goldsmith. We're proud to be the central resource for cities interested in the intersection of government, data, and innovation. Thanks for listening.