Preparing Multi-Year
Budgets in the New
Economy
September 23, 2010
Mark Ruff & Stacie Kvilvang – Ehlers
What is a
Financial Management Plan?
•
A multi-year fiscal plan for all
tax-supported funds
•
Integrates:
−
−
−
−
−
•
Existing debt
Capital improvement plans (CIP)
Future debt
Tax base growth
Future operating expenses
Compares entity to standards
−
−
Government Finance Officers Association
(GFOA)
Similar entities
What Makes It Practical?
•
Helps to manage expectations
−
New spending proposals evaluated against other
identified priorities
−
Weigh proposals vs. predefined affordability parameters
•
Helps to maintain assets
−
Regular replacements
−
Large periodic repairs
•
Reduces stress during budget process
−
Previously agreed spending guidelines
−
Better understanding of the effect decisions have
•
Rating agencies like multi-year planning
•
Reduces reactivity amidst an unpredictable
fiscal environment and unfunded mandates
Why Is Planning Necessary?
•
Harrisburg, PA Example
−
−
−
Capital of Pennsylvania with population of 50,000
City-Owned Garbage Incinerator
Built in 1972 and improved/expanded in 2003
Why Is Planning Necessary?
•
Harrisburg, PA Example
−
General Obligation Debt of the City
−
In 2003 borrowed additional $125 million to do repairs
and expand facility
•
•
−
Didn’t have enough money to make a scheduled $3.3
million GO bond payment in September
•
−
Had toxic air pollution issues
Total debt is $288 million
Payment to come from revenues from the incinerator and tax levy
Moody’s Investors Service warned that “the city’s guarantee
of the incinerator debt results in a continuing burden that will
stress the city’s finances for the foreseeable future,
negatively affect its creditworthiness and jeopardize its
future access to the public credit markets.”
Why Is Planning Necessary?
•
City was looking at filing for bankruptcy
•
State had to step in to make the scheduled
payment
•
City is now forced to hire a consultant
−
To assist in crafting a plan to return it to solid financial
footing
−
Looking at all options including:
−
−
−
−
Selling incinerator
Selling City-Owned garages
Raising taxes
Etc.
Financial Planning
• Process of
Financial Planning
Step One: Review your situation
•
Review the entity’s financial position
−
−
−
•
Fund balances
Annual operating surplus or deficit
Projected debt payments
Review financial policies to make sure the
appropriate financial controls and
constraints are understood by management
and staff
General Fund Balance
General Fund Balance History
2,500,000
80%
70%
2,000,000
60%
1,500,000
50%
Net Change
1,000,000
40%
Fund Balance
% of Expenditures
30%
500,000
20%
-500,000
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
10%
0%
Step Two:
Assemble the Required Information
•
Develop an inventory of all
capital needs (CIP)
−
•
Look for deferred or one-time
maintenance expenditures (nonrecurring)
Identify current and
alternative revenue sources
Street Improvement Plan
Project
Year
2010
2011
2012
2013
2014
2015
187,527
5,000
5,000
140,000
50,000
502,168
361,514
5,000
5,000
140,000
3,500,000
39,809
4,075,636
170,954
1,068,476
316,485
125,086
236,091
60,727
25,695
5,000
5,000
83,506
109,645
2,206,665
435,671
86,326
100,654
5,000
237,919
103,122
263,282
1,293,605
262,395
27,125
47,232
1,286,514
5,000
150,000
347,085
2,125,351
671,000
514,690
1,185,690
315,000
5.10% Prepaids
6.50%
6.50%
6.50%
6.50%
6.50%
6.50%
6.50%
6.50%
6.50%
6.50%
4,388
150,000
484,236
750,000
10,482
-
1,650,000
10,482
19,564
-
900,000
10,482
19,564
56,185
-
1,800,000
10,482
19,564
56,185
27,936
-
900,000
10,482
19,564
56,185
27,936
52,388
-
4,030
3,150,000
150,000
4,079,359
4,104
534,238
93,506
2,326,742
6,506
242,919
1,250,503
5,643
155,000
2,089,658
4,930
150,000
1,236,332
201,477
205,199
325,276
282,174
246,481
297,124
-
31,318
85,081
190,215
250,272
373,869
Expenses
Inflation
0.00%
Hamel Road - Pinto To Tower Reconstruct
2012
Tamarack North of Medina Overlay
2014
Tamarack City Limits to CSAH 24 Rehab.
2013
Comanche Trail Overlay
2014
Hunter Drive South of CSAH 24 Rehab.
2011
Hunter Drive Medina to Hamel Maintenance 2012
Lake View Road Overlay
2014
Willow Drive Orono to 24 Reconstruct
2014
Willow Drive N. of Chippewa Reconstruct
2012
Wichita Trail Reconstruct
2012
Tower Drive WTP to Hamel Reconstruct
2012
Shire Drive Overlay
2012
Iroquois Drive Overlay
2012
Pioneer Trail - Willow to TH55 Final Overlay 2010
Bobolink Road Overlay
2013
Morningside Road Overlay
2013
Chippewa Road West Maintenance
Various
Hunter Drive - Medina to Hamel Maint.
Various
General Sealcoating
Various
Townline Road CR11 to TH55 Overlay
2013
Hwy 55 :& CR116 Intersection
10% Various
Other (Placeholder)
Various
Debt Service
Total Expenses
0
Assess
Revenue
%
Amount
G.O. 429/Reconstruction Debt
Special Assessments 2010
20%
60,434
Special Assessments 2011
25%
183,957
Special Assessments 2012
25%
528,290
Special Assessments 2013
25%
262,672
Special Assessments 2014
25%
492,588
Special Assessments 2015
25%
296,422
Special Assessments 2016
25%
317,373
Special Assessments 2017
25%
335,996
Special Assessments 2018
25%
358,110
Special Assessments 2019
25%
383,717
Special Assessments 2020
25%
409,323
Interest Earnings
2%
Intergovernmental
Developer
Paid by General Fund
Total Revenue
Cash Balance
New Debt Levy
-
-
Rate
Capital Equipment Plan
2009
Expenditures
Streets
Skid Steer on Tracks
Streets
Compressor on Trailer
Streets
Directional Safety Sign
Streets
Mill Attachment
Streets
Hook Truck
Public Works 2002 PW 1500 Turnover
Public Works 1996 Plow Trk L8000 Turnover
Public Works 1982 Loader Turnover
Public Works 2001 Tandem Truck
Engineering Inspection Vehicle
Engineering 2002 Eng 2500HD Turnover
Engineering 2002 Insp 1500 Turnover
Engineering Survey Equipment
Parks
Sidewalk Machine
Parks
Wide Area Mower
Parks
Turf Maintenance Attachments
Parks
1999 Skidsteer
Police
Squad Car Replacement
Police
Records Mgmt System
Fire
Engine #22
Fire
Duty Crew Vehicle
Fire
1986 Engine 13
Fire
1992 Utility 11
Fire
2003 GMC
Fire
2005 Rescue 12
Total Uses of Funds
Sources of Funds
Equipment Certificates
Other
Total Sources of Funds
Cash Balance
2010
2011
2012
2013
2014
40,000
18,000
12,000
16,000
166,000
20,000
150,000
130,000
25,000
30,000
25,000
15,000
85,000
15,500
22,000
99,000
100,000
33,000
136,000
63,000
132,000
50,000
33,000
420,000
185,000
425,000
450,000
42,000
214,500
436,000
411,000
563,000
614,000
699,000
250,000
350,000
400,000
500,000
600,000
700,000
250,000
350,000
400,000
500,000
600,000
700,000
355,380
269,380
258,380
195,380
181,380
182,380
Step Two:
Assemble the Required Information
•
How do City Planners fit into
the financial planning
process?
•
Planners are on the “front
line” of development trends
Costs of Development
•
City Versus Developer

City cares about impact of development on
General Fund
 Development is an operational cost, not a capital
cost
 What is your community’s sustainability
•
•
20 homes a year vs. 200 homes a year
Total build out value
Costs of Development
•
City Versus Developer

Developer cares about assessment funds
 How much and when do I have to pay
•
•
•
Capital cost
Up front is a risk issue
City bonds and pay later
 Finding balance is important
•
Not a universal model
Step Two:
Assemble the Required Information
•
Estimate growth in the tax base
−
New value for both commercial and
residential construction
−
Inflation in existing properties
−
TIF district decertification
•
Look for new budget needs to meet
growth demands
−
Personnel and Equipment
Problems With Forecasting
•
Problem areas
 Growth didn’t keep up with infrastructure
costs
 Assessment issues
 Hook up fees/area charge issues
•
Changes in infrastructure
financing due to these issues
New Growth Projections
Residential Growth
Total Residential Units
Total Residential Market Value
Total Residential Tax Capacity
Commercial Growth
Total Commercial Units
Total Commercial Market Value
Total Commercial Tax Capacity
Unit Value
Unit Value
Built in 2009
Total Units
2011
465
10
$6,750,000
$67,500
Built in 2010
2012
10
$6,750,000
$67,500
Built in 2011
2013
45
$13,750,000
$137,500
Built in 2012
2014
100
$37,500,000
$375,000
Built in 2013
2015
100
$37,500,000
$375,000
Built in 2009
2011
$0
$0
Built in 2010
2012
10
$5,000,000
$99,250
Built in 2011
2013
35
$10,000,000
$199,250
Built in 2012
2014
50
$17,500,000
$349,250
Built in 2013
2015
50
$17,500,000
$349,250
Total Units
395
TOTAL NEW MARKET VALUE
NEW TAX CAPACITY
Less NEW FISCAL DISP. CONTRIBUTION TAX CAPACITY
TOTAL NEW TAX CAPACITY including expired TIF Districts
$6,750,000
$67,500
0
$67,500
$11,750,000
$166,750
-34,369
$132,381
$23,750,000
$336,750
-68,998
$267,752
$55,000,000
$724,250
-120,941
$603,309
$55,000,000
$724,250
-120,941
$603,309
Step Three: Prepare the Model
•
Analyze the financial impact of the
total requested spending
•
Determine if it meets the
affordability limits defined by the
governing body
•
Affordability limits may include:
−
−
−
Impact on overall tax levy
Tax impact on average home
Impact on city tax rate
Summary Spreadsheet
2009
ACTUAL
2,658,415
GENERAL FUND
TOTAL REVENUE
TOTAL EXPENSES
2010
BUDGET
2,316,969
2011
2012
2013
2014
2015
2,210,273
2,377,246
2,411,516
2,446,471
2,542,125
2,316,969
0.0%
0
2,196,947
-5.2%
13,326
2,377,246
2,411,516
2,446,471
2,542,125
REVENUE OVER (UNDER) EXPENSES
2,316,958
-8.5%
341,457
0
0
0
0
Beginning General Fund Balance
Add Contingency Amount (Transfer In)
Ending General Fund Balance
Percent of Expenditures to Ending Fund Balance
1,421,298
0
1,762,755
76%
1,762,755
50,000
1,812,755
78%
1,812,755
0
1,826,081
83%
1,826,081
0
1,826,081
77%
1,826,081
0
1,826,081
76%
1,826,081
0
1,826,081
75%
1,826,081
0
1,826,081
72%
2,388,536
0.0%
2,594,150
-205,614
2,172,369
-9.1%
2,694,450
-522,081
1,965,535
-9.5%
2,740,994
-775,459
2,132,508
8.5%
2,166,778
1.6%
2,201,733
1.6%
2,297,387
4.3%
0
75,000
81,500
101,700
0
28,800
53,282
0
0
83,840
99,500
0
28,600
53,282
0
0
0
97,300
0
28,300
56,911
0
0
0
100,300
0
29,100
55,077
0
0
0
103,100
0
28,700
53,234
0
0
0
105,700
0
29,300
56,637
0
0
0
108,000
0
28,800
54,574
0
340,282
0
265,222
15,000
197,511
15,000
199,477
55,211
240,245
55,211
246,848
55,211
246,585
2,728,818
81,972
2,646,846
-3.7%
7,715,717
0
7,715,717
2,437,591
97,504
2,340,087
-11.6%
7,173,858
0
7,173,858
2,163,046
96,838
2,066,208
2,331,985
96,838
2,235,147
2,407,022
96,838
2,310,184
2,448,581
96,838
2,351,743
2,543,972
96,838
2,447,134
6,582,883
0
6,582,883
6,582,883
20,000
6,602,883
6,734,941
30,600
6,765,541
6,900,851
31,212
6,932,063
7,038,869
31,836
7,070,705
34.305%
-2.73%
32.620%
-4.91%
31.388%
-3.78%
33.851%
7.85%
34.146%
0.87%
33.926%
-0.65%
34.609%
2.02%
1,715
-2.73%
1,631
-4.91%
1,569
-3.78%
1,693
7.85%
1,750
3.39%
1,782
1.83%
1,863
4.54%
GENERAL FUND OPERATING TAX LEVY
ANNUAL INCREASE
LEVY LIMIT
LEVY ABOVE/BELOW LEVY LIMIT
Refunding Bond 2001 (97 Road Imp.) 307
Refunding Bond 1998 (98 Sewer Imp.) 301
HRA Revenue Bond 1999 - Public Works 304
G.O. CIP Plan Bond 2006 (01 Public Safety) 309
G.O. Equipment Certificate 2002 - 310
G.O. Improvement Bond 2005 - Drake Drive
G.O. Equipment Certificates 2007
Pioneer-Sarah Watershed Levy (not included)
POTENTIAL NEW LEVY (SEE EXHIBITS)
TOTAL SPECIAL LEVY (No Watershed Levy)
TOTAL TAX LEVY
LESS FISCAL DISPARITIES
NET LEVY TO TAXPAYERS
EXISTING TAX BASE
NEW TAX CAPACITY
TOTAL TAX CAPACITY
TAX RATE ON TAX CAPACITY
TAX RATE % CHANGE
City Taxes (prior to homestead credit)
Percentage tax increase in average home ($500k)
Payoff
Paid
Paid
2010
2020
Paid
2016
2015
Step Four: Analyze and Compare to
Standards
•
Compare to other similar entities –
best practices
−
−
−
•
Level of expenditures
Employees per capita
Debt
• Per Capita
• As a Percentage of Budget
Model and analyze alternative “what
if” scenarios
Tracking Debt Levies
Debt Levy as a Percentage of Total Levy
30.00%
Debt Levy %
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Debt Levy %
2010
5.53%
2011
6.54%
2012
14.07%
2013
19.09%
2014
18.67%
2015
25.09%
2016
28.04%
2017
27.75%
2018
27.56%
2019
27.50%
2020
27.40%
Avoid major increases/decreases from year to year and
prepare for opportunities to provide for capital projects or tax
reductions
Projected Tax Rates
40%
35%
30%
Tax Rate
25%
20%
15%
10%
5%
0%
Tax Rate
2010
17.240%
2011
17.665%
2012
19.681%
2013
21.260%
2014
22.406%
2015
25.088%
2016
28.129%
2017
28.820%
2018
29.545%
2019
30.324%
2020
31.079%
Tax Rate to Tax Impact
Annual City Tax
Projected City Tax Impacts
$500,000 Home (Inflated at 0% in 2011 & 2% thereafter)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
City Taxes
2010
862
2011
883
2012
1,009
2013
1,117
2014
1,206
2015
1,384
2016
1,589
2017
1,668
2018
1,752
2019
1,842
2020
1,933
Step Five: Develop Support and
Communicate Plan to the Public
•
Prioritize expenditures
•
Obtain feedback
−
−
Governing body feedback (work sessions)
Public feedback
Tactics for Successful Implementation
•
Make this a comprehensive fiscal plan
•
Integrate budget, tax policy, and capital
plans
−
Often seen as completely separate processes, but
this should be a unifying document
•
Update annually
•
Need involvement from all departments
−
Need all information to make the plan accurate
−
This will increase various departments
understanding of how they fit into the big picture
Results
•
Less “paycheck to paycheck” thinking
•
Projects, in the context of multi-year
planning, tend to be less controversial
•
A Financial Management Plan makes
difficult decisions easier for elected officials
•
If there is a plan, projects get done
Financial Planning & Bond
Ratings
•
How important is financial planning and
management to bond ratings?
How Important is Management
to Bond Ratings?
•
Economic factors may set foundation,
but
•
Most downgrades are management
related
•
Most upgrades also have roots in
management decisions
•
Management usually more important
than many other credit factors
−
−
Liquidity
Leverage/fixed cost ratios
But I Don’t Make the Decisions!
Management vs. Governance
•
Governance: How policy makers interact with
themselves and others to guide the organization
according to its mission
•
Management: The day-to-day implementation of policies
designed to achieve organizational goals
•
Management can and often does compensate for limited
governance
•
As long as an entity’s goals are clear and poor
governance does not impede quality management, risks
may be minimal
•
If poor governance does prevent the implementation of
optimal policies, risk may still be minimized if
management can implement the “next best” policy
The Financial Management
Assessment
An analytical methodology that evaluates established
and ongoing management practices and policies in the
seven areas most likely to affect credit quality
1.
2.
3.
4.
5.
6.
7.
Revenue and expenditure assumptions
Budget amendments and updates
Long term financial planning
Long term capital planning
Investment management policies
Debt management policies
Reserve and liquidity policies
What The FMA Is and What The
FMA Isn’t
IS
One component of the
entire rating process
ISN’T
A separate rating
An enhancement to the
existing process
An evaluation of the competency
or aptitude of individual finance
professionals or elected and
appointed representatives
An evaluation of the
guiding assumptions and
policies regarding financial
decision-making
An affirmation of best
practices you’ve probably
already heard preached by
S&P, GFOA, ICMA, etc.
An assessment of actual financial
performance
Revenue and Expenditure
Assumptions
Strong
Formal historic trend analysis is performed and updated
annually for both revenue and spending; regular effort is made
to determine whether revenues or expenditures will deviate from
their long-term trends over the next couple of years; evidence of
independent revenue forecasting exists(when possible);
budgeting performance is either good or conservative.
Standard
Optimistic assumptions exist that, while supportable, add risk;
assumptions are based on recent performance, but little evidence
of questioning or validating assumptions exists. Budget
performance is mixed and sometimes reflects optimistic
assumptions.
Vulnerable
Assumptions neglect likely shortfalls, expenditure pressures or
other pending issues; assumptions exist which enjoy no prudent
validation.
Budget Amendments &
Updates
Strong
At least quarterly budget surveillance is maintained to
identify problem areas and enable timely budget
adjustments; management exhibits ability and willingness to
address necessary intra-year revenue and expenditure
changes to meet fiscal targets.
Standard
Semiannual budget reviews exist; management identifies
variances between budget and actual performance.
Vulnerable
No formal process exists for regular review and timely
updating of budget during the year.
Long Term Financial Planning
Strong
A multi-year financial plan exists where future issues are
identified and possible solutions are identified, if not
implemented; revenue and expenditure decisions are made
primarily from a long-term perspective. Structural balance is
a clear goal.
Standard
Multi-year projections are done informally; multi-year
projections are done, but without discussion of pending
issues, so that issues are not addressed; some one-shot
actions exist, but the long-term consequences of these actions
are acknowledged and communicated.
Vulnerable
No long-term financial planning exists; operational planning
is done on a year-to-year (or budget-to-budget) basis; oneshot budget fixes are used with little attention to long-term
consequences.
Long Term Capital Planning
Strong
A five-year rolling CIP with funding identified for all years
exists and is linked to the operating budget and long-term
revenue and financing strategies.
Standard
A five-year CIP is done, but is generally limited to projects
to be funded from the current budget plus a four-year wish
list; some funding for out-year projects is identified, but not
all.
Vulnerable
No five-year CIP exists; capital planning is done as needs
arise.
Investment Management Policies
Strong
Investment policies exist and are well defined; strong reporting
and monitoring mechanisms exist and are functioning.
Standard
Informal or non-published policies exist; policies are widely
communicated and followed.
Vulnerable
Absence of informal or non-published policies.
Debt Management Policies
Strong
Debt policies exist and are well defined; strong reporting and
monitoring mechanisms exist and are functioning. If swaps
are allowed, a formal swap management plan that follows
S&P’s guidelines (see the DDP 1) has been adopted.
Standard
Basic policies exist; policies are widely communicated and
followed. If swaps are allowed there is a swap management
plan in place, but it does not follow S&P’s guidelines.
Vulnerable
Absence of basic policies or clear evidence that basic policies
are followed. Swaps are allowed but there is no swap
management plan in place, and/or there is no local (non-FA)
knowledge about the swap.
1
DDP = Debt Derivative Profile
Reserve and Liquidity Policies
Strong
A formal operating reserve policy is well defined. Reserve
levels are clearly linked to the government’s cash flow
needs and the historic volatility of revenues and
expenditures throughout economic cycles. Management has
historically adhered to it.
Standard
A less defined policy exists, which has no actual basis but
has been historically adhered to it.
Vulnerable
Absence of basic policies or, if they exist, are not followed.
A $2 Crystal Ball is Worth
More Than You Think

Despite the multitude of questionable assumptions
which support any forecast, several benefits justify at
least a minimal effort toward long-term planning

Planning forces managers to recognize long-term
trends and encourages early investigation of possible
solutions

Planning can limit the opportunity for political
interference

Planning limits surprises, which almost always
decrease efficiency and increase risk
Questions
Mark Ruff
651-697-8505
[email protected]
Stacie Kvilvang
651-697-8506
[email protected]