FUNDAMENTALS OF BUDGETING AND FINANCE William “King” Cole - January, 29th, 2015

Overview

Introduction Budget Basics

Different Approaches

Process Key Players and Their Roles

How We Do It

Concepts and Policies Must Have - Ought To Have - Nice To Have - Don’t Have

Tool Box Calendar Items

State Law

Structure

Financial Management Tools

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INTRODUCTION 3

BUDGET BASICS

What is a budget? An annual policy statement that sets the tone for the year

and specifically governs the City’s use of its funds A “work” plan that includes a set of priorities for the year

and reflects the implementation of established long-range planning items

A financial plan that lays out the state of the City’s finances and what to expect in terms of revenues and expenditures

An effective communication piece for the public to be able to easily understand the City’s plan for the next budget year

Most importantly, it is LAW since it is adopted by ordinance

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BUDGET BASICS (cont.)

What does a good budget document look like? It should tell a complete story of the City‘s financial plan

for the coming year by showing past, present and future information for both operations and projects.

Should reflect the goals of the Council, the values of the community, efficient & effective use of tax revenues, and the overall management approach of the organization

Should be realistic, sustainable and balanced Use charts, graphs and other illustrations along with text

to get your point across Should be EASY to understand… for EVERYONE…

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DIFFERENT APPROACHES

Budget Philosophy You can approach the budget by using one or more of

several budget philosophies: Zero-based budgeting Incremental budgeting Performance based budgeting Line – item budgeting Target based budgeting

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PROCESS 7

SETTING THE STAGE

Community profile Comp plan Council goals Other long term plans Departmental plans CIP Annual Budget

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City Council

Group Planning Sessions / Workshops One on One Area politics Individual interests/ pet projects Feedback from public

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Departmental Needs

Everyone needs more of something: Performance Measurement Service Levels Perceived Needs Departmental Goals Ranking of priorities

Proper Planning ≠ More $$$

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Citizens/Stakeholders

Public Hearings Responsiveness Proactive/Reactive Feedback Surveys? Public perception Electoral Process Service demands

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Executive Leadership

Balancing ??? Growth Redevelopment Change Political Climate Internal organizational issues Ethical challenges Fiscal realities

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How we do it.

Inputs from 4 sources Sort - two categories base budget request and

enhancements Prioritize needs Propose draft budget Accept feedback (criticism) Propose change Lather/rinse/repeat as necessary

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CONCEPTS AND POLICIES 15

Must Have

Balanced Budget Recurring revenues equal or greater to recurring

expenditures – “Structurally Balanced” Address use of one time revenues/cash reserves/fund

balance for non-recurring/non-operating expenses Capital Purchases Construction Projects

Specified Legal Level of Appropriation Fund, Function, Department, Category, Line Item?

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Ought To Have

Revenues Diverse Revenues

Match revenues to expenditures if possible (user fees) Know limitations and dynamics of primary revenue

streams Revenue Philosophy – how much should fees recover?

Debt Policy Philosophy, uses, processes, and limits Generational Equity

Cash Flow Analysis

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Ought To Have

Expenditures Capital Replacement Schedules and/or Reserves

Schedule based on useful lives Outdated equipment acts like a liability (maintenance

issues) Depreciation / Capital Replacement

(Reserve/Transfer?) High Technology Replacement Schedule and/or

Reserve Multi Year Capital Improvement Plan

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Ought To Have

Expenditures Donations / Grant Management

Use for operations/ expectation of replacement Recovery Planning – disaster management Budget Contingency Policy (Deficit Avoidance)

Identify cuts prior to emotional and political influence Target Fund Balance Reserve Policy

Between 90 and 180 days operating expenditures Address appropriate use of reserve funds Address replenishment of reserve

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Ought To Have

Amendment Policy / Charter Frequency, Triggers, Appropriateness Amendment vs Line Item Transfer

Identify Term of Budget Year end encumbrances Re-appropriation or encumbrance policy

Performance Measures Commitment to sustainability – don’t pass a budget

that isn’t sustainable.

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Nice To Have

Tax Rate Policy

Effective M&O + % Multi Year Fiscal Forecast

Future liabilities, growth characteristics, contingency planning Well Defined Budget Construction Strategy

Base Budget Enhancements

Contingent Uses % of dynamic revenue source for deferrable expenses 10% Sales Tax for Street Maintenance Pay As You Go Capital Projects

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Nice to Have

Good rapport / communication with accountants (translation) Dedicated Reserve Funds

Health Insurance – Self Fund vs premium Special Revenue

Active Investment Program Grant Program Economic Development Program Knowledgeable financial staff or advisors Mid Year Pay For Performance Departmental Service Plans

Connect resources with Service levels

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Don’t Have

Policies that too narrowly restrict financial operation based on “today” Should provide for good times and bad Ex. Any issuance of tax based debt must be approved

by the voters

Policies that conflict with requirements of state law

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PARTING SHOTS

Just a few more items… A Budget MUST be managed throughout the year. Amendments can be done as needed (good to limit and/or

plan these in advance, however). Have a plan in case revenue projections begin to fall off

tremendously. Give your Council AND your Staff regular Budget reports so

everyone knows where they stand. No one likes surprises and if things are looking bad, its much better to plan for it and deal with it in advance.

A budget is NOT a popularity contest, but a means to accomplish the goals of the City.

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Resources

www.GFOA.org www.TML.org www.ICMA.org Peers in Other Cities

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CALENDAR ITEMS

Why do a Budget Calendar? You should plan out your process well in advance and incorporate

important milestones with other steps and processes to ensure you have enough time to complete the process as needed.

Some hints? Appraisal districts are rarely on time… be careful about using

preliminary rolls for estimating property tax revenues. Schedule time with your departments first so that everyone is on

the same page when Council sees the budget. Give allowances for additional Council workshops if need be.

Council will need to feel comfortable in order to proceed and support the budget it is adopting.

Watch out for legal requirements for public hearings, postings and other tax-related items. Be sure to include these items in your calendar.

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STATE LAW

State Law provides certain parameters for municipal budgeting. Ch. 102 of the Local Government Code lists out certain parameters for the budget process:

102.001 – Identifies the Mayor or the City Manager as the budget officer. In most instances, creation of the budget is a team effort involving many members of staff and coordination with the City Council

102.002 – Requires an annual budget to be created to cover proposed expenditures for the upcoming year

102.003 – Lists out what must be included in an annual budget. Some of those items include details of funds received from the previous and upcoming years, the proposed tax rate, obligations of the city, revenue sources and cash on hand

102.004 – Budget officer can get information as needed to prepare the budget

102.005 – The proposed budget must be filed with the municipal clerk 30 days prior to the establishment of the tax levy

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STATE LAW

102.006 & 102.665 – Cities are required to hold a public hearing to allow the public a chance to comment on the proposed budget. Specific notices regarding the hearing are also required

102.007 – Specifies that the Council takes action on the budget after the public hearing

102.008 – Requires that the adopted budget be placed on file with the municipal clerk

102.009 – Specifies that taxes must be levied & expenditures must be made in accordance with the budget except in cases of an emergency. This section also states a copy of the budget must be filed with the county clerk

102.010 – Allows for budget changes (via budget amendment) for municipal purposes

102.011 – This section outlines that specific charter provisions may trump state law as long as a public hearing is conducted and properly filed.

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STRUCTURE IS IMPORTANT

How should a budget be structured? Management letter Tax rate Revenue projections Allowances for reserves Breakout by fund/department Organizational Chart Have categories for revenues and expenditures that are

specific enough to provide for transparency and generic enough to provide for adequate operational flexibility

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Structural Tools

Adequate Chart of Accounts Type - Revenues, Expenditures, Transfers Revenues Class – Tax, Fines, Fees Detail - Property Tax, Sales Tax, Franchise Fees

Expenditures Function – Police, Fire, Public Works Category – Personnel, Supplies, Maintenance Detail – Payroll, Taxes, Health Insurance

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Financial Management Tools

Internal controls Ensure dailly processes are in best interest of City Segregation of Duties – AP, AR, GL Staffing issues – creativity

Training Staff must both be aware and “buy in” with policies

Regular Reporting / Review Investment Policy / Strategy Purchasing Policy Audit – Internal and External

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