Preparing Multi-Year Budgets in the New

EconomySeptember 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

• Had toxic air pollution issues• Total debt is $288 million

− Didn’t have enough money to make a scheduled $3.3 million GO bond payment in September

• 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

Step Two:Assemble the Required Information

• Develop an inventory of all capital needs (CIP)

− Look for deferred or one-time maintenance expenditures (non-recurring)

• Identify current and alternative revenue sources

Street Improvement Plan

Project Year 2010 2011 2012 2013 2014 2015

Expenses Inflation 0.00%Hamel Road - Pinto To Tower Reconstruct 2012 - - 170,954 - - - Tamarack North of Medina Overlay 2014 - - - - 262,395 - Tamarack City Limits to CSAH 24 Rehab. 2013 - - - 435,671 - - Comanche Trail Overlay 2014 - - - - 27,125 - Hunter Drive South of CSAH 24 Rehab. 2011 - 361,514 - - - - Hunter Drive Medina to Hamel Maintenance 2012 - - 1,068,476 - - - Lake View Road Overlay 2014 - - - - 47,232 - Willow Drive Orono to 24 Reconstruct 2014 - - - - 1,286,514 - Willow Drive N. of Chippewa Reconstruct 2012 - - 316,485 - - - Wichita Trail Reconstruct 2012 - - 125,086 - - - Tower Drive WTP to Hamel Reconstruct 2012 - - 236,091 - - - Shire Drive Overlay 2012 - - 60,727 - - - Iroquois Drive Overlay 2012 - - 25,695 - - - Pioneer Trail - Willow to TH55 Final Overlay 2010 187,527 - - - - - Bobolink Road Overlay 2013 - - - 86,326 - - Morningside Road Overlay 2013 - - - 100,654 - - Chippewa Road West Maintenance Various 5,000 5,000 5,000 5,000 5,000 - Hunter Drive - Medina to Hamel Maint. Various 5,000 5,000 5,000 - - - General Sealcoating Various 140,000 140,000 83,506 237,919 150,000 - Townline Road CR11 to TH55 Overlay 2013 - - - 103,122 - - Hwy 55 :& CR116 Intersection 10% Various 50,000 3,500,000 - - - - Other (Placeholder) Various - - - - - 671,000 Debt Service - 39,809 109,645 263,282 347,085 514,690 Total Expenses 0 - 502,168 4,075,636 2,206,665 1,293,605 2,125,351 1,185,690

AssessRevenue % Amount RateG.O. 429/Reconstruction Debt 315,000 750,000 1,650,000 900,000 1,800,000 900,000 Special Assessments 2010 20% 60,434 5.10% Prepaids 10,482 10,482 10,482 10,482 10,482 Special Assessments 2011 25% 183,957 6.50% - - 19,564 19,564 19,564 19,564 Special Assessments 2012 25% 528,290 6.50% - - - 56,185 56,185 56,185 Special Assessments 2013 25% 262,672 6.50% - - - - 27,936 27,936 Special Assessments 2014 25% 492,588 6.50% - - - - - 52,388 Special Assessments 2015 25% 296,422 6.50% - - - - - - Special Assessments 2016 25% 317,373 6.50% - - - - - - Special Assessments 2017 25% 335,996 6.50%Special Assessments 2018 25% 358,110 6.50%Special Assessments 2019 25% 383,717 6.50%Special Assessments 2020 25% 409,323 6.50%Interest Earnings 2% 4,388 4,030 4,104 6,506 5,643 4,930 Intergovernmental - 3,150,000 - - - - Developer - - 534,238 - - - Paid by General Fund 150,000 150,000 93,506 242,919 155,000 150,000 Total Revenue 484,236 4,079,359 2,326,742 1,250,503 2,089,658 1,236,332

Cash Balance 201,477 205,199 325,276 282,174 246,481 297,124

New Debt Levy - 31,318 85,081 190,215 250,272 373,869

Capital Equipment Plan

2009 2010 2011 2012 2013 2014ExpendituresStreets Skid Steer on Tracks 40,000 Streets Compressor on Trailer 18,000 Streets Directional Safety Sign 12,000Streets Mill Attachment 16,000Streets Hook Truck 166,000Public Works 2002 PW 1500 Turnover 20,000Public Works 1996 Plow Trk L8000 Turnover 150,000Public Works 1982 Loader Turnover 130,000Public Works 2001 Tandem TruckEngineering Inspection Vehicle 25,000Engineering 2002 Eng 2500HD Turnover 30,000Engineering 2002 Insp 1500 Turnover 25,000Engineering Survey Equipment 15,000Parks Sidewalk Machine 85,000Parks Wide Area Mower 15,500Parks Turf Maintenance Attachments 22,000Parks 1999 Skidsteer 50,000Police Squad Car Replacement 99,000 33,000 136,000 63,000 132,000 33,000Police Records Mgmt System 100,000Fire Engine #22 420,000Fire Duty Crew Vehicle 185,000Fire 1986 Engine 13 425,000Fire 1992 Utility 11 450,000Fire 2003 GMC 42,000Fire 2005 Rescue 12Total Uses of Funds 214,500 436,000 411,000 563,000 614,000 699,000

Sources of Funds Equipment Certificates 250,000 350,000 400,000 500,000 600,000 700,000Other

Total Sources of Funds 250,000 350,000 400,000 500,000 600,000 700,000

Cash Balance 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

Built in 2009 Built in 2010 Built in 2011 Built in 2012 Built in 2013Residential Growth Unit Value Total Units 2011 2012 2013 2014 2015Total Residential Units 465 10 10 45 100 100 Total Residential Market Value $6,750,000 $6,750,000 $13,750,000 $37,500,000 $37,500,000Total Residential Tax Capacity $67,500 $67,500 $137,500 $375,000 $375,000

Built in 2009 Built in 2010 Built in 2011 Built in 2012 Built in 2013Commercial Growth Unit Value Total Units 2011 2012 2013 2014 2015Total Commercial Units 395 - 10 35 50 50 Total Commercial Market Value $0 $5,000,000 $10,000,000 $17,500,000 $17,500,000Total Commercial Tax Capacity $0 $99,250 $199,250 $349,250 $349,250

TOTAL NEW MARKET VALUE $6,750,000 $11,750,000 $23,750,000 $55,000,000 $55,000,000NEW TAX CAPACITY $67,500 $166,750 $336,750 $724,250 $724,250Less NEW FISCAL DISP. CONTRIBUTION TAX CAPACITY 0 -34,369 -68,998 -120,941 -120,941TOTAL NEW TAX CAPACITY including expired TIF Districts $67,500 $132,381 $267,752 $603,309 $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 2010 2011 2012 2013 2014 2015GENERAL FUND ACTUAL BUDGET

TOTAL REVENUE 2,658,415 2,316,969 2,210,273 2,377,246 2,411,516 2,446,471 2,542,125 TOTAL EXPENSES 2,316,958 2,316,969 2,196,947 2,377,246 2,411,516 2,446,471 2,542,125

-8.5% 0.0% -5.2%REVENUE OVER (UNDER) EXPENSES 341,457 0 13,326 0 0 0 0

Beginning General Fund Balance 1,421,298 1,762,755 1,812,755 1,826,081 1,826,081 1,826,081 1,826,081Add Contingency Amount (Transfer In) 0 50,000 0 0 0 0 0Ending General Fund Balance 1,762,755 1,812,755 1,826,081 1,826,081 1,826,081 1,826,081 1,826,081Percent of Expenditures to Ending Fund Balance 76% 78% 83% 77% 76% 75% 72%

GENERAL FUND OPERATING TAX LEVY 2,388,536 2,172,369 1,965,535 2,132,508 2,166,778 2,201,733 2,297,387ANNUAL INCREASE 0.0% -9.1% -9.5% 8.5% 1.6% 1.6% 4.3%LEVY LIMIT 2,594,150 2,694,450 2,740,994LEVY ABOVE/BELOW LEVY LIMIT -205,614 -522,081 -775,459

PayoffRefunding Bond 2001 (97 Road Imp.) 307 Paid 0 0 0 0 0 0 0Refunding Bond 1998 (98 Sewer Imp.) 301 Paid 75,000 0 0 0 0 0 0HRA Revenue Bond 1999 - Public Works 304 2010 81,500 83,840 0 0 0 0 0G.O. CIP Plan Bond 2006 (01 Public Safety) 309 2020 101,700 99,500 97,300 100,300 103,100 105,700 108,000G.O. Equipment Certificate 2002 - 310 Paid 0 0 0 0 0 0 0G.O. Improvement Bond 2005 - Drake Drive 2016 28,800 28,600 28,300 29,100 28,700 29,300 28,800G.O. Equipment Certificates 2007 2015 53,282 53,282 56,911 55,077 53,234 56,637 54,574Pioneer-Sarah Watershed Levy (not included)POTENTIAL NEW LEVY (SEE EXHIBITS) 0 0 15,000 15,000 55,211 55,211 55,211TOTAL SPECIAL LEVY (No Watershed Levy) 340,282 265,222 197,511 199,477 240,245 246,848 246,585

TOTAL TAX LEVY 2,728,818 2,437,591 2,163,046 2,331,985 2,407,022 2,448,581 2,543,972LESS FISCAL DISPARITIES 81,972 97,504 96,838 96,838 96,838 96,838 96,838NET LEVY TO TAXPAYERS 2,646,846 2,340,087 2,066,208 2,235,147 2,310,184 2,351,743 2,447,134

-3.7% -11.6%EXISTING TAX BASE 7,715,717 7,173,858 6,582,883 6,582,883 6,734,941 6,900,851 7,038,869NEW TAX CAPACITY 0 0 0 20,000 30,600 31,212 31,836TOTAL TAX CAPACITY 7,715,717 7,173,858 6,582,883 6,602,883 6,765,541 6,932,063 7,070,705

TAX RATE ON TAX CAPACITY 34.305% 32.620% 31.388% 33.851% 34.146% 33.926% 34.609%TAX RATE % CHANGE -2.73% -4.91% -3.78% 7.85% 0.87% -0.65% 2.02%

City Taxes (prior to homestead credit) 1,715 1,631 1,569 1,693 1,750 1,782 1,863Percentage tax increase in average home ($500k) -2.73% -4.91% -3.78% 7.85% 3.39% 1.83% 4.54%

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

Avoid major increases/decreases from year to year and prepare for opportunities to provide for capital projects or tax reductions

Tax Rate to Tax Impact

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. Revenue and expenditure assumptions

2. Budget amendments and updates

3. Long term financial planning

4. Long term capital planning

5. Investment management policies

6. Debt management policies

7. Reserve and liquidity policies

What The FMA Is and What The FMA Isn’t

ISOne component of the entire rating process

An enhancement to the existing process

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.

ISN’TA separate rating

An evaluation of the competency or aptitude of individual finance professionals or elected and appointed representatives

An assessment of actual financial performance

Revenue and Expenditure AssumptionsStrong 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.

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; one-shot budget fixes are used with little attention to long-term consequences.

Long Term Financial 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.

Long Term Capital Planning

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.

Investment 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.

Debt Management Policies

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

Mark Ruff

651-697-8505

mruff@ehlers-inc.com

Stacie Kvilvang

651-697-8506

skvilvang@ehlers-inc.com

Questions