Utility Financial Management

AWWAIntermountain Section

Leadership Forum Session TwoNovember 12, 2013

BUDGET PROCESS

Outline Who is Involved in Budget Preparation Main Components to a Budget

Strategic Plan (Master Plan) Annual Operating Budget Annual Capital Budget

Approaches to Budget Preparation Example of Budget Steps / Budget Process

Who Are the Players City Council/Board of Trustees Managers Accounting Department Heads Employee input as appropriate

Strategic Plan Strategic Plan Video

Strategic Plan Strategic plan is critical to budget process Defines long-range goals and objectives Starts and evolves around utility mission Provides parameters for short range goals Takes into account other partner entities Top management identifies, implements, and

monitors long range goals in plan

Strategic Plan Importance of Effective Strategic Plan

Dilbert – “Do you prefer that I spend my day planning which doesn’t look like work or should I plunge in to my work with aggressive randomness?”

Strategic Plan

Strategic Plan A strategic plan provides the framework to prepare:

Annual Operating Budget Annual Capital Budget

Operating Versus Capital Operating Budget

Day to Day Revenues & Expenses Payroll, Supplies, Legal & Professional

Capital Budget Anticipated Useful Life of More Than 1 Year Significant Value (Determined by Policy)

Equipment, Vehicles, Land Acquisition, Infrastructure Projects

Annual Operating Budget Refinement & expansion of the strategic plan

in the short term Internal financial plan for a one-year period Identifies operating requirements for that one-

year period Serves multiple purposes

Aids in making short range plans Mechanism to achieve goals Answers “Spend how much for what?”

Capital Budget Expansion of the strategic plan Implementation of specific and prioritized projects Move organization towards its goals Schedule of large expenditures / projects Planned several years in advance May involve additional public

hearings, review meetings

Operating Budget

Operating Budget: Revenue Expenses

Revenue First step in budget process Can be influenced by external factors

Political - Considerable impact through rates Physical - Weather Other factors

Business cycles Economic conditions New development Conservation

Revenue Operating Revenue (Normal Course of

Business): Water Sales Basic service fees Engineering review and inspection fees Misc. fees:

Penalties, reconnection fees, sign-up fees, other income, etc.

Non-Operating Revenue Non-Operating Revenue:

Property taxes Interest income Impact fees (be careful here) Grant Proceeds

Operating Expenses Second step in budget process Expenses Include:

Payroll, Payroll Taxes, EE Benefits Water purchases, production, treatment Utilities Maintenance, materials, supplies Contract / professional services Training, travel Legal & accounting fees Vehicle repair and maintenance, etc.

Non-Operating Expenses Debt service Other

Capital Budget Break down into departments Usually larger items requested by department

heads Items over a specified amount include:

Projects identified in strategic (master) plan Line replacement New reservoir Meter replacement, reading hardware Equipment, vehicle purchases Computer hardware, software

Approach to Budget PreparationTwo processes: Top down or bottom up

Top Down: Top Management decides the level of expenses Divides them among department as needed Budget developers follow management directives Can be unrealistic, does not incorporate input of those who

implement it

Approach to Budget Preparation Bottom up:

Department heads submit estimated expenses with justification

Budgets are reviewed to eliminate unnecessary spending and spending that can be delayed (let departments know)

Helps ensure spending is well-managed and not wasteful Pushes decision making process down through organization

freeing senior management resources Department heads can measure own performance and take

corrective action as required Can lead to over budgeting causing issues in overall budget

Approach to Budget Preparation

Can use a combination of both Department heads submit expenses Top management decides level of expenses

based on department estimations and historical information, such as past actuals and YTD projections

Budget is developed based on the above steps Department budgets are managed by

department heads

Budget Steps / Process Provide Historical Information & Budget Sheets to

Managers (Early August) Manager’s Budget Requests Due (Early September) Preliminary (September) Tentative (October) Proposed (November)

Public Input Rate Hearing

Final (December)

Preliminary Budget Incorporate department estimates into

operating budget and capital budget Review 2-3 years actuals, YTD actuals, and

projected Estimate revenue, expenses and capital Prepare preliminary budget for council/board

review (not required by law but is a good tool) If recommending rate increase, inform

council/board

Tentative Budget Make adjustments to preliminary budget based on

council/board input (show adjustments) Update YTD numbers Update revenues, expenses, and capital budget Prepare tentative budget, present for adoption After adoption

Set a public hearing date for approval of budget Set a public hearing date for rate & tax increase (if

applicable) Advertise budget hearing & increases in newspaper Post hearing information on public notice website Display tentative budget for seven days before budget hearing date

Proposed Budget Make adjustments to tentative budget based on

council/board input Update revenues and expenses (same as tentative

process) Prepare proposed budget Present at budget hearing

Proposed Budget Presentation Summarize operating, non-operating revenue and

expenses Include capital expenses Determine budget surplus or deficit If deficit, present how will it be covered

Rates (advertise and hold public hearing) Property Taxes (Truth in taxation process) Reserves

Proposed Budget Presentation From rate increase and/or property taxes:

Present proposed increases Present amount of revenue derived from increases

From reserves: Acts as a storage reservoir Part of an overall long-term financial plan (strategic plan) Specific goals should be established Emergency fund Debt service fund Anticipated capital project funds Operating reserves based on xxx days (determined by management in

strategic plan) Replace what is taken Cities have different reserves requirements and constraints

Final Approval Board meeting following

proposed budget Can have hearing before final

approval if needed Take public comments into

consideration Board/council approve budget Send adopted budget to state

auditor Video - Objective