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MUNICIPAL BUDGETING

CERTIFIED GOVERNMENT FINANCE OFFICER (CGFO)

EXAMREVIEW SESSION

NOVEMBER 15, 2012

Mary-Lou Pickles, CGFO, CMAChris Lyons, CPA, CGFO, CPFO

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TOPICSI. Budget Process/Budget TypesII. Fiscal Policies & Best PracticesIII. Performance MeasurementIV. Revenue Management &

ForecastingV. CIP & Financial PlanningVI. Budget Presentation AwardVII. Additional Information and

Source Material

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BUDGET PROCESS/

BUDGET TYPES

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BUDGET BASICS Governments allocate funds to programs

and services through the budget process Process should effectively involve major

stakeholders and reflect their needs and priorities

The budget process should: Incorporate a long-term perspectiveEstablish linkage to broad organizational goalsFocus decisions on results and outcomesAchieve consensus on decisions related to

goals, services, and resource allocation

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BUDGET BASICS

The budget is a plan If you don’t have a plan, how do you know

when you are done? Benefits of the budget

Stable service delivery Impact of current decisionsThoughtful responses Identifies future trends earlyBuilds credibilityTransparency

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BUDGET REFORM/APPROACH

Budget process reforms are designed to provide more and better information to decision makers increasing the rationale for budget decisions.

Approach depends on management and legislative body

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BUDGET REFORM TYPES Executive Budgeting Performance Budgeting Program Budgeting Program-Planning Budgeting Zero-Based Budgeting Budget Allotment

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EXECUTIVE BUDGET

Control of budget preparation lies with the Chief Executive Officer/City Manager

Earliest version used a simple line item format

Cities and states were the first to adopt this format

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PERFORMANCE BUDGETING First major reform after Executive

Budget format Emphasizes purpose and

accomplishments Primary features are efficiency and

effectiveness measures Expenditures are based on

measurable performance of activities and programs

Sets primary focus on evaluation of the efficiency of existing activities

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PROGRAM BUDGETING

A budget wherein expenditures are based on program of work and on character and object class (GFOA definition)

Organized by major programs Enables comparison of the costs and

benefits of major programs May encourage micro management

of department activity by CEO or legislative body

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PROGRAM-PLANNING BUDGETING

Originated by Department of Defense Identify most cost effective way to

achieve goal Successful at DOD where results were

easily quantified

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ZERO-BASED BUDGETING

Continued existence of programs and activities must be justified every year and not taken for granted

Purpose is to force conscious decisions between disparate goals

Designed to address the appropriateness of each goal, rather than the most cost effective program to achieve the goal

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BUDGET ALLOTMENTS

A portion of the budget is allocated to an interim period based on historical spending patterns and needs

Advantages include:Avoidance of rushed year-end spendingAids in cash flow Provides for inventory planning needs

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ASPECTS OF THE BUDGETING FUNCTION

Financial: plan for future revenue collection and spending

Political: resolve conflicts due to allocation of scarce resources

Planning/Analytical: Effectively use government resource tools, such as, cost-benefits analysis, cost effectiveness, net present value analysis and strategic planning

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ASPECTS OF THE BUDGETING FUNCTION (CONTINUED)

Administrative: effectively coordinate the preparation of the budget and ensure expenditures are made in accordance with the adopted budget

Communicative: provide information that will assist with choices and promote stakeholder participation in the budget process

Strategic Planning: define the direction of making decision on allocating resources, link to budget, be outcome driven and be supported by elected officials

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SIX PHASES OF THE BUDGET PROCESS

1. Budget manual (call)2. Agency/Department budget

requests3. Preparation of the proposed

budget4. Legislature consideration and

adoption5. Implementation6. Audit and evaluation

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PHASE 1 – BUDGET MANUAL

Responsibility for initiating budget cycle rests with the CEO, usually City Manager or Mayor

Budget call or manual is instructions sent to agency and department heads concerning the submission of information for the budget year

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BUDGET MANUAL (CONTINUED)

Statement from CEO or budget officer outlining fiscal position

Description of budget process Budget calendar Assumptions to be used for

requests Forms to be used with

instructions

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PHASE 2 – BUDGET REQUESTS Prepared by Agency/Department Budgets usually begin as

requests that contain three itemsBudget schedules that detail the amounts

requested, usually in line item formatSupporting documentationTransmittal letter that describes the

agency/department and provides justification for its major objectives and initiatives for the budget year

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PHASE 3 – PREPARATION

Budget staff reviews requests to ensure:Compliance with priorities and objectives

in budget manualRevenues and expenditures balanceRevenue estimates are realistic and within

guidelines, DOR provides information about revenue to local governments

Budget staff compile requests into a single budget document that is submitted to the legislative body for review

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PHASE 4 – LEGISLATIVE CONSIDERATION AND ADOPTION

Executive proposal is presented to legislative body for consideration

Legislative body reviews to ensure the budget addresses their constituents’ needs

Public hearings in compliance with State Statutes dictate:Date, Time, and Place of hearings Publicized hearings that give citizen interest

groups the opportunity to raise issues related to the allocation of resources

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LEGISLATIVE CONSIDERATION AND ADOPTION (CONTINUED) Budget document should:

Provide summary information for the public and media

Include a transmittal letter that outlines key policies and strategies

Be readable and understandable Chapter 200, F.S. Truth in Millage (TRIM)

Requires two public hearings for open discussion of millage rates and budgets of taxing authorities

Sets the maximum operating millage for cities and counties at 10 mills

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LEGISLATIVE CONSIDERATION AND ADOPTION (CONTINUED) Chapter 200, F.S. TRIM (continued)

Tax revenue is based on the Certification of Value provided by the Property Appraiser and is the valuation of taxable value within the jurisdiction

Requires taxing authorities to utilize a minimum of 95% of the certified taxable value

Defines a “county of special financial concern” as a county where 1 mill will raise less than $100 per capita

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LEGISLATIVE CONSIDERATION AND ADOPTION (CONTINUED) Chapter 200, F.S. TRIM (continued)

Requires taxing authorities to advise property appraiser of its proposed millage rate, its rolled-back rate, and public hearing information within 35 days after receipt of certification of value

Requires certification of statutory compliance be sent to Department of Revenue

Allows taxing authorities to readopt its prior year’s adopted final budget, as amended, and expend moneys based on that budget until such time as its tentative budget is adopted if the fiscal year of the taxing authority begins prior to adoption of the tentative budget.

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PHASE 5 - IMPLEMENTATION

Budget officer implements Establish and record budget as

approved by legislative body Start new fiscal year Establish position control based

on approved positions, job description and pay rate

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PHASE 6 – AUDIT AND EVALUATION

Budget officer monitors quarterly or monthly

Report actual compared to budget

Make budget adjustment as necessary

Monitor progress toward objectives

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MULTI-YEAR BUDGETING TYPES

Classic (traditional)Both the spending and revenue plan for

each budgetary year are approved at the same time

RollingEach year’s appropriations are adopted in

each subsequent year

RecommendedGovernments should prepare multi-year

expenditure projections

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MULTI-YEAR BUDGETING ADVANTAGES Improves

Financial managementLong-range strategic planningProgram monitoring and

evaluation/benchmarking Reduces staff time in budget

development Links operating and capital

activities/spending Reduces surprises Pinpoints problem areas early

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MULTI-YEAR BUDGETING DISADVANTAGES

Difficult to project into the future Could reduce responsiveness to

emergencies if too restrictive Initial year may increase work

and stress in departments

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MULTI-YEAR BUDGETING SAFEGUARDS

Amend existing financial and budget policies and procedures addressing:Allowance/disallowance of carryovers from

one year to the nextLevel of acceptance of budget

adjustments, if any The amount of revenue reserves that can

be used for unanticipated expenditures

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MULTI-YEAR BUDGETING SAFEGUARDS (CONTINUED)

Create financial policiesBalanced budgetRevenue diversificationDebt capacityFund balance

Other safeguardsExamine key economic and fiscal

indicatorsPerform analysis of existing revenue

structureUpdate budget manual/call to reflect

changes

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MULTI-YEAR BUDGET VS. MULTI-YEAR FINANCIAL PLAN

Budgets have more detail Budgets have goals and/or

objectives Budgets are public documents Budgets are approved by the

governing body

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ACCOUNTING BASIS

Governmental fund types:Used to account for most, if not all, of a

government’s taxable supported activitiesUses modified accrual basis of accounting

which recognizes revenue when measurable and available

Five types:1. General fund2. Special Revenue funds3. Debt Service funds4. Capital Projects funds5. Permanent funds

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ACCOUNTING BASIS (CONTINUED) Proprietary funds:

Used to account for a government’s business-type activities and serves internal and external customers

Uses accrual basis of accounting which recognizes revenue when earned

Two typesExternal – Enterprise funds Internal – Internal service funds

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ACCOUNTING DEFINITIONS Encumbrances: obligations

incurred for which receipt of goods or services have not occurred

Mandate: when a higher level of government requires a lower level of government to perform a specific task or to meet a standard

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FISCAL POLICIES &

BEST PRACTICES

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NATIONAL ADVISORY COUNCIL ON STATE AND LOCAL BUDGETING (NACSLB)

Four principles of the budget process

Twelve elements each of the four principles of the budget process incorporates at least two of the twelve elements to help translate the guiding principles into action components

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NACSLB – FOUR PRINCIPLES1. Establish broad goals to guide

government decision making2. Develop approaches to achieve

goals3. Develop a budget consistent

with approaches to achieve goals

4. Evaluate performance and make adjustments

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ESTABLISH BROAD GOALS1. Assess community needs, priorities,

challenges and opportunities2. Identify opportunities and

challenges for government services, capital assets, and management

3. Develop and disseminate broad goals

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DEVELOP APPROACHES

4. Adopt financial policies5. Develop programmatic,

operating, and capital policies and plans

6. Develop programs and services that are consistent with policies and plans

7. Develop management strategies

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DEVELOP BUDGET

8. Develop a process for preparing and adopting a budget

9. Develop and evaluate financial options

10.Make choices necessary to adopt a budget

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EVALUATE PERFORMANCE

11.Monitor, measure and evaluate performance

12.Make adjustments as needed

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OPERATING BUDGET POLICIES

Define a balanced operating budget

Develop with goal to maintain structurally balanced budget (balance between operating expenditures and operating revenues)

Identify who is responsible for budget preparation - management

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REVENUE POLICIES How much change in the property tax

rate is acceptable in a given year How will one-time revenues be used How frequently should service

charges and fees be reviewed

Example: ContributionSavings from bond issue

Don’t budget Not used for ongoing expenditures

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FUND BALANCE POLICIES GFOA recommends governments

establish a formal policy on level of Unrestricted Fund Balance that should be maintained in General Fund based upon a government’s own specific circumstances considering:Predictability of its revenuesVolatility of its expendituresRisk to significant one-time outlays

(disasters)Commitments and assignmentsConformity with legal and regulatory

constraints

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STABILIZATION POLICIES

To guide the creation, maintenance and use of resources for financial stabilization purposes

Identify purpose for which funds can be used

Also referred to as rainy day funds, unreserved, undesignated fund balances and contingency funds

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CONTINGENCY PLANNING POLICIES

Guide financial actions that will take place in the event of emergencies, natural disasters or other unexpected events

General guide to improve the ability to take timely action and to aid management when an emergency occurs

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DEBT POLICIES Should guide issuance and

management of debt What is the maximum long-term debt

burden that the government will incur What mix of long-term debt and

current revenues, if any, will be the basis for financing capital improvements

How will bond proceeds be used Under what conditions will short-term

debt be used

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DEVELOP MANAGEMENT STRATEGIES

Develop mechanisms for budgetary complianceAppropriate management processes and

systems should be in place to ensure compliance with the adopted budget

Institute procedures to review budget periodically (actual-to-budget comparisons)

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COST OF GOVERNMENT SERVICES Full Cost – Encompasses all direct and

indirect costs related to that service Direct Cost – salaries, wages and

benefits of employees working exclusively on the delivery of the service and materials and supplies and other associated operating costs

Indirect Cost – shared administrative expenses in the work unit and in support functions outside the work unit

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COST OF GOVERNMENT SERVICES (CONTINUED)

Life-cycle costs - Include costs in addition to purchase price over the life of an asset such as maintenance and repairs, failure costs (downtime) and money costs (interest and opportunity)This concept is useful for decisions

involving the purchase of major equipment

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COST OF GOVERNMENT SERVICES (CONTINUED)

Opportunity costs – The benefit of an option that is forgone by choosing another option (loss benefit)

Sunk costs – A cost that has been incurred and cannot be reversedShould be ignored when evaluating

future decisions

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COST OF GOVERNMENT SERVICES (CONTINUED)

Marginal Cost – Associated with expansion of a service without any increase in fixed costs (unused capacity)

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PERFORMANCE MEASUREMEN

T

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PERFORMANCE MEASUREMENT Performance measurement - process for

determining how a program is accomplishing its mission

Four key steps: Identification and definition of indicatorsCollection of appropriate dataAnalysis (comparing) performance to

previous results or benchmarksReporting the results

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PERFORMANCE MEASURES Input – resources used in producing an

output or outcome Output – completed activity, amount of

work done within the organizationWorkload – the level of productivity of staff in

providing goods and services to customers Effectiveness – the degree that goals and

objectives are met within deadlines Efficiency – measures the amount of

outcomes per unit of resources allocated to an objective

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PERFORMANCE MEASURES Performance measures should be

linked to specific program goals and objectives

Give priority where goals are achieved Measures should be valid, reliable and

verifiable (quantified assessment) Performance budgeting (outcome)

links the budget by establishing performance measures agreed upon by managers and decision makers

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PERFORMANCE MEASURES Answers key questions:

How much did we do (quantity)?How well did we do it (quality)?How hard did we try (effort)?What change did we produce (effect)?

Why Measure?To improve performanceTo enable good decision making (quantified)Enhance accountabilityReport to the public

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PROGRAM COMPONENTS Clearly defined service area Processes Activities and tasks Planned outcomes or achieved

results Link expenditures and revenues

to goals, objectives and outcome Expenditures and revenues are

related to specific functions

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GOOD OBJECTIVES

SMARTSpecificMeasurableAttainableRelevantTime-Bound or Timely

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PERFORMANCE BENCHMARKS Should be developed to aid in

assessing how well a function, program or activity meets needs or purpose

Comparative standards that prove a frame of reference for evaluating program/service quality or effectiveness

Should be consistently defined and measureable

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REVENUE MANAGEMENT

& FORECASTING

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FORECASTING REVENUE Estimating revenue is the first

step in determining the level of resources that will be available for budget appropriations

Influenced by:Administrative factorsPolitical factorsEconomic factorsPolicy factors

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FORECASTING REVENUE (CONTINUED) Uses analytical techniques to

estimate Should be decentralized with

process to achieve consensus on the forecast

Establishes a spending target Projects the overall future

financial condition – capital spending and debt

Should extend over a period of at least 3 years

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FORECASTING REVENUE (CONTINUED) Governments should maintain a

revenue manual that documents revenue sources and factors relevant to present and projected future levels of those resourcesPromotes better understanding of

government’s resourcesSupports decision-makingInternal staff training tool

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QUALITATIVE METHODS Qualitative revenue forecasting methods

rely on judgments about future revenuesConsensus - Group collectively reaches

agreement on revenue projections based on previous collection patterns, experience, and knowledge of historical events.

Judgmental - Informed decision based on history and general economic conditions.

Expert - uses economists, demographers, market researchers, and social scientists to study trends.

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QUALITATIVE METHODS (CONTINUED) Weaknesses

Responds to political pressuresFocus on current issues/eventsLack of comparability over time

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QUANTITATIVE METHODS

Relies on numerical data enabling testing to see if underlying data assumptions are met

Requires extensive amounts of historical data to generate dependable projections

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FORECASTING REVENUE METHODS Trend analysis – forecasting future

revenues based on its short-term historic trend

Simple linear and multiple regression analysis

Time series analysis – forecasting revenues based on financial data over extended periods (e.g., 15 or more time periods)

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FORECASTING REVENUE METHODS (CONTINUED) Econometric forecasting involves

projecting future revenues by taking into account the economic factors that influence that revenue sourceSales taxUser charges (building & construction

permits)Real estate revenues

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BREAK-EVEN ANALYSIS

Simple technique for determining whether a project will break-even Revenues = Costs

Four variablesRevenue per unitFixed costsVariable costsNumber of units or users

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CALCULATE NET PRESENT VALUE Method of comparing the long-

term financial costs and benefits of different alternatives Uses discounting – process of converting a future value into the value it would be given today

The value of the promise today

= $ Promised in future Discount factor

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REVENUE RESTRICTIONS To form a Community

Redevelopment District, Florida Statute 163.355 requires a municipality to adopt a resolution, supported by data and analysis, which makes a legislative finding that the conditions in the area meet the criteria described in s.163.340(7) or (8).Finding of necessity

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REVENUE RESTRICTIONS Florida Statute 205.0535 requires a

municipality to establish an equity study commission before adopting a new rate structure for business taxes

Florida Statute 218.25 constrains the use of State Revenue Sharing for debt service in excess of guaranteed entitlement amount

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CAPITAL IMPROVEMENT

PLAN (CIP) AND

FINANCIAL PLANNING

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CAPITAL ASSETS (GFOA POLICY) Capital assets are government

facilities, infrastructure, equipment or networks Enable the delivery of essential public

sector services Recommends governments establish

a system for assessing their assets Plan and budget for any capital

maintenance and replacement needsInventory policy

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CIP PLANNING Prioritize projects and funding

sources for period of time, usually 5 years

Should involve citizens – recommendations

Should be included in budget document and approved by the governing body

Adopted at the same time Is a decision-making tool – future

considerations outside scope Is a financial management tool

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CIP PLANNING (CONTINUED)

Is part of long-term strategic plans but doesn’t drive them

Includes projects approved by key officials (manager, council) waiting for funding

Projects are typically placed in out years and move up until they are included in the current year’s capital budget

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STEPS TO IDENTIFY CIP PROJECTS Review status of previously

approved projects Identify new projects Assess alternatives Complete forms Evaluate ability to fund

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EVALUATE NEW PROJECTS

Project description Location map Justification Cost by year Impact of future revenues Future operating costs

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RANKING CIP Criteria

Should be developed to select and rank proposed CIP projects and agreed on by everyone in the decision making process.

ConsiderIf taxes will have to be raisedHow many citizens will benefitSafety issues

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METHODS TO FINANCE CIP Current revenues or fund

balance (pay-as-you-go) Debt (pay-as-you-use) Tax-Increment Financing Bonds

Used for projects within an area expecting to benefit from economic development

Grants Impact fees

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BUDGET PRESENTATION

AWARD

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REQUIREMENTS FOR AWARD

Four categories: Budget as a policy document Budget as a financial plan Budget as an operations guide Budget as a communications

device

27 Criteria:14 Mandatory requirements

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BUDGET AS A POLICY DOCUMENT

Statement of entity-wide long-term financial policies (mandatory)

Budget message that articulates priorities and issues for the budget for the new year (mandatory)

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BUDGET AS A FINANCIAL PLAN Summary of major revenues and

expenditures, as well as other financing sources and uses, to provide an overview for all total resources

Summaries of revenues, expenditures and other financing sources and uses for the prior year actual, current year budget and/or estimated current year actual, and proposed budget year

Describe major revenue sources, explain the underlying assumptions for the revenue estimates and discuss significant revenue trends

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FINANCIAL PLAN (CONTINUED) Projected changes in fund balances,

as defined by the entity in the budget document

Financial data on current debt obligations and description of the relationship between current debt levels and legal debt limits

Explain the basis of budgeting for all funds, whether cash, modified accrual, or some other statutory basis

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BUDGET AS AN OPERATIONS GUIDE Describe activities, services or

functions carried out by organizational units

Include an organizational chart Schedule or table summary of

personnel or position counts for prior, current and budgeted years

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BUDGET AS A COMMUNICATIONS DEVICE Description of processes for

preparing, reviewing and adopting the current year’s budget and procedures for amending the budget after its adoption

Use charts and graphs to highlight financial and statistical information

Include a table of contents

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TIPS FOR TAKING TESTS Stay positive throughout the whole test and

try to stay relaxedTake deep breaths to relax

Read the entire question and pay attention to the detailsMake sure you understand what question is

really asking you If you don't know an answer, skip it and

come back to it laterDon't stay on a question that you are stuck on

Only change an answer if you misread or misinterpreted the question Your first answer is usually the correct one.

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SOURCE MATERIALS

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SOURCE MATERIALS – FLORIDA STATUTES Chapter 200 - Determination of

Millage, specifically: 200.065 200.071 200.185 200.068 200.081

Chapter 205.035 Chapter 218.25 Chapter 163, Part III

http://www.leg.state.fl.us/

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SOURCE MATERIALS - GFOA Capital Improvement

Programming: A Guide for Smaller Governments

An Elected Official’s Guide to Revenue Forecasting

An Elected Official’s Guide to Performance Measurement

An Elected Official’s Guide to Multi-Year Budgeting

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SOURCE MATERIALS - GFOA Cost Analysis and ABC for Governments Decision Tools for Budgetary Analysis Financial Policies: Design and

Implementation The Operating Guide: A Guide for

Smaller Governments

Other ReadingsAn Elected Official’s Guide to Government

FinanceAn Elected Official’s Guide to Debt Issuance

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SOURCE MATERIALS - GAAFR Chapter 1 - GAAP and the

Governmental Environment Chapter 2 - The Governmental

Financial Reporting Model Chapter 10 - Financial Statements Chapter 16 - Budgetary Integration

and Reporting Chapter 17 - Performance

Measurement

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SOURCE MATERIALS Friedman, Mark. Trying Hard is Not

Good Enough. Trafford Publishing, 2005.

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SOURCE MATERIALS - WEB Recommended Budget Practices: A

Framework for Improved State and Local Government Budgeting http://www.gfoa.org/services/dfl/budget/RecommendedBudgetPractices.pdf

Recommended Practices: Budget and Fiscal Policyhttp://www.gfoa.org/services/rp/budget.shtml

Distinguished Budget Presentation Award Program Criteria Guide and Explanations http://www.gfoa.org/downloads/BudgetCriteriaLocation.pdf http://www.gfoa.org/downloads/BudgetCriteriaExplanations.pdf

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QUESTIONS