WA STATE PUBLIC WORKS BOARD

CENTRAL WA LOCAL GOVERNMENT REGIONAL ACADEMY August 28, 2013

“KEY CONCEPTS IN A BUDGET PROCESS”

Toni Nelson, Director of Professional ServicesVision Municipal Solutions

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Session Agenda

• Principles of budgeting • Review key terms & concepts– Fiscal Sustainability– Reserves– Contingencies

• Discuss policies and their role• Budget Process – how does it work?

The Budget is an economic plan that focuses the entity’s financial & human resources on the accomplishment of specific goals & objectives established by the policy makers.

The budget establishes the annual (or biennial) expenditure levels for “all “departments & funds.

• These expenditure levels are called appropriations, and they represent spending limits.

Budget Definition

• The mission of the budget process is to help decision makers make informed choices about the provision of services and capital assets and to promote stakeholder participation in the process.

National Advisory Council on State and Local Budgeting

Budget definition continued……

• It’s more than a way to authorize expenditures.• More than just a management tool• The budget is a political and managerial process

that has financial and technical dimensions.• GFOA (Government Finance Officers Assoc.) has

identified a critical gap in the local budget process. Which is the:– Long-term implications of current decisions

What is a budget?

It’s a long time horizon…..

• What is that we see on the horizon

• Will our budget decisions today impact future years and if so, did we plan for it?

• We’ve heard about vision / purpose

• Now let’s translate it into long term accomplishments

1. Stakeholder Input

2. Vision/Mission

3. Short-term goals

4. Direction to staff

5. Operating / budget Impacts

6. Adopt budget

7. Monitor results

8. Adjust as necessary

National Advisory Council on State and Local Budgeting

(NACSLB)

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Stakeholder Input• Citizen / taxpayer to Policy

Maker– “I’ll trust you with my taxes but I

want equal value (or better) in return”

• How do we know what the citizens value?– Citizen Surveys

• Formal surveys– Citizen interest– Citizen satisfaction

– Topical surveys• Bond elections• Facilities (Library for example)

– Focus Groups

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• Establish Broad Goals to Guide Government Decision Making– A government should have broad goals

that provide overall direction for the government and serve as a basis for decision making.

NACSLB – Principal 1(National Advisory Council on State and Local Budgeting)

Question: What are our goals?

Leads to discussion

about objectives

and direction

Guidance for Budget Developm

ent=

• Consistent direction over a period of years.– Usually not specific to programs or times– Incorporate other policy actions / documents

• Comprehensive Plan, Park Master Plan, Capital Facilities Plan

– Should review and update annually (biennial if you adopt a biennial budget)

• Policy making at its best– An unusual council/board activity

• Usually a retreat type setting• Usually requires some type of facilitation• Focus on what makes a better community

– Communicate goals• To the community and to the staff• Newsletter, web site, announcements

Set Broad Goals

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• Broad Goal – Promote Citywide Economic Development– Short-term Goals: – Develop promotional campaign– Improve feeling of safety in

downtown– Review land use policies for

alignment– Clarify standards and expectations

for development permitting

Example

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• Inherent step of the budget process:• Demand for services always exceeds resources

• Use the information gathered from:– Community input–Management Retreats– Staff

• Results will assist in determining those functions/programs considered the most important to the attainment of service goals and objectives

Budget Priority Setting

• Strategic planning to evaluate results• Administrative Retreat• Council Retreat

• Include capital assets as a component of “level of service”– Managing capital assets is often overlooked

• Streets and Roads• Utilities

• Evaluate the level of service to be provided– Use a matrix for ranking services

• Essential • Discretionary• Mandated

Budget Priorities/Level of Service

Budget Priority SettingMethods used

• Informal method (most often used by smaller entities)– Depends heavily on the

judgment or intuition of key individuals

– Does not follow a standardized set of procedures

– Lack of consistency– Lack of transparency

• Formal method– Follows a defined,

consistent and usually written process

– Provides increased transparency

– Provides methodology for service evaluation

– Provides greater level of accountability

Community priorities vs. revenue shortfall

• What is our direction?– More of the same? – Something different?

• Have we considered alternatives?– Contracting for services– Partnering with others– Use of volunteers

Evaluating Level of Service

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Establish program priorities

• Also known as “short-term goals”– Usually achievable in next few years.– Related to “broad goals”– The tangible policy direction related to

specific budget proposals– Can be part of the same “broad goals” retreat

• Might be too much to accomplish at one time• Build on prior work

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Fiscal Sustainability• Sustainability is the notion that

current economic and consumption patterns should not reduce opportunities for future generations by depleting or impairing resources. – Sustainability demands balance

among economy, environment and community.

• “More with less” a short term solution – Need for long term solution in essential service areas

• “Less with less”– not sustainable unless repeatedly applied

• Sustainable budgeting requires:– Level of service evaluation– Evaluate supporting revenues in conjunction with

service– Long term planning and evaluation– Contingencies– Reserves

Fiscal Sustainability

• Do we have any of the known fiscal stress indicators?– Declining fund balances– Ending and beginning fund balance of 5% or less?– Interfund loans to the general fund for “operating”

costs– Debt service ratio to operating revenues– Major employer has moved &/or reduced staff

significantly– Current revenues no longer meet the demands of

service delivery– Cost of service cannot be sustained at current levels

Evaluating the Numbers

Red Flag indicators

1 2 3 4 5 6 7 8 9 10$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

General Fund

ExpendituresRevenues

Ten Years (2003-2012)

Declining Fund Balance

1 2 3 4 5 6 7 8 9 10$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

General Fund w/Ending Fund Balance

ExpendituresRevenuesEnding Fund Balance

Ten Years (2003-2012)

Utility Fund Example

1 2 3 4 5 6 7 8 9 10 $-

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

$600,000.00

$700,000.00

$800,000.00

$900,000.00 Utility Fund- w/3 % rate increase

RevenuesExpendituresEnding Fund Balance

• Red Flag Checklist– Provides a starting point for further

discussions

• Evaluation of fiscal signs will assist with developing the budget strategy.

• Fiscal review should include the question:– is this short term or long term?– What is the strategy to stop the

bleeding?

Financial Condition-Evaluation

• How much is enough?– GFOA recommended best practice

• No less than 2 months of regular operating revenue or expenditures for the general fund.

• Utility funds – no less than 45 days of working capital

• Differences between reserves and fund balance– External demands and/or fiscal policies to set the

definitions of “reserved” fund balances

• Contingencies – what are they and why do we need them? – Historically, economic cycles will continue to occur– Contingencies are considered a best practice to

handle the unknowns.

Reserves & Contingencies

• RCW 35.33.051 states that preliminary budget “shall include unencumbered fund balances estimated to be available” at year end.

• Use the “Common sense test” when forecasting• Avoid using Beginning/Ending fund balances to balance M

& O budget• RCW requires revenue forecasting, not appropriation!• Appropriating all revenue sources = zero cash at year end• Develop a financial policy for the maximum/minimum

ending (unrestricted reserve) fund balances at year end

Fund BalancesShould it be used?

Long Range Plans –Ties to the Budget Process

Historical PlanFire Master Plan

Park Plan

Capital

Facilities Plan

Transportation Plan

Land Use Plan

Water Comp. Plan

Sewer Comp. PlanStorm Drainage

Comp. Plan

` Public Safety

Master

Plan

Economic

Development Plan

Capital Facilities Plan (CFP) • The CFP is a 6 – 20 year plan of capital

projects with estimated costs and proposed methods of financing.

• Required by those entities fully planning under the Growth Management Act (GMA)

• It is a strategy for defining :– Public facilities needed– Where they will be provided– When the project will occur– How they will be financed

• Connect current year capital spending with longer-term plans.

• Concentrate on long-term financial sustainability.– Commitments to continuing outlays should be

avoided unless ongoing supporting revenue growth is assured.• Commitment of income to debt service

Connect the Dots…..

Developing a Process for Preparing and Adopting the Budget

JUNE/JULY-Budget Strategy• Public Input • Goals/Policies• Council

Retreat• Pre-Budget

issues• Budget

Calendar

AUGUST/SEPTEMBER• Call to Budget• Forecasting• Budget

Materials due from Departments

• Revenue projections and budget proposals to Mayor

OCTOBER• Clerks

preliminary projections to Council

• Council Workshops

NOVEMBER/ DECEMBER• Mayor submits

Preliminary Budget and Budget message

• Public Hearings

• Setting Levy Rates

• Adoption of Budget

Balancing the Budget• Keep your “eye” on the

Priorities that you set!• Look to the results of

evaluating Level of Service:– Reduction in services?– Cut or eliminate?– Delivery of service using new

approach?

• Translate results to budget• Communicate the results in

your budget message

• Reserves– General Fund– Utility Funds

• Contingencies– Plan for the unexpected

• Long Term planning– Capital Replacement– Infrastructure enhancements

• Evaluate results – Performance measures– Outcomes rather than budget

compliance

Budgeting Best Practices

Tools for Success• Start early – use calendar• Communications

– Public, Council, Staff

• Fiscal Sustainability evaluation• Long-term planning• Monitor and assess frequently throughout the

year• Outside resources available:– GFOA.org (best practices)– State Associations (AWC, APWA, MRSC,

WACO)– Professional Services