Wednesday, September 19, 2012
Evansville Administrator Overview; "Budget Starts with Revenue"
Much of the early stages of developing the city’s annual budget can take on a parochial outlook. Each department or committee focuses on its piece of the budget in isolation; the big picture comes later on when the Finance Committee and Common Council take a comprehensive look at the budget as a whole. Last week at Finance Committee and this week for Department Heads and for Common Council, I presented a fiscal overview to give some of the broader context. This column covers the highlights of my fiscal overview presentation. Budget as a Plan for Action I think it can be too easy to fall into a routine of viewing the budget as a once a year exercise in number crunching. Maintaining financial control is an important function of the budget. We are required by state statute to have a balanced budget, and more importantly we have a fiduciary responsibility to our taxpayers and customers. But we also use the budget to shape policy: for example, setting expectations for maintaining infrastructure or for hiring staff. We use the budget to set priorities. For example, the importance of quality of life and top notch services have been central themes during recent Committee of the Whole meetings; these should be reflected in the budget. We use the budget to improve organizational performance. The best example is our monitoring budgettoactual variances throughout the entire year. And we use the budget to provide longterm stability for the city’s finances. The budget is much more than just a shortterm, annual exercise. Budget Policies To ensure that longterm focus, we follow several policies when developing the budget. First and foremost: the budget starts with revenues. This message is so important that it is in the Finance Committee and Department Head reference books, in fiscal presentations, in newspaper columns, and I will keep repeating it to make sure it sinks in. The budget starts with revenues. This is the key to making sure we spend within our means. We maintain a structural balance in the budget. Although we are required to have a balanced annual budget, we go beyond that with an eye toward being able to sustain the budget in the longterm. The obvious example is to match onetime sources of money with onetime uses. Grants or other donations are better used for individual projects or purchases rather than operations or staff which would continue to cost money every year after the grant. Another example is maintaining our assets, in particular infrastructure. In a tight economy, we may be able to defer maintenance for a year or two, but it cannot become a longterm approach. We also use the budget as a management tool. As mentioned earlier, we monitor variances throughout the year. We also allow Department Heads the flexibility to combine or adjust individual lineitems in their budgets so long as they stay within the department’s overall budget and do not cause ongoing expenses or commitments. And we formally consider budget amendments in the middle of the year and at the end of theyear. Our Department Heads are frugal in their own right, but I think these flexibility features help to discourage spending to the budget – a problem common in some municipalities. Financial Information My presentation provides some background information on historic tax rates, revenues and expenditures, and comparisons to other jurisdictions. I’m not going to repeat dry statistics here today (maybe in a future column). However on an average property of $150,000, the city’s portion of the property tax bill would be $1,023. When looking at what property taxes pay for police, fire, streets, library, parks, and other services, I think we provide our taxpayers with a very good deal. Revenue Limits Our major sources of intergovernmental revenues are the shared revenue program, general transportation aid, and connecting streets program. These comprise a significant portion of the general fund budget: close to $800,000. They have been prone to frequent cuts over the last decade, including an $86,000 cut just last year. For much of the last decade we used growth in the tax base for a steady reduction in our tax rate. We operate under a very tight levy limit set by state law at zero percent or net new construction. Zero is zero. And the net new construction would allow about $8,300 in new property tax levy for next year. This is a very small amount when compared to the over $1.6 million levied for general operations. The state’s expenditure restraint program (ERP) is meant to encourage limiting increases in general fund operations regardless of the revenue source. By participating in ERP and controlling our expenses, we receive a very helpful grant: just over $50,000 this year. It is important for the city management to understand this program in an environment where it can be easy to propose raising fees or fundraising. Fees and fundraising do play important roles in portions of our budget, but we don’t want to jeopardize our ERP funds. Recommendations In preparation for the upcoming 2013 budget, I reviewed major cost drivers, particularly where tax levy supported. We provide services, so personnel comprise a major portion of our operating expenses. There are wage increases in our union contracts, adjustments for staffing changes, health insurance premiums are anticipated to go up considerably, and the formula for retirement contributions will have a significant increase for next year. In the general fund alone, these personnel costs will exceed $55,000, varying across the different departments. These added costs are offset by anticipated cost savings. Most notable is about $45,000 in reduced general obligation debt payments. Some projected savings in reduced maintenance, energy, and computer expenses cover the balance. It is not an exact match, but I think close enough to call it a wash. We can afford the anticipated personnel expenses without drastic cuts in operations. With the major expenses over which we have limited control covered, I recommended Department Heads and committees use a“hold steady” budget target. Any increased operating expense should be matched with a corresponding decreased expenses or new revenue source to keep in balance. We had a bit of a pause in major capital projects in 20112012. I recommended we reinvigorate the city’s capital improvements plan (CIP) for systematic repair and upgrade of infrastructure. Having infrastructure projects identified in a fiveyear plan allows time for planning, engineering, scheduling, and financing well in advance of potential capital projects. With financing, it is particularly important to also consider cash on hand and to balance debt payments with existing debt service projections. The Water & Light and Public Works Superintendents and City Engineer have had a series of discussions to evaluate potential projects. It is vital that we be both effective and efficient from the customer’s point of view, and I again recommended looking beyond the status quo. With a drive for excellence, we need to be committed to continuous improvement. Recent examples of improved service include the Public Works Department applying a salt brine prior to snowstorms in order to reduce the time it takes to clear the streets; the Finance Department now accepting on line and byphone payment of utility bills for better customer ease and convenience; and paying bills on a weekly rather than monthly basis, consolidating our general and utility accounts, and upgrading the accounting software to streamline processes and to eliminate duplication of back office work. At the moment, we are waiting on a proposal to conduct revaluation of properties in the city. By state law, each major class of property must be within ten percent of the full value determined by the state Department of Revenue in a four year period. Our commercial values are out of compliance at 86% of value. Furthermore, the assessor has commented that residential land values are off. Although awaiting the proposal, this cost will likely be in the range of $40,000 to $80,000 (and need to be accomplished without exceeding our budget limits). When the details are known, I expect to recommend this in an amendment to the current 2012 budget. Conclusion We are listening. For your convenience, we’ve set an email address specifically for public budget suggestions: firstname.lastname@example.org. All suggestions will be forwarded to the appropriate department, the Finance Committee, and the Common Council. Department budget requests will be presented to the Common Council on Wednesday, September 26. Then the Finance Committee, Mayor, and I will recommend adjustments. The Common Council will hold a public hearing on Tuesday, November 13, to consider the recommended budget. Although we are looking at a tight budget, it is doable. And we are in very sound financial shape and positioned well for the future.
Posted by Richard Woulfe at 11:25 AM