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Budget 101Budget 101 June Council Retreat June 22, 2010 This is the Budget 101 presentation for the June 22, 2010 City Council Retreat. 1 Understanding the Budget Budget Basics Financial Indicators FY2011 Goals and Challenges This Budget 101 presentation will go over the basics required to understand the City’s budget, financial indicators that guide the budget process, and the goals and challenges the city will face in FY2011. 2 Budget Basics Budget is prepared annually FY runs from Oct. 1 – Sept. 30 Multi-year components Fund Accounting General Fund Debt Service Fund Utility (Enterprise) Fund Special Revenue Funds Other Funds 3 Although the budget is prepared and approved on an annual basis for a fiscal year that begins October 1 of each year, there are several multi-year components to it. For example, the budget includes a multi-year capital improvement program and staff performs a multi-year analysis to assist the City Council in its review of planned programs and budget options. Dollars are accounted for in a series of “funds.” These funds are accounting entities with their own self-balancing set of accounts recording cash and/or other sources of revenues against expenditures for specific activities. As we go through the next series of slides we will walk you through an overview of each of the major funds included in the city budget. Budget Basics – General Fund Funds general operations of city Supported by tax & other revenues Property taxes Sales taxes Franchise fees Fines Permits Service charges, misc., fees Property tax rate allocation Maintenance & operations Debt service 4 We are all most familiar with the General Fund because our tax revenues, and most of our operational expenditures flow through it. This slide demonstrates the types of revenues that are accounted for within this fund. The current property tax rate is .462 per $100 valuation. But note that property tax collections are split, with 33 cents per $100 designated for the operational uses and 13 cents going towards debt service. So 33¢ of the tax rate is used for general fund operations, which include services like police and fire protection, the library, code enforcement and others. The General Fund is also the most likely place to find dollars budgeted for internal services such as finance, IT, and human resources. GENERAL FUND - REVENUES 2010 Adopted Budget vs. 2009 Adopted Budget When presenting budget information as part of our budget document, revenues and expenditures are shown in what we call “fund summaries”. Each fund summary shows details about revenues and expenditures for that particular fund, including a comparison of the current adopted budget to the prior year amended budget. This slide shows a graphic depiction of the revenue part of the summary, detailing each revenue line item. The gray columns compare the FY 2009 adopted budget with the FY 2010 adopted budget. As you can see with the red circles in this example, total revenues were down by 3.8%. The revenue summary also shows the 2009 amended budget numbers, reflecting any changes made to the adopted budget. Note that the budget is normally amended twice each year – first, during mid-year budget review and for the second time when the Council adopts the new budget and amends the current year budget to reflect our final revenue estimates. 5 GENERAL FUND - EXPENDITURES 2010 Adopted Budget vs. 2009 Adopted Budget 6 This is the other half of the fund summary for the General Fund, showing expenditures. Again, the gray columns reflect the adopted budget for FY 2009 and the adopted budget for FY 2010. The red circles show the planned expenditures for each budget. This part of the fund summary shows the reader the planned expenditure for each department, and how the proposed number for the upcoming fiscal year relates to the current year number. Net Revenues This chart shows net revenues, which is the sum of total revenues minus total expenditures for the fiscal year. Net revenues carry over to maintain an optimum fund balance of 25% as required by the fund balance policy. 7 Fund Balance Policy Adopted August 1993 General Fund “…goal shall be to maintain a fund balance in the General Fund equal to a minimum of 15% of General Fund budgeted operating expenditures, with the optimum goal of 25%.” Utility Fund “…goal shall be to maintain a fund balance of 60 days of working capital in the Utility Fund…with the optimum goal of 90 days of working capital.” Debt Service “…shall also maintain Reserve Funds for all statutorily required reserve funds to guarantee debt service.” 8 This slide shows excerpts from the city’s fund balance policy adopted in August 1993. This policy guides the staff and Council when preparing and adopting the budget. Once revenues and expenditures are planned, the resulting fund balance serves as the city’s protection against unforeseen impacts to the budget, such as economic downturns, disasters, etc. It is important for the city to maintain reserves so that we are prepared for the unanticipated and the policy guides our decisions regarding how much is too little and how much is too much. GENERAL FUND – Fund Balance 2010 Adopted Budget vs. 2009 Adopted Budget 9 This fund balance summary shows you the aggregate detail for the General Fund. The red circles show you the final amended and proposed fund balance for FY 2009 and FY 2010. Per city policy, the fund balance should reflect a percentage of 15-25%. A quick glance of the fund summary will demonstrate whether we are compliant with our policy. Note that excess fund balance is transferred to the SIF at the end of the fiscal year when all revenues and expenditures are fully accounted for. Budget Basics – General Fund Strategic Initiative Fund Restricted Excess revenue Unspent appropriation Fund balance exceeds optimum level (25%) Used for one-time, non-recurring costs What happens if the General Fund ends the year with more than 25% in the fund balance? The simple answer is that the portion exceeding the 25% level is swept out of the General Fund and into the Strategic Initiative Fund and put to work for the citizens of Southlake. The next chart shows how SIF funds are primarily used. 10 Strategic Initiative Fund History 11 It is not our purpose today to review the history of the Strategic Initiative Fund in detail, but this slide shows how it has been used since it was established. Whether transferred into the CIP, used to purchase costly fire equipment, or a good source of revenue for investing in the city’s technology, the Strategic Initiative Fund has gone a long way to advancing city causes without embedding future operational expenses into future budgets, and without increasing the city’s debt service and related interest costs. SIF Expenditures by Category FY 2010 12 This slide is just intended to give you an idea for how the Strategic Initiative Fund is used. Budget Basics – Debt Service Restricted uses Supported by tax revenue (property) Revenues used to pay debt Debt supports the Capital Improvement Program budget 13 Moving on to the other funds that make up the city budget, we’ll now discuss the Debt Service Fund. As mentioned, a portion of the revenue generated by the property tax rate is allocated to support long-term bond projects through the debt service fund. As we have discussed, thirteen cents of the current tax rate is allocated to support the city’s debt. Much the way you allocate a portion of your budget for long-term expenses like your mortgage or to pay off a car loan, the City of Southlake sets these funds aside to pay for capital projects such as roads and sidewalks. By putting a portion of tax revenues into the debt service fund, we are able to protect those funds for the future payment of city debt. Fund Balance Policy Adopted August 1993 General Fund “…goal shall be to maintain a fund balance in the General Fund equal to a minimum of 15% of General Fund budgeted operating expenditures, with the optimum goal of 25%.” Debt Service “…shall also maintain Reserve Funds for all statutorily required reserve funds to guarantee debt service.” Utility Fund “…goal shall be to maintain a fund balance of 60 days of working capital in the Utility Fund…with the optimum goal of 90 days of working capital.” 14 This slide shows excerpts from the city’s fund balance policy adopted in August 1993 relating to debt service. Again, This policy guides the staff and Council when preparing and adopting the budget. Once revenues and expenditures are planned, the resulting fund balance serves as the city’s protection against unforeseen impacts to the budget, such as economic downturns, disasters, etc. It is important for the city to maintain reserves so that we are prepared for the unanticipated and the policy guides our decisions regarding how much is too little and how much is too much. Budget Basics – Utility Fund Restricted uses Supported by fees/rates Self-supporting Water, wastewater or refuse services Working capital (fund balance) requirements – 60 days minimal 15 The utility fund is an enterprise or business fund. The intention is for the direct beneficiaries of the service to pay for all costs of the fund through fees. Water, sewer and even garbage revenues (utility service rates) and expenditures (the cost of treated water, etc.) are accounted for through this fund, with the idea that it will be self-supported, that is, not supported by the general fund. Note that the Utility Fund is set up to pay for its ongoing operations, as well as its debt. So it is very unlikely that you would see water and/or sewer infrastructure paid for using General Fund monies. Budget Basics – Utility Fund 2010 Adopted vs. 2009 Adopted 16 Here is a representation of the Utility Fund Summary. It works the same as the General Fund Summary, showing all revenue and expenditures for each fiscal year by line item and comparing the relative growth from year to year. You will note that this budget is structurally balanced; that is, revenues are in excess of planned expenditures. This is something we seek to achieve with all of our operating funds so that we can sustain the budget into the future. Drawing down or borrowing from the fund balance is acceptable only when the draw down is used for one-time purchases. A draw down used to balance the operating budget is a sign of fiscal distress or poor budget management and should be avoided if possible. Fund Balance Policy Adopted August 1993 General Fund “…goal shall be to maintain a fund balance in the General Fund equal to a minimum of 15% of General Fund budgeted operating expenditures, with the optimum goal of 25%.” Debt Service “…shall also maintain Reserve Funds for all statutorily required reserve funds to guarantee debt service.” Utility Fund “…goal shall be to maintain a fund balance of 60 days of working capital in the Utility Fund…with the optimum goal of 90 days of working capital.” 17 This slide shows excerpts from the city’s fund balance policy adopted in August 1993 as it relates to the Utility Fund. Once again, this policy guides the staff and Council when preparing and adopting the budget. Once revenues and expenditures are planned, the resulting fund balance serves as the city’s protection against unforeseen impacts to the budget, such as economic downturns, disasters, etc. It is important for the city to maintain reserves so that we are prepared for the unanticipated and the policy guides our decisions regarding how much is too little and how much is too much. Utility FUND – Fund Balance 2010 Adopted Budget vs. 2009 Adopted Budget 18 This slide depicts the portion of the Utility Fund Summary that shows the ending fund balance, which is called “No. of days working capital” for an enterprise fund. Our policy requires 60-90 days of working capital at the end of the fiscal year, which is roughly equivalent to 15-25% of planned expenses. Budget Basics – SPDC Use restricted to allowable expenses under Section 4B of state economic development statute Supported by ½ cent special levy sales tax Tax allocation Operating Fund Capital Projects Fund 19 The Southlake Park Development Corporation was formed when Southlake voters approved the special levy of a half-cent sales tax in the mid-1990s. The half-cent, which generates about $4.6 million per year, is dedicated toward the acquisition and development of Southlake’s park land. The specific projects are identified in the City’s CIP. The City may spend the funds for operational or capital projects, but it is our preference to focus on one-time, non-recurring costs. Revenues are captured in the operating fund, but a large portion of the collections are then transferred to the debt service fund. We try to fund very little ongoing operational expenses out of SPDC money. Collections for this fund are capped by state law, well in excess of our abilities. There is no expiration deadline, unlike the Crime Control and Prevention District. Southlake Parks Development Corporation Examples Liberty Park at Sheltonwood Lonesome Dove Park Royal and Annie Smith Park Bicentennial Park Improvements Funds collected by the Southlake Parks Development Corporation half-cent sales tax has funded the construction of city parks such as Liberty Park and Sheltonwood, Lonesome Dove Park, Royal and Annie Smith park, and the ongoing Bicentennial Park Improvements. 20 Budget Basics: Crime Control & Prevention District (CCPD) Use restricted to allowable expenses under Chapter 363 of the Texas LGC Supported by ½ cent special levy sales tax Tax allocation Operating Fund Capital Projects Fund 21 As you all know, Southlake voters have approved another special levy for crime control and prevention. A half-cent sales tax was approved by the voters in 1997 for an initial 5-year period. Since then, voters have reauthorized the levy for an additional 15 years. The funds are used primarily for land acquisition and facility development, although there have been limited operational expenses borne by the fund. About $4.1 million was projected for FY 2010 total revenues. The capital portion of this budget is included in the CIP as well – to be used for the construction of DPS facilities. Crime Control & Prevention District Project Examples DPS Headquarters DPS West North Training Facility Security Cameras Laptops/Radios Technology Limited operational expenses Funds collected by the Crime Control and Prevention District have built the DPS Headquarters, and DPS West facilities and will so be used to fund the DPS North Training facility. Other funds have purchased security cameras for Town Square, laptops and radios for the Department of Public Safety, and other technology and limited operational expenses. 22 Budget Basics – Tax Increment Financing District Restricted uses Supported with property taxes captured in Tax Increment Reinvestment Zone #1 Supported by other taxing jurisdictions Funds projects identified in Project and Financing Plan, approved in August 1999 Primarily funds projects associated with Town Square 23 The TIF Fund accounts for ad valorem revenues “captured” within a designated district. When a TIF district is created, the city then accounts for any increase in the property values of the district in the TIF Fund. Not only does the TIF get the CITY portion of these tax dollars, but we are also the beneficiary of funding from other taxing jurisdictions through interlocal agreements with Tarrant County, the hospital district, the junior college district and even from CISD. For FY 2010, we expected about $3.3 million in revenue, to be used for projects within the district. In our case, most of the projects we have undertaken with TIF funding are associated with the development of Town Square. Examples include public works infrastructure, parks, parking garages, and Town Hall. We use these funds exclusively for capital projects. The CISD part of a TIF gets a little complicated. We won’t address that with this presentation, but are happy to answer your questions about that aspect of the TIF if you have them. 24 This slide is simply a map of the Tax Increment Reinvestment Zone #1, showing you the areas where TIF funds can be used. Budget Basics – Special Revenue Funds Restricted uses Supports special projects, with dedicated income stream from fees: Reforestation Bicentennial Concessions Library Donations Park Dedication Vehicle Replacement Hotel Occupancy Tax Court technology/security Public Art 25 Next we would like to talk briefly about the special revenue fund portion of our budget. Although you try to limit the number of special revenue funds you create – to minimize the complexity of your budget and the administrative effort required to support them – the city does have a number of special revenue funds, as shown above. These budgets are very simple, and usually reflect the accounting for very specific revenue streams, with specific expenditure parameters. Special revenue funds not yet discussed are shown on this slide – These funds are usually used for projects, not ongoing operating expenses and often carry small balances of unused funds as “ending fund balance.” This concludes our discussion of budget basics. We will now move forward with a brief overview of how the budget is prepared. City of Southlake Strategy Map The City of Southlake provides municipal services that support the highest quality of life for our residents and businesses. We do this by delivering outstanding value and unrivaled quality in everything that we do. Fulfill Our Mission Live Our Core Values Promote Learning and Growth Provide Financial Stewardship Serve Our Customers Manage the Business Safety and Security Deliver on Our Focus Areas Integrity ● Innovation ● Accountability ● Commitment to Excellence ● Teamwork Infrastructure Quality Development Mobility Performance Management and Service Delivery Partnerships and Volunteerism 26 You have seen the Strategy Map many times and you know that it is the cornerstone of our activity. This map is the definitive document driving our work and resource allocation. As you know, we use a balanced scorecard system. The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It transforms our strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. This strategy map defines our work from a broad perspective. The next step is to cascade the map down into the departments where, based upon the focus areas and objectives of this map – they chart their own course and define their department’s strategy. Ultimately, budget requests are based very clearly on meeting the articulated goals of the Council as stated on the Strategy Map. How do we prepare the budget? Southlake Budget Process 27 This slide graphically depicts the budget preparation and approval process. As you will note, we typically spend our summer finalizing the details and working with boards and commissions who are responsible for the programs and projects funded through the city’s budget. The City Manager is required by Charter to file the proposed budget no later than August 15 of each year. The Council reviews the budget in a series of work sessions in the fall and the new fiscal year begins on October 1. Financial Indicators Provide trend information Financial, environmental, organizational factors tracked Based on ICMA publication: Evaluating Financial Condition 28 One final thought on the budget preparation process – it is important to note that staff and Council not only review the proposals for the upcoming budget year, but also review trend information with the preparation of certain financial indicators. We look at environmental, financial and organizational factors to determine if our budget is sustainable over time, to identify any warning trends and to manage financial policies that will ensure the fiscal health and wellness of the city over time. The model used for this purpose was developed by the International City County Management Association in conjunction with bond rating agencies and the Government Finance Officers Association. GF Per Capita Revenues & Expenses This chart shows General Fund Revenues and Expenses per capita from 2006 to 2010, with the blue line indicating revenues and the red line indicating expenditures. 29 Long-term debt as a percentage of assessed value This chart shows long-term debt as a percentage of assessed value from fiscal year 2006 to 2010. Since FY2006, the property tax supported long-term debt as a percentage of assessed valuation has been declining. From 2006 to 2010, the percent of valuation has declined from 2.07% to 1.49%. This is primarily a result of using cash, rather than taking on additional debt to fund certain capital projects. In addition, the city uses other tools to reduce its debt service requirements such as debt refunding or refinancing when appropriate. 30 So what about FY 2011? Budget goals Structural balance Optimum fund balance Budget with the ongoing economic situation in mind Initiatives that support Council’s Strategic Vision Declining revenue Operational impacts Cost drivers (health insurance, retirement) Budget goals for Fiscal Year 2011 include maintaining a structurally balanced budget with an optimum fund balance at 25%. The City will also budget with the ongoing economic situation in mind, and support initiatives that are in line with the City Council’s strategic vision. Things to be aware of are declining revenue and the operational impacts of cost drivers such as health insurance and retirement that heavily influence the budget. 31 QUESTIONS? 32