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Budget 101 2009Hello! A few years ago staff was asked to develop a presentation outlining the way the city budget works so that newcomers could more easily get up to speed. Each year since we have updated the presentation, and we hope the information that follows will be useful to you as you prepare to work through the details of the city’s proposed FY 2010 budget. 1 The purpose of this presentation is to provide basic information about the structure of the city’s budget, how it is prepared, how the city uses financial indicators to track budget trends and how the public is given an opportunity to participate in the process. This presentation is not intended to discuss the specifics of the current year budget or proposals for next year –it is intended to serve as a “primer” as we move into the budget season so that everyone involved in the process has an understanding of how it all works. 2 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. 3 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 .32 per $100 designated for the operational uses and .14 going towards debt service. So 32¢ 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. 4 When presenting budget information as a 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 adopted budget. This slide shows a graphic depiction of the revenue part of the summary, detailing each revenue line item. The white columns compare the FY 2008 budget with the FY 2009 adopted budget. As you can see with the red circles, in this example Total revenues were up by 6.3%. The revenue summary also shows the 2008 amended budget numbers, reflecting any changes made to the adopted budget. Note that the budget is normally amended twice each year –first, During the 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 This is the other half of the fund summary for the General Fund, showing expenditures. Again the white columns reflect the adopted budget for FY 2008 and FY 2009 respectively. The red circles show the planned expenditures for each adopted 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. 6 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. 7 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 GF and into the Strategic Initiative Fund And put to work for the citizens of Southlake. The next chart shows how the Strategic Initiative Funds have been used Since the SIF was established in 2006. Note that it has primarily been used For capital projects. 8 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. 9 This slide is just intended to give you a flavor for the use of the Strategic Initiative Fund. 10 But going back to the fund summary. This section of the fund summary shows you the aggregate detail for the General Fund, including the final fund balance. The red circles show you the final fund balance for each fiscal year. 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 when all revenues and expenditures are fully accounted for. 11 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, fourteen 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. 12 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. 13 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. 14 This slide depicts the portion of the Utility Fund Summary that shows the ending funding 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. 15 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. No time deadline. 16 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 $4.8 million was projected for FY 2009 total revenues. The capital portion of this budget is included in the CIP as well –to be used for the construction of DPS facilities. 17 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 2009, we expected about $3.4 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 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. 18 This slide is simply a map of the Tax Increment Reinvestment Zone #1, showing you the areas where TIF funds can be used. 19 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. 20 Each year when the staff begins the budget preparation for the coming fiscal year, we used the Strategic Management System as our guide. After all, the purpose of the system is to ensure that our resource allocation supports the stated vision, mission and goals of the City Council. The staff takes the Council’s stated focus areas and develops initiatives to support them. We also use information included in the citizen survey. Each year the City Council holds a strategy session in January to identify strategic priorities. The staff uses these priorities to develop Departmental business plans and annual work plans. These plans then become the foundation for making resource requests through the budget process. Once the budget is set, Department Directors are held accountable for implementing the initiatives funded through the budget. 21 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 usedextensively in business and industry, government, and nonprofit organizations worldwideto 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. 22 To ensure that we don’t have incremental “creep” or unintended growth in budget line items, the City of Southlake uses a target budget process. The next slide shows how it works. 23 This slide shows how the target budget process works. The Finance Department calculates the target number (or base budget number) and provides to staff at the budget kickoff retreat in March. 24 The City Manager’s Office then focuses review on the supplemental requests. This process prevents the incremental budget “creep”, requiring departments to justify their supplemental requests each year, rather than embedding them in line items where they are not easily identified. This process allows us to scrub the budget more thoroughly before it is submitted to Council. 25 As you might imagine, the Finance Department plays a critical role in the process. This slide shows the role of the Finance Department in the preparation of the budget, which is primarily to ensure the technical accuracy and completeness of the budget. 26 The City Manager’s office looks at the budget in a “big picture” context. What are we trying to achieve strategically? Does the budget address the Council’s strategic goals? Is the budget linked tightly to workplans and service provision requirements? Does the budget meet the City’s overall financial goals? It is the C-M-O’s role to finalize a responsible budget that meets the needs of the Council and our citizens, as well as the organization and to ensure that we make prudent investments in the community, city service provision and the workforce. 27 NOTES: 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 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. 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. 29 Since the budget is a plan for the use of taxpayer dollars, it is critical that the process be transparent and provide plenty of opportunities for input from the community and the boards you see listed. As such, the budget calendar provides for presentation of the filed budget in a series of public meetings, including the SPIN Standing Committee and Advisory Board meeting. Public input during work sessions is accepted but somewhat limited. (This is Council’s time to roll up their sleeves and get questions answered) Public hearings provide opportunity for formal public comment-The budget requires two public hearings under City Charter provisions. 30 Staff is available to answer any questions you may have about the budget at any time throughout the process. Thank you for taking the time to listen to this Budget 101 presentation. It is our hope that it has provided you with a solid foundation for your upcoming review of the FY 2009-2010 proposed budget. 31 32