Budgeting for Local Governments Minnesota Government Finance Officers

Budgeting for Local Governments Minnesota Government Finance Officers Association Albertville, Minnesota June 25, 2014

“Our Reputation Proceeds Us” n n Giving money and power to government is like giving whiskey and car keys to teenage boys. ~ P. J. O’Rourke "If you put the government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand. " ~ Milton Friedman

Does this sound familiar?

Challenges for Government n n n Economic transition: impacts tax base Aging population changes spending and voting patterns Structural changes Tax/expenditure limitations Government deficits Deteriorating capital infrastructure

Budget Function The Balancing Act n n n Revenues and expenditures must balance. Agency requests consistent with overall priorities and financial policies. Budget reflects the sometime contradictory policies and intent of elected officials. Long term fiscal health not sacrificed to short term solutions. Boards/Councils make informed decisions.

Budget Types

Line-Item Budgeting n Expenditures related to commodities n What is to be bought n Focus is on control

Program Budgeting n Organizes information along “program” rather than departmental lines. • a set of activities with a common goal (public safety) n Expenditures related to public goals

Performance Budgeting n n Performance goals and objectives Demand, workload, efficiency, and effectiveness (outcome) measures for each program • What is to be done? • Focus on managerial aspects

Zero-Based Budgeting • • Prepare decision packages representing various service levels Rank order them Rankings are merged across entire governmental unit; single, ranked list Funding allocated down the list until the money runs out.

Recommended Budget Practices “GAAP for Budgeting”

National Advisory Council on State and Local Budgeting - NACSLB n n n n Assoc. of School Business Official Int’l Council of State Governments GFOA/ICMA National Association of Counties National Conference of State Legislators National League of Cities Industry, Labor, and Academia

What are Recommended Budget Practices? n n Comprehensive processes & procedures - define an accepted budget process “Goal-driven” approach: Planning, development, adoption and execution phases of budgeting

Benefits of Recommended Practices n n “TOOL” for governments seeking to improve budget process Educate on potential of budget systems • • • Assessment of existing Guidance on improving Promote education, training, and research on effective techniques

Practices are “Recommended”; Not Required Implementation - over number of years n Apply to variety of management and political styles • State/local laws, political aspects, management needs

Essential Features of a Good Budget Process n n n Long-term perspective Linkages to organizational goals Focuses decisions on results and outcomes Provide incentives to management and employees Promotes effective communication with stakeholders

Recommended Practices (NACSLB) 4 Major Principles n 12 Elements n 59 Practices n

Four Principles of the Budget Process (NACSLB) n n Establish broad goals to guide decision making Develop approaches to achieve goals • Policies, plans, programs, and mgmt. strategies n n Develop a budget consistent with goals, policies, plans, etc. Evaluate performance/make adjustments • Encourage progress toward achieving goals

Twelve Elements of the Budget Process n Establish Broad Goals to Guide Government Decision Making 1. 2. 3. Assess community needs, priorities, challenges and opportunities Identify opportunities and challenges for government services, capital assets, & management Develop and disseminate broad goals

Twelve Elements (cont. ) n Develop Approaches to Achieve Goals 4. 5. 6. 7. Adopt financial policies Develop programmatic, operating and capital policies and plans Develop programs/services that are consistent with policies and plans Develop management strategies to deliver the strategic plan

Twelve Elements (cont. ) n Develop a Budget Consistent with Approaches to Achieve Goals 8. 9. 10. Develop a process for preparing and adopting a budget Develop and evaluate financial options Make choices necessary to adopt a budget

Twelve Elements (cont. ) n Evaluate Performance and Make Adjustments 11. 12. Monitor, measure, and evaluate performance Make adjustments as needed

59 Recommended Budget Practices n n n Procedures that assist in accomplishing elements of budget process Multiple practices associated with each element Appropriate for all governments • All circumstances and situations

What is a Budget? A quantified, planned course of action over a definitive time period: n n Forces an organization to consider the demand for services/resources required Translates priorities into resources Highlights potential problems in sufficient time to take corrective actions Creates a baseline against which actual results can be compared.

Functions of the Budget The budget is a means--not an end. “Turns policy and intentions into services. ” n The budget is a policy document • determines who gets what • “establishes organizational priority. ” n n Budgets enable organizations to prioritize resources to attain objectives. Budgeting defines the scope of specific operational activities

Budgeting n Goal of the Budget Function: Manage the balancing act between providing funding for vital services, protecting the fiscal health of the whole agency and ensuring the budget meets the goals of elected officials. n The budget is a tool for proving services.

Budget Process is Crucial Government Activity “Characteristics” of budget process determine: n n Quality of decisions made Level of acceptance of budget decisions

Distinguished Budget Presentation Award

Budgetary Reporting - GFOA Distinguished Budget Presentation 4 major aspects of budget documentation are identified and communicated: n n Budget a s a policy document as a financial plan as an operations guide as a communications device

Four Themes of Budget Presentation n Budget as a policy document • Should identify and clarify policies. • Policies should be adopted by governing body. • 5 criteria

Four Themes of Budget Presentation n Budget as a financial plan • Takes account of available and anticipated resources and provides a plan for their disposition. • Primary instrument for promoting solvency, efficiency, and collective choices regarding distribution/allocation of resources • 10 criteria

Four Themes of Budget Presentation n Budget as an operations guide • Operating considerations go beyond financial dimensions, and effect the number and level of employees and other factors that affect day-to-day activities of various units • The budget seeks to explain the relationship between organizational units and programs. • 6 criteria

Four Themes of Budget Presentation n Budget as a communications device • The printed operating budget is a central focal point for residents, taxpayers, the financial community, and the media. • Budget hearings on the proposed operating budget afford the public the single most important opportunity to obtain and to understand the workings of a locality • 6 Criteria

Budget Award continued n n Budget document reviewed by 3 independent reviewers Judged proficient or outstanding by 2 reviewers in all 4 basic categories And judged proficient or outstanding in 14 criteria identified as mandatory Unlike CAFR allows more flexibility of format & context

What to Expect from Potential Stakeholders n n n Don’t have time Lack of understanding Want simple solution Perception of government often poor to begin with Special & narrow interests Strong bias

Budget Award continued n n n Great deal of effort for first time Not as time consuming in year 2 1996 Government Finance Review Article asked “How important is the budget to the credit evaluation process compared to the Official Statement and the CAFR? ” • Fitch & S&P Rate OS, Budget, CAFR • Moody’s Budget, CAFR, OS

Budget Award continued n Minnesota Participants: • 27 Government entities receive the award. • 14 Independent reviewers • List available on GFOA web site with links

Criteria n n Table of contents (C 1) mandatory Strategic goals & strategies (P 1) • Long-term, entity-wide, strategic goals • Provide context for decisions • Reference: GFOA’s best practice on Establishment of Strategic Plans.

Criteria n Short-term organization-wide factors influencing decisions (P 2) • Key factors guiding upcoming year’s budget • Could include; personnel costs, tax levels or capital improvements n Priorities & Issues (P 3) mandatory • Summary of key issues/decisions made during budget process and their ramifications

Criteria n Budget overview (C 2) mandatory • Executive summary n Similar to MD&A in CAFR • Understand quickly major budgetary items & trends • GFOA best practice Effective Presentation of the Budget Document n Organization chart (O 1) mandatory

Criteria n Fund descriptions & structure (F 1) • Each major fund • Whether its governmental, proprietary, or fiduciary or the fund type n Department/fund relationship (O 2)

Criteria

Criteria n Basis of budgeting (F 2) • For each fund type • Explain basis of accounting verse budgeting basis n Financial policies (P 4) mandatory • Should include financial planning, revenue, and expenditure policies • Should define balanced operating budget • Various GFOA best practices

Financial Policies n Guidelines: operational and strategic decision-making related to financial matters • Identify acceptable/unacceptable courses of action, establish parameters in which to operate, and provide standard against which fiscal performance can be judged

Essential Characteristics n n n Consistent with broad goals. Mutually consistent. Integrated into various planning processes: • Program planning • Capital planning • Budget preparation

Financial Policies: Benefits n n “Good government” practice. Streamline decision-making process. • Provide direction to decision makers. n n n Improve control. Avoid hazards of short-term horizon for decision making. Provide political cover for difficult decisions.

Common Objections n n n Statutes are sufficient – financial policies would be redundant. Fewer controls the better – need maximum control and managerial discretion. Small size of government.

Criteria n Budget Process (P 5) mandatory • Help decision makers make informed choices about the provision of services and capital assets, and…… • Promote stakeholder participation in the process • Internal process, opportunities for public input, adoption of the budget, and process for amending budget

Criteria • Budget calendar with key dates • GFOA best practice on Public Participation in Planning, Budgeting, and Performance Management • Should be well-integrated with: n n n Comprehensive Plan Capital Programming (CIP) Long-range financial plan Policy Development Service/performance targets

Budget Process: Activities Budget Instructions Overall Financial Plan and Policies Audit and Evaluation Agency Budget Development Narrative Personnel Requests Nonpersonnel Requests Budget Office Review & Executive Submission Executive’s Budget Speech Financial Reporting Performance Audit Delivery Services Budget Execution Public Hearings on Agency Buildings Legislative Review & Enactment

Criteria n Consolidated financial schedule (F 3) mandatory

Criteria n n 3 (4) year consolidated and fund financial schedule (F 4) mandatory Fund balance (F 5) mandatory • Beginning & ending • GFOA best practice Determining the Appropriate Level of Unrestricted Fund Balance in the General Fund & Determining the Appropriate Level of Working Capital in Enterprise Funds

Criteria n Revenues (F 6) mandatory • Describe revenues representing 75% of total revenues • Methods used to estimate • GFOA best practice Financial Forecasting in Budget Preparation Process n Long-range financial plans (F 7) • Identify plans that extend beyond budget year • 4 GFOA Best Practices

Any plan is better than no plan?

Establish Policy Framework Programmatic Policies n Reflects vision for community and the services levels to be provided n n Adopted policy statements, strategic or comprehensive plans, informal org. goals Essential that goals, needs, and priorities of community be stated clearly n Examples: Retaining open space, providing safe environment, maintaining a balanced transportation system, promoting jobs and businesses, etc.

Criteria n Capital Expenditures (F 8) mandatory • Define capital expenditures • 5 GFOA best practices n Impact of capital investment on operating budget (F 9) • Anticipated future cost, savings, revenue impacts, service impacts

Impact of Capital Projects on Operating Budget n Operating and maintenance costs • Based on total square footage/other facilities, etc. n n Personnel Non-personnel services • Utilities, supplies, equipment. n New vs. Renovations • Potential cost savings of improvements vs new structures. n Cost of debt service

Criteria n Debt (F 10) mandatory • Debt limits described • Impact on budget n Position summary schedule (O 3) mandatory • Summary table • FTE • Changes described

Examining Personnel Costs

Personnel Expenditures Comprises a very large % of a localities budget n Position Control • Employee is hired for position that has been approved and budgeted; rate of pay approved by legislative body • Usually administered by HR n n OT & PT analysis Turnover Savings (Vacancies)

Criteria n Department descriptions (O 4) mandatory • Best practice Departmental Presentation in the Operating Budget Document • Main Goal for Departments: Obtain resources sufficient to cover program needs to deliver services. n Unit goals and objectives (O 5) • Linked to organization’s goals and objectives

Criteria n Performance measures (O 6) • For each department • Linked to goals • GFOA best practice A Systematic Approach to Managing Performance & Performance Management for Decision Making n Statistical/supplemental section (C 3) • Defines community/organization • Not a CAFR statistical section

Criteria n Glossary (C 4) • Include abbreviations & acronyms • Easy to understand n n Charts & graphs (C 5) Understandability & usability (C 6) • Consistent formatting • GFOA best practice Making the Budget Document Easier to Understand Presenting Official Finance Documents on Your Government’s Website

Thank you Tom Kelly Finance Officer White Bear Township tom. kelly@ci. white-bear-township. mn. us (651)-747 -2760