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1
MUNICIPAL BUDGETING
CERTIFIED GOVERNMENT FINANCE OFFICER (CGFO)
EXAMREVIEW SESSION
NOVEMBER 15, 2012
Mary-Lou Pickles, CGFO, CMAChris Lyons, CPA, CGFO, CPFO
2
TOPICSI. Budget Process/Budget TypesII. Fiscal Policies & Best PracticesIII. Performance MeasurementIV. Revenue Management &
ForecastingV. CIP & Financial PlanningVI. Budget Presentation AwardVII. Additional Information and
Source Material
3
BUDGET PROCESS/
BUDGET TYPES
4
BUDGET BASICS Governments allocate funds to programs
and services through the budget process Process should effectively involve major
stakeholders and reflect their needs and priorities
The budget process should: Incorporate a long-term perspectiveEstablish linkage to broad organizational goalsFocus decisions on results and outcomesAchieve consensus on decisions related to
goals, services, and resource allocation
5
BUDGET BASICS
The budget is a plan If you don’t have a plan, how do you know
when you are done? Benefits of the budget
Stable service delivery Impact of current decisionsThoughtful responses Identifies future trends earlyBuilds credibilityTransparency
6
BUDGET REFORM/APPROACH
Budget process reforms are designed to provide more and better information to decision makers increasing the rationale for budget decisions.
Approach depends on management and legislative body
7
BUDGET REFORM TYPES Executive Budgeting Performance Budgeting Program Budgeting Program-Planning Budgeting Zero-Based Budgeting Budget Allotment
8
EXECUTIVE BUDGET
Control of budget preparation lies with the Chief Executive Officer/City Manager
Earliest version used a simple line item format
Cities and states were the first to adopt this format
9
PERFORMANCE BUDGETING First major reform after Executive
Budget format Emphasizes purpose and
accomplishments Primary features are efficiency and
effectiveness measures Expenditures are based on
measurable performance of activities and programs
Sets primary focus on evaluation of the efficiency of existing activities
10
PROGRAM BUDGETING
A budget wherein expenditures are based on program of work and on character and object class (GFOA definition)
Organized by major programs Enables comparison of the costs and
benefits of major programs May encourage micro management
of department activity by CEO or legislative body
11
PROGRAM-PLANNING BUDGETING
Originated by Department of Defense Identify most cost effective way to
achieve goal Successful at DOD where results were
easily quantified
12
ZERO-BASED BUDGETING
Continued existence of programs and activities must be justified every year and not taken for granted
Purpose is to force conscious decisions between disparate goals
Designed to address the appropriateness of each goal, rather than the most cost effective program to achieve the goal
13
BUDGET ALLOTMENTS
A portion of the budget is allocated to an interim period based on historical spending patterns and needs
Advantages include:Avoidance of rushed year-end spendingAids in cash flow Provides for inventory planning needs
14
ASPECTS OF THE BUDGETING FUNCTION
Financial: plan for future revenue collection and spending
Political: resolve conflicts due to allocation of scarce resources
Planning/Analytical: Effectively use government resource tools, such as, cost-benefits analysis, cost effectiveness, net present value analysis and strategic planning
15
ASPECTS OF THE BUDGETING FUNCTION (CONTINUED)
Administrative: effectively coordinate the preparation of the budget and ensure expenditures are made in accordance with the adopted budget
Communicative: provide information that will assist with choices and promote stakeholder participation in the budget process
Strategic Planning: define the direction of making decision on allocating resources, link to budget, be outcome driven and be supported by elected officials
16
SIX PHASES OF THE BUDGET PROCESS
1. Budget manual (call)2. Agency/Department budget
requests3. Preparation of the proposed
budget4. Legislature consideration and
adoption5. Implementation6. Audit and evaluation
17
PHASE 1 – BUDGET MANUAL
Responsibility for initiating budget cycle rests with the CEO, usually City Manager or Mayor
Budget call or manual is instructions sent to agency and department heads concerning the submission of information for the budget year
18
BUDGET MANUAL (CONTINUED)
Statement from CEO or budget officer outlining fiscal position
Description of budget process Budget calendar Assumptions to be used for
requests Forms to be used with
instructions
19
PHASE 2 – BUDGET REQUESTS Prepared by Agency/Department Budgets usually begin as
requests that contain three itemsBudget schedules that detail the amounts
requested, usually in line item formatSupporting documentationTransmittal letter that describes the
agency/department and provides justification for its major objectives and initiatives for the budget year
20
PHASE 3 – PREPARATION
Budget staff reviews requests to ensure:Compliance with priorities and objectives
in budget manualRevenues and expenditures balanceRevenue estimates are realistic and within
guidelines, DOR provides information about revenue to local governments
Budget staff compile requests into a single budget document that is submitted to the legislative body for review
21
PHASE 4 – LEGISLATIVE CONSIDERATION AND ADOPTION
Executive proposal is presented to legislative body for consideration
Legislative body reviews to ensure the budget addresses their constituents’ needs
Public hearings in compliance with State Statutes dictate:Date, Time, and Place of hearings Publicized hearings that give citizen interest
groups the opportunity to raise issues related to the allocation of resources
22
LEGISLATIVE CONSIDERATION AND ADOPTION (CONTINUED) Budget document should:
Provide summary information for the public and media
Include a transmittal letter that outlines key policies and strategies
Be readable and understandable Chapter 200, F.S. Truth in Millage (TRIM)
Requires two public hearings for open discussion of millage rates and budgets of taxing authorities
Sets the maximum operating millage for cities and counties at 10 mills
23
LEGISLATIVE CONSIDERATION AND ADOPTION (CONTINUED) Chapter 200, F.S. TRIM (continued)
Tax revenue is based on the Certification of Value provided by the Property Appraiser and is the valuation of taxable value within the jurisdiction
Requires taxing authorities to utilize a minimum of 95% of the certified taxable value
Defines a “county of special financial concern” as a county where 1 mill will raise less than $100 per capita
24
LEGISLATIVE CONSIDERATION AND ADOPTION (CONTINUED) Chapter 200, F.S. TRIM (continued)
Requires taxing authorities to advise property appraiser of its proposed millage rate, its rolled-back rate, and public hearing information within 35 days after receipt of certification of value
Requires certification of statutory compliance be sent to Department of Revenue
Allows taxing authorities to readopt its prior year’s adopted final budget, as amended, and expend moneys based on that budget until such time as its tentative budget is adopted if the fiscal year of the taxing authority begins prior to adoption of the tentative budget.
25
PHASE 5 - IMPLEMENTATION
Budget officer implements Establish and record budget as
approved by legislative body Start new fiscal year Establish position control based
on approved positions, job description and pay rate
26
PHASE 6 – AUDIT AND EVALUATION
Budget officer monitors quarterly or monthly
Report actual compared to budget
Make budget adjustment as necessary
Monitor progress toward objectives
27
MULTI-YEAR BUDGETING TYPES
Classic (traditional)Both the spending and revenue plan for
each budgetary year are approved at the same time
RollingEach year’s appropriations are adopted in
each subsequent year
RecommendedGovernments should prepare multi-year
expenditure projections
28
MULTI-YEAR BUDGETING ADVANTAGES Improves
Financial managementLong-range strategic planningProgram monitoring and
evaluation/benchmarking Reduces staff time in budget
development Links operating and capital
activities/spending Reduces surprises Pinpoints problem areas early
29
MULTI-YEAR BUDGETING DISADVANTAGES
Difficult to project into the future Could reduce responsiveness to
emergencies if too restrictive Initial year may increase work
and stress in departments
30
MULTI-YEAR BUDGETING SAFEGUARDS
Amend existing financial and budget policies and procedures addressing:Allowance/disallowance of carryovers from
one year to the nextLevel of acceptance of budget
adjustments, if any The amount of revenue reserves that can
be used for unanticipated expenditures
31
MULTI-YEAR BUDGETING SAFEGUARDS (CONTINUED)
Create financial policiesBalanced budgetRevenue diversificationDebt capacityFund balance
Other safeguardsExamine key economic and fiscal
indicatorsPerform analysis of existing revenue
structureUpdate budget manual/call to reflect
changes
32
MULTI-YEAR BUDGET VS. MULTI-YEAR FINANCIAL PLAN
Budgets have more detail Budgets have goals and/or
objectives Budgets are public documents Budgets are approved by the
governing body
33
ACCOUNTING BASIS
Governmental fund types:Used to account for most, if not all, of a
government’s taxable supported activitiesUses modified accrual basis of accounting
which recognizes revenue when measurable and available
Five types:1. General fund2. Special Revenue funds3. Debt Service funds4. Capital Projects funds5. Permanent funds
34
ACCOUNTING BASIS (CONTINUED) Proprietary funds:
Used to account for a government’s business-type activities and serves internal and external customers
Uses accrual basis of accounting which recognizes revenue when earned
Two typesExternal – Enterprise funds Internal – Internal service funds
35
ACCOUNTING DEFINITIONS Encumbrances: obligations
incurred for which receipt of goods or services have not occurred
Mandate: when a higher level of government requires a lower level of government to perform a specific task or to meet a standard
36
FISCAL POLICIES &
BEST PRACTICES
37
NATIONAL ADVISORY COUNCIL ON STATE AND LOCAL BUDGETING (NACSLB)
Four principles of the budget process
Twelve elements each of the four principles of the budget process incorporates at least two of the twelve elements to help translate the guiding principles into action components
38
NACSLB – FOUR PRINCIPLES1. Establish broad goals to guide
government decision making2. Develop approaches to achieve
goals3. Develop a budget consistent
with approaches to achieve goals
4. Evaluate performance and make adjustments
39
ESTABLISH BROAD GOALS1. Assess community needs, priorities,
challenges and opportunities2. Identify opportunities and
challenges for government services, capital assets, and management
3. Develop and disseminate broad goals
40
DEVELOP APPROACHES
4. Adopt financial policies5. Develop programmatic,
operating, and capital policies and plans
6. Develop programs and services that are consistent with policies and plans
7. Develop management strategies
41
DEVELOP BUDGET
8. Develop a process for preparing and adopting a budget
9. Develop and evaluate financial options
10.Make choices necessary to adopt a budget
42
EVALUATE PERFORMANCE
11.Monitor, measure and evaluate performance
12.Make adjustments as needed
43
OPERATING BUDGET POLICIES
Define a balanced operating budget
Develop with goal to maintain structurally balanced budget (balance between operating expenditures and operating revenues)
Identify who is responsible for budget preparation - management
44
REVENUE POLICIES How much change in the property tax
rate is acceptable in a given year How will one-time revenues be used How frequently should service
charges and fees be reviewed
Example: ContributionSavings from bond issue
Don’t budget Not used for ongoing expenditures
45
FUND BALANCE POLICIES GFOA recommends governments
establish a formal policy on level of Unrestricted Fund Balance that should be maintained in General Fund based upon a government’s own specific circumstances considering:Predictability of its revenuesVolatility of its expendituresRisk to significant one-time outlays
(disasters)Commitments and assignmentsConformity with legal and regulatory
constraints
46
STABILIZATION POLICIES
To guide the creation, maintenance and use of resources for financial stabilization purposes
Identify purpose for which funds can be used
Also referred to as rainy day funds, unreserved, undesignated fund balances and contingency funds
47
CONTINGENCY PLANNING POLICIES
Guide financial actions that will take place in the event of emergencies, natural disasters or other unexpected events
General guide to improve the ability to take timely action and to aid management when an emergency occurs
48
DEBT POLICIES Should guide issuance and
management of debt What is the maximum long-term debt
burden that the government will incur What mix of long-term debt and
current revenues, if any, will be the basis for financing capital improvements
How will bond proceeds be used Under what conditions will short-term
debt be used
49
DEVELOP MANAGEMENT STRATEGIES
Develop mechanisms for budgetary complianceAppropriate management processes and
systems should be in place to ensure compliance with the adopted budget
Institute procedures to review budget periodically (actual-to-budget comparisons)
50
COST OF GOVERNMENT SERVICES Full Cost – Encompasses all direct and
indirect costs related to that service Direct Cost – salaries, wages and
benefits of employees working exclusively on the delivery of the service and materials and supplies and other associated operating costs
Indirect Cost – shared administrative expenses in the work unit and in support functions outside the work unit
51
COST OF GOVERNMENT SERVICES (CONTINUED)
Life-cycle costs - Include costs in addition to purchase price over the life of an asset such as maintenance and repairs, failure costs (downtime) and money costs (interest and opportunity)This concept is useful for decisions
involving the purchase of major equipment
52
COST OF GOVERNMENT SERVICES (CONTINUED)
Opportunity costs – The benefit of an option that is forgone by choosing another option (loss benefit)
Sunk costs – A cost that has been incurred and cannot be reversedShould be ignored when evaluating
future decisions
53
COST OF GOVERNMENT SERVICES (CONTINUED)
Marginal Cost – Associated with expansion of a service without any increase in fixed costs (unused capacity)
54
PERFORMANCE MEASUREMEN
T
55
PERFORMANCE MEASUREMENT Performance measurement - process for
determining how a program is accomplishing its mission
Four key steps: Identification and definition of indicatorsCollection of appropriate dataAnalysis (comparing) performance to
previous results or benchmarksReporting the results
56
PERFORMANCE MEASURES Input – resources used in producing an
output or outcome Output – completed activity, amount of
work done within the organizationWorkload – the level of productivity of staff in
providing goods and services to customers Effectiveness – the degree that goals and
objectives are met within deadlines Efficiency – measures the amount of
outcomes per unit of resources allocated to an objective
57
PERFORMANCE MEASURES Performance measures should be
linked to specific program goals and objectives
Give priority where goals are achieved Measures should be valid, reliable and
verifiable (quantified assessment) Performance budgeting (outcome)
links the budget by establishing performance measures agreed upon by managers and decision makers
58
PERFORMANCE MEASURES Answers key questions:
How much did we do (quantity)?How well did we do it (quality)?How hard did we try (effort)?What change did we produce (effect)?
Why Measure?To improve performanceTo enable good decision making (quantified)Enhance accountabilityReport to the public
59
PROGRAM COMPONENTS Clearly defined service area Processes Activities and tasks Planned outcomes or achieved
results Link expenditures and revenues
to goals, objectives and outcome Expenditures and revenues are
related to specific functions
60
GOOD OBJECTIVES
SMARTSpecificMeasurableAttainableRelevantTime-Bound or Timely
61
PERFORMANCE BENCHMARKS Should be developed to aid in
assessing how well a function, program or activity meets needs or purpose
Comparative standards that prove a frame of reference for evaluating program/service quality or effectiveness
Should be consistently defined and measureable
62
REVENUE MANAGEMENT
& FORECASTING
63
FORECASTING REVENUE Estimating revenue is the first
step in determining the level of resources that will be available for budget appropriations
Influenced by:Administrative factorsPolitical factorsEconomic factorsPolicy factors
64
FORECASTING REVENUE (CONTINUED) Uses analytical techniques to
estimate Should be decentralized with
process to achieve consensus on the forecast
Establishes a spending target Projects the overall future
financial condition – capital spending and debt
Should extend over a period of at least 3 years
65
FORECASTING REVENUE (CONTINUED) Governments should maintain a
revenue manual that documents revenue sources and factors relevant to present and projected future levels of those resourcesPromotes better understanding of
government’s resourcesSupports decision-makingInternal staff training tool
66
QUALITATIVE METHODS Qualitative revenue forecasting methods
rely on judgments about future revenuesConsensus - Group collectively reaches
agreement on revenue projections based on previous collection patterns, experience, and knowledge of historical events.
Judgmental - Informed decision based on history and general economic conditions.
Expert - uses economists, demographers, market researchers, and social scientists to study trends.
67
QUALITATIVE METHODS (CONTINUED) Weaknesses
Responds to political pressuresFocus on current issues/eventsLack of comparability over time
68
QUANTITATIVE METHODS
Relies on numerical data enabling testing to see if underlying data assumptions are met
Requires extensive amounts of historical data to generate dependable projections
69
FORECASTING REVENUE METHODS Trend analysis – forecasting future
revenues based on its short-term historic trend
Simple linear and multiple regression analysis
Time series analysis – forecasting revenues based on financial data over extended periods (e.g., 15 or more time periods)
70
FORECASTING REVENUE METHODS (CONTINUED) Econometric forecasting involves
projecting future revenues by taking into account the economic factors that influence that revenue sourceSales taxUser charges (building & construction
permits)Real estate revenues
71
BREAK-EVEN ANALYSIS
Simple technique for determining whether a project will break-even Revenues = Costs
Four variablesRevenue per unitFixed costsVariable costsNumber of units or users
72
CALCULATE NET PRESENT VALUE Method of comparing the long-
term financial costs and benefits of different alternatives Uses discounting – process of converting a future value into the value it would be given today
The value of the promise today
= $ Promised in future Discount factor
73
REVENUE RESTRICTIONS To form a Community
Redevelopment District, Florida Statute 163.355 requires a municipality to adopt a resolution, supported by data and analysis, which makes a legislative finding that the conditions in the area meet the criteria described in s.163.340(7) or (8).Finding of necessity
74
REVENUE RESTRICTIONS Florida Statute 205.0535 requires a
municipality to establish an equity study commission before adopting a new rate structure for business taxes
Florida Statute 218.25 constrains the use of State Revenue Sharing for debt service in excess of guaranteed entitlement amount
75
CAPITAL IMPROVEMENT
PLAN (CIP) AND
FINANCIAL PLANNING
76
CAPITAL ASSETS (GFOA POLICY) Capital assets are government
facilities, infrastructure, equipment or networks Enable the delivery of essential public
sector services Recommends governments establish
a system for assessing their assets Plan and budget for any capital
maintenance and replacement needsInventory policy
77
CIP PLANNING Prioritize projects and funding
sources for period of time, usually 5 years
Should involve citizens – recommendations
Should be included in budget document and approved by the governing body
Adopted at the same time Is a decision-making tool – future
considerations outside scope Is a financial management tool
78
CIP PLANNING (CONTINUED)
Is part of long-term strategic plans but doesn’t drive them
Includes projects approved by key officials (manager, council) waiting for funding
Projects are typically placed in out years and move up until they are included in the current year’s capital budget
79
STEPS TO IDENTIFY CIP PROJECTS Review status of previously
approved projects Identify new projects Assess alternatives Complete forms Evaluate ability to fund
80
EVALUATE NEW PROJECTS
Project description Location map Justification Cost by year Impact of future revenues Future operating costs
81
RANKING CIP Criteria
Should be developed to select and rank proposed CIP projects and agreed on by everyone in the decision making process.
ConsiderIf taxes will have to be raisedHow many citizens will benefitSafety issues
82
METHODS TO FINANCE CIP Current revenues or fund
balance (pay-as-you-go) Debt (pay-as-you-use) Tax-Increment Financing Bonds
Used for projects within an area expecting to benefit from economic development
Grants Impact fees
83
BUDGET PRESENTATION
AWARD
84
REQUIREMENTS FOR AWARD
Four categories: Budget as a policy document Budget as a financial plan Budget as an operations guide Budget as a communications
device
27 Criteria:14 Mandatory requirements
85
BUDGET AS A POLICY DOCUMENT
Statement of entity-wide long-term financial policies (mandatory)
Budget message that articulates priorities and issues for the budget for the new year (mandatory)
86
BUDGET AS A FINANCIAL PLAN Summary of major revenues and
expenditures, as well as other financing sources and uses, to provide an overview for all total resources
Summaries of revenues, expenditures and other financing sources and uses for the prior year actual, current year budget and/or estimated current year actual, and proposed budget year
Describe major revenue sources, explain the underlying assumptions for the revenue estimates and discuss significant revenue trends
87
FINANCIAL PLAN (CONTINUED) Projected changes in fund balances,
as defined by the entity in the budget document
Financial data on current debt obligations and description of the relationship between current debt levels and legal debt limits
Explain the basis of budgeting for all funds, whether cash, modified accrual, or some other statutory basis
88
BUDGET AS AN OPERATIONS GUIDE Describe activities, services or
functions carried out by organizational units
Include an organizational chart Schedule or table summary of
personnel or position counts for prior, current and budgeted years
89
BUDGET AS A COMMUNICATIONS DEVICE Description of processes for
preparing, reviewing and adopting the current year’s budget and procedures for amending the budget after its adoption
Use charts and graphs to highlight financial and statistical information
Include a table of contents
90
TIPS FOR TAKING TESTS Stay positive throughout the whole test and
try to stay relaxedTake deep breaths to relax
Read the entire question and pay attention to the detailsMake sure you understand what question is
really asking you If you don't know an answer, skip it and
come back to it laterDon't stay on a question that you are stuck on
Only change an answer if you misread or misinterpreted the question Your first answer is usually the correct one.
91
SOURCE MATERIALS
92
SOURCE MATERIALS – FLORIDA STATUTES Chapter 200 - Determination of
Millage, specifically: 200.065 200.071 200.185 200.068 200.081
Chapter 205.035 Chapter 218.25 Chapter 163, Part III
http://www.leg.state.fl.us/
93
SOURCE MATERIALS - GFOA Capital Improvement
Programming: A Guide for Smaller Governments
An Elected Official’s Guide to Revenue Forecasting
An Elected Official’s Guide to Performance Measurement
An Elected Official’s Guide to Multi-Year Budgeting
94
SOURCE MATERIALS - GFOA Cost Analysis and ABC for Governments Decision Tools for Budgetary Analysis Financial Policies: Design and
Implementation The Operating Guide: A Guide for
Smaller Governments
Other ReadingsAn Elected Official’s Guide to Government
FinanceAn Elected Official’s Guide to Debt Issuance
95
SOURCE MATERIALS - GAAFR Chapter 1 - GAAP and the
Governmental Environment Chapter 2 - The Governmental
Financial Reporting Model Chapter 10 - Financial Statements Chapter 16 - Budgetary Integration
and Reporting Chapter 17 - Performance
Measurement
96
SOURCE MATERIALS Friedman, Mark. Trying Hard is Not
Good Enough. Trafford Publishing, 2005.
97
SOURCE MATERIALS - WEB Recommended Budget Practices: A
Framework for Improved State and Local Government Budgeting http://www.gfoa.org/services/dfl/budget/RecommendedBudgetPractices.pdf
Recommended Practices: Budget and Fiscal Policyhttp://www.gfoa.org/services/rp/budget.shtml
Distinguished Budget Presentation Award Program Criteria Guide and Explanations http://www.gfoa.org/downloads/BudgetCriteriaLocation.pdf http://www.gfoa.org/downloads/BudgetCriteriaExplanations.pdf
98
QUESTIONS