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Point Paper; City of Sheltons Budget Practices and Reserves

Background:As with many municipalities, Shelton maintains an approximate five percent general fund balance(reserve) to offset losses in revenue or operating increases as economic conditions change. This practice

allows the city to achieve the best possible interest rate when borrowing. Many states and municipalitiestypically fund these reserves from amounts raised through the annual budget process. The funding ofreserves must be transparent.

Current Practice:In Shelton, the reserve is funded when departmental expenditures are less than budget. Whenexpenditures are under budget the general fund balance increases and the reserve is increased. However,the estimated reserve is not visible as it is co-mingled with expenditure line items in each departmentsoperating budget. The problem with this method is that it overstates the operating budgets making itdifficult to determine how much of the underrun was designated for reserve and how much is truedepartmental expense. The significant concern with this method is that spending constraints

enacted to increase the reserve may reduce necessary operating expenses and decrease the qualityand level of service provided by city departments.

To illustrate the current practice, in the table below I analyzed the city audit reports for four fiscal yearsand found that the city side spending, although only about 28% of the total budget, contributed to mostof the underruns. The city (less education and debt) underran their budgets by $4.4 million on averageor 13% during the four year period.

Budget Actual Underrun %FY 2009 34,154,917$ 30,156,827$ 3,998,090$ 12%

FY 2010 33,432,441 29,752,420 3,680,021 11%

FY 2011 35,231,126 29,579,450 5,651,676 16%

FY 2012 35,285,417 30,926,448 4,358,969 12%

FY 2013 38,704,241$ NA

City of Shelton Budget Performance

(Less education and debt)

From this chart we can see that the actual spending remained flat at about $30 million between 2009 and2011 while the budget was 11% to 16% higher. Most striking, is the FY 2012 actual expenditure of$30.9 million versus the $38.7 million budgeted for FY 2013. That is a projected increase of 25%. Thisillustrates that the budget continues to be overstated by co-mingling the reserve amount with city budget

expenditures. Much of this overstatement is accomplished by overstated headcount requirements. Thispractice is flawed and does not promote transparency for the public or city departments.

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Alternative Method:The public thinks this balance is a surplus and can be used to fund shortfalls in other areas such aseducation. To eliminate the public confusion and to make this process more transparent the changewould be simple.

Add a separate expenditure line item in the budgets general fund for the reserve. *Decrease departmental budget expenses by an amount equal to the designated reserve. Establish a city policy on how all reserves are estimated, managed, and controlled by the City

Finance Director.

Make the Board of Aldermen responsible for managing and monitoring the reserve balance.THIS CHANGE WILL HAVE NO EFFECT ON THE BUDGET or TAXES.

ConclusionThis change would provide more visibility to the reserve and hold the departments accountable tobudgets that are aligned with their actual work requirements . Further, it would make the budgetingprocess less complicated by eliminating the need to continually and arbitrarily cut spending or holding

back headcount to meet the needed reserve.

Benefits

Budgets reflect reality and are transparent to the public. NO change in tax rate. Allows departments to focus on resources needed to allow their operations to function efficiently.

More accountability.

Budget under runs can be accurately characterized as improvements in productivity and efficiency.Opportunity for real productivity.

Will eliminate the amount of time necessary to manage and control the reserve in multiple budgetline items.

Management can focus on departmental quality and their level of service delivery*Changes in Budget Preparation and Estimates:

Annual budget should contain a monthly departmental staffing plan that supports the expenses.Should specify full time and part time positions.

Monthly Staffing projections should be based on employee expected date of hire, merit,retirements etc, not beginning of the year as default. Salary expenses should be aligned.

Every expense line item should be reviewed with regard to actual spending and annual estimatesand updated in accordance with the Finance directors zero based budgeting requirement.

Develop monthly report on gasoline spending and use of city vehicles that separates business usefrom personal use.

Monthly budget reports must be prepared and distributed in a timely fashion and Board of A&Tshould review significant spending and headcount variances monthly and follow up withdepartments to explain variances and monitor transfers.

Significant departments should present their actual spending and headcount versus budgetquarterly to the BOA, Board of A&T, city auditors, and the public.

Comments are relative to the City of Sheltons method used to fund the designated surplus/general fundbalance presented on Exhibit F of the FY 2012 audit report.