Preparing Multi-Year Budgets in the New Economy September 23, 2010

1. Preparing Multi-Year Budgets in the New Economy September 23, 2010 Mark Ruff & Stacie Kvilvang – Ehlers

2. What is a Financial Management Plan? • A multi-year fiscal plan for all tax-supported funds • Integrates: • Existing debt • Capital improvement plans (CIP) • Future debt • Tax base growth • Future operating expenses • Compares entity to standards • Government Finance Officers Association (GFOA) • Similar entities

3. What Makes It Practical? • Helps to manage expectations • New spending proposals evaluated against other identified priorities • Weigh proposals vs. predefined affordability parameters • Helps to maintain assets • Regular replacements • Large periodic repairs • Reduces stress during budget process • Previously agreed spending guidelines • Better understanding of the effect decisions have • Rating agencies like multi-year planning • Reduces reactivity amidst an unpredictable fiscal environment and unfunded mandates

4. Why Is Planning Necessary? • Harrisburg, PA Example • Capital of Pennsylvania with population of 50,000 • City-Owned Garbage Incinerator • Built in 1972 and improved/expanded in 2003

5. Why Is Planning Necessary? • Harrisburg, PA Example • General Obligation Debt of the City • In 2003 borrowed additional $125 million to do repairs and expand facility • Had toxic air pollution issues • Total debt is $288 million • Didn’t have enough money to make a scheduled $3.3 million GO bond payment in September • Payment to come from revenues from the incinerator and tax levy • Moody’s Investors Service warned that “the city’s guarantee of the incinerator debt results in a continuing burden that will stress the city’s finances for the foreseeable future, negatively affect its creditworthiness and jeopardize its future access to the public credit markets.”

6. Why Is Planning Necessary? • City was looking at filing for bankruptcy • State had to step in to make the scheduled payment • City is now forced to hire a consultant • To assist in crafting a plan to return it to solid financial footing • Looking at all options including: • Selling incinerator • Selling City-Owned garages • Raising taxes • Etc.

7. Financial Planning • Process of Financial Planning

8. Step One: Review your situation • Review the entity’s financial position • Fund balances • Annual operating surplus or deficit • Projected debt payments • Review financial policies to make sure the appropriate financial controls and constraints are understood by management and staff

9. General Fund Balance

10. Step Two:Assemble the Required Information • Develop an inventory of all capital needs (CIP) • Look for deferred or one-time maintenance expenditures (non-recurring) • Identify current and alternative revenue sources

11. Street Improvement Plan

12. Capital Equipment Plan

13. Step Two:Assemble the Required Information • How do City Planners fit into the financial planning process? • Planners are on the “front line” of development trends

14. Costs of Development • City Versus Developer • City cares about impact of development on General Fund • Development is an operational cost, not a capital cost • What is your community’s sustainability • 20 homes a year vs. 200 homes a year • Total build out value

15. Costs of Development • City Versus Developer • Developer cares about assessment funds • How much and when do I have to pay • Capital cost • Up front is a risk issue • City bonds and pay later • Finding balance is important • Not a universal model

16. Step Two:Assemble the Required Information • Estimate growth in the tax base • New value for both commercial and residential construction • Inflation in existing properties • TIF district decertification • Look for new budget needs to meet growth demands • Personnel and Equipment

17. Problems With Forecasting • Problem areas • Growth didn’t keep up with infrastructure costs • Assessment issues • Hook up fees/area charge issues • Changes in infrastructure financing due to these issues

19. New Growth Projections

20. Step Three: Prepare the Model • Analyze the financial impact of the total requested spending • Determine if it meets the affordability limits defined by the governing body • Affordability limits may include: • Impact on overall tax levy • Tax impact on average home • Impact on city tax rate

21. Summary Spreadsheet

22. Step Four: Analyze and Compare to Standards • Compare to other similar entities – best practices • Level of expenditures • Employees per capita • Debt • Per Capita • As a Percentage of Budget • Model and analyze alternative “what if” scenarios

23. Tracking Debt Levies

24. Avoid major increases/decreases from year to year and prepare for opportunities to provide for capital projects or tax reductions

25. Tax Rate to Tax Impact

26. Step Five: Develop Support and Communicate Plan to the Public • Prioritize expenditures • Obtain feedback • Governing body feedback (work sessions) • Public feedback

27. Tactics for Successful Implementation • Make this a comprehensive fiscal plan • Integrate budget, tax policy, and capital plans • Often seen as completely separate processes, but this should be a unifying document • Update annually • Need involvement from all departments • Need all information to make the plan accurate • This will increase various departments understanding of how they fit into the big picture

28. Results • Less “paycheck to paycheck” thinking • Projects, in the context of multi-year planning, tend to be less controversial • A Financial Management Plan makes difficult decisions easier for elected officials • If there is a plan, projects get done

29. Financial Planning & Bond Ratings • How important is financial planning and management to bond ratings?

30. How Important is Management to Bond Ratings? • Economic factors may set foundation, but • Most downgrades are management related • Most upgrades also have roots in management decisions • Management usually more important than many other credit factors • Liquidity • Leverage/fixed cost ratios

31. But I Don’t Make the Decisions! Management vs. Governance • Governance: How policy makers interact with themselves and others to guide the organization according to its mission • Management: The day-to-day implementation of policies designed to achieve organizational goals • Management can and often does compensate for limited governance • As long as an entity’s goals are clear and poor governance does not impede quality management, risks may be minimal • If poor governance does prevent the implementation of optimal policies, risk may still be minimized if management can implement the “next best” policy

32. The Financial Management Assessment An analytical methodology that evaluatesestablished and ongoing management practices and policies in the seven areas most likely to affect credit quality • Revenue and expenditure assumptions • Budget amendments and updates • Long term financial planning • Long term capital planning • Investment management policies • Debt management policies • Reserve and liquidity policies

33. IS One component of the entire rating process An enhancement to the existing process An evaluation of the guiding assumptions and policies regarding financial decision-making An affirmation of best practices you’ve probably already heard preached by S&P, GFOA, ICMA, etc. ISN’T A separate rating An evaluation of the competency or aptitude of individual finance professionals or elected and appointed representatives An assessment of actual financial performance What The FMA Is and What The FMA Isn’t

34. Revenue and Expenditure Assumptions

35. Budget Amendments & Updates

36. Long Term Financial Planning

37. Long Term Capital Planning

38. Investment Management Policies

39. Debt Management Policies 1 DDP = Debt Derivative Profile

40. Reserve and Liquidity Policies

41. A $2 Crystal Ball is Worth More Than You Think • Despite the multitude of questionable assumptions which support any forecast, several benefits justify at least a minimal effort toward long-term planning • Planning forces managers to recognize long-term trends and encourages early investigation of possible solutions • Planning can limit the opportunity for political interference • Planning limits surprises, which almost always decrease efficiency and increase risk

42. Questions Mark Ruff 651-697-8505 mruff@ehlers-inc.com Stacie Kvilvang 651-697-8506 skvilvang@ehlers-inc.com