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Our Path to Financial Resiliency

Our Path to Financial Resiliency. August 11, 2011 GFOAz Summer Conference. Our Future is Bright… . Now 10 th Largest City in Arizona Population: 117,517 Growth since 2000: 281% Housing Units: 52,586 Economic Development Coming 0.5M SF New Construction 1,000+ New Jobs

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Our Path to Financial Resiliency

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  1. Our Path to Financial Resiliency August 11, 2011 GFOAz Summer Conference

  2. Our Future is Bright… • Now 10th Largest City in Arizona • Population: 117,517 • Growth since 2000: 281% • Housing Units: 52,586 • Economic Development Coming • 0.5M SF New Construction • 1,000+ New Jobs • Rio Glass Solar – US HQ • Gestamp Steel

  3. MAG 2007 Population Concentration 2005: 93,400 2030: 401,500

  4. MAG 2007 Employment Concentration 2005: 16,300 2030: 147,700

  5. Financial Resiliency Institutionalize long-term financial planning; adaptable to a changing environment • Diversity • Redundancy • Decentralization • Transparency • Collaboration • Fail Gracefully • Flexibility • Foresight

  6. Warnings Signs

  7. Financial Resiliency

  8. Bridging Stage Get through the immediate crisis and create breathing room for more sustainable reforms • Diagnose Causes of Distress • Stabilize the Situation • Get the Recovery Process Started

  9. Bridging Stage

  10. 1. Larson Allen Special Audit #1 Completed Capital Project Review of City Hall, Central Plant, Public Safety HQ, Streetscape • Interfund Transfers • Recording of Expenses and Funding • General CIP Subsidy of Growth Projects • 2007 MPC Bonds under spent • Change Order Review, including Approvals • Internal Controls and Operating Efficiency

  11. 2. Larson Allen Special Audit #2 Completed Review of Transaction Cycles • Payroll, AR, AP, Street Light Improvement Districts, Investments • Findings related to: • CAFR • Segregation of Duties • Internal Controls Missing • Internal Control Improvements • Process Improvements

  12. 3. New CFO Observations • FY 2009 CAFR • MPC Presentation • $64M Debt not reported in Wastewater Fund • Restricted Fund Balances not presented for Development Agreements • $24M FY 2009 CAFR General Fund Fund Balance included Vehicle Replacement ($11.1M) and General CIP ($2.9M) Funds • General Fund Fund Balance only = $10M

  13. 3. New CFO Observations(continued) • Impact Fee Fund Deficits at 6/30/09 • $4.3M Fire Fund Deficit • Other Fund Cash Deficits at 6/30/09 • CAFR due to / from entries not approved by City Council • Accounting and Budget Practices • Transfers Used Instead of Interfund Loans • Financial Statement only entries • Revenue “Holding Account” • Depreciation duplicated Transfers Out in Enterprise Funds

  14. 3. New CFO Observations(continued) • Water and Wastewater Rate Study • Difficulty determining Restricted Cash associated with Development Agreements • Incorrect Application of Indirect Cost Allocations • Overcharging General Fund, Undercharging Water and Wastewater • Development Agreements • Finance Department Culture

  15. 4. Impact Fee Audit • Evaluated use of impact fees and how growth related assets were constructed • Detailed Later in Presentation

  16. 5. FY 2010 CAFR • 33 PPAs (Summarized) • 10 Pages in CAFR (A-GG) • 209 Individual Line Items • 23 Individual Funds • Errors Dating Back To FY 2000 • Changes to Every Financial Statement Category (Assets, Liabilities, Revenues, Expenses & Fund Balances)

  17. FY 2010 Prior Period Adjustments • Impact Fee Corrections (only 1 PPA) • Assets • Missing $8M Capitalized Interest in Wastewater Fund • Missing $4.3M Development Agreement in Wastewater • Liabilities • Missing Sewer Fund Debt $64M (2 MPC bonds) • Missing $3.7M Development Agreement in Wastewater

  18. FY 2010 Prior Period Adjustments • Expenses • Missing $2.1 Developer Agreement payment • Revenues • Missing June 2009 $1M State Shared Revenue Accrual • Missing $587K Revenue Accrual for 9 Grants • Recorded in Wrong Fund • Fund Balance • Missing Development Agreement Restrictions

  19. Most Impacted Funds(in millions)

  20. FY 2010 CAFR Implications • Operating Fund Balance • ~$10M Less Than Previously Reported • Reserve was ~$6M Less Than the $13M Policy Amount • Public Opinion and Perception • Auditor Competency • Bond Ratings

  21. 6. ASRS Audit • City’s First Audit • 7 Findings • Back to 2003 • Due From ASRS • 20/20 Part-Time Employees Not Eligible • Medical Opt Out Not Subject to ASRS • Due To ASRS • Eligible Part-Time Employees • Allowances: Uniform, Phone, Text, Car

  22. Financial Resiliency

  23. Reform Stage Execute a short-term recovery plan and develop long-term therapies • Create Predictability • Create Accountability • Establish Financial Stability

  24. Reform Stage

  25. 1. Department Strategic Plan Primary Functions • Policy Development • Financial Analysis and Reporting • Transaction Processing

  26. CFO Perspective • Architect the conditions for the “right” decisions • It’s what you accomplish; not how you spend your time • Begin with the end in mind; manage backwards from the future • Change is constant

  27. Department Strategic Plan Mission Statement “Why do we exist?” The City of Surprise Finance Department strives to be proactive leaders, identifying issues and offering innovative solutions while providing excellent customer service.

  28. Department Strategic Plan Value Objectives “How we support the mission” • Listen and Communicate • Customer Service • Trust, Accountability, and Respect • Continuous Improvement of Employees and Services

  29. Value Objectives Listen and Communicate Create a culture which ensures that we listen and understand what is being said so we can provide a timely response in an accurate, complete, and respectful manner. • Implement Online Business License Application

  30. Value Objectives Customer Service Serve customers through providing accurate, timely information and guidance in a courteous, compassionate and approachable manner. • Complete Payroll Self-Service Application

  31. Value Objectives Trust, Accountability, and Respect We will strive to enhance the trust and respect of all stakeholders through responsible stewardship of public resources. • Improve Financial Reporting

  32. Value Objectives Continuous Improvement of Employees and Services Establish an environment where we improve employees and services through staff involvement, education, and development. • Conduct Financial Software Needs Assessment

  33. 2. Weekly Take 5 Report Continuous Improvement of Employees and Services Matthew: Attended GASBS #54 seminar Craig: Initiated work on new Vacancy Savings Report Art: Reviewed preliminary ASRS audit findings

  34. 3. Restructured Finance Department OUTCOMES • Allocate Resources to Support 3 Primary Functions • Support Strategic Plan • Flatten Department • Eliminated One Level of Management • Eliminated Several Job Titles • Reallocated Staff to Other Departments

  35. Major Changes • Created Accounting and Budget Division • Created Deputy CFO position • Merged Budget and CAFR • Numerous positions combined into new position (Sr. Financial Analyst) • Each responsible for specific areas (e.g. healthcare) • Added dedicated resources to PD and HR

  36. Major Changes (continued) • Created Internal Audit Division • Dedicate compliance resource • Evaluates efficiency and effectiveness of programs and process • Created Special Project Manager • Involved with major initiatives

  37. 4. Hired Investment Firm • Contracted with Public Financial Management Group, Inc. (PFM) • “Better Than the Pool” • $35M with PFM; $30M with CDARs • PFM Portfolio • Yield: 0.80% • Annual Interest: $0.5M • Increased Earnings over Pool: $0.4M • Annual Fee: Up to $60,000 (9 bp of portfolio) • $20,000 higher than Pool

  38. 5. Built Relationships • City Council • Department Directors • City Staff • Newspaper • Financial Advisors • Bond Attorney • Developers • Rating Agencies

  39. 6. Created Monthly Reports • Monthly Investment Report • Monthly Sales Tax Report • Monthly Operating Report • Economy Overview • Budget to Actual • Actual to Actual • Sales Tax • Accepted Monthly by City Council

  40. 7. Adopted Financial Policies • Operating Management • Capital Management • Debt Management • Minimum Fund Balance • Financial Reporting

  41. Financial Resiliency

  42. Financial Resiliency Phase Institutionalize long-term financial planning and become adaptable to a changing environment with these 8 characteristics • Diversity • Redundancy • Decentralization • Transparency • Collaboration • Fail Gracefully • Flexibility • Foresight

  43. 8 Characteristics of Financial Resiliency 1. Diversity: Keep a multi-faced perspective on financial health • Operating Revenues $2M>Operating Expenses • “Banked” Property Tax Capacity Exists • $1.5M Below Legal Maximum • Employee Costs • Compensation • Pension Costs • Healthcare Costs

  44. 8 Characteristics of Financial Resiliency 2. Redundancy: Avoid having only one path of rescue • “Banked” Property Tax Exist • $1.5M Below Legal Maximum • 2 Month Operating Reserve ~$6M (50%) Underfunded as a result of PPAs • Limited Non-Enterprise Fund Asset Replacement Funding • Create Debt Management Policy • Failed GO Bond in Fall 2009

  45. 8 Characteristics of Financial Resiliency 3. Decentralization: Engage departments in identifying issues and developing strategies • Other Sources of CIP Funding (e.g. Stormwater Utility) • Impact Fee Study Update • Payroll Process Improvements • Accounts Payable Process Improvements • Enhanced Comprehensive Monthly Financial Analysis

  46. 8 Characteristics of Financial Resiliency 4. Transparency: Make it easier to see where the problems are • Interfund Loans • Additional Reports • Monthly Water/Wastewater/Solid Waste • Bi-Weekly Vacancy Savings • Annual PAFR • Annual Budget-in-Brief • 5 Year Operating Plan

  47. 8 Characteristics of Financial Resiliency 5. Collaboration: Orient information towards Elected Officials • CIP Funding Strategies • Impact Fee Study Update • Create Debt Management Policy • Create Economic Development Strategic Policy

  48. 8 Characteristics of Financial Resiliency 6. Fail Gracefully: Recognize changing conditions and learn from failure • Impact Fee Audit • ASRS Audit

  49. 8 Characteristics of Financial Resiliency 7. Flexibility: Don’t expect Stability • Implications of New Impact Fee Law • CIP Funding Options • CFDs vs. DAs vs. Impact Fees • Employee Compensation Increases

  50. 8 Characteristics of Financial Resiliency 8. Foresight: Plan Strategically • 5 Year Operating Plan • Develop CIP Funding Strategies • Asset Replacement Funding • Debt Management Policy • ED Strategic Policy • Cost Recovery Strategies

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