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Utility Financial Management

Learn about the strategic planning process for budget preparation in utility management, including key components, operating versus capital budgets, and approaches to budget development. Discover the importance of effective planning and tracking in financial management.

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Utility Financial Management

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  1. Utility Financial Management AWWAIntermountain SectionLeadership Forum Session One November 14, 2017

  2. BUDGET PROCESS

  3. Outline • Who is Involved in Budget Preparation • Main Components to a Budget • Strategic Plan (Master Plan) • Annual Operating Budget • Annual Capital Budget • Approaches to Budget Preparation • Example of Budget Steps / Budget Process

  4. Who Are the Players • City Council/Board of Trustees • Managers • Department Heads • Accounting • Employee input as appropriate

  5. Strategic Plan • Strategic plan is critical to budget process • Defines long-range goals and objectives • Starts and evolves around utility mission • Provides parameters for short range goals • Takes into account other partner entities • Top management identifies, implements, and monitors long range goals in plan

  6. Strategic Plan • Strategic Planning Video

  7. Strategic Plan • Importance of Effective Strategic Plan • Dilbert – “Do you prefer that I spend my day planning which doesn’t look like work or should I plunge in to my work with aggressive randomness?”

  8. Strategic Plan

  9. Strategic Plan • A strategic plan provides the framework to prepare: • Annual Operating Budget • Annual Capital Budget

  10. Operating Versus Capital • Operating Budget • Day to Day Revenues & Expenses • Payroll, Supplies, Legal & Professional • Capital Budget • Anticipated Useful Life of More Than 1 Year • Significant Value (Determined by Policy) • Equipment, Vehicles, Land Acquisition, Infrastructure Projects

  11. Capital Budget Expansion of the strategic plan Implementation of specific and prioritized projects Move organization towards its goals Schedule of large expenditures / projects Planned several years in advance May involve additional public hearings, review meetings

  12. Operating Budget Operating Budget: • Revenue • Expenses

  13. Revenue • First step in budget process • Can be influenced by external factors • Political - Considerable impact through rates • Physical - Weather • Other factors • Business cycles • Economic conditions • New development • Conservation

  14. Revenue • Operating Revenue (Normal Course of Business): • Water Sales • Basic service fees • Engineering review and inspection fees • Misc. fees: • Penalties, reconnection fees, sign-up fees, other income, etc.

  15. Non-Operating Revenue • Non-Operating Revenue: • Property taxes • Interest income • Impact fees • Grant Proceeds

  16. Operating Expenses • Second step in budget process • Expenses Include: • Payroll, Payroll Taxes, EE Benefits • Water purchases, production, treatment • Utilities • Maintenance, materials, supplies • Contract / professional services • Training, travel • Legal & accounting fees • Vehicle repair and maintenance, etc.

  17. Non-Operating Expenses • Debt service • Other

  18. Capital Budget • Break down into departments • Usually larger items requested by department heads • Items over a specified amount include: • Projects identified in strategic (master) plan • Line replacement • New reservoir • Meter replacement, reading hardware • Equipment, vehicle purchases • Computer hardware, software

  19. Approach to Budget Preparation Two processes: Top down or bottom up • Top Down: • Top Management decides the level of expenses • Divides them among department as needed • Budget developers follow management directives • Can be unrealistic, does not incorporate input of those who implement it

  20. Approach to Budget Preparation • Bottom up: • Department heads submit estimated expenses with justification • Budgets are reviewed to eliminate unnecessary spending and spending that can be delayed (let departments know) • Helps ensure spending is well-managed and not wasteful • Pushes decision making process down through organization freeing senior management resources • Department heads can measure own performance and take corrective action as required • Can lead to over budgeting causing issues in overall budget

  21. Approach to Budget Preparation • Can use a combination of both • Department heads submit expenses • Top management decides level of expenses based on department estimations and historical information, such as past actuals and YTD projections • Budget is developed based on the above steps • Department budgets are managed by department heads

  22. Budget Management & Tracking • Budget Management Video

  23. Budget Steps / Process • Provide Historical Information & Budget Sheets to Managers (Early August) • Manager’s Budget Requests Due (Early September) • Preliminary (September) • Tentative (October) • Proposed (November) • Public Input • Rate Hearing • Final (December)

  24. Preliminary Budget • Incorporate department estimates into operating budget and capital budget • Review 2-3 years actuals, YTD actuals, and projected • Estimate revenue, expenses and capital • Prepare preliminary budget for council/board review (not required by law but is a good tool) • If recommending rate increase or tax increase, inform council/board

  25. Tentative Budget • Make adjustments to preliminary budget based on council/board input (show adjustments) • Update YTD numbers • Update revenues, expenses, and capital budget • Prepare tentative budget, present for adoption • After adoption • Set a public hearing date for approval of budget • Set a public hearing date for rate & tax increase (if applicable) • Advertise budget hearing & increases in newspaper • Post hearing information on public notice website • Display tentative budget for seven days before budget hearing date

  26. Proposed Budget • Make adjustments to tentative budget based on council/board input or public input • Update revenues and expenses (same as tentative process) • Prepare proposed budget • Present at budget hearing

  27. Proposed Budget Presentation • Summarize operating, non-operating revenue and expenses • Include capital expenses • Determine budget surplus or deficit • If deficit, present how will it be covered • Rates (advertise and hold public hearing) • Property Taxes (Truth in taxation process) • Reserves

  28. Proposed Budget Presentation • From rate increase and/or property taxes: • Present proposed increases • Present amount of revenue derived from increases • From reserves: • Acts as a storage reservoir • Part of an overall long-term financial plan (strategic plan) • Specific goals should be established • Emergency fund • Debt service fund • Anticipated capital project funds • Operating reserves based on xxx days (determined by management in strategic plan) • Replace what is taken • Cities have different reserves requirements and constraints

  29. Final Approval • Board meeting following proposed budget • Can have hearing before final approval if needed • Take public comments into consideration • Board/council approve budget • Submit adopted budget to state auditor

  30. Questions / Comments

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