Developing A Policy Driven Budget

1. Developing A Policy Driven Budget Department of Commerce & Economic Opportunity

2. Developing a Policy Driven Budget Policies can make budgeting, and your job, easier Policies clarify the why and how of budgeting Building agreement on policies and desired outcomes helps focus budget debates Policies can provide clear direction to staff and other groups submitting budget requests

3. Caution We will cover a variety of policy examples in this presentation. Each government should base their own policies on thoughtful and complete trend analysis, revenue and expenditure forecasting, service level and scope evaluation, and priority setting that reflect the unique circumstance of each community.

4. What Is a Policy? Strategic issue or purpose policies Operational policies Financial and budgetary policies

5. Purpose Policies What purpose does this government serve? What do we want our community to be in the near and long term future?

6. Purpose Policies (Con’t) Sufficiently specific to help define the services to be emphasized and make difficult resource allocation decisions May be necessary to define priorities among the broad goals Base on assessment of community needs and opportunities

7. Incorporating a Strategic Plan in the Budget Strategic planning Mission or vision statements Strategies

8. Strategic Planning Integrate what to decide with how to decide Move away from line item budgets Compares with capital improvement budget process

9. Identifying Issues and Setting Priorities Identify issues Vital priorities Limited number of strategic goals

10. Examples Of Purpose Policies Metropolitan Wastewater Reclamation District’s goal is: “To keep pollution out of Lake Michigan”

11. Examples Of Purpose Policies City of St. Charles mission statement: Maintain taxes and service fees at the lowest possible levels while Providing responsive, timely, and competent public health and safety services Creating an atmosphere in which citizens feel safe, secure, and confident in city governmental operation

12. City of St. Charles Mission Statement, (Con’t) Providing integrated and coordinated city-wide planning to maintain city character and accommodate change Providing a reliable utility infrastructure that meets federal, state, and local standards Providing a well-maintained transportation system meeting an adequate level of service

13. Purpose Policies Work best when developed and agreed to well in advance of budgeting Important to communicate to staff prior to budgeting Communicate to citizens via the budget document Dollars allocated through budget reflect goals and priorities

14. Operational Policies Services provided Quantity and quality of services Actions needed today to shape the future Should relate to broad goals Clarify the how the government will accomplish its goals

15. Examples Of Operational Policies Essential services will receive priority for funding Increased emphasis on community appearance through intensified street sweeping program as well as streetscape planning Firm but fair enforcement of up-to-date codes

16. Examples of Operational Policies Emphasize business retention as an important part of economic development Emphasis on preventive measures and practices rather than cures Maintain a balance between services provided by village employees and those provided by private sector, utilizing cost effectiveness and quality measures as determinants

17. Financial and Budgetary Policies Guide the creation, maintenance, and use of resources Financial trend analysis can help pin-point problem areas Multi-year revenue and expenditure forecasting an important prelude to setting financial policies

18. Financial and Budgetary Policies Trend analysis can help Identify areas where the government is already reasonably strong in terms of protecting its financial condition Identify existing or emerging problems in revenue sources, management practices, and infrastructure condition

19. Financial and Budgetary Policies Forecasting for the next 3 to 5 years can help focus financial policies Consider external factors such as state and federal actions and bond market Incorporate equipment and facility replacement plans Incorporate capital and economic development plans Incorporate collective bargaining and pension related impacts

20. Financial and Budgetary Policies Fund balance policies Maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of temporary revenue shortfalls or unpredicted one-time expenditures

21. Financial and Budgetary Policies Fund balance policies (cont) How and when the government builds up funds Purposes for which funds may be used Legally required reserves should be distinguished from discretionary reserves

22. Examples of Fund Balance Policies To maintain the city’s credit rating and meet seasonal cash flow shortfalls, the budget shall provide for an anticipated undesignated fund balance between 5% and 8% for general government and enterprise fund types, of estimated annual revenues

23. Examples of Fund Balance Policies The General Fund minimum undesignated fund balance is based on the equivalent of four months of the current fiscal year’s projected sales and service tax revenues Should the fund balance fall below 5% of revenues, a plan for expenditure reductions and/or revenue increases shall be submitted to the city council

24. Contingency Policies Policies on contingency planning are used as a general guide when an emergency or unexpected event occurs. A set of actions and strategies will be identified for each various situations

25. Contingency Policies Examples of financial emergencies that require contingency plans are sudden and severe decreases in locally collected revenues or intergovernmental aid, and unexpected capital maintenance requirements Contingency planning in advance of such situations are viewed as a positive by rating agencies

26. Examples of Contingency Policies To help maintain services during short periods of economic decline and meet emergency conditions, in addition to the fund balance, the budget shall provide for a contingency equivalent to 2% annual operating revenues The contingency is established to provide for nonrecurring unanticipated expenditures, or to meet small increases in service delivery costs

27. Revenue Policies One-time Revenue Government should adopt a policy limiting the use of one-time revenues for ongoing expenditures By definition, one-time revenue cannot be relied on in future budget periods One-time revenues and allowable uses for those revenues should be explicitly defined

28. Revenue Policies Revenue Diversification All revenue sources have particular characteristics in terms of stability, growth, sensitivity to inflation or business cycle effects, and impact on tax and ratepayers A diversity of revenue sources can improve a government’s ability to handle fluctuations in revenues

29. Examples of RevenueDiversification Policies The city will strive to maintain a diversified and stable revenue system to shelter the government from short-run fluctuations in any one revenue source and ensure its ability to provide ongoing service The village revenue mix shall combine elastic and inelastic revenue sources to minimize the effect of an economic downturn

30. Fees and Charges Policies Identify the manner in which fees and charges are set and the extent to which they cover the cost of the service provided Identify the cost of the program and the portion of the cost that will be recovered through fees and charges Policies may require periodic review of fees

31. Examples of Fees and Charges Policies The city follows a “cost of service” approach which results in user fees, rates and customer charges being sufficient to cover the cost of providing the service. Each year the city will establish user fees, rates and charges at a level related to the cost of providing the service and to adjust for the effects of inflation

32. Examples of Fees and Charges Policies The city will set fees and user charges for each enterprise fund, such as water and sewer, at a level that fully supports the total direct and indirect cost of the activity. Indirect costs include the cost of annual depreciation of capital assets

33. Examples of Fees and Charges Policies A fee shall be charged for any service that benefits limited interests within the community, except for human needs type services to persons with limited ability to pay

34. Examples of Grant Acceptance Policies The city shall aggressively pursue all grant opportunities; however, before accepting grants, the city will consider the current and future implications of both accepting and rejecting the monies

35. Examples of Grant Acceptance Policies Intergovernmental assistance shall be used to finance only those capital improvements that are consistent with the capital improvement plan and local government priorities, and whose operation and maintenance costs have been included in operating budget forecasts

36. Examples of Grant Acceptance Policies In recommending acceptance or rejection of inter-governmental grants the staff shall consider: The amount of matching funds required In-kind services that are to be provided Length of grant and consequential

37. Examples of Grant Acceptance Policies Disposition of service after the grant has ended Related operating expenses Related capital maintenance expenses Indirect and administrative costs

38. Balanced Budget Policies Encourages commitment to a balanced budget under normal circumstances Balance should be defined to ensure that a government’s use of resources for operating purposes does not exceed available resources over a defined budget period

39. Examples ofBalanced Budget Policies The city shall balance operating expenditures with operating revenues. The general fund shall not be balanced with with appropriations from the fund balance if to do so would drop the fund balance below 5% of operating revenue

40. Examples of Operating Budget Policies The city shall attempt to conduct its operations on a pay-as-you-go basis from existing or foreseeable revenue sources. The control of costs will be emphasized. Achieving pay-as-you-go requires current operations, maintenance and depreciation costs to be funded with current revenues, direct and indirect costs of service to be fully identified, and sound revenue and expenditure forecasts must be prepared

41. Examples of Operating Budget Policies All equipment replacement and maintenance needs for the next five years will be projected and the projection will be updated each year. A maintenance and replacement schedule based on this projection will be developed and followed Replacement of capital outlay items shall be timed at fairly stable intervals so as not to spend excessively in one year and restrictively in the next

42. Examples of Operating Budget Policies The budget shall provide sufficient funds for the regular repair and maintenance of all capital assets. The budget should not be balanced by deferring these expenditures

43. Examples of Operating Budget Policies The city shall strive to pay prevailing market rates of pay to its employees. Prevailing market rate is defined to include both salary and fringe benefit levels When establishing pay rates, such rates should not exceed the normal percentage increase in general fund revenue

44. Examples of Operating Budget Policies The city’s workforce, measured in full time equivalents, shall not fluctuate more than 2% annually without corresponding changes in service levels or scope

45. Examples of Capital Improvement Program Policies A five year capital improvement plan shall be developed and presented annually by staff and approved by the city council. This plan shall contain all capital improvements from all funds and departments of the city. The first year of the plan shall constitute the next year’s capital budget

46. Examples of Capital Improvement Program Policies Future operating and maintenance needs of all new or significantly expanded capital facilities will be fully costed out

47. Examples of Capital Improvement Program Policies A high priority shall be placed on replacement of capital improvements when such improvements have deteriorated to the point of becoming hazardous, incur high maintenance costs, are negatively affecting property values, and/or no longer functionally serve their intended purpose

48. Debt Policies Elements of policies on debt include: Purposes for which debt may be issued Matching the useful life of an asset with the maturity of the debt Limitations on the amount of outstanding debt Types of permissible debt

49. Debt Policies Structural features, including payment of debt service and any limitations resulting from legal provisions or financial constraints Refunding of debt Investment of bond proceeds Limitations on outstanding debt and maximum debt service

50. Assessing Financial Condition Cash policy Reserve policy Budget policy Debt policy Other financial policies

51. Making The Connection Between Policies And Dollars Objectives Performance measures

52. Planning For The Long Term Projections - 5 year Analysis Multi-year strategies

53. Other Related Policies Risk management policies and plans Investment policies Accounting policies