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HomeMy WebLinkAbout3.i. Two Year Budget j. . I. CITY OF SHAKOPEE Memorandum TO: Mayor and Council Mark McNeill, City Administrator FROM: Gregg Voxland, Finance Director SUBJ: Two Year Budget DATE: May 14, 2009 Introduction & Background One of the current "hot issues" in government finance is longer term planning and multi-year budgets. Shakopee has a 5 year capital improvement plan, a 10 year equipment plan and has started a 20 year facility plan. Supporting those items are the internal service funds for equipment, buildings and park assets. What Shakopee does not have is multi-year operating budgets. Eden Prairie has prepared a two year budget for several years. The state does two years and is looking at a four year forecast. I do not have any further information on what other jurisdiction in the state do for multi-year budgeting nor have I researched for more information. Advantages of a two year budget are reduced staff effort/cost by doing two years at one time, closer linking of the budget to goals, seeing how a decision on one year may impact subsequent years and a "bigger picture" approach with sustainability to the city's finances. Proposed actual budget adoption would be to formally adopt an annual budget as is done currently. The second year would have minimal review and Council formal adoption in the second year. Council retains the same level of controls as it has currently. Attached is an article on implementing a two year budget for Auburn Georgia for your information. It is recommended that Council implement a two year operating budget for at least the General Fund. Action Requested Consider implementing a two operating budget and give staff direction. Gregg Voxland Finance Director H:\Finance\budget\ . . ~~~~~/." ,:l%!a~~ ~1$ii',i>'?i ~..(,~&,,=~= fL. By abandoning the traditional annual budget in favor of a biennial budget framework, one small city has saved staff time, improved its strategic planning capabilities, and enhanced its overall financial condition. Taking the Plunge: The Conversion to MUlti-vear Budgeting By Andrea) ackson MUlti-year budgeting offers a number of. potencial advan- review did little to facilitate long-term financial planning. tages over annual budgeting, including decreased staff The improved long-range planning potential of mul.ri-year bud- time, enhanced long-range planning, and improved pro- geting offered another importane benefit to city officials: enhanced gram evaluation. Mulc.i-yeat bndgeting facilitates the integration of fund balance position and bond raring. III the early 1990s, financial and strategic planning, replacing incrementalism with a Auburn's general ~und balance had dipped to precariously low lev- more strategic approach to resource allocation. As more and more els, having been tapped for a series of capital improvement projects. governments have become aware of these and other benefits, many By the end of the decade, the general fund balance had been signifi- jurisdictions have converted to multi-year budgeting, usnally on a cantly improved thanks to a renewed emphasis on careful budget- biennial basis. Like many management reforms, however, imp le- ing and close monitoring. Botb the ciry manager and the finance mentation of multi-year budgeting .requires careful planning in director included fund balance maincenance as a strategic..goal of order to realize the desired benefits. This article describes one city's biennial bndgeting. conversion from an annual budget to a biennial budget, emphasiz- Of Form and Function ing the most important considerations for governments pondering similar initiatives. Local goverrunencs that budget on a multi-year basis typically The Case for Change employ one of the following variations of biennial budgeting: bien- nial financial plan, rolling biennial budget, or classic biennial bud- The City of Auburn, Alabama, is a council-manager government get. The biennial financial plan is characterized by an annual with a population of 43,000 and a general fund budget of $35 mil- appropriation linked to a temative, unenforceable spending plan lion. The dty has a well-esrablished history of innovation, long- for the following year. The rolling biennial budget is a two-year range planning and goal-oriemed stewardship of public resources. spending plan comprised of two one-year appropriations that are As a result, launching a multi-yc:ar budgeting effort was a logical adjusted annually. The classic, or traditional, biennial budget is a extension of Auburn's approach co government. Auburn is believed two-year spending plan in which 24 months worth of expenditures to be the only local government in Alabama engaged in multi-year are approved simultaneously. The distriburion of rhese three rypes budgeting. of biennial budgets has been almost even among governments tbat In the spring of 2000, the city manager asked the finance director practice multi-year budgeting.' to consider preparing a biennial budget with the intention of reduc- In deciding which rype of biennial budget to use, governments ing the amount of staff time devoted to budget preparation and need co consider applicable state laws, as well as the characteristics publication and to the mid-year review process. Because Auburn of the various rypes of budgets. For Auburn, the classic biennial does not have a separate budget office or even one staff position budget made the most sense. The Alabama State Code requires dedicated to budget administration, finance staff were perpetually municipalities to adopt an annual budget and to have an annual involved in some aspect of the budget. The budget also consumed a financial audit. However, there is no apparent legal prohibition great deal of time for line department staff. A reduction in the num- against adopting n'lo annual budgets at one time. In the city's view, ber of staff hours devoted to the budget represented significant sav- the rolling biennial budget did nor offer the time savings of the clas- ings that could be channeled into other important activities. sic biennial budget, and the biennial financial plan did not facilitate The city manager's other motivation for investigating biennial long-term planning as well as the classic biennial budget. Given budgeting was to extend the staff's planning and management hori- state legal requirements and the ciry's major objectives in convert- zon. The dry's annual budget process had been goal-oriented since ing to multi-year budgeting, Auburn opted in favor of the classic the institution of the annual citizen survey, the results of which were biennial budget. used by the Ciry Council to establish priorities for the upcoming Winning Organizational Support budget period. These priorities then served as the basis for the preparation of departmental goals and budget requests. Despite its Introducing change is never eas)' in the public sector, especially success in linking goals and priorities to resource all{ication, when it involves something as fundamental as the budget process. Auburn's annual budger ~ppropriation and subsequent mid-year To be successful, the conversion co multi-year budgeting must have 24 AUGUST 2002 GOVERNMENT FINANCE REVIEW . . ~~d~m ~ . !::r~; , """"""'" , ~ r __-ow.-."" ~ the support of the governing body, the chid executive, and depart- Adding to Human Resource's burden, Finance proposed and the menr directors. Winning the support of these key stakeholders city manager approved an additional change to the personnel bud- tequires that finance officers be able to clearly explain the rationale get spreadsheets. It was decided [0 calculate salaries so as to include behind multi .year budgeting and to identify the benefitS thereof. the amount of the cost-of-living salary increase to be proposed to The process of implememing biennial budgeting in Auburn the City Council. In the past, cost-of-living increases were not began with " meeting between the finance director and her staff included in the proposed budget. Rather, the money required to about the city manager's proposal and the goals of biennial budget- fund these raises was included separately, as one of the Council's ing. The tesponse from finance staff was positive and supportive, "key decisions." This approach presented a disadvantage in that which encouraged the city manager to rake his idea to the other the effect of the cost-of-living increases on fund balance was not department directors. The potential of biennial budgeting to reduce represented in the proposed budget numbers. To maintain the the amount of staff time required for budget preparation earned the desired level of the general fund balance, the city determined that immediate support of these important stakeholders. The depart- the effect of any proposed cost-of-living increase would be included ment direcrors had ample experience in implementing innovative in the proposed budget document. improvements, so rhey enthusiastically accepted the challenge of Given that salaries and benefits comprise the largest single com- preparing a two-year budget despite the increased workload that ponent of the city's budget, rhe accuracy of the personnel budget was inevitable during the conversion. spreadsheets is always critic:11 to the overall budget process. Once the ciry manager had secured departmental support for Because of the increased workload necessitated by the conversion biennial budgeting, he rook the recommendarion to the City process, the Finance Department was unable to include the person- Council for approval. Given the city's generalJy favorable disposi- nel spreadsheets in the department budget packets distributed at the tion toward innovation and change, the Council was not surprised budget kickoff meeting. Thanks to a significant overtime effort by by the proposal and threw irs support behind the effort to convert the Human Resources Department, however, the personnel spread- to biennial budge'ring. Although multi-year budgeting is sometimes sheets for both years-including rhe proposed cost-of-living viewed as a threat to the governing body's budgetary oversight, the increase-were distributed to rhe departments shortly thereafter. City Council did not express any concerns to this effect. The city manager partially mitigated the potential for concern by assuring Forecasting Revenues council members that they would continue to receive monthly bud- Multi-year budgeting complicates revenue forecasting by extend- get reports and that any increases would require City Council ing the time horizon from one year to two or more years. The fur- approval via ordinance. ther projections are extended, the less accurate they become. As envisioned by the city manager, biennial budgeting would Fundamental changes in a government's revenue mix or signiJicant reduce the City Council's workload with respect to rhe budget. deviations from expected revenues following the adoption of a Midway through the first biennium, the administration would com- multi-year budget may require revisions to revenue estimates or pare actual to projected revenues. As long as acmal revenue collec- adjustments to appropriations. tions to date and projected revenues through the end of the fiscal year Through the years, the Finance Department has endeavored to were sufficient to support appropriations and maintain desired fund produce realistically conservative revenue projections for the city balance levels, no additional mid-year review would be required. manager's consideration. For each major revenue source, and for most of the minor ones, Finance maintains a month-by-month rev- Conversion Challenges enue history going back 15 years or more. Staff carefully monitors Having secured the support of the key stakeholders in city gov- national, state, and local economic conditions, and analyzes the ernment, the Finance Department turned its attention to the logis- revenue implications of annexations, population growth, building tics of developing the proposed biennial budget for fiscal years permit data, and developments at Auburn University. Because the 2001 and 2002. The City Council did not approve the conversion city collects its own sales taxes, Auburn has a valuable source of to biennial budgeting until late ApriL Under the previous budget information about the vitality of the local economy. However, the calendar, finance staff already would have begun assembling the city's revenue forecasts are complicated by the fact that it relies on spreadsheets, forms, and instructions to be used by the departments several state-shared revenues that cannot be reliably projected. in submitting their budget requests. Already behind schedule, staff Forecasting revenues for Auburn's first biennial budget was a real decided to use essentially the same spreadsheets and forms as challenge. Although the city used the same methodology it had used before, using color coding to differentiate materials for the second to project revenues for the annual budget, it was somewhat more year of the bief)niuIIl. This section describes three major challenges conservative with the second year's revenues because of the extend- of Auburn's conversioll to biennial budgeting: estimating personnel ed time frame. The fact that 60 percent of the city's four major needs, forecasting revenues, and balancing the budget. sources of general fund revenue are received by mid-year helps alle- viate some of the ullcertainty. It is also helpful in identifying any sig- Estimating Personnel Needs nificant deviations from expected revenues so that the city manager Multi-year budgeting forces governments to assess future staffing can make any necessary adjustments sooner rather than later. levels and their effect on the operating budget, In Auburn, the Human Resource Departmem is responsible for preparing person- Reviewing Departmental Budget Requests nel budget spreadsheets for each department. These spreadsheets Following the submission of the departmental budget requests provide detailed information for each authorized position, includ- for the first biennium, the city manager and Finance staff faced the ing the name of the employee occupying the position, the employ- ever-daunting task of balancing the budget requests to the projected ee's salary grade and steps, and the employee's salarj' for the next revenues while maintaining appropriate fund balance levels. budget period. Auburn has more than 300 regular full-time Although the city adhered to the same procedures it had used to employees, a dozen regular part-time employees, and approximate- balance the annual budget, the process was complicated by the Iy 150 temporary employees, which increases significantly on a sea- additional year. The city manager reviewed all capital outlay items sonal basis. Calculating salary information for all of these employ- and capital projects, making cuts and deferrals as he deemed neces- ees and estimating fmure personnel needs for two years instead of sarI'. All departments were given a target budget amount for each one posed what seemed like a monumental obstacle for the Human budget year that was a specific percentage less than their original Resources Department. budget requests. Department heads were allowed to change line GOVERNMENT FINANCE REVIEW AUGUST 2002 25 w . ~~ '-":W;W:. ~ ..,.w~, ^~;u~ ~ item amounts as long as the target budget amount was achieved. ment of the Office of the City Manager and the Finance The ciry made provisions to borrow money for capital projects that Department. Departmem heads and their scaffs did not participate could not be accommodated by the projected available resources as they had in previous years. And as the end of the first fiscal year and that could not be Cut or deferred because of Council priorities. approached, staff had only to review and revise the second year's numbers instead of building a new budget from scratch. This saved Results substantial time for the City Council and all of the ciry employees As Auburn geared up for the preparation of its second biennial involved in the budget process. budget, the citywide consensus was that multi-year budgeting had Ciry officials scheduled preparation of the second biennium to lived up to its promises. The management and staff of all ciry begin t\vo months 'earlier than the last rime. This allowed the city to departments agreed that biennial budgeting had reduced the incorporate the mid-year review for the second year of the first amount of staff time devoted to budget preparation, shifting biennium into the preparation of the proposed budget for the sec- resources toward the achievement of other goals. During the first ond biennium. Another factor in the early scheduling was that Ciry biennium, the mid-year review required only the limited involve- Council election activities were to begin in July for the August elec- 26 AUGUST 2002 GOVERNMENT FINANCE REVIEW <# ~ ;W~~ , ,....~..._A<: ~~ don. As such, the mayor and City Council members, all of whom budget packets distributed to rhe departments for preparation of were up for election, could devote appropriare attention ro the pro- their budget requests. posed budget before the campaign hit full srride. . Budgeting for the salaries and wages of remporary employees has Auburn also achieved irs orher goal with tespect to biennial bud- been a perennial problem for the city. Auburn has never been able geting-to extend the city's planning horizon. Since the conversion to precisely budget the personnel COStS of temporary employees to biennial budgeting, the city manager and finance director have whose pay fluctuates by season and whose work schedules are witnessed a paradigm shift in both the department heads and mid- unpredictable. Departments like Parks and Recreation that die management. The notion of "fixing things at mid-year" is now employ many such employees have traditionally budgeted for obsolete, having been replaced by a forward-facing perspective that these employees as a group, using a single lump sum amount. takes into consideration the long-term financial and operating However, the annual audited financial statements always showed impacts of spending recommendations. The mid-year review is now significant budget balances for these departments because of over just a mechanism for assessing the adequacy of revenues. budgeting for temporary employees. Thanks to the accounting During the initial biennium, Auburn experienced firsthand the change describe above, the city determined that the actual expen- increased uncertainty that accompanies multi-year revenue fore- ditures for these employees was approximately $500,000 less that casting. In July 2001, sales tax revenue decreased from the prior what had been budgeted. year for the first time in more than a year. Sales tax revenue is the . Capital outlay and debt service expenditures are budget;ed by single largest component of rhe city's general fund budget, so nega- department. Although this approach does not yield a GAAP- tive fluctuations have serious budgetary implications. During the based budget, it does facilitate accountability for and comparabiJ- mid-biennium review, Auburn had to reduce its original revenue ity of departmemal operating costs. For the second biennium, projeCtions for the biennium by a net amount of approximately Finance entered the debt service amounts directly into the depart- $500,000 (although projected sales tax revenue was off bj' more mental budget spreadsheets instead of generating a separate list of than $1 million for the biennium, other revenue sources combined debt service requirements by department. This change is intended to make up for half of this amount). To offset the decrease in bud- to prevent math errors and omissions for departmental debt ser- getary resources, the city opted to finance a property purchase of vice expenditures, approximately $1 million, thereby maintaining the desired ending Conclusion general fund balance. The economic uncertainties of projecting revenues for a longer The consensus opinion among Auburn's senior management time horizon provided the impetus for a recommendation to estab- team is that the city's first biennial budgeting experience was an lish a "permanent" reserve of a portion of general fund net assets. unqualified success. Auburn reduced the staff required to prepare As part of the mid-biennium review, the city manager recommend- and review the budget, extended its planning and management ed establishing a $4 million permanent reserve in the general fund. horizon, and maintained major fund balances. The citj' also intro- This amount represented approximately 13 percent of the budgeted duced a number of process improvements that have further simpli- general fund expenditures. The City Council approved this recom- fled budget preparation and resulted in additional time savings. mendation, and included a provision in the mid-biennium amend- Although the conversion to biennial budgeting was not without ing ordinance to establish this reserve for ust" only in times of narur- challenges, the benefits realized so far have been well worth the ini- al disaster or economic downturn. tial effort. By thinking through the conversion issues identified in this article, other governments can successfully transition to multi- Process Improvements year budgeting and enhance their financial and strategic manage- The Finance and Human Resources departments learned a great ment. JIill. deal from Auburn's first biennial budget experience. As a result, the city has introduced several improvements to its budget process that NOTE will save addirioual time and money and enhance overall financial B. Blom and S. Guajardo, "Multi-Year Budgeting: A Primer for Finance management. These improvements are discussed below. Officers," Government FilUl>>ce Review 16 (2000): 39-43. . Maintaining separate spreadsheets for each year of the biennium ANDREA JACKSON, CPA, CGFM, is finance director for the City of Auburn, proved to be too confusing for city departments and finance staff. The simplest process improvement was to include both years of Alabama. She bas more than 17 years of experience in govemttlemal the biennium on the same spreadsheet. This seemingly minor accounting m.d auditittg. and holds an MBA from Aubum University. adjustment greatly facilitated the analysis of departmental budget requests and the preparation of the budget document. . Given the critical importance of an accurate personnel budget, the city improved its accounting for salaries and benefits by establish- ing separate salary accounts for the various classes of employees (regular full-time, regular part-time, temporary part-time, etc.). This enhanced level of detail facilitates the analysis of departmen- tal budget requests, providing better information on the fiscal impact of proposed increases in personnel costs. . Heading into the city's second biennium, the human resources director questioned the wisdom of preparing detailed personnel budget spreadsheets for the second year of the biennium. Instead, it was suggested that the amollnts budgeted for salaries and bene- fits the first year be increased by a flat percentage accommodating both merit pay increases and proposed cost-of-Iiving increases. The second-year amounts would then be updated position by position during the mid-biennium review to ensure the.ir accuracy. This change made it possible to include personnel figures in the GOVEHNMENT FINANCE REVIEW AUGUST 2002 27