Sunday, November 18, 2007

Municipal Budgeting: Care & Feeding of the Fiscal Monster

"The purse of the people is the real seat of sensibility. Let it be drawn upon largely, and they will then listen to truths which could not excite them through any other organ." --  Thomas Jefferson

An AWC* CONFERENCE Work Session I attended back in 2005 was titled 'TACKLING TOUGH BUDGET CHOICES'
[*= Association of Washington Cities]

This session first focused on what some of the toughest budget issues are and then developed ways to address those choices.

While it is true that 2005 is history, this kind of history does repeat itself in every community, every year in some variation.

See if you can recognize which of the issues summarized are 'unique' to Bellingham, and which are shared by many communities.
HINT: 'unique' is very rare!


• The cost of operating budget items (salaries, benefits) increasing at a rate faster than inflation, particularly health care benefits

• The cost of infrastructure, such as transportation, sewer/water, and the need to respond to growth by providing more of these

• The property tax increase cap at 1% per year vs. 3% annual inflation

• The need to educate Council, staff and citizens

• Unfunded mandates

• Impacts from UGA residents outside the city limits being served but not paying

• The tax structure

• Disconnects – distrust of government, perceived lack of value for taxes paid

• Fee increases with service cuts

• Deferred maintenance


• Communicate more effectively with the public •••
o Be honest
o Frame the issues carefully
o Unify the Council before going out to the public
o Go to the public; don’t expect them to come to you
o Use all available tools (web site, etc.)
o Use polls to determine public opinion rather than basing it on what those who attend a hearing say
o Recognize that “complainers” care; connect with them
o Remember the audience
o Educate ourselves with “The Price of Government”

• Mid- to long-term: Change the tax structure •••
o Some possibilities for changes short of full scale changes:

• Designate the sales tax to the jurisdiction in which the purchaser resides (e.g., by tracking internet sales)

• Look at the AWC proposal to replace impact mitigation fees with additional .25% REET

• Lift the levy lid

• Identify cross-jurisdictional economic regions and the facilities needed to support the region and identify different ways to pay for them (no city can handle the full cost of regional facilities established by other jurisdictions, such as ports)

• Set up an opportunity fund for leveraging grants, etc.

• Focus REET truly on capital, rather than diverting it indirectly

• Use the private sector as well as government comparables when setting salaries and benefits

• Set up an equipment replacement fund

• Make fee increases incrementally (more regularly), rather than making larger increases less often

• Maintain good relationships with the Legislators who represent you

• Don’t miss grant opportunities
o But be careful when using grants for operating costs because there can be unintended consequences, such as establishing a service that must be sustained after the grant period

• Establish a vision for the city.
o Use a public process to engage the public in confirming the vision
o Use the vision to prioritize the budget and do long-range planning for economic development

Other comments :

• Cost of significant sewer extension with few people to pay the cost

• Private developments (e.g., in one community, a Big Box Store) pay for capital projects

• Can’t fund police and fire strategic plans. Unions view significant public safety problems.

• Impact on utility tax on proposed annexation area not used to paying that cost; impact on city to suddenly annex area with nearly same population as existing city.

• Cost of programs such as EMS with small population base

• Need 10-11% increase in utility taxes

• Half of the sales tax is allocated to the street fund by ordinance

• 40% growth rate for 20 years

• Lots of folks in the UGA who get water and sewer without annexing; need moratorium to stop that

• Growth in community, with changing demographics, has hit fire services and created very expensive capital and operating costs

• Growth has brought lots of one-time revenue, and the city has to avoid putting it into O&M that can’t be supported in the long-run

• Traffic, traffic, traffic – the city is most impacted by traffic from other communities over which it has no control

• Suggestion for utility costs: have the storm water utility help pay the costs of storm water infrastructure associated with transportation projects

• Need to educate people about costs that are imposed by others, esp. mandates

• To fund major regional projects, we need to identify areas of risk in our regional economy and target investment

• Focus revenue on maintenance, because in the long term, the deferred maintenance will become major capital projects

• Give high priority to funds to be used for matches (the “opportunity fund”)

• In growing areas, focus funds on areas where developers are doing a lot of work

• Create a budget advisory committee

Common perceptions are that municipal budgets are very simple, like household budgets.

Folks, they aren't, except in general principles!

Despite the City's winning national awards for excellence in accounting and budgeting for the last several years, this is a topic that is still about as clear as muddy water for most people.

A municipal budget is made up of multiple parts, some of which are relatively simple because they are self-balancing -like so-called enterprise funds [Water, Sewer, etc]

Other budget components are accounting devices to hold designated reserves, inter-departmental transfers and long-term obligations -like the LEOFF-1 Pension fund. [LEOFF refers to 'Law Enforcement & Firefighters]

The key budget component to watch is the so-called 'General Fund' which currently is being proposed at just under $82 million for 2008.
That compares with just over $77 million adopted for 2007, about a 6% increase.
In recent years, the General Fund has represented about a third of the total City Budget.

A 12% Reserve is established for augmenting the General Fund for use in case of emergency or other needs that are OKed by the City Council.
A brief explanation is offered in the 2008 Preliminary Budget for how these Reserves are expected to be impacted;
- a slowing of revenue growth
- a change in B&O tax rules [reduction of $890 k per year]
- some funds to be used for Fleet replacement
- some funds to be used for LEOFF-1 pension liability

Although General Fund monies are considered as more 'discretionary' than other public funds, this is largely a misconception.
That is because almost half [48%] of the General Fund is used to pay for essential Public Safety services like the Police and Fire Departments.
No one I know considers those services as discretionary!

Of the remainder;
- 19% goes to pay for Parks, Library, Museum and the like
- 14% goes to pay for General administrative services
- 7% goes to pay for Debt service & Capital projects
- 6% goes to pay for Judicial Services
- 6% goes to pay for Planning

General Fund revenue sources are broken down like this:
- 19% comes from B&O taxes
- 19% comes from Utility taxes
- 16% comes from grants, interest and other sources
- 15% comes from sales taxes
- 13% comes from property taxes
- 12% comes from inter-fund transfers
- 6% comes from various charges

Note the proposed '1%' Property Tax increase for 2008 will raise about $170 k in new revenues, all of which will be dedicated to help pay for the City's LEOFF-1 Pension obligation, which is estimated to total about $47 million.

The annual City Budget process is always interesting and often controversial.

But, more than anything else, it should be viewed as an opportunity to learn by anyone interested.

It is the time when comparisons can be drawn between what was expected and what actually happened.

And, it is a time to take into account the new demands, challenges and opportunities that are always changing.

The City has made great strides in being transparent about its budget process, but that alone can not be expected to adequately explain the inherent complexities involved to every citizen in a way that is completely understandable.

That is a much longer process which even intelligent professionals can have trouble understanding, without more direct experience with government accounting procedures and requirements.

With these comments in mind, now imagine how often the Municipal Budgeting mystery is encountered everywhere -not just in Bellingham.
That is the beauty of having associations, like the AWC, convene to bring public officials together periodically so that common problems and issues can be addressed and discussed in common.

Fortunately, common problems are often amenable to common solutions, notwithstanding the inherent differences between jurisdictions and times.

The Monster can be tamed, but it's still a Monster and will need taming again and again!

"We are what we do repeatedly. Excellence is not a single act but a habit."
- Aristotle