Public Budgeting PA 512

1. Public BudgetingPA 512

2. Intergovernmental Trends • Decreasing federal $ to S&L governments • Increasing $ to individuals (e.g., Medicaid) • Few new big grants (Exception: SCHIP and No Child Left Behind) • State initiatives (e.g., health care in MA and CA) • Devolution (e.g., Temporary assistance to needy children)

3. Federalism Models • Coercive. E.g., increased unfunded mandates, preemptions (e.g., Clean Air and Cleanwater Acts) • Cooperative. Cooperation in local grant implementation. • Pork Barrel • Opportunistic. E.g., welfare reform

4. Interlocal IGR Methods • Contract for service (e.g., water and sewer service) • Transfer city function to county (e.g., libraries, tax assessment • Double taxation (e.g., recreation and Sheriff) • Annexation • Methods: legislative, vote of the people, unilateral action, judicial, quasi-legislative • Unilateral: Density of 2 person per acre, must put in water and sewer trunk lines within 1 year (<5,000), 2 years (>5,000) • Satellite: Up to 10% of the population • Extraterritorial jurisdiction (ETJ). • 1-mile. Less than 10,000 population • 2-miles. 10-25 000 • 3-miles. Over 25,000 population • All of the cities zoning and subdivision regulations apply in the ETJ

5. State and Local IGR • Local legislation • Local bill affects 15 or fewer counties • During long session any member can present a bill • During the short session all members of the delegation must approve • Contentious issues • 0.4% real estate transfer tax • Medicaid reimbursement to counties

6. Forms of Local Government • Cities: Strong-mayor. Counties: Elective executive • Cities: Weak-mayor council. Counties: Weak-executive commission • Cities: Council-manager. Counties: Commission-manager

7. Strong-Mayor • Found mostly in large cities • Exceptions: Sunbelt cities (e.g., Charlotte, Phoenix, San Diego, Dallas, San Antonio) • None in NC • Model Charter recommends mayor have a Chief Administrative Officer (CAO)

8. Weak-Mayor • Whole Board supervises departments • Each Board member supervises a department • Board appoints an administrator without the powers of a city manager • Role of Mayor: If elected, only votes in case of a tie. If selected by Board, votes in all instances

9. Council-Manager • In theory the Board sets policy; manager administers it • Politics v. administration dichotomy • Boards: 75% are non-partisan • Role of mayors • All mayors play the ceremonial role • Some mayors are policy consensus builders

10. Differences Between Cities and Counties in NC • Counties have department heads who are elected officials (e.g., Sheriff) • Counties have more Board members that run on a partisan basis • Most county chairs are appointed by the Board • Three major county departments (Health, Mental Health and Social Services) have advisory boards • Counties jointly fund: Community colleges, Agricultural Extension and Public Schools • Most counties do not provide water and sewer services • County budgets are more constrained by federal and state mandates • E.g., NC is the only state to require county Medicaid funding, which is 15% of the budget of budgets on average, over 20% in poor, rural counties

11. State Government • NC Organization • Executive branch • Powers: Institutional, personal • Cabinet • Legislative branch • Professional, hybrid and citizen legislatures • Council of State • Judicial branch

12. State Trends • Decline in Council of State agencies (not in NC) • Stronger veto power (NC governor given veto power, but 43 states have line-item veto power • Increase in Republican governors (Gov. Martin, 2 terms) • Increase in partisan splits (Republicans have controlled the House) • 2-year to 4-year terms (not in NC) • Increase in term limits (not in NC) • More lobbyists (yes in NC) • More think tanks (yes in NC)

13. Medicaid Spending *2010 percentage projected by Health Management Associates Source: NASBO State Expenditure Report

14. NC Center for Public Policy Legislative Effectiveness Criteria • Participation in committee work • Skill at guiding bills thru floor debate • General expertise in special fields • Respect from fellow legislators • Political power they hold by virtue of their office, longevity or personal attributes • Ability to sway fellow legislators • Aptitude for the overall legislative process

16. Types of Funds • Governmental • General • Special revenue • Debt service • Capital projects • Permanent • Proprietary • Enterprise • Internal service • Fiduciary • Pension trust • Private-purpose trust • Investment trust • Agency

17. General Special Revenue State Highway Highway Trust Tobacco Settlement Clean Water Wildlife Resources Commission Enterprise State Fair USS NC Battleship Commission Agricultural Farmers Marked Internal Service Prison Enterprises Motor Fleet Courier Service Temporary Solution Computing Services State Telecommunications State of NC Funds

18. Basis of Accounting • Modified accrual: governmental funds • Accrual: proprietary and fiduciary funds • Cash: small local units, nonprofits and the state of NC, which converts to accrual at fiscal year end • Cash to accrual: Pros and Cons. Provides more accurate fiscal picture, but reduces fund balance in the conversion year and requires software and expertise

19. Accounting and Auditing Terms • GAAP • The “Blue Book” • GAAFR • GASB • FASB • CAFR and PAFR • Statement 117 • The 990

20. Indirect Costs (ISFs) • Internal service funds (ISFs) • Local government: fleet, printing, IT, custodial services • All but fleet are easy to create • Provides more accurate departmental costs • NC: prison enterprises, fleet, courier services, IT, telecommunications

21. Accounting and Auditing Terms • GAAP • The “Blue Book” • GAAFR • GASB • FASG • CAFR and PAFR • Statement 117 • The 990

23. Indirect Costs (Reciprocal Services) • General fund indirect services (e.g., legal, accounting, auditing, purchasing, human resources, city manager) provided to other funds • Costing method: A-87 Cost Allocation Plan (CAP) • Pros and cons of charging other funds for indirect services

24. Indirect Costs: Non Profits • Auditor usually approves the method • Indirect administrative costs are charged to program services • Typical methods: Programs’ relative share of expenses or personnel • Some funders limit the amount of indirect costs. Program ratio: program expenses/total expenses (E.g., Wake United Way limit is 25%)

25. Certificate of Achievement for Excellence in Financial Reporting (CAFR) • Content • Management and discussion analysis (MD&A) • Notes to financial statements • Required supplementary information (RSI) • Statistical section • Obtaining a CAFR: Pros and cons

26. Fund Balance • Unreserved • Designated • Undesignated • Fund balance policy • Norm amounts: • Local government in NC • NC State government • Nonprofits

27. Balances Remain Healthy; Some Decline Likely for Fiscal 2008 *2007 figures are estimated; 2008 figures are recommended Source: NASBO June 2007 Fiscal Survey of States

28. Budget Cuts have Declined Since Early 2000’s Downturn Source: June 2007 Fiscal Survey of States

29. Ways to Increase Fund Balance • Increase property tax rate • Adopt a cost allocation plan (CAP) • Increase property tax collection rate (90% to issue bonds) • Put names in the paper • Put a lien on paycheck • Sell the property for back taxes • Underestimate next year’s revenues (3% of budget) and budget a full employment budget (5%)

30. Local Government Fiscal Indicators • General fund • Property tax collection rate • Net debt per capita • Direct debt per assessed value • Fund balance • Unfunded pension and health liabilities • Enterprise funds • Retained earnings • Net working capital • Current ratio • Quick ratio • Day’s cash • Day’s receivables

31. Nonprofit Ratios • Program ratio • Fundraising ratio • Fundraising efficiency ratio • Current ratio • Net working capital

32. Budget Cycle • Budget preparation • Budget forms and procedures • Budget approval • Budget message • Budget execution • Financial audit and evaluation

33. Budget Decisions • The fiscal year • Balanced budget • Strategic plan • Reserve amount • Accounting basis • Budgetary system • Meet with governing board • Meet with department heads

34. Agency Request Strategies Increasing workload It is a mandate It is a crisis!!! It pays The camel’s nose under the tent The public wants it

35. Budget Analyst Review • Possible roles • Watchdog only • Facilitator only (captured) • Watchdog and facilitator • Needed skills • Assertion and active listening • Know one’s self • Clear and succinct writing • Spread sheet capability • Desire to make a difference

36. Types of Budgets • Line-item • Line-item performance • Performance • Program • Zero-based • Target v. open-ended • Entrepreneurial • Multi-year • Full employment • Current services • Base v. expansion • Capital

37. Types of Revenues • State individual income tax • State sales tax • Property tax • State-collected, locally shared revenues • Development fees • Impact fees (22 states) • Connection charge • Exaction

38. Property Tax • How to compute a 1 cent change • Delinquent property tax collection rate (90% issue debt; 93% get a unit letter) • Methods: Names in paper, lien on paycheck, sell parcel for back taxes owed • Exemption • Income level $25,000. Pay taxes on ½ the value if the home is over $50.000 • Circuit breaker or deferral • Property tax base mix • Property tax cycle • Appraisal methods: mass cyclical, segmental and annual

39. State Revenues • Income tax: 43 states; 6 with a flat rate • General sales tax: 45 states. 4%-7.25% range. Very popular. • Sumptuary excise: tobacco and booze. Very regressive. • Gambling: 37 states; 2% of revenues (1%-8%)

40. Revenue Criteria • Equity • Ability to pay v. benefits received • Horizontal equity • Vertical equity • Regressive • Progressive • Proportional • Elasticity • Compliance costs • Public acceptance • Transparency

41. Water and Sewer Revenue Policy Questions • Adopt a user fee policy? • How much to charge water and sewer users living outside the town? • How much water usage to apply the sewer rate to? • Whether to charge impact fees and if so, how much? • What type of water and sewer rate? • Declining block • Uniform rate • Ascending block • Seasonal

42. Revenue Forecasting • Methods • Qualitative • Deterministic • Extrapolative • Penultimate year • Average change • Simple moving average • Linear regression • Multiple regression • Politics • Federal government: CBO v. OMB • Election-year estimates

43. Types of Measures • Output • Intermediate outcome • End outcome • Efficiency • Output/costs. Output/hours • Intermediate or end outcome/costs or hours • Guidelines • Measure quantity and quality • Avoid goal displacement • Involve stakeholders in deciding what to measure

44. Legislative Budget Review • State of NC • House and Senate standing committees • Key players • Fiscal Research Division • Fiscal note preparation • Local governing board review • Nonprofit board review

45. Budget Documents • Budget in brief • Federal documents • Budget of the U.S. Government • The Budget Appendix • Analytical Perspectives • North Carolina documents • Governor’s Recommended Budget • NC Capital Improvement Plan • Post Legislative Budget Summary • Legislative Session Fiscal and Budgetary Actions (Fiscal Research Division)

46. Levels of Capital Budgeting • Level 1. No separate CIP. • Level 2. Large projects in CIP, capital projects funds, ordinances, etc. • Level 3. Level 2, plus master planning, multi-year financial forecasting, sophisticated project management

47. Why Have a CIP? • Orderly replacement of facilities and equipment • More time to arrange financing and acquire land • Better project coordination • Information for developers and neighborhood groups • Bond rating

48. Capital Policies • Term of debt to not exceed useful life of the asset • Limit debt financing to one-time projects • Dedicate a specific amount of operating property tax rate to pay for infrastructure along with debt • Maintain an internal service fund to purchase equipment • Lease purchase only when the useful life is equal to or longer than the length of the lease. • Limit the amount of GO debt will to x% of assessed value

49. LGC Debt Review • GO bonds • Tax information • Budgeting requirements • Purchasing requirements • Cash management requirements • Other requirements • Revenue bond requirements • Revenue projection • Rate projection • Repayment plan

50. Typical Financing Team • City • Senior underwriter (lead banker) • Co-managers (bankers) • Fiscal advisor • LGC staff and Commission members • Bond counsel • Underwriter’s counsel • Trustee (trustee bank)