Sustainable Budget Balancing Practices

Transcription

1 Sustainable Budget Balancing Practices 1 L I N D A C. D A V I D S O N F I N A N C I A L S E R V I C E S D I R E C T O R C I T Y O F B O C A R A T O N P R E S E N T E D T O T H E F G F O A S C H O O L O F G O V E R N M E N T A L F I N A N C E 1 1 / 5 /

2 Financial Strategies Political/Internal Adopt financial policies Improve teamwork Re-organize Program inventory & review Technical/Internal Reform budget process Make innovation a discipline Lean process improvement Variance modeling Political/External Mandate review Understand citizens service priorities Align new revenues with citizen preferences Technical/External Economic Development Inflation indexing of fees Pension reform Metro area restructuring

3 Financial Policies 3

4 Financial Policies Standards of stewardship Framework for financial strategies Key point of elected official involvement in budgeting Institutionalize good financial management practices 4

5 Balanced Budget Key Policies Defines a balanced operating budget True structural balance Recurring revenue will equal or exceed recurring expenditures Encourages commitment to a balanced budget Long-Range Planning Supports a financial planning process Define minimum time horizon Define baseline content Assesses the long-term financial implications of plans & budgets 5

6 Asset Inventory Key Policies Inventory and assess the condition of all major capital assets. First step in coming up with maintenance strategy Dedicated source of funding for maintenance? 10 percent of all new (ongoing) discretionary revenue will be devoted to capital projects including deferred maintenance and infrastructure needs. Revenue Diversification Encourage more stable revenue base

7 Key Policies Fees and Charges Setting and updating fees Will full costs be used? How often will fees be reviewed? Define subsidization levels Use of One-time Revenues Define one-time revenues Define acceptable uses Define unacceptable uses Use of Unpredictable Revenues 7

8 Key Policies Debt capacity, issuance, and management Define benchmarks E.g., debt payments shall not exceed 10 percent of operating expenditures Prohibit long-term debt for operations Expenditure accountability Regular variance analysis & accountability Grant seeking Net positive benefit Long and short-term analysis 8

9 What is a Reserve Anyway? A reserve is a hedge against risk Reserve refers to the portion of fund balance that is used for hedging risk Reserve is not an accounting term. It is a policy device. Unassigned fund balances are typically used for the reserve Committed can play a role as can unrestricted 9

10 10 What are some of the challenges you face in developing a reserve strategy?

11 More is not better. Too much reserves can erode public confidence. Helps you find the just right amount Helps elected officials better appreciate why you have reserves Risk analysis process produces other ideas for mitigating risks 11

12 Risks are inherently uncertain! 12 H O W D O Y O U A N A L Y Z E U N C E R T A I N T I E S?

13 Triple-A Approach to Dealing with Uncertainty Accept Uncertainty is inevitable Assess Find potential impact, using reference cases Augment 13 Uncertainty will usually be underestimated!

14 Vulnerability to Extreme Events What natural or man-made disasters might you be subject to? Hurricanes, Fire, and Floods 14 Consider role of FEMA, but FEMA doesn t reimburse everything Reimbursement isn t immediate

15 Revenue Source Stability How dependable are your revenues? Do they vary greatly from one year to the next? Or are they pretty stable? 15 Consider individual sources and the entire portfolio. Don t be fooled by monthly variation

16 Expenditure Volatility What one-time, unpredictable expenditure spikes are you subject to? Lawsuits? What cases are outstanding? Fuel price spikes? Reserves should not be used to cover general cost escalation like rising salaries, health care cost, etc. 16

17 Leverage Leverage is any obligation that reduces financial flexibility. Reserves increase financial flexibility. Examples of leverage Pension obligations (even for pooled plans) Long-term debt Unfunded asset maintenance/replacement 17

18 Liquidity A mismatch between when revenues are received and when expenditures are made could create a cash flow problem Reserves may be needed as working capital Most common for governments that are very reliant on property taxes 18

19 Other Funds Dependency Does the General Fund backstop other funds? If so, the General Fund will ultimately be on the hook if something happens to these other funds What level of dependency is there? What types of risks does the other fund face? 19 What other options are there?

20 Growth Is the government expecting rapid growth? If so, will new revenues come in soon enough to cover the cost of serving growth? What other options might be available (e.g., impact fees)? 20

21 Capital Projects Do critical capital projects have a funding source? If not, might people look to reserves? 21

22 Use Reference Cases to Analyze Risks Do not rely on your own judgment to assess the magnitude of the risks Human judgment is afflicted by cognitive biases Overconfidence Anchoring Recency Use reference cases Past history Analogues 22

23 Do Involve Others in the Risk Analysis Process Creates greater commitment to the resulting reserve target Provides more credibility to council Different people have different perspectives 23 Risk in in the eye of the beholder Is there a risk that Microsoft stock will go down tomorrow?

24 Reserve Policies 24 A B O U T R E S E R V E P O L I C I E S S I Z I N G Y O U R R E S E R V E K E Y P O L I C Y E L E M E N T S

25 About a Reserve Policy Corner stone of financial flexibility Buffer shocks Manage risk Policy is essential to: Define amount to hold in reserve Describe purpose of reserves

26 Reserve Key Questions What is the right level of reserves? What factors influence the "right" level of reserves? What are the most important elements of a reserve policy? How can you develop a strategy for using reserves for budgetary stabilization?

27 The Right Level of Reserves? How to measure? Reserves as a percent of Regular revenues or Regular expenditures Choice depends upon which is more predictable

28 The Right Level of Reserves? What does GFOA recommend? As a baseline for the general fund: 16% of regular operating revenues 2 months of regular operating expenditures S&P s views on available reserves Low: Below 0% Adequate: 1%-4% Good: 4%-8% Strong: 8%-15% Very strong: Above 15%

29 Factors Influencing the Right Level? GFOA recommendation just a baseline Need to adjust based on local conditions Conduct a risk analysis Catalogue major influencing factors Analyze past experience on factors Judge implications for reserves Discuss risk appetite Risk is in the eye of the beholder Finalize target amount

30 Other Drivers to Consider Government size Management plan Borrowing capacity Public perception Political Support Is there a level of reserves that resonates? Can elected officials be engaged in the analysis?

31 Most Important Policy Elements? Reserve target levels Consider breaking into subcategories Key word: credibility How to reach target levels Broad guidance in policy Use a long-term financial plan for more specifics

32 Most Important Policy Elements? Conditions for use of reserves Use of Reserves Authority to Use Reserves Replenishment of Reserves Excess Reserves

33 Take-Aways Reserves are critical to financial planning Flexibility Risk mitigation A policy defines a target level and what reserves can be used for Analyze the risks you face to define your target

34 Other Key Policies 34 P O L I C I E S T H A T S U P P O R T Y O U R R E S E R V E M A N A G E M E N T S T R A T E G Y

35 True Structurally Balanced Budget Defines a balanced operating budget Goes beyond State requirements True structural balance Recurring revenues = recurring expenditures Makes it less likely reserves will be called upon to balance out a short-fall because their will be less structural dependence on non-recurring revenues to pay for recurring expenditures

36 Asset Maintenance & Inventory Establish intent to keep assets maintained Inventory and assess the condition of all major capital assets. Consider cost of maintenance when making new investment decisions Commit to funding a maintenance plan 36

37 One-Time & Volatile Revenues Use of One-time Revenues Only use them for non-recurring purposes Prevents them from creating structural imbalance Encourage them to be used to replenish reserves when needed Use of Volatile Revenues Treats unusually high yields of regular, but volatile revenue sources the same as one-time revenues

38 Fees and Charges Goal of fees Provide flexibility in use of general revenues Assign costs to specific beneficiaries Cost recovery What are the criteria for high levels of cost recovery vs. lower levels? What will the cost basis be for recovery? Review of fees How often are fees reviewed? When are new fees warranted?

39 Debt Management Debt limits Legal limits What does provincial law allow? Policy limits What types of debt can be used & for what purposes? Financial limits How much debt is acceptable? Debt structuring Term Repayment schedules

40 Take-Aways The policies presented in this section complement a reserve policy Judge your own situation to decide which are most important Most important will usually be Structurally balanced budget Long-term financial planning Debt

41 Reorganize

42 Why reorganize or restructure? Goal is to transition to a more high-performance, results-oriented and accountable government Fundamental look at roles, function and structure Examine emerging trends and fiscal challenges Maximize effectiveness and efficiency

43 Why reorganize or restructure? Given current trends and increasing fiscal challenges a comprehensive review, reassessment, and reprioritization of what we do is needed changing priorities and the compelling need to examine the base of government programs, policies, and operations status quo is unsustainable over time due to limited resources

44 Reexamination of Programs and Services Are current programs relevant, appropriate and effective? Are they sustainable? Can operations be combined/improved? Is there an opportunity to eliminate redundancies? Is there a layer of management that can be eliminated?

45 Approach to Reorganizations Establish clear goals Follow an integrated approach Develop an effective human capital strategy Consider alternative program delivery methods Plan for both initial and long-term implementation

46 Results Integrated Shared Services Payroll, HR, Procurement Used Technology to improve service delivery and reduce costs Privatized or outsourced programs Expansion of 4 day 10 hour work Reduction of work force Elimination of non-core services

47 Innovation Management

48 About Innovation Objective Make innovation the rule not just a response to crisis or one-off project This requires processes to Generate ideas Select the best ones Implement them Spread the benefits thru the organization

49 About Innovation Innovation also requires Effectively using in-house resources and well as harnessing ideas from outside An organizational culture that encourages innovation Innovation is a discipline, just like strategy, planning, or budgeting

50 Innovation Process Idea Generation First, define meaningful shared goals for the organization Next, develop methods to come up with ideas to meet the goals. Examples include Employee suggestion programs Examining other organizations Working with clientele to understand their view

51 Innovation Process The idea selection process Must effectively separate the best ideas from the rest Must be transparent Should be informed by data on constituent preferences

52 Innovation Process The implementation approach must Create a sense of ownership over results by employees Maintain open communication between leadership and line staff Define standards against which project will be measured

53 Innovation Process Diffusion Transfer successful innovations to other parts of the organization Share knowledge of how to make the innovation work Publicize success Break down silos Build a coalition for change

54 Boca Lean F L E E T O P T I M I Z A T I O N J U L Y

55 KAIZEN Kai Zen To break apart Think To modify Make good To change Make better Kaizen Change for the better Improvement Continuous Improvement

56 What does Lean offer? Through the interviews and plan development, improvements fall into the following categories: Kaizen events rigorously validated beforehand BPIs Business Process Improvements work of lesser magnitude than a Kaizen Benchmarking don t create the wheel from scratch, instead, steal shamelessly and legally Just Do Its Ideas and changes that have positive impact and have been languishing without action known as Daily Kaizen Organizational Discipline there is no need for action other that to have good organizational discipline to follow the good policies & procedures we already have

57 Project Charter

58 Project Charter Why is the project important to the City? Define what the project boundaries Keep what is out out! What are we looking? How big is it? What is the impact? What does the team look like? Do we need people from outside the department? What are we saving? Quantifiable Goals with definite completion dates. Goals should not be solutions.

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60 Local Economic Development Policy

61 Key Policy Elements Goals of Local Economic Development (LED) Conditions for Subsidization Financial Incentive Tools Performance Standards Proposal Evaluation

62 Goals and Objectives for LED Two major objectives Jobs Qualifications / education required? Match current residents? Draw in new residents? Industry created in? Focus on regional specialty? Focus on emerging sector? Pay and benefit Level? How should the compensation level compare to regional averages? Tax base Acceptable land users and economic activities? Altering the competitive environment? Impact of LED on new versus existing businesses? Regional considerations? Will projects with regional benefits be favored? The answers to these questions impact how LED opportunities will be evaluated

63 Conditions for Subsidization Define conditions for subsidization Situations that may be appropriate are: The program impacts an entire local industry such that competition is enhanced. Businesses that are deemed socially beneficial are affected. The program increases general wage levels in the area by improving work productivity The program impacts businesses that export outside the local economy and the program improves productivity by an amount greater than it costs.

64 Incentive Tools Incentives carry inherent risk and can be complex A policy describes which tools will be used & the extent to which they will be used Guide toward tools where the entity has expertise Limit exposure

65 Performance Standards Safeguard the Entity s investment through performance standards Jobs created, types of jobs, new taxes Tie incentives to targets If up-front incentives are needed, commit to a clawback Commit to transparency on whether projects are meeting objectives

66 Proposal Evaluation Define procedure to evaluate proposals Provide consistency & transparency in the evaluation process Policy elements Who will be involved and their roles Criteria used for evaluation Staff develop detailed procedures to operationalize Information required as part of a submittal from developers

67 Program Evaluation Evidence of LED effectiveness is mixed Commit to evaluating LED projects / incentives against the stated goals for the project Find out which are more (or less) effective given local conditions

68 Local Economic Development Performance standards for LED projects Make sure project meets the goals Jobs created, tax revenue delivered Clawbacks How LED proposals will be evaluated Participants and their roles Criteria for evaluation Information required from developers Systems for evaluating & monitoring Formally commit to monitoring programs Commit to monitoring results

69 Other Ideas to Think About Funding source for LED activities Principles for Financing LED Fairness, protecting general tax dollars, indirect v. direct benefit, incentives and safeguards, intraregional impacts Maintaining accountability for project results Evaluation procedure specifics

70 Pension Reform

71 Recent Focus on Public Pension Plans Pension plans in news Funding status of public pension plans Pew Report Study from Northwestern/Rochester Universities Financial Market Impact Long term impact on government budgets for promise to pay future benefits Review of GFOA best practice on Sustainable Funding Practices for Defined Benefit Retirement Plans

72 Pension Plans Defined Benefit vs. Defined Contribution Plans Future costs, benefit and assumption rate changes Impact of changes to GASB 67 and 68 Pension Accounting on financial statements

73 Types of Pension Plans Defined Benefit Plan Benefit is a monthly payment at a guaranteed fixed amount for life Contributions Employee % of pay Employer set actuarially Benefit is based upon on pay and years of service Employer makes investment decisions and assumes the risk

74 Types of Pension Plans Defined Contribution Plan Benefit is the balance in the individual retirement account Contributions Employee % of payroll Employer % of payroll Employee makes investment decisions and assumes the risk

75 GFOA Best Practice Sustainable Pension Funding Practices Adopt a Funding Policy targeting a 100% or more funded ratio Discuss the funding and amortization methods with actuary Stipulate employer and employee contributions, as determined actuarially, are made at regular intervals

76 GFOA Best Practice Sustainable Pension Funding Practices Have an actuarial valuation prepared at least biennially Review actuarial assumptions Prepare and widely distribute a CAFR covering retirement system activity

77 Recent Pension Plan changes Transfer from DB to DC plan Creation of second tier of reduced benefits for new employees Lower multiplier Elimination of COLA Retirement age extended Hybrid Plans combining aspects of both DB and DC plan Conversion to the Florida Retirement System

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79 Financial Sustainability Understand the actuarial valuation reports and its impact on the budget Identify projected pension costs: Use actuarial report to project future costs Address financial impact of any proposed new benefit or change to the plan 91

80 Financial Sustainability 92 Set policy minimum for plan s funded status before considering any improvements to the plan Review annually assumptions Salary Growth Rate of return on investments Mortality Asset Allocation Other