FINANCIAL FUNDAMENTALS FOR CITY CLERKS. Dave Callister, Plymouth City Manager LMC Conference June 20, 2018

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1 FINANCIAL FUNDAMENTALS FOR CITY CLERKS Dave Callister, Plymouth City Manager LMC Conference June 20, 2018

2 Public Finance Questions Why is public finance important? What leads to financial strength in cities? How are city finances structured? Why are transparency and communication important? How are operational budgets shaped and funded? What are capital items and how are they funded? What are enterprise operations and how are they funded? What are financial reporting requirements?

3 Seven Pillars of Financial Health

4 Finance Calendar - Sample Jan - March State Budget Report County Bonded Indebtedness Report Budget publication Lawful Gambling reports Lobbying report Audit Preparation Certification Process Set Prelim Levy (Sept) Annual Disclosure reporting Submit final levy (Dec) Set Utility rates Sept - Dec April - May Audit fieldwork Annual Financial Statement (CAFR) Development fee reporting Budget development State Auditor reporting Development fee reporting TIF reporting Update studies June - August

5 What is Fund Accounting? A method of segregating resources into categories (i.e., funds) to identify both the source of funds and the use of funds.

6 Fund Accounting System Emphasizing Accountability Rather Than Profitability Funds Tracked and Held in Separate Funds Governmental Funds Proprietary Funds

7 Fund Categories Governmental Funds used to account for activities primarily supported by taxes, grants, and similar sources General Fund Special Revenue Parks & Recreation Transit Debt Service Capital Project Permanent Proprietary Funds Used to account for activities that receive significant support from user fees and charges Enterprise Water Sewer Electric Internal Service Fleet Facilities Information Technology Risk Management

8 Fund Types Governmental Fund Types General Fund Special Revenue Fund Capital Projects Fund Debt Service Fund Permanent Fund Accounts for all financial resources except for those accounted for in another fund. Includes transactions for general governmental services. Each entity creates only one General fund, but it may create more than one of each of the other types of funds. Accounts for the proceeds of specific revenue sources that are restricted for specified purposes. Accounts for financial resources for the acquisition or construction of major capital facilities that benefit many citizens, such as parks and municipal buildings. Accounts for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Accounts for resources that are restricted such that only earnings, but not principal, may be used in support of governmental programs that benefit the government or its citizenry.

9 Fund Types - continued Proprietary Fund Types Enterprise Fund Internal Services Fund Fiduciary Fund Types and Similar Component Units Pension (and other employee benefit) Trust Fund Investment Fund Private Purpose Trust Fund Agency Fund Accounts for operations of governmental units that charge for services provided to the general public. Accounts for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit. Services are offered only to governmental agencies. Accounts for resources required to be held in trust for the members and beneficiaries of pension plans, other postemployment benefit plans, or other EBPs. Accounts for the external portion of investment pools reported by the sponsoring government. Accounts for all other trust arrangements under which the fund s resources are to be used to benefit specific individuals, private organizations, or other governments. Accounts for assets held by a governmental unit in an agency capacity for employees or for other governmental units.

10 Fund Accounting MN OSA Has Uniform Chart of Accounts to Assist Internal Controls Necessary to Protect Public Funds Resources Include City s Auditor, OSA or Software Vendor

11 Key Public Finance Documents

12 Communicating Budget Priorities and Decisions Early engagement Identifying budget priorities Place budget priorities in context with competing demands Staff Feedback Council Feedback Public Feedback

13 Budget Calendar Key Dates: Preliminary Levy Adoption by September 30 each year Final Levy Adoption on or before five working days after December 20 in each year.

14 Budget Planning and Management Gauge Council s willingness to increase taxes, and if so, how much Forecast property tax levy Background on new projects and initiatives Market growth Debt including existing and future Budget Operations by Fund Capital Improvement Fund Other context Proposed payroll increases Benefit increases Contract increases

15 General Fund Revenues Property Taxes Local Government Aid (LGA) State Fire Aid (pensions) State Police Aid (training) Fees and Licenses Interest Earnings

16 General Fund Expenses Administration Community Development Police Fire Parks and Recreation Public Works Elections?

17 Levy Calculation Revenue Amount Property Tax? Building Permits $100,000 Licenses and Fees $50,000 Local Government Aid? $200,000 Total Without Property Tax $350,000 $1,550,000 Expenses Amount General Government $350,000 Planning and Building $200,000 Public Works $800,000 Public Safety $550,000 Total $1,900,000

18 General Fund Budget - Solutions Analyze existing budget to determine what could be moved outside operating levy Equipment Street reconstruction Capital improvements Determine if debt could be issued, and if so, for what term? Including debt restructuring

19 Contingencies To cover unforeseeable expenditures Reduce budget impact for emergency situations Not everything can be planned for

20 Helpful Hints Do not use an annual operating surplus to plug a budget hole Use annual surplus to add to general fund balance or for one-time or non-recurring expenses or capital items Do not fixate on tax levy freezes every year but rather work to stabilize annual levies over time Do the appropriate long range fiscal planning to provide stability and context to your annual budget and levy

21 Capital Improvement Planning A capital improvement plan (CIP) is a short-range plan, usually 5 10 years, which identifies capital projects and equipment purchases, provides a planning schedule and identifies options for financing.

Capital Improvement Planning Five to Ten Year Plan for Capital Expenditures Steps Prepare Capital Requests from Departments Formulate and Recommend Plan to Elected Officials Council Approval Assess

22 Capital Improvement Planning Five to Ten Year Plan for Capital Expenditures Steps Prepare Capital Requests from Departments Formulate and Recommend Plan to Elected Officials Council Approval Assess Project Feasibility Review Project Financing Project Approval and Implementation The CIP is a planning/concept document. Purchases are still reviewed/approved by City Council under your City s Purchasing Policy.

23 Capital Improvement Plan - sample

24 Long Term Financial Planning Why? Comprehensive Fiscal Plan For Future Allows Evaluation of Budget Priorities Maintains Assets and Provides Replacement Schedules Stabilizes Property Tax Levies (Avoid Spikes) Avoids Kicking the Can Down the Road Gives Council Comfort They Can Afford Capital Investments Over the Long Term Reduces Stress During Budget Process Rating Agencies View Multi-Year Planning Favorably Less Paycheck to Paycheck Thinking Projects in the Context of Multi-Year Planning Tend To Be Less Controversial If There is a Plan, Projects Get Done

25 Levy Tax Impact Long Range Financial Plan Multi-Year Fiscal Plan For Tax Supported Funds Five to Ten Year Projections Integrates: Existing Debt CIP s Future Debt Tax Base Growth Future Operating Expenses Staff Additions TIF District Decertifications $45,000,000 $40,000,000 $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 Levy and Tax Impact Projections $ Total City Levy Commercial City Tax Residential City Tax $6,500 $6,000 $5,500 $5,000 $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 This data feeds into the projection of levy and tax impacts

26 Financial Policies Financial policies are central to a strategic, long-term approach to financial management. Formal policies should promote stability and continuity (usually outliving their creators). Prevent the need to re-invent responses to recurring issues. Financial policies define a shared understanding of how the organization will develop its financial practices and manage its resources. Define boundaries. Financial policies define limits on the actions staff may take. Support good bond ratings and thereby reduce the cost of borrowing. Promote long-term and strategic thinking. Manage risks to financial condition. A key component of governance accountability is not to incur excessive risk in the pursuit of public goals. Comply with established public management best practices.

27 Expenditure Approval Ask about how your City Council exercises its oversight authority on Public Purpose Expenditures

28 Resources

29 Cash Management and Investments Define policies Establish strong internal controls Review purchases Ensure appropriate oversight on all purchases Investments should follow the priority order of: Safety Liquidity Yield

30 Investments Official Depository Written Investment Policy Broker s Annual Notification and Certification Cash Flow Analysis to Determine Needs Federal Deposit Insurance Corporation (FDIC) Insured up to $250,000 Amounts in excess of $250,000 must be collateralized If unsure, make sure you get professional advice before you make investment decisions

31 Approved Investing US Government Securities State and Local Municipal Securities Commercial Paper Certificates of Deposit 4M Fund 4M Plus Fund Money Market Funds

32 Cashflow Major sources of revenue (property taxes and LGA) are distributed in July and December Expenditures begin January 1 of each fiscal year General Fund Cash Balance is necessary to cash flow from January to July State Auditor recommends end-of-year fund balance of 35% to 50% of annual expenditures Cities can and do have higher and lower fund balance

33 Millions Annual Cash Flow Property Tax Settlement $150 $140 $130 $120

34 Is Cash balance the same as Fund balance? a. Yes b. No

35 Is Cash balance the same as Fund balance? b. No

36 Fund balance is the difference between assets and liabilities. It provides an indication of the relative health of the fund. You typically cannot spend fund balance. Cash balance is the spendable asset portion of your fund balance.

37 Cash and Fund balance meanings are different, however the fund balance could equal cash balance if there are no other assets or liabilities other than cash. Cash $1,000,000 Receivables 50,000 Capital Assets (less depreciation) 2,000,000 Total Assets $3,050,000 Accounts Payable $ 500,000 Debt Payable 20,000 Total Liabilities $ 520,000 Fund Balance $2,530,000

38 General Fund Revenues

39 General Fund Expenditures

40 Annual Financial Statements Review Measures short-term financial health Fund based statements (Balance sheet and Income Statement) General Fund unrestricted fund balance as a percentage of annual expenditures Do any funds have a deficit fund balance? Review budgetary comparison schedules for revenue and expenditures variations Measures long-term financial health Government-wide financial statements (first two statements in CAFR) The total net position for governmental activities should be positive Key reports Management Discussion and Analysis highlights key events and includes an analysis of significant changes Notes to Financial Statements provides overview of government s accounting practices Independent auditor s report provides external auditor s opinion

Government Finance Officers Association (optional) -awards governments with the Certificate of Achievement for Excellence in

41 Annual Financial Reporting Requirements Office of the State Auditor - requires submission of the Annual Financial Report. This report is a summary of the financial activity of the government. Government Finance Officers Association (optional) -awards governments with the Certificate of Achievement for Excellence in Financial Reporting. Grant Administration - Audited financial statements are submitted to grant administrators as a compliance requirement. Publication statements must be published for community review.

42 Financial Reporting Treasurer s Report Annual Financial Report (Cities over 2,500) Annual Financial Statement (Cities under 2,500)

43 Annual Financial Report (Cities Over 2,500) Clerk or Chief Financial Officer must prepare an annual financial report and statements in accordance with state law, GAAP and GASB 34 Must be Available for Public Inspection Must Present to City Council Must Submit to State Auditor by June 30

44 Annual Financial Statement (Cities Under 2,500) Clerk or Chief Financial Officer Must Prepare Annual Financial Statement Must Prepare Detailed Statement of the Financial Affairs of the City All Funds Received, Sources and Amounts All Disbursements Amount of Outstanding Orders Accounts Payable All Indebtedness Contingent Liabilities Accounts Receivable Balances

45 Audit Audits help to ensure the city accounts are properly kept and that all financial transactions have occurred according to law. Preparing for a year-end audit: Reconcile all balance sheet accounts Reconcile all bank accounts Prepare reports, schedules and work papers Finalize transfers and authority (budget or resolution) Record accruals (including wages and benefits) Have City Council minutes and resolutions available Provide requested reports to auditors including a trial balance Provide all documents requested on the checklist from the auditing firm

46 Capital Financing and Debt Management Pay-as-you-go Debt financing

47 Annual Debt Levy Tax Levy Opportunities When TIF Districts are decertified or Debt obligations are paid off Use levy capacity for other projects Keep debt levy constant 1,200,000 City of Plymouth Levies for Tax Supported Debt 1,000, , , , , A GO Open Space Bonds 2012A GO CIP Bonds 2015A GO Open Space Bonds

48 Tax Levy Opportunities City of Plymouth Levies for Tax Supported Debt

49 Interfund Loans Interfund loans from other funds/accounts Compare to rate on usual city investments Prepare amortization schedule Maximum interest rate of 4%

50 Issuing Debt Three approaches to project financing: Pay-as-you-go using cash Internal borrowing cash Borrowing using bonds or other forms of municipal debt Why borrow? Payers use the asset over its life May allow for better management of tax rates and fees Cash flow and fund balance considerations Potential of future levy limits restricting ability to save and use cash; debt historically exempt from levy limits

51 Financing Debt 1. When and how much to borrow Include all construction and soft costs in the financing May be other items to capitalize 2. Source of revenues Tax levy, utility, assessment, TIF revenues May dictate the structure and type of debt 3. Term of repayment Tax levy, utility, assessment, TIF revenues May dictate the structure and type of debt 4. Existing and future debt considerations Impact on levy or other revenue stream Affordability based on the need for future financing(s)

52 Key Player Rating Agency Three main agencies assess relative risk of holding a municipality s debt (General Obligation and/or Revenue): Standard & Poor s Moody s Fitch (not commonly used in Minnesota) Higher rating = more secure investment = lower interest rates Not all issuers/issues benefit from receiving a rating. Your financial advisor can assist in making this determination.

53 Rating Agency Factors Management Local Economy Debt Profile Financial Performance

54 Ratings Standard Moody's & Poor's Fitch Highest Aaa AAA AAA City of Rochester Aa1 AA+ AA+ City of St. Cloud Aa2 AA AA City of Columbia Heights Aa3 AA- AA- City of Eyota A1 A+ A+ City of St. James A2 A A City of Twin Valley A3 A- A- Baa1 Baa+ Baa+ Baa2 Baa Baa Investment Grade Baa3 Baa- Baa- City of Detroit, MI B1 City of Detroit, MI B2 City of Detroit, MI B3 City of Detroit, MI

55 Security Type Debt must be secured by something Two main types of security pledges: General Obligation (G.O.): irrevocable pledge to levy property taxes for payment of debt service Revenue: secured by specified revenue source (Non G.O.) such as utility system, lease payments, assessments, tax Increment, etc. G.O. pledge considered the strongest = lowest interest rates

56 Sources of Financing Variety of borrowing options: 1. Bonds sold in commercial market 2. Bank financing or private placement (small issues, equipment) 3. State Public Facilities Authority (PFA) infrastructure programs: Clean Water Revolving Fund (wastewater), Drinking Water Revolving Fund (water), Transportation Revolving Loan Fund 4. USDA Rural Development Loan Program Each option has pros and cons

57 Choosing a Method of Sale Two primary options available for bringing a debt issue to market: 1. Competitive offering: Terms and conditions of debt are pre-determined and bids are solicited 2. Negotiated offering: Issuer selects a firm to underwrite and market the transaction in advance of the sale

58 Bid Example

59 emma.msrb.org

60 Property Taxes & Value Overview of property tax process Key terms to know How does it work and who does what? Timeline of events Common questions on the process Resources to help

63 Property Taxes & Values Key Terms Market value how much a property is worth for property tax purposes Class rate portion of a property s market value that is taxable. This is NOT the tax rate. Tax capacity the dollar value of the taxable portion of a property value Levy (verb) to collect property taxes (noun) the dollars collected in property taxes Tax rate the rate applied to the taxable portion to generate taxes Tax capacity taxes most property taxes are calculated based on tax capacity of a parcel Market value taxes some property taxes are calculated based on market value (e.g. school referenda) LGA: local government aid the revenue sharing program administered by the state; funding comes from state general fund and goes to roughly 750 cities

64 Property Taxes & Values A Multi-Year Process 2. Budgeting/the levy (year one) 1. Assessment/valuation (year one) 3. Estimated tax bills/ budget hearings (year one) 5. Taxes paid (year two) 4. Tax bills (year two)

65 Sample Property Tax Calculation 1 Determine the property s estimated market value $200,000 2 Determine the property s homestead market value exclusion $19,200 3 Determine the property s taxable market value $200,000 - $19,200 = $180,800 4 Determine the class rate based on property type Residential homestead: 1.0% 5 Multiply taxable market value by class rate to obtain the net tax capacity $180,800 x 1.0% - $1,808 6 Determine the total local tax rate by summing the tax rates of all jurisdications authorized to levy property taxes upon the property 7 Multiply net tax capacity by total tax rate to determine the net tax capacity - based tax 8 Determine the total market value tax rate by summing the market value tax rate for all taxing jurisdictions authorized to levy property taxes upon the property County: 45% City/town 35% School District 25% Special Districts 5% Total 110% $1,808 x 110% = $1,989 County: 0.00% City/town 0.00% School District.15% Special Districts 0.00% Total.15% 9 Multiply estimated market value by total market value tax rate to determine the market value-based tax $200,000 x 0.15% = $ Add the net tax capacity-based tax to the market value-based tax $1,989 + $300 = $2,289

66 What is a property worth? Valuation or assessment Sales data Property information records Property use Appeals process Who does the Assessing for our City? Do we use the Open Book process or do we have a Board of Equalization and Appeals?

67 Market Value vs. Tax Capacity Market Value 2017 Tax Capacity 2017

68 Property Taxes & Values Common Questions Spring of Year 1: What key property tax events can property owners anticipate? Homeowners disagree with the valuation of their home. Do they have any recourse? How does the legislature affect the property tax system? Fall of Year 1: What are some of the factors city councils are likely wrestling with this year when setting the levy? Are final levies usually lower or higher than the preliminary levy? How are decisions different if the city doesn t get any LGA? Do homeowners and other property owners have a chance to weigh in on the city s levy decision? Spring of Year 2: Why are the taxes going up for some properties and down for others in the same city? If the city increases the levy, does everyone s taxes go up? Why are the taxes owed different from the estimates sent last fall?

69 What makes my property tax bill change from year to year? a. My property s value b. My neighbor s property value c. My city council, my county board, and my school board d. The state legislature e. All of the above

70 Help with paying property taxes Homestead Credit Refund (aka circuit breaker) Renter s Property Tax Refund (aka renter s credit) Targeting property tax relief

71 Resources lmc.org 101 series on property tax system, LGA, and other fiscal issues; property tax calculator; property tax data tables (rates and levies for all cities) house.leg.state.mn.us Classification rates, analyses of property tax system changes taxes.state.mn.us LGA amounts; forms and FAQ documents Rachel Walker,

72 Questions? Dave Callister, City Manager City of Plymouth

AUDITED FINANCIAL STATEMENTS

VILLAGE OF JACKSON AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2016 James R. Frechette CERTIFIED PUBLIC ACCOUNTANT TABLE OF CONTENTS Table of Contents Page Independent Auditor s Report 1-2 Basic Financial