The Importance of Long-Term Financial Planning

Transcription

1 The Importance of Long-Term Financial Planning Presented by: Paige E. Sansone, CPA, UMBAUGH IACC Annual Conference December 2, 2015

2 Topics for Discussion Long-Term Financial Planning Possible Causes of Funding Shortfalls Circuit Breaker Tax Caps Managing Cash Flow Shortages and Budget Deficits Common Funds and Uses 2

3 Introduction Declining revenues and tax caps may significantly impact budgets Greater need to anticipate and identify budget deficits and cash flow shortages Long-term fiscal planning is key Fiscal projections are a necessary component of strong financial management 3

4 Long-Term Financial Planning 4

5 Long-Term Financial Planning Purpose Provides historical perspective Defines current financial position Forecast receipts and disbursements for the next 3 to 5 years Identifies potential funding gaps Outlines funding options Develops plan to manage uncertainties and anticipate future risk 5 5

6 Long-Term Financial Planning Intended Results Provides a baseline for future financial operations Develops a model that may be modified as different needs arise and as priorities change Provides a guide to preserve or improve current financial position Other considerations : Maintaining current service levels Revenue increases Spending reductions Utilization of cash reserves 6

7 Long-Term Financial Planning Possible Findings Strengths, weaknesses, opportunities, and threats Structural budget deficit annual expenditures exceed annual receipts Insufficient cash reserves to cover recurring expenditures Temporary cash flow shortages Continued use of cash reserves to fund operating costs 7

8 Long-Term Financial Planning Possible Findings Lack of funding for capital purchases and improvements Identification of other funding sources Budget savings opportunities Investment opportunities 8

9 Long-Term Financial Planning Benefits Allows time to prepare contingency plans when shortfalls or delays in revenues occur Contributes to better, more timely decision making and financial management Provides a tool to project fiscal impacts of major policy decisions Identifies the need to borrow money to purchase capital items to prevent future cash deficiency 9

10 Long-Term Financial Planning Development Analyze the financial results of the past two to three year to identify trends in revenues and expenditures that will aid in the development of future projections Determine whether past trends will continue. If not, what changes need to be incorporated into your projections? Include future estimates of circuit breaker tax credits 10

11 Long-Term Financial Planning Development Consider changes in property tax appeals or uncollectible taxes Adjust income tax allocations (CAGIT, COIT, EDIT, Public Safety LOIT) to reflect economic changes Include scheduled changes in personnel costs to reflect labor contracts or expected increases in health care costs Consider changes in utility costs, supply costs, liability insurance etc. 11

12 Long-Term Financial Planning Development Determine appropriate level of cash reserves for each fund Include major maintenance and capital expenditures Include changes in debt service obligations Identify future needs personnel, land, buildings, equipment, improvements, etc. Prepare a five-year capital improvement\replacement plan 12

13 Long-Term Financial Planning Development Identify available funding options New revenue sources Increase existing revenues Cost reductions Cost elimination Develop a plan to meet the goals and priorities of the County Continually monitor and update the plan as necessary 13

14 Possible Causes of Funding Shortfalls 14

15 Possible Causes of Funding Shortfalls Timing Issues (Temporary) Delayed tax rate certification and late mailing of tax bills Only two tax draws (June and December) Delinquencies (collection rates historically below 100%) Local Income Taxes Affected by economic downturns and changes in levies of other taxing units within the county Erroneous Assessed Values Certified net assessed value substantially different from previous year Net assessed value used to calculate tax bills much lower than certified net assessed value used to calculate tax rates 15

16 Other Possible Causes of Funding Shortfalls Taxpayer Refunds Due to erroneous assessed values Large number of assessment appeals settled in favor of the taxpayer Abatements not applied Structural Budget Deficit Annual disbursements exceed annual receipts Circuit Breaker Credits Reduction of property tax distribution 16

17 CIRCUIT BREAKER CREDITS How do they affect your budget? The Circuit Breaker is a tax cap that limits taxpayer liability If calculated tax liability exceeds cap, credit is applied to tax bill Percentage caps are based on property type Credits are a direct reduction of a taxing unit s property tax receipts Credits affect actual property tax distributions and have no affect on certified levies Very important Actual losses due to circuit breaker credits may not be determined until tax bills are calculated Tax rate increases may cause increases in circuit breaker credits 17

18 CIRCUIT BREAKER CREDITS All credits (tax caps) are applied to the gross assessed value Property Type Tax Cap Homesteads 1% Other residential property, agricultural land, and long-term care facilities All other real and personal property (commercial) 2% 3% 18

19 Circuit Breaker Example Taxing District #1 Taxing District #2 Taxing District #3 Property Type Residential HS Residential HS Residential HS Gross A.V. of Property $100,000 $100,000 $100,000 Circuit Breaker Tax Cap 1% 1% 1% Tax Cap $1,000 $1,000 $1,000 Net Assessed Value (after deductions) $32,750 $32,750 $32,750 Net District Tax Rate $ $ $ Calculated Tax Liability $509 $837 $1,164 Amount in excess of Tax Cap $0 $0 $164 19

20 How are Circuit Breaker Credits Distributed to Taxing Units? Circuit breaker credits are allocated to taxing units based on the percentage the taxing unit s tax rate is to the overall district tax rate. 20

21 Sample Taxing District Allocation of Taxing Unit Taxing Unit Rate % of Total Rate C.B. Credit County $ % $35 Township % 2 School % 49 Library % 4 Municipality % 66 Special District % 8 Total District Tax Rate $ % $164 In this example, the County would be allocated 21% of total circuit breaker credits. 21

22 Budgeting with Property Tax Caps Estimate loss of property taxes due to circuit breaker Monitor activity of other taxing units within the county tax rates, levy appeals, debt issuance Develop a plan to absorb circuit breaker losses Remember that DLGF certified budgets and levies do not include circuit breakers! 22

23 What s the difference between a temporary cash flow shortage and a structural budget deficit? 23

24 Cash Flow Shortage or Budget Deficit? Jan - Mar April - June July - Sept Oct - Dec Totals Receipts: Property Tax $ - $ - $ - $ 900,000 $ 900,000 Auto Excise, CVET, FIT ,000 90,000 CAGIT/CAGIT PTRC - 37,500-37,500 75,000 Other Misc. Revenues 13,500 13,500 13,500 13,500 54,000 Total Receipts 13,500 51,000 13,500 1,041,000 1,119,000 Disbursements: Personal Services 195, , , , ,300 Supplies 22,380 22,380 22,380 22,380 89,520 Other Services and Charges 55,950 55,950 55,950 55, ,800 Capital Outlays - - 8,952 13,428 22,380 Total Disbursements 274, , , ,583 1,119,000 Net Cash Flow (260,655) (223,155) (269,607) 753,417 - Beginning Cash 263,800 3,145 (220,010) (489,617) 263,800 Estimated Ending Cash $ 3,145 $ (220,010) $ (489,617) $ 263,800 $ 263,800 24

25 Cash Flow Shortage or Budget Deficit? Jan - Mar April - June July - Sept Oct - Dec Totals Receipts: Property Tax $ - $ - $ - $ 900,000 $ 900,000 Property Tax Shortfall (36,000) (36,000) Circuit Breaker Tax Credit (94,000) (94,000) Auto Excise, CVET, FIT ,000 90,000 CAGIT/CAGIT PTRC 37,500 37,500 75,000 Other Misc. Revenues 13,500 13,500 13,500 13,500 54,000 Total Receipts 13,500 51,000 13, , ,000 Disbursements: Personal Services 264, , , ,264 1,057,050 Supplies 22,375 22,375 22,375 22,375 89,500 Other Services and Charges 43,750 43,750 43,750 43, ,200 Capital Outlays , ,000 Total Disbursements 330, , , ,389 1,448,750 - Net Cash Flow (316,887) (279,387) (316,887) 450,611 (459,750) Beginning Cash 329,750 12,863 (266,524) (583,411) 329,750 - Estimated Ending Cash $ 12,863 $ (266,524) $ (583,411) $ (132,800) $ (130,000) 25

26 What is a balanced budget? 26

27 Budget Example A B C Funded (Not Balanced) Unfunded Budget Balanced Budget Receipts: Property taxes $ 2,533,800 $ 2,533,800 $ 2,533,800 CAGIT 1,274,500 1,274,500 1,274,500 Excise taxes 250, , ,000 Fines and fees 181, , ,800 Charges for services 660, , ,100 Miscellaneous receipts 54,300 54,300 54,300 Total Receipts 4,954,500 4,954,500 4,954,500 Disbursements: Personal services 4,388,600 4,188,600 3,988,600 Supplies 305, , ,700 Other services and charges 955, , ,200 Capital outlays 200,000 50,000 - Total Disbursements 5,850,000 5,500,000 4,954,500 Net Receipts/(Disbursements) (895,500) (545,500) - Beginning Cash and Investments 750, , ,000 Ending Cash and Investments $ (145,500) $ 204,500 $ 750,000 27

28 Anticipating Shortfalls Identify the causes that may affect your taxing unit Identify trends from historical activity Prepare monthly and long-term cash flow projections and continually monitor Understand the difference between a temporary cash flow shortage and a structural budget deficit 28

29 Financially Distressed Unit Possible Reasons Reliance on DLGF to make budget reductions Annual budgets did not match spending with receipts Dwindling cash reserves Significant losses due to circuit breaker credits No plans or procedures in place to manage cash flow shortages No long-term fiscal planning Ineffective communication 29

30 Managing Cash Flow Shortages and Budget Deficits 30

31 Managing Cash Flow Shortages Maintain Adequate Cash Reserves Temporary Borrowing from Other Funds Taxing units may temporarily borrow money from any fund The borrowed money must be repaid by the end of the current budget year or by June 30 of the ensuing budget year (if emergency declared by fiscal body) Tax Anticipation Warrants 1-year loan from a financial institution Borrowing against future tax draws Interest costs 31

32 Managing Cash Flow Shortages Defer Non-Essential Spending Example Capital Outlays Consider policy to delay non-essential spending until such time as property taxes revenues are fixed and measurable May be as late as December of each year Declare Inactive Funds Dormant Look for funds that are no longer in use that have existing balances. Funds can be declared dormant by the fiscal body and remaining balances may be transferred to the General Fund. 32

33 Managing Budget Deficits Reduction of Current Budget (Appropriations) Estimate realistic expenditures through year-end Formalize budget reductions with the passage of a Reduction of Appropriation resolution Discontinue Additional Appropriations Only request additional expenditures (appropriations) in extenuating circumstances. Determine if the additional expenditure can be deferred to a future period or funded by reducing an appropriation in another area. Stay informed about financial status Maintain accurate accounting records Prepare monthly cash flows Develop a long-term financial plan 33

34 Other Options for Managing Budget Deficits Temporary Solutions: Sell assets Use cash reserves in operating funds Pay operating costs out of Rainy Day and Riverboat funds Institute hiring/wage freezes Declare inactive funds dormant and transfer remaining balance to General Fund 34

35 Other Options for Managing Budget Deficits Long-Term Solutions: Increase or implement fines and fees Adopt local option income tax Increase CCD Fund rate to maximum allowed Consider modifying employee health plans (employer/employee contributions) Shift appropriations from financially distressed funds to those with cash surplus Bulk purchasing 35

36 Other Options for Managing Budget Deficits Long-Term Solutions: Consolidate service delivery with other units of government Obtain better returns on idle cash Offer early retirement Reduce hours of operation Outsource functions such as payroll and accounts payable Eliminate vacant positions 36

37 Common Funds and Uses 37

38 Fund Name Clerk Title IV-D #1 Fund Description and Uses Title IV-D incentive payments are distributed in equal shares to the County General Fund, the operating budget of the Prosecuting Attorney, and the operating budget of the Clerk of Circuit Court. Funds may be expended without appropriation for any purpose for which the operating budgets of the Prosecuting Attorney and the Clerk of Circuit Court may be properly used as long as that purpose is for Title IV-D program activities. Deputies and employees in the offices of the Prosecuting Attorney and the Clerk of the Circuit Court may be paid additional salary from this fund without prior approval of the County Council; however, the additional compensation must be paid as an increase in salary. Clerk's Record Perpetuation County Economic Development Income Tax (CEDIT) Receipts for this fund are generated from requests for access of public records and include the transmitting of documents by facsimile machine, document storage fees and late payment fees. This fund is to be appropriated and expended for the preservation of records and the improvement of record keeping systems and equipment. The receipts in this fund include the economic development income tax certified each year by the State. Current law allows this fund to be used for any lawful purpose and permits permanent transfers from this fund to the General Fund or any other appropriated fund. Cumulative Bridge Drainage Maintenance General This fund is used to accumulate funds for the purpose of construction, maintenance and repair of bridges, approaches and grade separation. The funds can also be used for making the County-wide bridge inspections and safety ratings for all bridges in the County that are not on the state highway system. This fund is used for the necessary or proper repair, maintenance, study, evaluation of the particular drain or combination of drains upon which the Drainage Board finds that it is necessary. The purpose of this fund is to pay for the management, maintenance, operating costs and other costs associated with providing County services. 38

39 Health Fund Name Fund Description and Uses This fund is used to appropriate money and allocate expenditures for the operation of official county board of health. Highway Local Road and Street Mental Health Plat Book Maintenance Probation User Fees Property Tax Assessment Appeals Prosecutor Title IV-D #1 This fund is used for construction and maintenance of streets and alleys. This fund is used for the construction and maintenance of local road and street systems, payment of principal and interest on bonds sold to finance road projects and the purchase and repair of highway equipment. This fund may not be used to pay salaries and benefits. This fund is used to provide treatment and rehabilitation services to those whose lives are disrupted by emotional struggles, substance abuse and dependency, behavioral difficulties and severe mental illness. This fund is used to provide funding sources for maintaining plat books and maps. Receipts for this fund include probation user fees paid when a person is convicted of a felony or misdemeanor. This fund may be appropriated only for the benefit of the courts of the County, and it may be used only to supplement probation services and to increase salaries for probation officers. This fund holds property tax receipts that are attributable to an increase in the taxing unit's tax rate caused by a reduction in the taxing unit's net assessed value. Money in this fund may be used only to pay expenses incurred by a a County Assessor in defending appeals with respect to property and taxpayer refunds. The balance in this fund may not exceed 5% of the amount budgeted by a taxing unit for a particular year. This fund receives State funding that has been converted from Federal IV-D program funds. The purpose of this fund is to pay for contracts with local prosecutors and child support enforcement offices. 39

40 Fund Name Public Safety LOIT Rainy Day Reassessment Recorder's Records Perpetuation Riverboat Statewide 911 Fund Description and Uses This fund receipts in the County's share of the Public Safety LOIT. This fund may be used for law enforcement systems, emergency ambulance services, environmental clean-up, probation programs, community corrections programs, juvenile detention centers and facilities, jail, communications systems or enhanced emergency telephone systems, medical and health care expenses for inmates, and pension payments for sheriff and other members that provide public safety services. This fund is used to support County operations and can be used for any legal purpose of the County upon approval of the County Council. This fund is used to accumulate receipts (primarily property tax) to provide funding for property assessments. Receipts for this fund are generated from charges for furnishing copies of records produced by a photographic process, for transmitting faxes, for duplicating a computer tape, a computer disk, an optical disk, microfilm or similar media and the supplemental fee for recording a document authorized by ordinance. The County Recorder may use money in this fund without appropriation for the preservation of records and the improvement of record keeping systems and equipment. This fund may be used for any legal or corporate purpose of the County. Money in the fund not currently needed to meet the obligations of the fund may be invested in the same manner as other public funds may be invested. Interest that accrues from the investments shall be deposited in the fund. This fund may be used for the lease, purchase, or maintenance of communications service equipment, necessary system hardware and software and data base equipment, personnel expenses the extent reasonable and necessary for the provision and maintenance of the statewide 911 system or a wireline enhanced emergency telephone system, and operational and other costs associated with E911 Surveyor's Corner Perpetuation This fund is used to maintain records of government corners, surveys, plats, maps and drainage records. 40

41 Summary Long-Term Financial Planning is the key to strong financial management A plan will help to identify funding deficits and available options to bridge funding gaps The plan can be used as a model that can be updated and modified has needs and priorities change 41 41

42 Questions? 42

43 Contact Information Paige E. Sansone, CPA UMBAUGH Indianapolis Office: (317)