Budgeting and Financial Responsibilities for Elected Officials Presented by Gregory S. Allison UNC School of Government
Purpose of Presentation Identify the role elected officials must play in the budget process Timelines Capital planning Capital finance The role of fund balance
Purpose (cont.) Overview of the Local Government Commission Brief history Responsibilities Communication with local governments Requirements for the annual audit Internal controls
What is the Local Government Budget and Fiscal Control Act? State legislation that contains the fiscal requirements in which local officials must follow in regard to the multiple aspects of public budgeting and financial management (Chapter 159).
Fiscal Requirements from LGBFCA For counties with the manager form of government, the county manager shall be the budget officer The budget officer shall submit a proposed balanced budget to the governing board. In each year of a revaluation, the budget officer shall include a revenue-neutral tax rate in the budget for comparison purposes.
Budget Preparation and Enactment The statutory budget calendar is budget requests to budget officer by April 30; proposed budget to governing board no later than June 1; and adopted budget ordinance on or before July 1. Counties are required by law to adopt a balanced budget ordinance, where the sum of estimated net revenues plus appropriated fund balance equals appropriations.
Budget Timelines Presentation to the Board and notice of availability for public inspection Public hearing must be held before budget may be adopted 10 days must pass at least before budget may be adopted Public hearing may occur at any time during the 10 days Often, the public hearing is held immediately before the budget is adopted (even if amendments are made)
Significant County Revenues Property tax Valuation is county responsibility and is established by January 1 for the following fiscal year. Tax levy = (assessed value / 100) x tax rate. The estimated percentage of collection for property taxes, which cannot exceed the current collection percentage, is multiplied by the tax levy to determine the revenue estimate for balancing the budget.
Significant County Revenues (cont.) Sales tax County levy that is collected by state. All counties levy a 2.0 percent sales tax 1.5 percent is returned to county on point of delivery and 0.5 percent on per capita basis. County shares with municipalities based on per capita or ad valorem formula.
Significant County Expenditures by Function Education Human services Public safety Debt service General government
Balanced Budget Formula Estimated Revenues + Appropriated Fund Balance = Appropriations
What is Fund Balance? Fund balance is the financial equity of a fund Assets Liabilities = Fund Balance Fund balance represents potential spendable equity
Why Do We Care About Fund Balance Levels? Working capital Emergencies Source of capital financing Bond rating Balancing the budget
Governmental Fund Equity
5 Components of Fund Balance Nonspendable Restricted Committed Assigned Degrees of Spendability Unassigned
Governmental Fund Equity 1. Nonspendable
Nonspendable Fund Balance Represents portion of fund balance that is physically or legally in a nonspendable form: Inventory Prepaid assets Long-term note receivable Principal of a permanent fund (legally nonspendable)
Governmental Fund Equity 1. Nonspendable 2. Restricted
Restricted Fund Balance Portion of fund balance that is restricted in purpose of use by the provider OR legally restricted by statute or enabling legislation Grants Shared resources limited by provider Taxes restricted for particular purpose Stabilization by State Statute (unique to NC)
Governmental Fund Equity 1. Nonspendable 2. Restricted 3. Committed
Committed Fund Balance Portion of fund balance committed for a particular purpose by the governing board Only the highest level of authority may commit Must be most binding formal action (e.g., ordinance typically) Equivalent formal action required to undo the commitment Must be enacted by the fiscal year end
Governmental Fund Equity 1. Nonspendable 2. Restricted 3. Committed 4. Assigned
Assigned Fund Balance Portion of fund balance assigned for a particular purpose by either the governing board or appointed upper management May be created formally or informally Does not require any action to undo Management must be formally given authority Serves as the default position for all governmental funds except the general fund (if the remainder is a positive amount)
Governmental Fund Equity 1. Nonspendable 2. Restricted 3. Committed 4. Assigned 5. Unassigned
Unassigned Fund Balance Portion of fund balance remaining after all other categories have been determined May be a positive or negative amount for the general fund May only be used for other governmental funds if the remaining amount after other classifications is negative
What is appropriable Fund Balance? Fund balance available for appropriation equals cash and investments minus the sum of liabilities, encumbrances, and deferred revenues arising from cash receipts.
Components of Fund Balance Available for Appropriation Fund Balance Available for Appropriation - G.S. 159-8(a) Unrestricted Cash and Investments $ 440,748 Restricted cash and investments (This would normally include Powell Bill, Bond Proceeds, consolidated funds such as capital reserve funds or tax revaluation funds) 34,537 Less: Liabilities excluding those to be paid from restricted cash 112,129 Liabilities to be paid from restricted cash not included above --- Encumbrances at June 30 (listed in the notes) 10,450 Deferred or Unearned Revenues Arising from Cash Receipts 15,502 Fund Balance Available for Appropriation $ 337,204
Stabilization by State Statute Fund Balance Available for Appropriation $ 337,204 Total Fund Balance (From Audited Financial Statements) 441,828 Total Restricted by State Statute $ 104,624 Restricted by State Statute Presented on Financial Statements Less Non Spendable - Inventory 1,245 Non Spendable - Prepaids --- Other Non Spendable amounts --- Restricted - Stabilization by State Statute (LGC calculation) $ 103,379
LGC Percentage Fund Balance Available for Appropriation $ 337,204 Expenditures - General Fund Total Expenditures - General Fund.... $ 1,849,144 Adjustments Transfers Out....... 305,800 Issuance of Capital Leases & Installment Purchases..... 19,000 Total Expenditures (As Adjusted).... $ 2,135,944 Fund Balance Available as % of Expenditures... 15.79 %
Average Fund Balance Levels Counties carry significant general fund balances. 10 percent to 25 percent of expenditures for large counties. 30 percent or more of expenditures for small counties.
What are Fund Balance Policies? Local governments should adopt by resolution a fund balance policy that clearly states its percentage threshold. Local Government Commission (LGC) recommends that fund balance should be at least 8 percent of general fund expenditures.
Economic vs. Financial Perspectives Assets Liabilities = Equity Economic equity represents all assets and all liabilities Business perspective; likewise for proprietary funds and government-wide picture Such equity referred to as net position Financial equity represents financial assets and current liabilities Unique perspective of the governmental funds Such equity referred to as fund balance
Net Position Equity used for proprietary funds (e.g., water, wastewater, electric) Equity position of the government-wide financial statements Net position does not reflect liquidity Represents an economic equity Net investment in capital assets Restricted net position Unrestricted net position
Who is the Local Government Commission (LGC)? The LGC, which is a division of the Department of State Treasurer, provides state oversight of North Carolina local finance.
The Local Government Commission Nine members Chaired by State Treasurer Staff to the Commission are employees of the Department of State Treasurer Other members State Auditor Secretary of State Secretary of Revenue 35
The Local Government Commission (continued) Five appointed members One appointed member must be a current or former city council member and one must be a current or former county commissioner Statutory authority for the Commission can be found in G.S. Chapter 159 36
How did the Depression play a role? Many county versus municipal services were realigned Local Government Commission was created to provide temporary oversight for local governments to get back on their feet Role has evolved to statutory oversight (the State looking out for its subdivisions)
Local Government Commission Staff Three sections of the staff Fiscal Management Debt Management North Carolina Capital Facilities Financing Agency 38
Local Government Commission Staff (continued) Fiscal Management Section-monitors the financial condition of local governments and public authorities - approximately 1,200 units Reviews audit reports of units Issues audit and policy manuals used by units and CPAs Assists units with financial difficulties 39
Local Government Commission Staff (continued) Provides technical assistance to units on accounting and financial reporting Monitors secondary market disclosure requirements Prepares financial section of official statements for general obligation bond issues 40
Local Government Commission Staff (continued) Debt Management Section reviews and monitors the sale and repayment of debt: Provides technical assistance to units in capital planning and debt management Recommends approval of sales based upon fiscal practices, compliance with General Statutes and feasibility studies or projections of operations Sells debt for the State and local governments, Informs units of annual debt service requirements Monitors the repayment of the debt 41
Local Government Commission Staff (continued) NC Capital Facilities Financing Agency Issues debt for capital needs of private universities 42
History of the LGC Much pain in NC due to the boom period after WWI Debt increased 700% Legitimate needs for roads & schools Lack of statutory control By 1931, Great Depression hit NC hard 43
History of the LGC (continued) Over 200 bank failures by the mid 30s Counties responded by slashing budgets By 1933, many governments in default 62 counties 152 municipalities 200 special tax districts 44
History of the LGC (continued) 1931-33 Session of the General Assembly determined that: State will be responsible for roads, schools, and prisons Income tax increased, sales tax passed to generate revenue To assist local governments the Local Government Commission was created 45
History of the LGC (continued) LGC given authority to: Review, approve, and conduct sales of all proposed bond issues by local governments Mandate the enforcement of sinking fund requirements Directly intercede with operations of a unit of government if need exists 46
History of the LGC (continued) Have taken control of a NC government 4 times in its history Not the preferred way of helping governments If LGC takes control, someone on the staff becomes the finance officer of the government 47
History of the LGC (continued) Other changes that came from the 1931-33 Session: Each unit of government required to have finance officer Uniform budgeting/bookkeeping Calendar/schedule developed with deadlines Fiscal code developed (chart of accounts) 48
History of the LGC (continued) Results: By 1946, local government debt reduced from $350 million to $241 million War was over and economy was good Revenues increased due to increasing property values 49
History of the LGC (continued) Today, the LGC is still the only agency of its kind in the US Contacted regularly by other states and by GASB and GFOA for our thoughts and current practices 50
Communications with Elected Officials Statutes charge the staff of the LGC with oversight responsibility and approval of most debt issued by local governments Analyze audit data to measure fiscal health of each entity What data is key?
Communications with Elected Officials Fund balance available statutes dictate formula Budgetary compliance Liquidity measures in enterprise funds Internal control issues and other findings Other statutory compliance issues
Communications with Elected Officials Results of an annual analysis may result in unit letter to elected officials Written documentation of concerns sent to elected officials Reponses should be made within 45 days Critical when debt is being issued
Communications with Elected Officials How should responses be? Prompt Thorough, addressing each item discussed in the letter Planned action as applicable
Communications with Elected Officials SLGFD staff may contact elected officials for follow up Staff also may offer to visit unit Often most effective if unit has internal control challenges Not punitive If debt issuance is pending, may ask officials to come to LGC offices to meet May suggest attendance at an LGC meeting when an issue is up for consideration
Capital Planning and Budgeting Local governments often use a separate process, known as capital budgeting, for acquiring major capital assets. When the capital budget includes a multiyear forecast (5 years) of capital needs, it becomes a capital improvement program. Predetermined criteria are commonly used to make decisions regarding capital asset acquisitions (mandate, public safety, etc.)
Capital Financing Options Pay-as-you-go financing Annual budget Fund balance Capital reserve fund (G.S. 159-18)
Capital Financing Options (cont.) General obligation bonds: secured by taxing power and requires voter referendum. Commonly used for major infrastructure projects. Revenue bonds: secured by net revenues of self-supporting enterprise and commonly used for water and sewer projects.
Capital Financing Options (cont.) Project development bonds: secured by the revenues generated from the tax increment created from public and private development in a project development financing district. Installment purchase financing: secured by property financed. Commonly used for infrastructure projects and large equipment.
Capital Reserve Funds Capital budgeting tool available to local governments in NC G.S. 159-18 thru 159-22 May used for any purpose for which a local government may issue bonds
Capital Reserve Funds (cont.) May be established by ordinance or resolution by the governing board Purpose(s) for fund Approximate time periods in which monies are to be accumulated for each purpose Approximate amounts to be spent for each purpose Sources of the funds
Capital Reserve Funds (cont.) Amendments may be made and purposes changed However, the purpose MUST remain some type of capital purpose Future boards may not undo Withdrawals must be authorized by a resolution or ordinance
Financial Reporting and the Annual Audit Purpose of an audit is to ensure that financial statements report the financial position of a local government in accordance with generally accepted accounted principles (GAAP)
Local Government Financial Reporting in NC NC state law requires adherence to generally accepted accounting principles (GAAP) for annual external financial reporting GAAP represents national standardized reporting Necessary for participation in debt market and grant environment All local governments and public authorities, regardless of size, must adhere to requirement
Financial Reporting (cont.) Other quick facts Reports are due to the Local Government Commission no later than October 31 st Audits must be conducted by an independent certified public accountant, chosen by the entity s governing board Financial statements present both an economic picture of the organization, as well as a financial picture
What is an audit? (cont.) Unmodified ( clean ) audit opinion required Formerly referred to as unqualified If such opinion cannot be reached, entity required to correct issue(s) Can impact debt issuances, etc. Auditors cannot audit their own work Presumption is that if financial statements follow GAAP, then financial condition will be evident
What is an audit? (cont.) Auditing standards have greatly tightened up on the relationship between auditor and client Many governments receive findings that they have a weakness because staff cannot prepare their own financial statements Auditors can propose entries and financial reporting options, but decisions may only be made by the entity s management
Products of an Audit Ask for a review a management letter! Auditing standards require one must be provided Identifies areas where weaknesses may be detected, procedures could be improved for efficiencies, concerns regarding management cooperation could be communicated All items are expected to be addressed by management prior to the next audit cycle
Internal Controls What do we mean by internal controls? as defined in accounting and auditing, is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies
Internal Controls A business practice, policy or procedure that is established within an organization to create value or minimize risk A series of business processes, practices and policies that, when followed, ensure that no one person controls a transaction from beginning to end
Internal Controls Good internal control goes beyond segregation of duties Important but not the only concern Collusion will circumvent even the strongest system of internal control Tone at the top
Internal Controls But I trust my employees! Trust but verify Professional skepticism Good internal controls are designed to catch human errors in addition to fraud Auditors must test internal controls, but that is not foolproof
Internal Controls Why should elected officials be concerned? LGBCFA states that Each local government or public authority shall establish and maintain an accounting system designed to show in detail its assets, liabilities, equities, revenues, and expenditures. The system shall also be designed to show appropriations and estimated revenues as established in the budget ordinance and each project ordinance as originally adopted and subsequently amended. ( 159-26)
Internal Controls As elected officials, you are ultimately responsible for the accounting system in your unit of government
Internal Controls What can you do? Tone at the top Staffing and training Be a part of the solution Roles that board members can play in maintaining effective internal controls Use annual audit as a learning experience, not as a burden
Internal Controls Memos #568 - Internal Controls #569 - Internal Controls in Small Governments
Internal Controls Signs that you have internal control weaknesses: Material errors in financial records that go undetected until the audit Records that are not ready to be audited in a timely manner Unit is paying penalties and/or interest on payroll liabilities or accounts payable
Internal Controls Material budget overexpenditures on a regular basis Lack of cross-training among staff Sensitive documents are easily accessible Check stock Passwords Personal data
OPPORTUNITY is the single biggest reason that frauds occur in any sector!!
Internal Controls Signs of potential fraud Staff member that works unsupervised much or most of the time Staff member that refuses to take leave Staff member that insists on getting mail Staff member that begins living beyond their means
Internal Controls Where is your exposure? Credit cards and p-cards Petty cash Cash deposits Personal use of unit assets Using unit assets to satisfy personal expenses or debts
Internal Controls Establish strong written policies over use of Credit cards and p-cards Town owned assets vehicles and electronics Establish strong operational policies over cash receipts, disbursements, petty cash and account reconciliations Work with accounting software vendor to strengthen system controls Have staff sign policies as applicable
Internal Controls Look for abnormalities in data Require monthly reports from finance and ask questions! Require auditor make a formal presentation of the audit in open board meeting and ask questions! Utilize unit attorney Check with SLGFD and SOG staff
Internal Controls What do we do if we suspect fraud? Are we required to call in the authorities? What is the exposure for elected officials?
Questions? Greg Allison (919) 966-3846 allison@sog.unc.edu