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Home My WebLink AboutItem 03Memorandum To: Mayor and City Council From: Steve Mielke, City Administrator Dennis Feller, Finance Director Date: August 28, 2013 Subject: Budget Financial Management Foundations ✓ Balanced Operating Budget ✓ Fund Balance Policy ✓ Long Term Property Tax Plan ✓ Levy Limit Management ✓ Appropriation of General Fund Unencumbered Balances ✓ Use of Liquor Fund Balances ✓ Asset Management ✓ Debt Management - Street Reconstruction ✓ Equipment Financing ✓ Infrastructure Replacement ✓ Facility Major Maintenance A discussion of each of the financial management foundations is attached. 3 City of Lakeville The proposed budget and tax levy are established on financial management foundations. The financial management foundations include but not limited to... Fund Balance Policy Office of State Auditor recommends a fund balance of 35 - 50% of expenditures PROPOSED Revenues equal to or exceed expenditures for operations Reduce fund balance to 40% of expenditures Current stable economic conditions enable the reduction of fund balance to 40 %. Balance is adequate and sufficient to address volatility in the economy and unforeseen major events. ALTERNATIVE Expenditures exceed revenues. Use of prior years unencumbered fund balances to reduce tax levy. May be more challenging to finance future budgets depending on nature of expenditures and revenue sources. ALTERNATIVE A I Reduce fund balance to 35% of expenditures * Reduced ability to react to crisis or significant economic changes * Credit rating agency concerns ALTERNATIVE B 1 Increase fund balance to 45 - 50% levels. * Requires a tax levy increase for current and future equipment and facility needs * Provides continued long -term operations stability for the future Balanced Operating Budget PROPOSED Revenues equal to or exceed expenditures for operations > Sound financial structure for short -term and long -term financial management > Favorable public communications of financial management ALTERNATIVE Expenditures exceed revenues. Use of prior years unencumbered fund balances to reduce tax levy. May be more challenging to finance future budgets depending on nature of expenditures and revenue sources. 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective i 1 Outcomes Page 1 Levy Limit Management PROPOSED Historically, levies for debt payments are exempt from State mandated levy limits. Therefore, appropriate Liquor Fund contributions and unencumbered balances to expenditures historically exempt from levy limits. Provide protection for financing future operations in the event levy limits are re- imposed by the Legislature. ALTERNATIVE I Appropriate tax levy consistently to same functions from year to year. > User friendly - easy to understand communications to demonstrate public purpose use of funds > Risk of loss of potential future levy authority or flexibility to finance operations. Long -term Property Tax Plan PROPOSED Appropriate Liquor Fund contributions and unencumbered balances to non - operating funds in such a manner as to result in long -term stability Long -term stable tax levies ALTERNATIVE I Appropriate Liquor Fund contributions and unencumbered balances to reduce short - term tax levies > Short term...Lower property taxes > Long term...Higher property taxes 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective 1 Outcomes i Page 2 Use of General Fund Unencumbered Fund Balance PROPOSED Appropriate unencumbered balances * $1.8 million to Equipment Fund * $590,000 to Building Fund * $45,000 for Emerald Ash Borer to purposes which achieve long -term tax objectives Equipment Fund and Building Fund Tax levy adjusted to reflect a 5 year amortization. Long -term budget objectives a) Establish stable future property tax levies for equipment acquisitions and replacements as well as facility major maintenance b) Avoid future tax fluctuations for equipment acquisitions and replacements and /or facility major maintenance c) Avoidance of debt /interest costs - hence, avoidance of future tax levy increase for interest expense d) Begin preparation for arrival of Emerald Ash Borer ALTERNATIVE A Appropriate Unencumbered balances to short- term property tax reductions - large property tax (or other revenue sources) in future years. a) Lower probability of stable future property tax levies for facility major maintenance, equipment replacement and acquisitions b) Increased probability of tax increases and /or fluctuations for facilities and equipment c) Higher probability of debt /interest costs d) Less funds available to react to the arrival of Emerald Ash Borer 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective i i Outcomes i Page 3 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective i i Outcomes i ALTERNATIVE B Appropriate Unencumbered balances to short - term property tax reductions - Reduce equipment and /or building maintenance expenditures. a) Higher equipment and facility maintenance costs due to aging assets. b) Lower probability of stable future property tax levies for facilities and equipment c) Increased probability of tax fluctuations for equipment and facilities d) Higher probability of debt /interest costs - hence increase future tax levies for interest e) Less funds available to react to the arrival of Emerald Ash Borer Page 4 Use of Liquor Fund Balances PROPOSED $1.3 million per year allocated to finance public purpose expenditures Reduces tax levies - primarily related to equipment acquisitions and replacements ALTERNATIVE A Appropriate to General Fund - rather than Equipment Fund * Reduces tax levy for operations * Increases tax levy (or fees) for equipment ALTERNATIVE B Appropriate tax levy to investment in future Liquor store projects * Increases tax levy (or fees) for equipment * Reduces future debt service requirements for liquor expansion and increases the probability of higher future net income 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective i i Outcomes i Page 5 Asset Management PROPOSED Equipment replacement based on expected useful life of asset. Replace assets based on need and cost effectiveness. > Maximize return on investment > Minimize tax levies and expenditures for asset replacement. > Cost effective asset maintenance. ALTERNATIVE Extend asset replacement schedule > Increased maintenance cost > Risk of reduced service during periods when asset is out of service due to equipment failure or maintenance 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS 1 Objective i i Outcomes i Page 6 Debt Management - Street Reconstruction PROPOSED Debt repaid with property taxes - for street reconstruction - amortized over a 13 year period (rather than 10 year period) to accommodate expanded street reconstruction program. No change in annual tax levy ALTERNATIVE A Shorten the term of debt repaid with taxes. > Reduced interest costs and hence long -term property taxes > Increased annual tax levy...short -term > Lower per capita debt long -term > Lower per capita taxes long -term ALTERNATIVE B Lengthen the term of debt repaid with taxes. > Increased interest costs and hence long- term property taxes > Reduced annual tax levy ...short -term > Higher per capita debt long -term > Higher per capita taxes long -term 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS Objective Outcomes Page 7 Equipment Financing PROPOSED Equipment acquisition and replacement financed with (a) Liquor Fund contributions (b) unencumbered fund balances (c.) modest property tax levy increases (d) other revenues such as sale of assets. > Least expensive method of financing using property taxes > Avoid of severe property tax fluctuations. ALTERNATIVE A 1 Issue General Obligation Debt > Exempt from levy limits > Lower short term property tax levies because repayment is deferred until future years > Higher Tong -term tax levies due to interest costs ALTERNATIVE B Lease > NOT Exempt from levy limits > Lower short term property tax levy because repayment is deferred to future years > Higher Tong -term property tax levies due to interest costs 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective i i Outcomes i Page 8 Infrastructure Replacement PROPOSED To establish a long term financial plan for major maintenance and replacement of park facilities, playgrounds and trails. The last tax levy for Park Bonds is in 2014. (a) The 2015 budget and tax levy propose that a tax levy equal to the prior levy for Park Bonds be established and appropriated to a newly created Park Capital Reserve Fund. (b) Modest increase in tax levy for trails to achieve a balance between revenues and expense > Stable property tax levies > Long term replacement of park assets. ALTERNATIVE A Reduce tax levy in 2015 > Lower taxes > No long term plan for maintenance or replacement of Park assets. ALTERNATIVE B Appropriate the levy to other purposes > No long term plan for maintenance or replacement of Park assets. 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective i i Outcomes i Page 9 2014 - 2015 BUDGET FINANCIAL MANAGEMENT FOUNDATIONS i Objective i i Facility Major Maintenance 1 PROPOSED The council has directed that facility major maintenance (such as City Hall, Police Station and Central Maintenance) be financed with one -time revenues such as sale of land and unencumbered General Fund balance. > No tax levies for facility major maintenance for the next five years. > There is uncertainty as to whether or not the one- time revenues will be available beyond the five year period. Therefore, it is anticipated that property taxes will be needed in future years to annually finance the quarter of a million of expenses in 2019 or thereafter. ALTERNATIVE A Implement a plan for of gradual property tax increases over the next 6 - 7 years. Gradual tax increases over an extended period of time are generally more acceptable to tax payers then erratic or large property tax increases. Page 10 i Outcomes