Democracy on the Front Lines
City Administrators Blog
February 20, 2009
It is budget time again. Staff has been working on the FY2009-10 annual budget since mid-January, and we are in the process of presenting the budget to the City Council committees. Due to the severe downturn in the economy, next year’s operating budget is substantially lower than this year’s, both in operations and capital.
As I have mentioned several times over the past year, tax revenues have been significantly below our budget estimates and we have been making a series of cuts to stay in line with the downward trend. The budget was cut by 5% in August, including one layoff and a general hiring freeze. Additional cuts were made in December.
So far, our revenues are 6% below budget estimates and our expenses are 8% below the budget. We just received February’s sales tax numbers and our revenues were $44,000 less than the same month last year and were the lowest in four years. The ½-cent sales tax also was down significantly. We are too late in the year to make up the difference in the budget, but we will continue to watch our expenses through the end of our fiscal year.
Into this uncertain environment we enter deliberations for next year’s budget beginning May 1, 2009. It is difficult to develop estimates for this budget. We thought our revenue projections were conservative last year, but obviously we were not conservative enough. Where will the economy go this year? Some experts predict that the economy will recover in late 2009 or early 2010, but recent market reports seem to indicate that things are getting worse.
Before getting into the City’s revenues and expenses, I would like to explain how the budget is structured. We often get questions and comments about how we should move money from one to place to another or why we need to increase one fee for one account when we have plenty of money in a different account. Answering these kinds of questions first will help when we discuss proposed expenses. So here is Municipal Budgeting 101.
For accounting purposes, the City is not treated as one large organization. Instead, it is viewed as a collection of accounting units known as funds. Each fund has its own set of accounts that are used to keep track of specific monies that are to be used for specific purposes. State and local laws, grant agreements, and financing agreements frequently restrict the way monies can be spent. The City has five major fund types: General Fund, Special Revenue Funds, Debt Service Fund, Capital Improvement Fund, and Enterprise Funds.
The General Fund is the main fund of the City. It is used to account for monies that are not set aside for specific purposes in other funds. Salaries, operating expenses, and equipment purchases are supported by General Fund monies for Administration, Finance, Planning and Zoning, Engineering, Street, Police, and Cemetery.
Special Revenue Funds are used to account for monies that are legally restricted to spend for specific purposes. The City’s special revenue funds can be divided into two categories: those established by City Council and those resulting from voter approval of taxes to be used for a specific use. The only Special Revenue Fund established by voters is the 1/2-cent sales tax for Proposition S approved in 2001 to improve streets, sidewalks, and stormwater. Special Revenue Funds established by Council include:
- Fire: Supported by a special property tax used to operate the O’Fallon Volunteer Fire Department. The department is part of a regional unit that includes Shiloh and the surrounding rural area.
- EMS: Supported by a special property tax and user fees to operate emergency medical services for the same general area as the fire department.
- Library: Supported by a special property tax and user fees to operate the O’Fallon Public Library.
- Parks and Recreation: Supported by a special property tax, utility tax, user fees, rental revenues and some General Fund revenues to operate the parks, pool and various recreation programs.
- Hotel/Motel: 5% tax to promote tourism in O’Fallon. This tax also is being used to pay the bonds for the Family Sports Park.
- Tax Increment Financing District: Funded by tax increment in the TIF area at the Scott-Troy Road/Hwy. 50/I-64 interchange.
- Telecommunications Tax: 5% tax increased from 1% in 2006 to purchase part of the Family Sports Park and assist in park development.
- Food Beverage Tax: 1% tax on food and beverages consumed on premises, used to build the $6 million Regency Conference Center.
The Debt Service Fund accounts for the accumulation of monies specifically identified to be used to repay principal and interest on City general long-term debt. Sources of revenue specifically identified to be used to repay debt from this fund include general fund revenue, special purpose sales taxes, special purpose property taxes, special assessments, and hotel/motel taxes. Projects currently using this fund include Sewer (plant upgrades), Water (meter upgrades), Library, Utility Tax (for the Public Safety Facility), and Proposition S (for street paving and concrete improvements), Hotel/Motel Tax (Family Sports Park), and Food Beverage Tax (Conference Center).
The Capital Improvement Fund accounts for the accumulation of monies specifically identified to be used for capital improvements other than enterprise funds. Projects currently using this fund include Public Works, Proposition S, and Parks.
Enterprise Funds are used to account for services that are supported totally or by the users through fees. The City’s Enterprise Funds include its water and sewer operations. No tax money is used to fund these operations.
When developing a budget for these various funds we have to pay close attention to the difference between reoccurring proceeds (revenue) and non-reoccurring proceeds (money). Revenue is like income, and comes primarily from taxes, be they sales, property, utility, or hotel/motel. Revenue also comes from user fees such as water and sewer rates. It is constant and dependable, normally changing only slightly year to year and month to month. Operating budgets are made with revenue such as salaries, benefits, supplies, utilities, etc.
Money is one-time funding that become available for use, often for special purposes. For an individual, money would be equivalent to a year-end bonus, a royalty check, or an IRS refund. Money includes such things as grants, loans, bond proceeds, annexation fees, penalties, donations, tap fees, permit fees, etc.
The key is that non-reoccuring proceeds are one-time and therefore cannot be counted on month to month or year to year. Money is used to fund special projects, capital programs, defray the cost of special services (e.g., plan review or inspection), and defray the cost of the impact of new developments. Subsequently, money cannot be used for general ongoing operations.
A good example of “money” is the $1.6 million bequest to the O’Fallon Public Library from former Library Board Member Vernon Ohlendorf. While there are no specific requirements on how the library can spend the money, the Library Board wisely decided the bequest should be spent on capital improvements for the building and not for operating expenses.
Therefore, our Budget Formula looks like this:
Reoccurring Revenue(sales tax, property tax, etc.)
- Less -
(personnel and operating expenses)
= Equal =
Money Available for One Time Costs
(vehicles, operating equipment,
and other one-time projects)
Now knowing this, we can answer questions such as: Why can’t we take funds from the Hotel/Motel Tax to pay for general water system improvements? You will know that we cannot do this for two reasons:
(1) Hotel/Motel Tax money is restricted for tourism purposes only.
(2) The Water Fund is funded solely through user fees.
Likewise, some people have suggested that we use Vernon Ohlendorf’s $1.6 million bequest to balance the budget shortfall in the General Fund. Using the rules from Municipal Budgeting 101, there two reasons why this is not possible:
(1) The O’Fallon Public Library is a Special Revenue Fund with its own dedicated property tax. State law prohibits taking money from the Library to the General Fund. Moreover, Mr. Ohlenforf’s will calls for the money to be used exclusively for the Library and not other City operations.
(2) Mr. Ohlendorf’s bequest is non-reoccuring money and should be used for one-time expenses, such as capital improvements and equipment. The shortfall in the General Fund is due to a revenue decrease and is tied to recoccuring expenses.
This concludes the lesson. I will get into the actual budget in future blogs.