2016/02/22 - Walter's Blog: What's in a Budget?

It is budget season again. Our fiscal year begins on May 1 and we are required by state law to operate under a balanced budget. We have been working on the FY2016-17 annual budget since mid-January, but anymore we seem to be in budget mode continuously all year round. While the economy has shown signs of life, next year’s operating budget is no-frills and status quo.

The City’s Management Team has prepared a proposed budget for City Council review. Beginning this week, Council committees will review the budget in detail and the City Council will approve the final budget in April. Click here to see a general overview of the proposed budget, here to see the Community Development budget, and here to see the Public Works budgets. The Parks and Public Safety budgets will be presented to committees on March 14.

While local revenue sources are improving and this budget does not contain any major cuts in programs or expenditures, the budget crisis in the state government has the potential to significantly affect this budget and the City’s services. Fifteen percent of our General Fund revenues come from the State Income Tax and it is unclear what will happen with the enduring state budget impasse. The state budget is still in disarray and if any reductions are made, the City Council will need to revisit this budget to consider additional spending cuts.

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 money 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 the General Fund for Administration, Finance, Planning and Zoning, Engineering, Streets, 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 the City 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 portions of Shiloh and the surrounding rural area.
• EMS: Supported by a special property tax and user fees to operate emergency medical services for the same 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 construction of the Family Sports Park.
• Tax Increment Financing District: Funded by tax increments from five TIF Districts: an area stretching from the Scott-Troy Road/Hwy. 50/I-64 interchange to South Lincoln; Green Mount Medical Campus; Central City/Downtown, Hwy. 50/Scott-Troy Road intersection, and Central Park Drive.
• 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. Revenues are used to pay the bonds for the 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), Utility Tax (for the Public Safety Facility), 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 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-reoccurring proceeds are one-time and therefore cannot be relied upon 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 should not be used for general ongoing operations.

Therefore, our Budget Formula looks like this:

Reoccurring Revenue (sales tax, property tax, etc.)

- Less -

Reoccurring Expenses (personnel and operating expenses)

= Equals =

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 sewer improvements? You will know that we cannot do this for two reasons: (1) Hotel/Motel Tax money is restricted for tourism purposes only; and (2) The Sewer Fund is funded solely through user fees.

Once the City Council reviews the budget, I will get into the specifics of the annual budget.

Comments or questions?

Actions from the February 16, 2016 City Council meeting:

• Resolution authorizing a sub-lease of a portion of the City’s Conference Center Property: The City Council recently approved the construction of a new Reliance Bank building on Regency Park Drive, but the bank must move out of their current location before the new building will be ready. They will have a temporary facility in the Regency Conference Center parking lot until the new building is complete.
• Ordinance regarding the City’s Dispatch Call Center (1^st Reading): There is a new state law requiring counties to consolidate 911 dispatch centers. We want to keep our dispatch center and this ordinance establishes our right as a Home-Rule City to operate our center.
• Ordinance regulating Towing Companies (1^st Reading): This ordinance modifies our towing policies to comply with state law.
• Ordinance for the Electricity Aggregation Program Plan of Operation and Governance (2^nd Reading): The Electrical Aggregation Program allows the City to negotiate for electric generation rates for all citizens of O’Fallon. We are in a consortium with several cities and will be going to bid within the next two weeks. This ordinance updates the specifications for us to participate in the program.
• Ordinance approving Skyline Community Church (2^nd Reading): The church plans to build a new building at 870 Milburn School Road.