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2023/03/03 - Walter's Blog: Budget Basics

Democracy on the Front Lines 
City Administrator’s Blog 
Walter Denton 
 

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 FY2023-24 annual budget since last fall, but anymore we seem to be in budget mode continuously year-round. 

Revenues have been strong and next year’s budget assumes the local economy will continue to do well. However, inflation and a potential recession have the potential to significantly affect this budget and the City’s services. Implementation of the state’s new minimum wage increase could also affect the City’s budget, particularly in Parks & Recreation and the Library. 

The City’s Leadership Team has prepared a proposed budget for City Council review. Department Directors are presenting departmental budgets to all City Council committees in March and the City Council will consider the budget ordinance on April 3. 

Before getting into the specifics of 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 pot of money. 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 three major fund types: General Fund, Special Revenue Funds, 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, Community Development, Streets, Facilities, 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 fire district 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 geographical 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 sales tax, utility tax, user fees, rental revenues, and some General Fund revenues to operate the parks, pool and various recreation programs. 
  • Hotel/Motel: 9% tax to promote economic development and tourism in O’Fallon. This tax also is being used to pay for the O’Fallon Station and Family Sports Park improvements. 
  • Tax Increment Financing District: Funded by tax increments from four TIF Districts: 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. 
  • Build O’Fallon Trust Fund: This is a new fund created by a ¼-cent sales tax to implement the new 2040 Master Plan. A portion of the tax will set aside each year to grow the Trust Fund for future needs, and the City Council will annually determine projects to be funded in the annual budget out of the Build O’Fallon Trust Fund. 

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 from year to year and month to month. Operating budgets are made with revenue to pay 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. For example, the City has received COVID Relief money from the state and federal governments over the past two years, which can only be spent for one-time purposes. 

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) 

= 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 Food/Beverage Tax to pay for sewer improvements? You will know that we cannot do this for two reasons: (1) Food/Beverage Tax revenue is restricted for debt service on the Regency Conference Center; and (2) The Sewer Fund is funded solely through user fees and not tax revenue. 

In my next blog, I will get into the specifics of the annual budget.