Agenda - Work Session: Budget Issues, 6/11/2007
Posted 6/7/2007

City of Gaithersburg
WORK SESSION
Mayor and City Council

Monday, June 11, 2007
7:30 P.M.

Closed Executive Session

Notice to the general public is hereby given that the Mayor and City Council of Gaithersburg plan to conduct a closed Executive Session on Monday, June 11, 2007, immediately following the work session of the Mayor and City Council, pursuant to Sections 10-508(a)(7) and 10-508(a)(8), State Government Article, of the Annotated Code of Maryland, to consult with legal counsel to obtain legal advice concerning potential litigation. The topics to be discussed are the legal issues, risks and procedures associated with potential litigation which has been brought to the attention of the City Attorney.   The meeting will be conducted pursuant to a motion properly adopted during the scheduled work session of the Mayor and City Council on June 11, 2007

Notice to the general public is hereby given that the Mayor and City Council of the City of Gaithersburg will not conduct a work session on Monday, June 25, 2007.

Due to the 4th of July holiday, the Mayor and City Council will not conduct a regular meeting on Monday, July 2, 2007, but will hold a regular meeting on July 9, 2007.

The background materials posted for this hearing include two memos: One from City Manager Humpton to the Mayor and Council outlining the presentation for the hearing, and another from Assistant City Manager Tomasello to Mr. Humpton, with background on the undesignated fund balance. The third document contained in that PDF is a slide presentation with talking points for the work session. The first two memos are, I think, valuable for everyone to read, so I’ve transcribed them out of the PDF and into HTML for posting here. Please note that, since I did much of this manually, there could be unintended errors, and thus the original PDF document should be consulted prior to commenting to the City on these materials. Also, you’ll need to pull up that PDF to see the slide presentation if you are so inclined.

Memorandum to: Mayor and City Council
From: David B. Humpton
Date: June 7, 2007
Re: June 11, 2007 Budget Work Session Presentation

At the work session of June 11, 2007 we will be discussing a number of topics including future budget projections, the undesignated fund balance policy, the clock tower/plaza project, and funding of a homeownership assistance program. The PowerPoint slides that will be used are included with this memo along with the work session cover sheet and a memo relating to the current undesignated fund balance policy. I wanted to summarize the points we intend to make in our presentation.

Future Budget Projections The presentation clearly outlines the fact that growth of the expenditure budget will need to be reigned in unless new revenue sources are identified. The current forecasts utilize too many undesignated funds to balance future budgets; indeed these funds would be totally depleted within the next few years. Historically, we have realized an annual “savings” by coming in under budget on expenses and over budget on revenue. Beginning with FY 2007, this is no longer the case.

Future budget numbers presented are conceptual but are based upon recent trends, an extremely robust Strategic Plan, and the need to maintain an ever-growing infrastructure inventory. For example, in developing the proposed FY 2008 plan I received requests from the various department heads for fifteen new employees and combined expenditure/capital requests of approximately $60 million. All of the requests were reasonably related to Strategic Plan initiatives and/or the need to maintain the high level of service to residents that has been our tradition for decades. The budget team eventually trimmed almost $10 million from the budget and proposed five new employees, but this illustrates that tough choices will need to be made in the years ahead – the budget will not be able to grow as it has in years past.

Undesignated Fund Balance As you know, this is a relatively new policy that has been in effect for about two years. I recommend that we reduce the current formula to 25% of the average of the previous three years’ budget. This is a reduction from the current 40%. Now that we have some experience with the policy, we feel comfortable with reducing it to a more reasonable level. The most likely expenditure scenario would be a severe weather emergency such as a tornado or hurricane.

Realistically, in a catastrophic event, the major responsibilities for restoration and recovery would fall to the State of Maryland, Montgomery County, FEMA, and/or the insurance companies. Additionally, the need to fund retiree healthcare was shifted to a trust fund (established under GASB 45) that will be funded out of contributions from the base expenditure budget.

In summary, even with this reduction in the policy, we would need to reduce future budgets from current expenditure forecasts to remain in compliance with the policy. In preparation for the FY 2009 proposed budget, staff will work to comprehensively review and re-prioritize the Strategic Plan. The results of this effort will be available prior to the Mayor and Council’s next strategic planning process.

Clock Tower/Plaza Project Several options for funding this CIP are presented. I recommend that we utilize the third option, which involves transferring $600,000 from the current Aquatic/Recreation Center CIP balance, and subsequently restoring that amount in FY 2009. Over the two fiscal years, there would be no net effect on the budget.

Homeownership Assistance Program The presentation identifies $147,000 available in a current open Purchase Order that was created for the West Deer Park relocation effort. I recommend that the purchase order be cancelled and the funds be applied to a new line item in the FY 2008 Economic Development budget. We will be holding a work session on this topic in summer or fall of this year. If new homeownership initiatives are identified by the Mayor and Council, they will need to be funded out of Operating Contingency funds.

Cc:

Tony Tomasello
Harold Belton
Memorandum to: Dave Humpton
From: Tony Tomasello
Date: June 7, 2007
Re: Undesignated Fund Balance

Pursuant to guidance staff received at the 2004 Mayor and Council retreat, we have been studying the possibility of implementing a policy regarding an appropriate level for our undesignated fund balance. This memo provides some background on the policies of other area jurisdictions, discusses factors considered in determining an appropriate level of reserves, and provides a recommendation you may wish to present to the Mayor and Council for further discussion.

Harold Belton collected data relating to the fund balance levels and policies of numerous jurisdictions throughout the region and these have been a very useful starting point for our analysis. The policies varied in both levels and methodologies, but all used either a percentage of revenues (for the current or previous year), or a percentage of the expenditure budget as the “benchmark”. Some examples of other local governments include –

» College Park, MD 25% of previous year’s expenditures
» Rockville, MD 15% of general fund revenue
» Bowie, MD 25% of current expenditures
» Leesburg, VA 10% of current expenditures

The City of Gaithersburg ended FY 2004 with an undesignated fund balance of approximately $18 million. This represents about 52% of FY 2005 expenditures and 56% of FY 2005 general fund revenues (reappropriation is not included in general fund revenue). Clearly, we do carry a substantial undesignated fund balance relative to other local municipalities.

We have long-standing financial policies that affect our consideration of this issue. Obvious examples of these are our unchanging (and relatively low) tax rate and the absence of debt on our balance sheet. While these policies have served us well over the years, they also indicate a need to carry higher undesignated fund balances than municipalities that are willing to borrow or adjust tax rates as circumstances require. In the event of a major drain on our undesignated funds, the City will likely take longer to replenish its reserves without raising taxes or implementing drastic cuts to services.

Additionally, many of the comparable policies were developed some time ago and may not address current needs adequately. Examples of several of these are –

» More frequent weather emergencies
» Possibility of homeland security emergencies
» Need to allocate increasing amounts for infrastructure projects
» Likelihood of a larger retiree pool in the near future

In developing this recommendation, we also considered the Mayor and Council’s input relating to achieving a level of consistency relating to the fund balance. It is often difficult to predict the actual level of the fund going out more than a year or two because municipal revenues tend to be more volatile than other levels of government and because we rely on unspent budgeted amounts from previous years’ to fund current activities. The actual amounts of the unspent funds are not known at the time we are developing the estimates we use at the retreats. This makes it especially difficult to program the CIP, which is presented as a six year plan. The Mayor and Council indicated that the policy should address this issue as well.

I feel that the following formula provides an acceptable level of reserves, acknowledges our unique financial situation, and offers a clear guideline to assist in planning future budgets -

Undesignated Average of Total City Expenditure
Fund Balance = Budgets for the Previous 3 Years X 40%

If, for example, this formula were used in developing the FY 2006 budget, the undesignated fund balance would be planned to be approximately $13.5 million at the end of that fiscal year; considerably lower than we currently carry but still a substantial level of reserve. As the budget increases, a simple calculation would tell us how much we need to keep in reserve from year to year. If an emergency or unforeseen expenditure depletes the balance below the recommended level, you would, in developing the next year’s budget, develop and propose a plan for replenishing the fund. If the reserve grows above the policy limit, you would program the overage into future budgets.

I look forward to discussing this information with you. Please feel free to contact me with any questions or clarifications.

Cc: Harold Belton