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Home My WebLink AboutBudget Process and Philosophy_21-23BudgetProcessandPhilosophy Beginningwiththe2014Ͳ15fiscalyear,weadoptedabudgetmanagementsystemthatgivesthe managersofthegeneralfunddepartmentsthesamebudgetauthorityandresponsibilityasthe managersoftheenterpriseandspecialrevenuefunds.Inthecaseofenterprisefunds(e.g.,water)or specialrevenuefunds(e.g.,streets),themanagerisconfrontedbythedisciplineofabalancedbudget. Expenditurescanneverexceedavailableresources,andthemanagerhastobecreativeinfindingnew sourcesofrevenueandincuttingcosts.Thenumberandlevelofpositions,thecostofunioncontracts, andinterestearningsoninvestedcashareallimportantfactorsinmanagingthebudget.Thereisno “spenditorloseit”incentive,becausespendinginonebudgetperioddirectlyreducesthebeginning balanceinthefollowingbudgetperiod. Inordertoenlistthemanagersofgeneralfundprogramsinasimilarroleinmanagingthecity’sfinancial resources,wemadethefollowingchanges: 1.AllocationofGeneralRevenuestoMajorPrograms.Whilemanygeneralfunddepartmentsgenerate somerevenue,theyarealsodependentongeneraltaxesandfees(forexample,propertytaxesand franchisefees).Butinatypicalbudget,it’shardtodeterminethelevelofthissupport.LakeOswego’s budgetshowsexplicitlythedollaramountofgeneralrevenuesallocatedtoeachprogram.These amountsreflecttheprioritiestheCityCouncilhasplacedonfundingcityservices,andtheyare consistentwiththeresultsofcitizensurveysonservices.Publicsafety(policeandfire)makeup,byfar, thelargestallocationofgeneralrevenues.Thisisfollowedbyparksmaintenance,transferstothestreet fund,andlibrary—allservicesthatarestronglysupportedbyLakeOswegoresidents. TheseallocationsareultimatelydecidedbytheCityCouncil.Settingthesetargetsinthebudgetisas muchartasitisscience.For2021Ͳ23,westartedwiththeallocationsapprovedbytheCityCouncilinthe 2019Ͳ21budget,andforthemostpartmultipliedtheseamountsbytheprojectedgrowthingeneral revenues(around3.25%peryear).Therewereafewexceptionstothisgeneralrule,asoutlinedinthe CityManager’sBudgetMessage. 2.CarryoverSavings.Asnotedabove,managersofenterpriseandspecialrevenuefundshaveastrong incentivetoreduceexpenses,sinceanysavingsduringafiscalyearorbienniumaddstothenextbudget period’sbeginningbalance,whichinturnprovidesmoreflexibilityinfundingoneͲtimeexpensessuchas equipmentorcapitalimprovements. Beginningwiththe2014Ͳ15Budget,weinstitutedasimilarincentiveforgeneralfundprogram managers,byallowingthemtocarryoversavings(anddepartmentrevenuesthatexceedprojections)as abeginningbalanceforthedepartment.Thesebalancesmustbeusedinwaysthatareconsistentwith Councilpriorities,andcan’tbeusedforongoingcommitmentssuchasstaffcosts. 3.DepartmentalContingencyAccounts.Allgeneralfundprogramsineverycityincludecontingency amounts,buttheyarehiddenintheformofpaddedlineitems.Withthestatelaw’sfixationon appropriations(ratherthanactualspending),andsanctionsforgoingoverbudget,therulesofthegame requirelineitempaddingasaninsurancepolicy. InLakeOswego’sbudget,wearemoreopenaboutthis,andhaveencourageddepartmentmanagersto setasidesomeportionoftheirbeginningbalanceinacontingencybudget.Theycan’tspenddirectlyout ofthisaccount,butitservesasabufferforhigherthanexpectedcostsinotherlineitems.Andof course,ifthecontingencyaccountisn’tneededinthecurrentbudgetperiod,itcarriesforwardintothe nextbudgetperiod. WellͲmanagedcitiesthathavecombinedacarryoversavingsprogramwithdepartmentalcontingency accountshavefoundtheyaremoreresilienttooutsideshockstothefinancialenvironment.For example,planningdepartmentsarebetterabletoweathertheinevitablecyclesinconstructionactivity, anddepartmentswithfacilitieslikethelibraryoradultcommunitycenterarebetterequippedtodeal withafailureoftheHVACsystem. 4.ResponsibilityforPersonnelCosts.Onecouldarguethatthecostofemployeesisoutsidethecontrol ofoperatingmanagers.Salariesaresetbyunioncontracts(approvedbytheCityCouncil)orbya citywideclassificationsystem.Pensioncostsaresetbythestate.Healthcarecostsarealsosetbyunion contractsorthroughcitywidepolicies. Butinthelongrun,operatingmanagersdodeterminepersonnelcosts:theysetthenumberandlevelof positionsintheirdepartments.Andtotheextentthemanagersinvolvetheirstaffmembersinfinancial management,thecostofcollectivebargainingagreementsisnotanabstractconcept,butarealcost thatreducestheabilitytoaddpositionsorreplaceequipment. Typically,thecentralbudgetofficeinacity“gives”thegeneralfunddepartmentstheirpersonnel budgets,basedonthecurrentnumberandlevelofauthorizedpositions.Inourbudgetprocess,we insteadgivethegeneralfundmanagerstheirshareofgeneralrevenuesandletthemtofigureouthow toallocateit.Thefinancedepartmentdoesshareprojectionsofthesalaryandbenefitcostsforeach currentemployee,butthedepartmentheadshavetoaddthem,onebyone,intothebudget.This processismorethansymbolic:itemphasizesthatoperatingmanagersareresponsibleforallthecosts ofprovidingservice,includingstaffcosts.Thereisnobudget“request”process:oncedepartments receivetheirtarget(i.e.,theirallocationofgeneralrevenues),theyareontheirowninfiguringouthow tobalancethebudget. 5.InternalFeesforService.Tobeabletoprovidecityservices,wehavetoaccountformoney,recruit staffandprocessthepayroll,providelegaladvice,maintainbuildings,operateacomputernetwork,and provideotherinternalsupportservices.Thesecostshavealwaysbeenexplicitintheenterpriseand specialrevenuefunds.Buttheyhavebeenhiddenfromsightinthegeneralfundprograms. TheCityofLakeOswegousesasophisticatedcostaccountingmodel—developedbyanindependent expertandupdatedbytheFinanceDirector—toallocateinternalservicecoststothevariouscity departments.Themodelincludesanallocationofcoststogeneralfundprograms,suchaspoliceand libraryservice,butsincemostoftheexpensesarealsoaccountedforingeneralfundunits(HR,IT, finance,etc.),thereisnoneedtotransfertheseamountsbetweenfunds,sotheyhaven’tbeenshown separately.Wenowshowtheseamountsasarealcomponentofthecostofgeneralfundservices. Insomecases,thesecostsaresignificant.Theinternalservicefeeforthepolicedepartmenttotalsover $1.8millionperfiscalyear.Butthedepartmentisaheavyuserofcomputersinthedispatchcenterand patrolcars,occupiesmostofafloorincityhall,andhasthelargestpayrollofanycitydepartment.It makessensethatitaccountsforalargeshareofsupportservicecosts.Theoverheadrateisstillless than15%,lowerthanthatofmostuniversityprograms,oratypicalallowanceinfederalgrantprograms. Theoverheadrateislowerfordepartmentsthataren’tsuchamajorconsumerofcomputerandother services(e.g.,approximately13.1%fortheadultcommunitycenter). Byfullyexpensingthesecosts,weareabletoshowcorrespondingrevenueforthesupportservice departments,soliketheirdirectservicepeers,theseprogramsbecomeselfͲbalancingaccounts.The directservicedepartmentsarethecustomersofthesupportservicedepartments,andthefees representthecostofinternal“contracts”forservice. Toemphasizethisrelationship,thefirststepinthebudgetpreparationprocessistocomputethefees foreachprogram.Themanagersofthesupportservicedepartmentsthenpresenttheirbudgets(and feeamounts)toa“tribunal”ofthedirectservicedepartments.Totheircredit,thesupportservice managershavebeenverywillingtodoso,andwelcomesuggestionsthatcouldresultinsavingsintheir operations.Theyhaveastrongcustomerserviceethic,andseetheirroleassupportingthefolkswho providethedirectservicestoourcitizens. ManagingtheBottomLine ThefinalbudgetappropriationsadoptedbytheCityCouncilsetatotalappropriation(spendinglimit)for eachprograminthegeneralfund,andappropriationsbycategoriesofexpenseintheotherfunds. Whereitreallymattersisinhowthebudgetsaremanaged.Enterpriseandspecialrevenuefund managershavealwayshadtomanagethebottomline:regardlessofestimatesandprojections(the budget),actualspendingcan’texceedtotalavailableresources.Thesameisnowtrueforthemanagers ofgeneralfundprograms.Actualexpenses(includinginternalservicefees)can’texceedresources (includingbeginningbalanceandthefixedallocationofgeneralrevenues).Ifcarryoversavingsareless thanprojected,orifdepartmentalrevenuescomeinbelowprojections,themanagerwillhavetooffset thisontheexpenseside.Ontheotherhand,if,forexample,theresponsetorecreationofferingsis greaterthananticipated,resultinginadditionalrevenue,theparksdirectorcanaddcoursesand contractors. DualBalancingProcesses—OperatingBudgetsandFundBalance AfinancialpolicythathasservedLakeOswegowellistoavoidusingoneͲtimeresources(e.g.,beginning balances)tofundongoingcosts,suchasstaffsalaries.Anexceptionistheuseofa“rainyday”fundto getthrougharecessionoremergency,sincethatisexactlywhatthefundisfor. Inthegeneralfund,thispolicyrequirestwobalancingprocesses.Theallocationofgeneralrevenues, notedabove,usesonlyongoingrevenuessuchaspropertytaxandfranchisefees.Thissource,along with(ongoing)departmentalrevenues,fullyfundstheongoingcostofgeneralfundservices. Thesecondbalancingprocessinvolvestheallocationofthebeginninggeneralfundbalance.Alargepart ofitissetasidefirstasthecity’soperatingreserve;bypolicy,30%ofgeneralfundoperatingcosts.The remainderiseithersetasideinotherreserves(e.g.futureequipmentreplacement),orappropriatedfor oneͲtimeexpenses.Theamountsinvolvedcanbesizeable,andthefinalallocationisoneofthemost criticaldecisionsfortheBudgetCommitteeandCityCouncil. BudgetInformationImprovements Tosavecostsandmakebudgetinformationmorewidelyavailable,wehavemovedfromaprinted budgetdocumenttowebͲbasedbudgetinformation.Aninnovationin2014Ͳ15wasthecreationofan interactivebudgetdashboardthatallowsoperatingmanagersandcitizensanatͲaͲglanceoverviewofall cityfinancialperformance,withtheabilitytodrilldowntomoredetaileddata.In2015Ͳ16,weaddeda CapitalImprovementDashboardforrealͲtimetrackingofmultiͲyearcapitalprojects,showingthetotal projectbudgetandtheamountspenttodate(acrossfiscalyears). BiennialBudget WellͲmanagedcitiespayattentiontothelongͲtermconsequencesofcurrentdecisions.Everyyear,we updateasixͲyearprojectionofgeneralfundrevenuesandexpenditures,butOregonlawlimitsustoonly atwoͲyear(biennial)budget.For2021Ͳ23,weare continuingabiennialbudgetformat.Thisdoesn’t, however,meanitisastaticdocument:theCityCouncilcanandshouldamenditasneeded,aslongas longtermconsequencesareaddressed.TherealͲtimebudgetdashboardallowstheCouncilandpublic tomonitorfinancialperformancethroughouttheperiod,andamidͲbienniumreviewinthespringof 2022willgivetheCityCouncilanopportunityformidͲcoursefineͲtuning.