I could assume most are probably done hearing about the budget, but in an effort to keep getting information out there, I'll keep adding to it. First, it has been said some employees were unaware of the situation or had to do their own homework. I invited all employees to a meeting on January 27th. I made 2 additional presentations to the fire department to cover all the shifts. I've uploaded the exact presentation (so some numbers are now dated).
One of the other factors in budgeting is of course a long-term outlook. While the budget only cover 12 months of spending, I have to make recommendations and the Council has to make tough decisions based on creating a budget that is sustainable beyond those 12 months. Are sales tax revenues going to bounce back in 12 months? 18 months? longer? Is unemployment going to reverse its trend in 6 months? 12 months? longer? Will income taxes from the State turn positive this year? next? Will the State withhold tax transfers to cities to make their Budget balance? Is their any end to health insurance increases? Will pension costs ever level off or will they continue to rise faster than revenues?
There are so many questions, but there are also plenty of known pressures. We know the trend for health insurance costs is about 8% a year. We know the police pension cost has doubled in 10 years. We know the fire pension has nearly quadrupled in 10 years. Construction costs have risen faster than inflation and our revenues. Electric has gone up. The cost of meeting EPA regulations for wastewater have gone up. None of this is sustainable over time without a change in the way we operate. When the entire global economy crashes as it has, it expedites the need to implement change. And when in a massive economic downturn, the choices can only be difficult. Difficult, but necessary.
Monday, April 20, 2009
Monday, April 13, 2009
A Word on Fund Balances
Now here's a topic that's sure to captivate! Well, probably not, but since it's become a topic of conversation, I thought I'd attempt to address it.
First, a fund balance is most simply the difference between assets and liabilities in a governmental fund. The fund balance is not cash sitting in a checking account waiting to be drawn down. While cash is a small component, investments, accounts receivable and inventories are also added into the total assets calculation.
Why maintain a healthy fund balance? The fund balance has multiple purposes. First, not every revenue comes in at a steady rate and not every expense is divided equally over the year. For instance, the second property tax payment for the budget year doesn't come to the City until September, but the majority of the road work and summer maintenance is complete. So while we are waiting for the second property tax payment and awaiting the sales tax for the rest of the year, we need cash and investments on hand to pay suppliers and contractors. Without a fund balance, we wouldn't always have the cash on hand. So we need funds there.
Another reason for the fund balance is to be prepared for a disaster. It's prudent to have funds set aside in the event of a natural or man-made disaster. If a tornado were to hit Sterling and tear up infrastructure, how would we pay the bill for repairs and cleanup? How do we pay overtime to keep employees working through rescue and the cleanup? In two years we find out that a material used to construct the firehouse or the Coliseum is a known carcinogen and the building needs to be razed and rebuilt and revenues aren't significant enough to issue a bond. We would need the reserves to do the work.
Even if we were able to bond, bonding costs are in part determined by the bond rating of the City. Without adequate reserves, the bond rating suffers. A lower bond rating means higher costs which can cost the City tens or hundreds of thousands of dollars in interest payment costs.
We also have to be prepared for economic catastrophe. There is no doubt these are bad times. While we're at 9.8% unemployment locally, in 1933, unemployment spiked nationwide at 24.9%. Even as recent as the early 1980's, much of the Midwest was in the mid to high teens for unemployment. If we reach those levels again, then we will likely be compelled to make use of our fund balances.
To make the most of the reserve funds, the vast majority of it is not in cash. In fact, the majority is held in long-term investments to maximize returns. Those returns are then used as revenues in our budget. That said, not all the investments are readily available. Some investments have maturity dates that extend out 10 or even 20 years. A sound fiscal policy involves investments coming due at staggered intervals so that some monies are constantly available while others are earning the most interest possible in safe investments.
Using fund balances to pay ongoing operational costs is generally not advisable, particularly when the budget deficit is not foreseen as a one-time problem. We do not see the City's budget issue as a one-time or short-term issue. While prior to this year, revenues continued to rise, so did personnel expenses. The problem is the rise in personnel expenses is outpacing the rise in revenues. While revenues may rise 3%-5% in past years, expenses for health insurance and pensions have far exceeded that pace, to the point that pension and health increases are rising at more than twice the rate of revenues. That trend cannot be sustained, which is why the City has to act early and prudently. If we merely use fund balances to solve our budgeting woes, our deficit will only accelerate over time as the cost of employees increase and fund balances disappear, taking with them interest earnings that were previously used to help pay for those very employee costs. Investment and interest income from the General Fund fund balance was worth over $250,000 in revenues. That's not a revenue stream we want to see sacrificed to so we can put off today's hard decision for what becomes tomorrow's even harder decision.
How's that for boring your socks off? If you stuck with that and read it through, congratulations! I hope you were able to gain some valuable insight.
First, a fund balance is most simply the difference between assets and liabilities in a governmental fund. The fund balance is not cash sitting in a checking account waiting to be drawn down. While cash is a small component, investments, accounts receivable and inventories are also added into the total assets calculation.
Why maintain a healthy fund balance? The fund balance has multiple purposes. First, not every revenue comes in at a steady rate and not every expense is divided equally over the year. For instance, the second property tax payment for the budget year doesn't come to the City until September, but the majority of the road work and summer maintenance is complete. So while we are waiting for the second property tax payment and awaiting the sales tax for the rest of the year, we need cash and investments on hand to pay suppliers and contractors. Without a fund balance, we wouldn't always have the cash on hand. So we need funds there.
Another reason for the fund balance is to be prepared for a disaster. It's prudent to have funds set aside in the event of a natural or man-made disaster. If a tornado were to hit Sterling and tear up infrastructure, how would we pay the bill for repairs and cleanup? How do we pay overtime to keep employees working through rescue and the cleanup? In two years we find out that a material used to construct the firehouse or the Coliseum is a known carcinogen and the building needs to be razed and rebuilt and revenues aren't significant enough to issue a bond. We would need the reserves to do the work.
Even if we were able to bond, bonding costs are in part determined by the bond rating of the City. Without adequate reserves, the bond rating suffers. A lower bond rating means higher costs which can cost the City tens or hundreds of thousands of dollars in interest payment costs.
We also have to be prepared for economic catastrophe. There is no doubt these are bad times. While we're at 9.8% unemployment locally, in 1933, unemployment spiked nationwide at 24.9%. Even as recent as the early 1980's, much of the Midwest was in the mid to high teens for unemployment. If we reach those levels again, then we will likely be compelled to make use of our fund balances.
To make the most of the reserve funds, the vast majority of it is not in cash. In fact, the majority is held in long-term investments to maximize returns. Those returns are then used as revenues in our budget. That said, not all the investments are readily available. Some investments have maturity dates that extend out 10 or even 20 years. A sound fiscal policy involves investments coming due at staggered intervals so that some monies are constantly available while others are earning the most interest possible in safe investments.
Using fund balances to pay ongoing operational costs is generally not advisable, particularly when the budget deficit is not foreseen as a one-time problem. We do not see the City's budget issue as a one-time or short-term issue. While prior to this year, revenues continued to rise, so did personnel expenses. The problem is the rise in personnel expenses is outpacing the rise in revenues. While revenues may rise 3%-5% in past years, expenses for health insurance and pensions have far exceeded that pace, to the point that pension and health increases are rising at more than twice the rate of revenues. That trend cannot be sustained, which is why the City has to act early and prudently. If we merely use fund balances to solve our budgeting woes, our deficit will only accelerate over time as the cost of employees increase and fund balances disappear, taking with them interest earnings that were previously used to help pay for those very employee costs. Investment and interest income from the General Fund fund balance was worth over $250,000 in revenues. That's not a revenue stream we want to see sacrificed to so we can put off today's hard decision for what becomes tomorrow's even harder decision.
How's that for boring your socks off? If you stuck with that and read it through, congratulations! I hope you were able to gain some valuable insight.
Saturday, April 11, 2009
Sterling Main Street's Official Designation
What a great day for Sterling!
On Main Street Day at the Capitol, Sterling and Sterling Main Street were officially elevated to the status of "Designated Main Street Community." That's result of a lot of effort from a group of dedicated individuals.
(L-R: Representative Jerry Mitchell; Myself; Sterling Main Street President, Ed Cox; Sterling Main Street Director, Shelley Hoffman; Sterling Main Street Board Member Phil Mattox; Governor Pat Quinn)
Normally the Lieutenant Governor comes to your City for the ceremonies, but of course we no longer have a Lt. Governor courtesy of the last Governor. That takes away a lot of the local spotlight from these tireless volunteers and director. They're adding a great asset to our City. The facade grant program and the low interest loan program are two opportunities to help downtown business and building owners that wouldn't exist without Main Street. Congratulations Main Street volunteers! http://www.sterlingmainstreet.org/
On Main Street Day at the Capitol, Sterling and Sterling Main Street were officially elevated to the status of "Designated Main Street Community." That's result of a lot of effort from a group of dedicated individuals.
(L-R: Representative Jerry Mitchell; Myself; Sterling Main Street President, Ed Cox; Sterling Main Street Director, Shelley Hoffman; Sterling Main Street Board Member Phil Mattox; Governor Pat Quinn)
Normally the Lieutenant Governor comes to your City for the ceremonies, but of course we no longer have a Lt. Governor courtesy of the last Governor. That takes away a lot of the local spotlight from these tireless volunteers and director. They're adding a great asset to our City. The facade grant program and the low interest loan program are two opportunities to help downtown business and building owners that wouldn't exist without Main Street. Congratulations Main Street volunteers! http://www.sterlingmainstreet.org/
Friday, April 3, 2009
City Budgeting
There's an unfortunate disinformation campaign being waged by individuals that consists of outright false information and misrepresents the ongoing issues with the City budget.
The City of Sterling, as most municipalities in Illinois and across the nation, is facing a sharp downturn in revenues as a result of the decline in the economy since last fall. The Sterling City Council directed staff to prepare a balanced budget that avoided tax increases while focusing on the Council goals of combating gangs and crime; addressing code enforcement and neighborhood issues including housing; maintaining and improving infrastructure, particularly streets; and addressing the condition of the riverfront to encourage future development in the area.
Given the state of the economy, with the exception of the increase to the property tax levy to help offset increases to the police and fire pensions, nearly every other major revenue source to the General Fund is expected to decrease more than $230,000 for Fiscal Year 2010. Further exacerbating the problem are costs for employee health insurance that are rising at 10% (an increase of $78,750), firefighter pension costs that are rising 17% (an increase of $37,328) and police pension costs that are rising 34% (an increase of $81,328). In short, after paying for the increased pension and health insurance costs, and paying a 3% increase to employee salaries due to already negotiated and impending contracts, the City needed to tighten its belt and cut more than half a million dollars from the General Fund budget or increase taxes. The consensus was this was not a good time to consider a tax hike on Sterling residents.
Over 70% of the General Fund’s operating revenues are personnel costs, making it extremely difficult to make significant cuts without cutting personnel costs. In light of the situation, employee meetings were conducted to inform them of the budgetary issues and were solicited for ideas. Staff made cuts to line items throughout the budget, including over $600,000 in departments outside the fire department. However, the budget was still not balanced.
It was determined that the easiest, fairest and most efficient way to balance the budget after all other cuts was to freeze the annual increase to salaries, while still honoring step and merit increases to employees. In an effort to avoid layoffs, the City approached the fire union and asked them for their help in closing the budget gap by reconsidering the contractual across the board increase in pay, and taking merit increases and specialty pay increases only. Even with a 0% change to across the board pay, specialty pay and step increases would increase most firefighter pay by an average of $500, with some as high as $1,080 and one by $4,074.
The City also made the suggestion that it would welcome the idea of furloughs where all employees in the City would keep the 3% increase, but take a few shifts off over the course of the year if the fire union would consider amending the contract to make that allowable. The City expressed a willingness to listen.
If contract employees had agreed to a 0% across the board increase while the City still honored the step and specialty pay increases, we would have avoided layoffs of full time firefighters and the substation would remain open.
If contract employees had agreed to a 3% across the board increase but with some unpaid furlough days, we would have avoided layoffs of full time firefighters and the substation would remain open.
After presenting the City’s difficult financial outlook, and asking for the fire union to help us given these unusual times and bad economy, the City was told that the union would get back to them. The City has not heard a response back from the union and thus, the City has to honor the contract and provide a 3% increase in addition to the step and specialty increases to the firefighters. The City was then left with the option to raise taxes or eliminate positions in the City. The City felt this was an extremely bad time to raise Sterling resident’s taxes, and had no alternative but to eliminate positions. The City cannot continue to sustain it's current spending levels in a down economic environment and since the general fund budget sis 70% personnel, there is little choice to do anything other than adjust the number of personnel in public works, code enforcement, police or fire.
Any cut in employees leads to a cut in services, the question is which cut minimizes the effect on citizens day-to0day services and prepares us for long view.
The City of Sterling, as most municipalities in Illinois and across the nation, is facing a sharp downturn in revenues as a result of the decline in the economy since last fall. The Sterling City Council directed staff to prepare a balanced budget that avoided tax increases while focusing on the Council goals of combating gangs and crime; addressing code enforcement and neighborhood issues including housing; maintaining and improving infrastructure, particularly streets; and addressing the condition of the riverfront to encourage future development in the area.
Given the state of the economy, with the exception of the increase to the property tax levy to help offset increases to the police and fire pensions, nearly every other major revenue source to the General Fund is expected to decrease more than $230,000 for Fiscal Year 2010. Further exacerbating the problem are costs for employee health insurance that are rising at 10% (an increase of $78,750), firefighter pension costs that are rising 17% (an increase of $37,328) and police pension costs that are rising 34% (an increase of $81,328). In short, after paying for the increased pension and health insurance costs, and paying a 3% increase to employee salaries due to already negotiated and impending contracts, the City needed to tighten its belt and cut more than half a million dollars from the General Fund budget or increase taxes. The consensus was this was not a good time to consider a tax hike on Sterling residents.
Over 70% of the General Fund’s operating revenues are personnel costs, making it extremely difficult to make significant cuts without cutting personnel costs. In light of the situation, employee meetings were conducted to inform them of the budgetary issues and were solicited for ideas. Staff made cuts to line items throughout the budget, including over $600,000 in departments outside the fire department. However, the budget was still not balanced.
It was determined that the easiest, fairest and most efficient way to balance the budget after all other cuts was to freeze the annual increase to salaries, while still honoring step and merit increases to employees. In an effort to avoid layoffs, the City approached the fire union and asked them for their help in closing the budget gap by reconsidering the contractual across the board increase in pay, and taking merit increases and specialty pay increases only. Even with a 0% change to across the board pay, specialty pay and step increases would increase most firefighter pay by an average of $500, with some as high as $1,080 and one by $4,074.
The City also made the suggestion that it would welcome the idea of furloughs where all employees in the City would keep the 3% increase, but take a few shifts off over the course of the year if the fire union would consider amending the contract to make that allowable. The City expressed a willingness to listen.
If contract employees had agreed to a 0% across the board increase while the City still honored the step and specialty pay increases, we would have avoided layoffs of full time firefighters and the substation would remain open.
If contract employees had agreed to a 3% across the board increase but with some unpaid furlough days, we would have avoided layoffs of full time firefighters and the substation would remain open.
After presenting the City’s difficult financial outlook, and asking for the fire union to help us given these unusual times and bad economy, the City was told that the union would get back to them. The City has not heard a response back from the union and thus, the City has to honor the contract and provide a 3% increase in addition to the step and specialty increases to the firefighters. The City was then left with the option to raise taxes or eliminate positions in the City. The City felt this was an extremely bad time to raise Sterling resident’s taxes, and had no alternative but to eliminate positions. The City cannot continue to sustain it's current spending levels in a down economic environment and since the general fund budget sis 70% personnel, there is little choice to do anything other than adjust the number of personnel in public works, code enforcement, police or fire.
Any cut in employees leads to a cut in services, the question is which cut minimizes the effect on citizens day-to0day services and prepares us for long view.
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