Workshop Item - Joe Huss, Finance Director/Asst. City Manager; Ali Bong, Deputy Finance Director
Title
Title
2022 Proposed Tax Levy and General Fund Budget
end
Background
Council will devote a generous portion of the Winter Retreat to discussions on development of the 2022 tax levy and General Fund budget. The retreat discussion will focus on the following:
1. Basics of the budget process
2. Process improvement feedback
3. Budget development
4. Levy development
5. Strategic priorities
Each topic will have a brief presentation followed by the opportunity for in-depth council discussion.
Budget process basics
As part of the budget process improvement initiative, staff is providing a brief overview of general budgeting principles including fund accounting, the general budget process, and an overview of services provided by the city.
Fund accounting
Unlike private industry, where the primary financial focus is maximizing profitability, government finance focuses on accountability and stewardship of the taxpayer dollar. All levels of government use fund accounting, which is defined as “an independent fiscal and accounting entity that is segregated for the purpose of performing specific activities or achieving certain objectives; a grouping of related accounts used to maintain control over resources that have been segregated for specific activities and/or objectives.” In plain language, fund accounting is maintaining different pots of money for specific activities that are determined by policy, regulation, or specific initiatives.
There are different types of funds whose purpose is explicit to the activity/objective determined by the governing body of the government unit (GU). Examples include:
• General fund - the main operating fund of a GU, which accounts for all unrestricted resources except those that are required to be accounted for in another fund
• Special revenue fund - used to account for proceeds of a specific revenue source that is legally restricted to expenditures for specified purposes. Examples of special revenue funds include the Charitable Gambling Fund and Communications (formerly Cable Television) Fund
• Capital funds - are non-operational in scope and account for the acquisition of property, equipment, and other fixed assets
• Enterprise funds - operate as their own individual business enterprises and their revenues must cover their expenses. Water, sewer, and other utility funds are examples of enterprise funds
• Internal service funds - used when one department receives reimbursement for services rendered to another department within the municipality. In 2019 Blaine established its first internal service fund whose purpose is to pay for the maintenance and preservation of city facilities
Budget process
General budgeting in a municipal setting follows six core steps which are briefly outlined below:
1) Identify services to provide - services are composed of mandated, non-mandated, and support services. Basic city services may include sanitation (both sewer and refuse); water system maintenance; streets and parks maintenance; operation of public facilities such as community centers and libraries; building and community standards services; police and fire services; and transportation
2) Determine fiscal capacity - in brief, a city’s fiscal capacity is determined by the total amount of revenue it can raise to support its desired level of services. The major source of revenue for most cities is property taxes. Throughout the year Anoka and Ramsey counties provide Blaine property assessment data. This data forms the basis for the levy model which is used to determine the city’s property tax levy. The council provides the City Manager direction to establish the property tax levy by giving guidance on one of the following methods of determining the preliminary levy: percent increase or decrease to the budget, tax rate, or specific dollar amount. Additional fiscal capacity includes all other revenue sources, and, depending on the fund type, could comprise enterprise fund revenues, fund reserves, and other operating revenue sources
3) Estimate costs of services - includes determining the costs of staffing requirements, personnel costs, support costs, operating and capital needs
4) Evaluate/prioritize services - once costs are determined staff vet and prioritize services and programs based off of regulatory and council mandates, the city’s mission statement, business plans, strategic plans and initiatives, council goals and initiatives, and internal policies
5) Allocate resources - the City Manager determines budget targets for each department based on the direction of the council. Staff determine service and program levels within the allotted resources
6) Review and report - review actual against the budget, measure the effectiveness of services, programs and initiatives via qualitative feedback and quantitative metrics which deepens accountability and stewardship of the taxpayer dollar
Blaine services and programs
Blaine is one of the most cost-effective and cost-efficient full-service cities to live, shop, and work in the 7-county metro area. Below is a high-level overview of Blaine services:
• Safety Services
o Police services
o Fire services
o Community standards
o City facilities
• Public Works
o Engineering
o Streets maintenance and preservation
o Snow removal from street, alley, and sidewalks
o Maintenance of parks, trails, and open spaces
o Water, sewer, and stormwater utilities
• Community Development
o City planning/development
o Building inspections and permitting
o Economic development
• Parks and recreation
o Recreation programs
o Blaine beach
o Mary Ann Young Center (MAYC)
• Administrative and Financial services
o Public records inquiries
o Conducting elections
o Organized collection of refuse, recycling, and organics
o Accounting and payroll services
o Internal support services
Budget process improvement feedback review
In the spirit of the city’s core value Innovation, Finance requested feedback from both Council and staff for ideas that could improve the budget process. The following six questions were asked:
• Question 1: With regard to creating the budget, what has worked well in the past?
• Question 2: What changes to the 2021 budget process were most helpful? Least?
• Question 3: What kind of information from staff would help you to review the budget?
• Question 4: What are the challenges you see/have with the current process?
• Question 5: What changes would you like to see to the process? Anything that can staff do more? Less?
Key takeaways from responses are summarized below:
- Tell the story - big picture first
o What services and programs
o At what level
o At what cost
- Present bite-sized information
o Keep it short, simple, with a narrow focus
o Cut the presentation in half and double the discussion time
- Small group meetings
o Have them early and often
o Answer individual questions outside of council meetings
- Set priority early
o Understand council values as a whole
Budget
Driving forces behind the budget
|
Growth |
Non-growth |
|
Streets, sidewalks, and trails |
Wage competition |
|
Parks |
Inflation |
|
Waste disposal |
Legislative/regulatory requirements |
|
Water quality and availability |
Labor contracts |
|
Housing development |
Infrastructure resiliency |
|
Public safety |
Commodity pricing/Insurance premiums |
|
Economic development |
Increase services to improve quality of service/life |
The above table provides examples of forces that cause increases to the budget. The majority of costs are ongoing costs and adjustments. For operating funds, such as the General Fund, there are few instances where the city incurs one-time costs. Examples of one-time costs may be cost participation in the construction of an asset maintained by another agency or contributing resources for an event or aid response. In a city that is fully developed, absent a reduction in services, assets, or programs, there are several factors that put pressure on the budget that are non-growth related. These drive an increase in the budget regardless of growth.
Values Facilitation
Based off feedback received and responses to the questions above, staff has designed a facilitated session which will be led by Deputy Finance Director, Alison Bong. This session is designed to solicit discussion and ultimately provide structure and focus based on the council’s shared values. This facilitation will be focused on the following: council’s top values, top priorities, and individual financial practices.
Levy and Budget
Economic conditions that affect the levy
Similar to driving forces that affect the budget, certain economic conditions that affect property values impact and influence the Council’s decisions regarding the tax levy.
- City growth, economic expansion
- Stable community, economic expansion
- Economic contraction
Strategy
Every year council provides guidance on the desired outcomes for the coming year, which ensures alignment with the Council’s top priorities and adopted Strategic Plan, and provides structure for staff to begin creating department level budget proposals.
The driving force in developing the budget is the guidance provided by the council through the values, priorities, and initiatives outlined by the council. By statute, the city is required to submit a preliminary levy in September. Staff is seeking feedback on the Council’s preferred strategy for developing the budget and preliminary levy. There are multiple ways that Council can provide guidance to staff on how to establish the levy, these include indicating a preferred tax rate, a maximum percent increase/decrease to the budget, or setting the total levy amount.
- Tax rate - for the past several years Councils have guided staff in developing the levy, and subsequently the budget, by establishing a preliminary rate. Over the last decade most levies have held the rate steady, constraining the levy increase exclusively to growth in tax capacity within the property class categories and new growth via development.
- Budget % increase/decrease - another common practice to set the levy is to indicate a total percentage increase/decrease to the property tax portion of the budget
- Levy amount - in the past, municipal governments’ levies were statutorily limited by a set dollar amount and the majority of municipalities set their levies accordingly
Strategic priorities
The City’s strategic priorities fund was last discussed at the March 8, 2021 workshop as item 3-3; minutes are attached.
The strategic priorities fund was established May 2019 from the proceeds of the dissolution of the North Suburban Hospital District (NSHD). On May 6, 2019 Council directed that the proceeds of $2,648,000 from the NSDH dissolution be placed in a strategic priorities fund to be used pursuant to Council priorities as established at a later date. Additionally, Council directed that $100,000 of this amount be set aside as a matching grant to assist in funding the new Veterans Memorial Park. Subsequent levies have included direct allocations to the Strategic Priorities Fund: $325,000 in the 2021 budget, adopted December 21, 2020; $250,000 in the 2022 budget, adopted December 19, 2021. An additional transfer of $4.2 million of unrestricted General Fund reserves was approved by Council at the end of 2021, bringing the total strategic priority fund balance to $7.2 million.
At the time the funds were placed into the Strategic Priorities Fund, the City Council expressed its intent to develop a policy governing expenditures from the fund. Per Council discussions, it was intended that the fund be used only for items the Council considers to be of high priority for accomplishing established strategic initiatives. With the adoption of the 2021 levy, Council also expressed a desire to establish a strategy whereby, in the event of an economic downturn, the City would have a funding source from which to draw to maintain basic service levels without putting undue pressure on Blaine property owners via the tax levy. With respect to the preceding parameters, Council was supportive of reviewing a draft policy for use of strategic priorities funds that is modeled after the capital improvement fund policy. In 2019 and 2021 Council expressed support that expenditures from the fund must be supported by at least five (5) affirmative votes of the Council.
Below is the current framework for a draft policy based on the information above and subsequent feedback received from Council. Furthermore, the most current draft of the policy is attached to the Legistar item.
1. Policy Statement - the purpose of the Strategic Priorities Fund is:
a. To fund items that the Council considers to be of high priority for accomplishing established strategic initiatives.
b. In the event of an economic downturn, to relieve the reliance on property tax levy increases and provide a funding source from which to draw to maintain basic service levels.
2. For Strategic Priorities
a. Expenditures or transfers from the Strategic Priorities Fund shall be made only after careful deliberation of the City Council.
b. The city council must identify that:
i. The project/strategic priority will advance or achieve one or more of the strategic initiatives identified in the City’s adopted Strategic Plan; and
ii. The project/strategic priority has sufficient community-wide benefit consistent with other city goals, programs, or policies.
3. For Economic Downturns - The City Council will consider the use of the Strategic Priorities Fund as a supplemental funding source for the General Fund in the event of an economic turndown as measured by:
a. A decline in the City’s overall taxable property value of 0.5%;
b. A decline in non-property tax revenue equal to 5% of annual revenue;
c. A mid-year decline in revenue to the extent that the General Fund’s reserves are depleted;
4. Expenditures or transfers from the Strategic Priorities Fund are to be made only upon the adoption of a resolution approved by an affirmative vote of at least five (5) Councilmembers.
Examples of strategic fund uses suggested by council include:
• Aquatore Park bandshell
• Traffic signals
• Trails (109th street)
• Redevelopment
• Road expansion
• Reserve for levy containment
There are other potential uses of the strategic priorities fund that either this Council or the previous Council has brought up in the past, including:
• Supplemental resource for funding capital equipment purchases
• Facilities Fund reserve
While the above other potential uses could be specifically incorporated into the strategic priorities fund use policy, staff feels that they are adequately and more properly addressed in Section 2 of the Policy.
Staff Recommendation
Review data and information presented and discuss City Council priorities, initiatives, and recommendations.
Attachment List
2022 Proposed Tax Levy and General Fund Budget Summary
March 8, 2021 Workshop minutes
Draft Strategic Priorities Use Policy
Recommendation
Staff will present information on the above topics for Council discussion and guidance on next steps in the budget process.