Operating Budget – Overview (Council has $350,000 to play with)

Only two speakers. Here is the overview by the Finance Department Director – very helpful and informative!

David Schmiedicke says that they should have gotten a copy of a summary with their budgets and he will work off of that.

Assessments
1st page (page 3, assessed values) references page 6 of the budget. He says the assessments determine what the tax rate will be. They have been falling, they stabilize in 2014. Really on the strength of commercial assessments which are the apartments and multifamily units that have been going up in the city. When they look at 1991 – 2014 they had very strong growth in that period what they have seen during the recession is that it has fallen about 1% 2010 through 2014. You can see in the box what has happened with residential is down slightly, commercial is pretty strong. Agricultural and manufacturing which is a small part is up and down. The over all is up .5% the average value home down about .5% and that will impact the tax rate.

General Fund Spending – Levy increase, revenues, expenditures, fund balance applied
The next page has some quick numbers on general fund spending and the levy increase. A quick reminder that the levy is what the expenditures are, less the revenues (local and state aid). Expenditures up $8M or 3%, general fund up 3%, library about 4% increase and when we look at total debt service it is up about 1.6M. Revenues, setting aside the levy are up 2.6M or 3.7%, state aid is a smaller increase, most of that is in transportation aide. Building permit revenue are up by 1/3 from the adopted budget to the executive budget. That really shows the strength of construction, particularly in multi-unit so we will see some growth in 2013 above the adopted budget. And continued growth to 4M in 2014. Room tax is also doing well, adopted to executive proposed the amount going to the general fund, the surplus over Monona Terrace, Convention and Visitors Bureau and other specific activities, that will go up about 27%, revenues are projected to go up 6% overall from 2013 to 2014. In the 2013 adopted budget we increased about 50%, there was a projection that reduced that estimate by 2.6M in 2014 primarily due to mix of medicare reimbursements. Medicare pays on a fixed basis, regardless of what the fee is, there is no additional revenue from medicare payment. Fund balance applied about $3.9M, up about $700,000, they are continuing with the process started in the 2012 budget starting spending down the balance in the premium stabilization fund which is about $2M per year. The premium stabilization fund was money build up in an account with Hartford insurance, they provide our wage insurance and disability insurance. They had paid about $7.5M to the city a few years ago and that in effect created a balanace and that will be spend down in a 4 year period. It continues one-time funding to support Overture and one-time funds for the items you see there, which he will go over on another page, but here you can see how the expenditures, revenues, fund balance applied and the levy all fit together at the macrolevel all at on one page at the table at the bottom.

They take a break for some public health people for the joint recommendation on the public health budget.

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They resume after about a half hour.

Mill Rate, Taxes on Average Home
Dave Schnmiedicke says they are now on page 5, that is the mill rate or the taxes on the average home. The mill rate or tax rate is basically the levy divided in into the assessed rate and the mill rate is about $9.50 of value, that is up about 2% due to the levy increase of about 2.5% and an increase in assessed value of a little under .5%. They also look at taxes on the average value home. That average value home is gotten by value of the homes divided by the number of parcels and the average value home in 2013, $230,831, the value is down a little under $1200 or .5% from the previous year. Taxes would be up about $32 or 1.5% in the executive budget.

Levy Limits
The increase in state mandated levy limits is the greater of 0% (the floor) or the change in net new constructions, there are key adjustments and exclusions. The major change in the recent changes in the state budget are that any fees for garbage collections, fire protections, snow plowing, street sweeping or storm water management that had been supported by property taxes results in a dollar for dollar reduction in the levy limit. So any fee increases in the future would not result in additional revenues for the city but a property tax reduction under the levy limit. That is a further constriction on the ability of the city to raise revenue and have revenue diversity.

Sue Ellingson asks if this is adjusted for population?

Schmiedicke says there is no adjustment except for net new construction.

Sue Ellingson asks if they add 1,000 people they just don’t get garbage collection?

Schmiedicke says this is about the fees, that we don’t have now, and that activity is currently supported by the property tax, that revenue displaces the property tax.

Mayor says that if we have a population increase of 10,000 they better all move in to new housing, new construction, otherwise we have no room from inflation or population growth, which is the case with the former formula.

Ellingson says that her, Mike and Ledell will try to get them all in to new housing.

Schmiedicke says that if they close a TID, 50% of the incremental value is added to the levy limit calculation. There is a change from the unused allowable lvey limit from the prior year, up to 1.5% can be carried over to the subsequent year. .5% requires majority vote, over that requires a 3/4 vote. Any change in debt service on general obligation debt is excluded and the amount of refunded and recinded taxes. The table on the bottom walks through the steps of that. Net new construction (1.03%) is the base of that, that is about $1.3M of levy capacity, so they do the calculations, adjust for transfers for annexation, prior unused levy ($96,000) and refunded and recinded taxes estimate is there. There is capacity of about $350,000 between the executive and the maximum levy limit. If you went up to the limit you would add a penny per $1,000 or $3.79 on the average value home.

David Ahrens asks if the increase in the commercial is all new construction.

Schmiedicke says that some of it appreciation, a lot of it is new construction. It is a big part of what is driving tat.

Ahrens asks if it is about 1/3 new construction?

Schmiedicke says the value of the net new construction relative to our equalized value is about 1%, the overall assessed value is going up 3%, so there is some appreciation in there.

Ellingson asks if they don’t use the money up to the levy limit, do they lose that?

Schmiedicke (WHO HAS THE PATIENCE OF A SAINT) says that they can carry over up to 1.5% (WHICH HE JUST SAID!)

Mayor says that this is in the 1.5%. The mayor says it is far more than he intended, but unfortunately they got good news after he submitted the budget.

Good News
Schmiedicke says he supposes he could explain that good news now. They just received transportation budget numbers a day or two after the budget was introduced. They expected got $80,000 more than what is in the executive budget. They may have some other re-estimates during the budget process.

TIF Increment Value
Clear asks about the 15% TIF increment value on page 3, that’s the net increase in value in all TIF districts, new districts and increment added, right?

Schmiedicke says yes.

How the budget was balanced
page 13 – The table has revenue growth, property tax under levy limits, local revenues like room tax, building permits, payment in lieu of taxes, fines and forfeitures and state aide. There is $7.7 in revenue growth. He says there are one time items in 2013 budget which is a little under 4.4M, there is 5.5M in scheduled wage increases, health insurance 1.5M, they got good news on retirement program mostly due to the duty disability program for police and fire. They had been paying 6.6% of payroll and the state reduced that to 1% as a result of that program being fully funded and the state deciding they don’t need it to be set so high. There are some other recalculations there. There is a provision in the contract with local 60 to establish a retiree health care plan and the city to make a contribution, that has not been done since the new contract was put in place because local 60 had not set up the plan yet, but it is not and the cost is $120,000 per year. They have those compensation costs, the debt service chain and cost to continue – the fire department SAFR grant that helped staff up the new fire station, there was a planned 15 police officer overhire in the 2013 budget, that will help them stay at their full strength when police retire and there is the city share of the public health department. They are on the biannual election cycle in 2014 for roughly $460,000 more in costs there. The route expansion that were partially funded in 2013 and fuel costs annualized, $835,000 for metro, fuel costs in fleet, parks is raising some fees, annualizing some positions in planning and library, and steps and longevity and education incentive for police and fire, so 4.5M in cost to continue. The cost to continue is about $11M and the revenue growth is about $7.7M. They have a gap before anythign else of $3.3M. Next page – iems of Community Services Related Programs and other key items beyond cost to continue. He says you will hear about these from the agencies and that pushes the gap to be close to $4.7M

Cuts and additional revenues
Next page – The table itemizes budget actions to balance the budget. A position in the assessors office was eliminated. A couple of the major changes are in the Metro budget, the fuel budget was not fully funded, the Transit and Parking Commission will have to look at fare options or route reductions or another approach. In the MG&E green energy purchases, in the capital budget there is an item for sustainability fund of $1M and that will replace the green energy purchases at a kilowatt per hour to say we are purchasing green energy. They would get out of that program but invest through the sustainability fund. Long term underspending in the budget has a handout, if you look back over time we typically underspend every year and the $550,000 represents about 1/4% of non-debt service general fund expenditures and we typically underspend every year by more than that and this would, rather than set up a structural issue by applying fund balance, this would take that into account in a budgeting perspective every year. There is a fund balance applied and you’ll see those items at the bottom of the page for one time, periodic or phasing out items. The next two columns are the effect of reducing the level of increase scheduled for 2013 and effect of smaller rate of increase for represented employees – instead of 3% is it 2.1%. The line that reads 1.88% is an annualization on how to get to a ful year effect given that some can’t have their pay reduced until March. The nonrepresented employees get 1.1% instead of 2% increase. You heard about the Overture, so there is about $5.5M in reductions or additional revenues so there is a balance of $350,000 compared to the maximum allowed under the levy limits. Then you can see the items that are in effect funded from one-time allocations from the fund balance. They total about 3.9M and about 2.1M is the spend down of the premium stabilization fund.

Mark Clear asks about the amount available for the premium stabilization – is that calculated by a formula about what is available in the fund balance? Schimiedicke says that it is a balance built up at the insurance carrier and they paid a lump sum of about $7M in 2010 or 2011 and staring in the 2012 budget they have about 2M in a year to pay for the premium costs, they are spending down that balance and it will be exhausted in the 2015 budget. Clear asks if it is just a target of about $2M and Schmiedicke says yes, and they are spreading it out as far as they could.

Shiva Bidar-Sielaff asks about the fund balance, she ask about $1.861M number, how do they get to the total, is it the items under fund balance. She says there is a $60,000 missing balance. Schmiedicke says there is another piece in another piece of the table on page 8 there is $53,000 that is tied to the change in the cost of the premium stabilization fund and that is a part of the difference. The 3.901M is the amount applied.

DeMarb had the question.

pages 11, 12, 13 you will hear from the agencies.

General Fund balance
Page 14, there are a couple policy items on page 3, financial and budget management policies, there is a paragraph there, the first paragraph has been in there for a few years about structural deficits, the next paragraph responds to some of the issues he raised at the briefing back in July, it puts into policy of 15% budget for the fund, unassigned, unallocated balance, and that we will try to maintain 15% and if they go above that amount they will spend it on one time expenses or if they go below they will look prudent spending reductions or revenue increases. That goal is to stay at 15%. The goal is to focus appropriations to the budget process unless there are emergency situations or year end reconciliation and expenditure restraint program process they have every year, that is a new recommendation for your consideration. The bottom of page 14 shows a history of the fund balance. The 2015 number is a projection. If the amounts proposed in 2014 and the other items expended that they are pretty certain of, they will be at 15.3% of budget at the end of 2014.

Maurice Cheeks asks about the goal of 15%, over the past 10 years i varied more. Schmiedicke says some of the variation is based on the year end calculations, the other things that changes it are things that happen in the balance sheets, the mark to market adjustment for our investments. When the market is improving we see the opposite of that in our adjustments. You might see a negative impact. Because the market has been relatively low, we invest in bonds and other securities but as the market has remained flat we have seen positive adjustments to our mark to market account so that has added over the last couple years in addition to higher revenues and lower expenses. That happened in 2006 but we would have see that on the investment side as well.

Mark to Market
Mayor asks if everyone understands the concept of mark to market. Everyone says they understand it. Mayor says alright. Sue Ellingson says she would like it explained. Mayor says if you buy a bond and you pay $98 and it is scheduled to be redeemable in 4 years at $100, it used to be that you can carry it on your books at $100, if we were to sell that bond next year and it dropped in value to $96, they have to market on the books to the mark, which is $96 so your asset has less value so we have less in reserve. The new accounting rules say that you have to mark to market because of the theory that if there is a crisis or emergency and you have to sell it, that is what you will realize, that is the consequences of marking to market. Schmiedicke says that what it does is move it from the unallocated fund balance to the allocated fund balance as those changes play out as we are redeeming our investments. What you see in fall off in 2010 is no fund balance applied in 2010 and 2011 is the pressure on city revenues form the recession, room tax, building permits were lower than budgeted.

Why 15% reserves
Cheeks asks how did they decide 15%, it is significant for a reason, why not a different amount. Schmiedicke says it is a historical number as a reserve that is sufficient from a good financial practice perspective. We have enough cash to get us through a few months if something happens. And rating agencies that rate our bond and debt look at factors like this and they would say 15% is a moderate level. It is a big component of our AAA bond rating the the lower interest rates we get on our debt as a response to that.

Growth in Government spending
page 15 shows the growth in key programs in city government over that past 5 or so years, Overture is there in percentage terms. Large growth in Madison Metro, mostly fuel costs but also declining state and federal aid and fare increases that didn’t keep pace with the overall growth in the budget. Debt service you have heard a lot about. Capital expenditures have increased dramatically over the last few years and that plays out in terms of what we pay in debt. If you look in terms of the total budget, about 13 – 14% increases, state aid has decreases, levy is about the same as the total budget, CPI is about 7 – 8% over that period of time.

Supplemental Requests
These are supplemental requests over the agency budgets and it shows what was included and what was not included.

Change in full time equivalent positions
page 19 – the top several positions are 15 new positions, 6.5 eliminated positions and then they list positions deleted and recreated.

Tax Rate Computation
page 20 – Assessed value, real and personal propertyBoard of Revew adjustments, TIF increment and calculations of how they get to the levy, the mill rate and taxes on the average value home.

Change in taxes on the average value home compared to levy increase
page 21

Macro Numbers
General fund, library fund, netting out debt services, major revenue category changes and general fund revenues that get into more detail.

Ledell Zellers asks about the underspending, does that include position vacancies? Schmiedicke says they build in salary savings in each budget and this is beyond that, fringe benefits and other things.

Larry Palm says that they are predefining the surplus for next year. Schmiedicke says that they are recognizing on a permanent basis what they would have put in the fund balance due to underspending.

New Handout
Schniedicke says that this is the way the general fund lapse will be shown in the final budget. The tax rate computation table, they move it from the general fund expenditures line to its own line and what they have is the budgeted expenditures of $275.7M and from a spending perspective it is $275.16M. So they get to the same levy numbers. The next page shows the expenditure summary. The miscellaneous appropriation page will have a separate line – that is a more appropriate way to show it since you will be appropriating the expenditure authority to the agencies and this is assumed city wide spending.

Larry Palm says he is nervous about the general fund lapse, can you as an accounting professional, explore your views. This is great the first year, next year it will be less. Schmiedicke says the assumption says that it will be recognized now and every year. It doesn’t mean that you have more, it is just that you set the base. The alternative is to apply it as fund balance and then it is a one time expenditure. If you look, historically this is low based on the actual underspending in the last 10 years. This was a way to reflect it, because they saw the fund balance grow due to the recovery of the economy, it is downward pressure on the rate of growth in the fund balance. It is a reasonable way to budget, as long as everyone understands it is a presentation issue and it would be money that would otherwise potentially go to the fund balance.

Mike Verveer asks about getting more “good news” are we awaiting any other figures like computer aid or anything else. Schmiedicke says not that they are aware of, the one piece they were waiting for was transportation aid and that was $80K higher, shared revenue doesn’t really change. Payment for Municipal Services is an estimate at the moment, but it is a number they got. Computer aid has been set.

Verveer asks about health insurance and the effect of WEA trust to our menu of health insurance plan options. Schmiedicke says it is a good question and created some consternation, the numbers they have seen from the premium perspective are higher than even the highest cost tier 1 plan that the city has, which is Dean Health Insurance and at first Employee Trust Funds has included the WEA trust premium in the average premium amoutn and then the city pays 88% of that raised the average, they contacted ETF and they removed it from the calculation of the average, but it is still available. They will pay only up to 88% of the plan. The ETF will have to evaluate that plan for next year in terms of the cost structure and if it qualifies as a tier 1 plan.