© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. The Importance of Long-Term Financial Planning Presented by: Paige E. Sansone, CPA, UMBAUGH IACC Annual Conference December 2, 2015

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Topics for Discussion Long-Term Financial Planning Possible Causes of Funding Shortfalls Circuit Breaker Tax Caps Managing Cash Flow Shortages and Budget Deficits Common Funds and Uses 2

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Introduction Declining revenues and tax caps may significantly impact budgets Greater need to anticipate and identify budget deficits and cash flow shortages Long-term fiscal planning is key Fiscal projections are a necessary component of strong financial management 3

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Long-Term Financial Planning 4

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Long-Term Financial Planning – Purpose Provides historical perspective Defines current financial position Forecast receipts and disbursements for the next 3 to 5 years Identifies potential funding gaps Outlines funding options Develops plan to manage uncertainties and anticipate future risk 5 5

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Long-Term Financial Planning – Intended Results Provides a baseline for future financial operations Develops a model that may be modified as different needs arise and as priorities change Provides a guide to preserve or improve current financial position Other considerations: – Maintaining current service levels – Revenue increases – Spending reductions – Utilization of cash reserves 6

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 7 Long-Term Financial Planning – Possible Findings Strengths, weaknesses, opportunities, and threats Structural budget deficit – annual expenditures exceed annual receipts Insufficient cash reserves to cover recurring expenditures Temporary cash flow shortages Continued use of cash reserves to fund operating costs

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 8 Long-Term Financial Planning – Possible Findings Lack of funding for capital purchases and improvements Identification of other funding sources Budget savings opportunities Investment opportunities

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 9 Long-Term Financial Planning – Benefits Allows time to prepare contingency plans when shortfalls or delays in revenues occur Contributes to better, more timely decision making and financial management Provides a tool to project fiscal impacts of major policy decisions Identifies the need to borrow money to purchase capital items to prevent future cash deficiency

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Long-Term Financial Planning – Development Analyze the financial results of the past two to three year to identify trends in revenues and expenditures that will aid in the development of future projections Determine whether past trends will continue. If not, what changes need to be incorporated into your projections? Include future estimates of circuit breaker tax credits 10

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Long-Term Financial Planning – Development Consider changes in property tax appeals or uncollectible taxes Adjust income tax allocations (CAGIT, COIT, EDIT, Public Safety LOIT) to reflect economic changes Include scheduled changes in personnel costs to reflect labor contracts or expected increases in health care costs Consider changes in utility costs, supply costs, liability insurance etc. 11

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Long-Term Financial Planning – Development Determine appropriate level of cash reserves for each fund Include major maintenance and capital expenditures Include changes in debt service obligations Identify future needs – personnel, land, buildings, equipment, improvements, etc. Prepare a five-year capital improvement\replacement plan 12

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Long-Term Financial Planning – Development Identify available funding options – New revenue sources – Increase existing revenues – Cost reductions – Cost elimination Develop a plan to meet the goals and priorities of the County Continually monitor and update the plan as necessary 13

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Possible Causes of Funding Shortfalls 14

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 15 Possible Causes of Funding Shortfalls Timing Issues (Temporary) – Delayed tax rate certification and late mailing of tax bills – Only two tax draws (June and December) – Delinquencies (collection rates historically below 100%) Local Income Taxes – Affected by economic downturns and changes in levies of other taxing units within the county Erroneous Assessed Values – Certified net assessed value substantially different from previous year – Net assessed value used to calculate tax bills much lower than certified net assessed value used to calculate tax rates

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 16 Other Possible Causes of Funding Shortfalls Taxpayer Refunds – Due to erroneous assessed values – Large number of assessment appeals settled in favor of the taxpayer – Abatements not applied Structural Budget Deficit – Annual disbursements exceed annual receipts Circuit Breaker Credits – Reduction of property tax distribution

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. CIRCUIT BREAKER CREDITS How do they affect your budget? The Circuit Breaker is a tax cap that limits taxpayer liability If calculated tax liability exceeds cap, credit is applied to tax bill Percentage caps are based on property type Credits are a direct reduction of a taxing unit’s property tax receipts Credits affect actual property tax distributions and have no affect on “certified” levies  Very important Actual losses due to circuit breaker credits may not be determined until tax bills are calculated Tax rate increases may cause increases in circuit breaker credits 17

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. CIRCUIT BREAKER CREDITS All credits (tax caps) are applied to the gross assessed value 18 Property TypeTax Cap Homesteads1% Other residential property, agricultural land, and long-term care facilities 2% All other real and personal property (commercial) 3%

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Circuit Breaker Example 19

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. How are Circuit Breaker Credits Distributed to Taxing Units? Circuit breaker credits are allocated to taxing units based on the percentage the taxing unit’s tax rate is to the overall district tax rate. 20

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Sample Taxing District 21 In this example, the County would be allocated 21% of total circuit breaker credits.

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Budgeting with Property Tax Caps Estimate loss of property taxes due to circuit breaker Monitor activity of other taxing units within the county – tax rates, levy appeals, debt issuance Develop a plan to absorb circuit breaker losses Remember that DLGF certified budgets and levies do not include circuit breakers! 22

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. What’s the difference between a temporary cash flow shortage and a structural budget deficit? 23

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 24 Cash Flow Shortage or Budget Deficit?

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 25 Cash Flow Shortage or Budget Deficit?

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. What is a balanced budget? 26

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 27 Budget Example

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Anticipating Shortfalls Identify the “causes” that may affect your taxing unit Identify trends from historical activity Prepare monthly and long-term cash flow projections and continually monitor Understand the difference between a temporary cash flow shortage and a structural budget deficit 28

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Financially Distressed Unit – Possible Reasons Reliance on DLGF to make budget reductions Annual budgets did not match spending with receipts Dwindling cash reserves Significant losses due to circuit breaker credits No plans or procedures in place to manage cash flow shortages No long-term fiscal planning Ineffective communication 29

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Managing Cash Flow Shortages and Budget Deficits 30

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 31 Managing Cash Flow Shortages Maintain Adequate Cash Reserves Temporary Borrowing from Other Funds – Taxing units may temporarily borrow money from any fund – The borrowed money must be repaid by the end of the current budget year or by June 30 of the ensuing budget year (if emergency declared by fiscal body)  Tax Anticipation Warrants – 1-year loan from a financial institution – Borrowing against future tax draws – Interest costs

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Managing Cash Flow Shortages Defer Non-Essential Spending – Example – Capital Outlays – Consider policy to delay non-essential spending until such time as property taxes revenues are fixed and measurable – May be as late as December of each year Declare Inactive Funds Dormant – Look for funds that are no longer in use that have existing balances. – Funds can be declared dormant by the fiscal body and remaining balances may be transferred to the General Fund. 32

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 33 Managing Budget Deficits Reduction of Current Budget (Appropriations) – Estimate realistic expenditures through year-end – Formalize budget reductions with the passage of a “Reduction of Appropriation” resolution Discontinue Additional Appropriations – Only request additional expenditures (appropriations) in extenuating circumstances. – Determine if the “additional” expenditure can be deferred to a future period or funded by reducing an appropriation in another area. Stay informed about financial status – Maintain accurate accounting records – Prepare monthly cash flows – Develop a long-term financial plan

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Other Options for Managing Budget Deficits Temporary Solutions: Sell assets Use cash reserves in operating funds Pay operating costs out of Rainy Day and Riverboat funds Institute hiring/wage freezes Declare inactive funds dormant and transfer remaining balance to General Fund 34

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Other Options for Managing Budget Deficits Long-Term Solutions: Increase or implement fines and fees Adopt local option income tax Increase CCD Fund rate to maximum allowed Consider modifying employee health plans (employer/employee contributions) Shift appropriations from financially distressed funds to those with cash surplus Bulk purchasing 35

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Other Options for Managing Budget Deficits Long-Term Solutions: Consolidate service delivery with other units of government Obtain better returns on idle cash Offer early retirement Reduce hours of operation Outsource functions such as payroll and accounts payable Eliminate vacant positions 36

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Common Funds and Uses 37

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 38

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 39

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. 40

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Summary Long-Term Financial Planning is the key to strong financial management A plan will help to identify funding deficits and available options to bridge funding gaps The plan can be used as a model that can be updated and modified has needs and priorities change 41

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Questions? 42

© 2015 H. J. Umbaugh and Associates, Certified Public Accountants, LLP. All rights reserved. Contact Information Paige E. Sansone, CPA UMBAUGH Indianapolis Office: (317)