Utility Financial Management AWWA Intermountain Section Leadership Forum Session Two November 10, 2015

BUDGET PROCESS

Outline Who is Involved in Budget Preparation Who is Involved in Budget Preparation Main Components to a Budget Main Components to a Budget Strategic Plan (Master Plan) Strategic Plan (Master Plan) Annual Operating Budget Annual Operating Budget Annual Capital Budget Annual Capital Budget Approaches to Budget Preparation Approaches to Budget Preparation Example of Budget Steps / Budget Process Example of Budget Steps / Budget Process

Who Are the Players City Council/Board of Trustees City Council/Board of Trustees Managers Managers Department Heads Department Heads Accounting Accounting Employee input Employee input as appropriate as appropriate

Strategic Plan Strategic Planning Video

Strategic Plan Strategic plan is critical to budget process Strategic plan is critical to budget process Defines long-range goals and objectives Defines long-range goals and objectives Starts and evolves around utility mission Starts and evolves around utility mission Provides parameters for short range goals Provides parameters for short range goals Takes into account other partner entities Takes into account other partner entities Top management identifies, implements, and monitors long range goals in plan Top management identifies, implements, and monitors long range goals in plan

Strategic Plan Importance of Effective Strategic Plan Importance of Effective Strategic Plan Dilbert – “Do you prefer that I spend my day planning which doesn’t look like work or should I plunge in to my work with aggressive randomness?” Dilbert – “Do you prefer that I spend my day planning which doesn’t look like work or should I plunge in to my work with aggressive randomness?”

Strategic Plan

A strategic plan provides the framework to prepare: A strategic plan provides the framework to prepare: Annual Operating Budget Annual Operating Budget Annual Capital Budget Annual Capital Budget

Operating Versus Capital Operating Budget Operating Budget Day to Day Revenues & Expenses Day to Day Revenues & Expenses Payroll, Supplies, Legal & Professional Payroll, Supplies, Legal & Professional Capital Budget Capital Budget Anticipated Useful Life of More Than 1 Year Anticipated Useful Life of More Than 1 Year Significant Value (Determined by Policy) Significant Value (Determined by Policy) Equipment, Vehicles, Land Acquisition, Infrastructure Projects Equipment, Vehicles, Land Acquisition, Infrastructure Projects

Capital Budget Expansion of the strategic plan Expansion of the strategic plan Implementation of specific and prioritized projects Implementation of specific and prioritized projects Move organization towards its goals Move organization towards its goals Schedule of large expenditures / projects Schedule of large expenditures / projects Planned several years in advance Planned several years in advance May involve additional public May involve additional public hearings, review meetings hearings, review meetings

Operating Budget Operating Budget: Revenue Revenue Expenses Expenses

Revenue First step in budget process First step in budget process Can be influenced by external factors Can be influenced by external factors Political - Considerable impact through rates Political - Considerable impact through rates Physical - Weather Physical - Weather Other factors Other factors Business cycles Business cycles Economic conditions Economic conditions New development New development Conservation Conservation

Revenue Operating Revenue (Normal Course of Business): Operating Revenue (Normal Course of Business): Water Sales Water Sales Basic service fees Basic service fees Engineering review and inspection fees Engineering review and inspection fees Misc. fees: Misc. fees: Penalties, reconnection fees, sign-up fees, other income, etc. Penalties, reconnection fees, sign-up fees, other income, etc.

Non-Operating Revenue Non-Operating Revenue: Non-Operating Revenue: Property taxes Property taxes Interest income Interest income Impact fees Impact fees Grant Proceeds Grant Proceeds

Operating Expenses Second step in budget process Second step in budget process Expenses Include: Expenses Include: Payroll, Payroll Taxes, EE Benefits Payroll, Payroll Taxes, EE Benefits Water purchases, production, treatment Water purchases, production, treatment Utilities Utilities Maintenance, materials, supplies Maintenance, materials, supplies Contract / professional services Contract / professional services Training, travel Training, travel Legal & accounting fees Legal & accounting fees Vehicle repair and maintenance, etc. Vehicle repair and maintenance, etc.

Non-Operating Expenses Debt service Debt service Other Other

Capital Budget Break down into departments Break down into departments Usually larger items requested by department heads Usually larger items requested by department heads Items over a specified amount include: Items over a specified amount include: Projects identified in strategic (master) plan Projects identified in strategic (master) plan Line replacement Line replacement New reservoir New reservoir Meter replacement, reading hardware Meter replacement, reading hardware Equipment, vehicle purchases Equipment, vehicle purchases Computer hardware, software Computer hardware, software

Approach to Budget Preparation Two processes: Top down or bottom up Top Down: Top Down: Top Management decides the level of expenses Top Management decides the level of expenses Divides them among department as needed Divides them among department as needed Budget developers follow management directives Budget developers follow management directives Can be unrealistic, does not incorporate input of those who implement it Can be unrealistic, does not incorporate input of those who implement it

Approach to Budget Preparation Bottom up: Bottom up: Department heads submit estimated expenses with justification Department heads submit estimated expenses with justification Budgets are reviewed to eliminate unnecessary spending and spending that can be delayed (let departments know) Budgets are reviewed to eliminate unnecessary spending and spending that can be delayed (let departments know) Helps ensure spending is well-managed and not wasteful Helps ensure spending is well-managed and not wasteful Pushes decision making process down through organization freeing senior management resources Pushes decision making process down through organization freeing senior management resources Department heads can measure own performance and take corrective action as required Department heads can measure own performance and take corrective action as required Can lead to over budgeting causing issues in overall budget Can lead to over budgeting causing issues in overall budget

Approach to Budget Preparation Can use a combination of both Can use a combination of both Department heads submit expenses Department heads submit expenses Top management decides level of expenses based on department estimations and historical information, such as past actuals and YTD projections Top management decides level of expenses based on department estimations and historical information, such as past actuals and YTD projections Budget is developed based on the above steps Budget is developed based on the above steps Department budgets are managed by department heads Department budgets are managed by department heads

Budget Management & Tracking Budget Management Video Budget Management Video Budget Management Video Budget Management Video

Budget Steps / Process Provide Historical Information & Budget Sheets to Managers (Early August) Provide Historical Information & Budget Sheets to Managers (Early August) Manager’s Budget Requests Due (Early September) Manager’s Budget Requests Due (Early September) Preliminary (September) Preliminary (September) Tentative (October) Tentative (October) Proposed (November) Proposed (November) Public Input Public Input Rate Hearing Rate Hearing Final (December) Final (December)

Preliminary Budget Incorporate department estimates into operating budget and capital budget Incorporate department estimates into operating budget and capital budget Review 2-3 years actuals, YTD actuals, and projected Review 2-3 years actuals, YTD actuals, and projected Estimate revenue, expenses and capital Estimate revenue, expenses and capital Prepare preliminary budget for council/board review (not required by law but is a good tool) Prepare preliminary budget for council/board review (not required by law but is a good tool) If recommending rate increase or tax increase, inform council/board If recommending rate increase or tax increase, inform council/board

Tentative Budget Make adjustments to preliminary budget based on council/board input (show adjustments) Make adjustments to preliminary budget based on council/board input (show adjustments) Update YTD numbers Update YTD numbers Update revenues, expenses, and capital budget Update revenues, expenses, and capital budget Prepare tentative budget, present for adoption Prepare tentative budget, present for adoption After adoption After adoption Set a public hearing date for approval of budget Set a public hearing date for approval of budget Set a public hearing date for rate & tax increase (if applicable) Set a public hearing date for rate & tax increase (if applicable) Advertise budget hearing & increases in newspaper Advertise budget hearing & increases in newspaper Post hearing information on public notice website Post hearing information on public notice website Display tentative budget for seven days before budget hearing date Display tentative budget for seven days before budget hearing date

Proposed Budget Make adjustments to tentative budget based on council/board input or public input Make adjustments to tentative budget based on council/board input or public input Update revenues and expenses (same as tentative process) Update revenues and expenses (same as tentative process) Prepare proposed budget Prepare proposed budget Present at budget hearing Present at budget hearing

Proposed Budget Presentation Summarize operating, non-operating revenue and expenses Summarize operating, non-operating revenue and expenses Include capital expenses Include capital expenses Determine budget surplus or deficit Determine budget surplus or deficit If deficit, present how will it be covered If deficit, present how will it be covered Rates (advertise and hold public hearing) Rates (advertise and hold public hearing) Property Taxes (Truth in taxation process) Property Taxes (Truth in taxation process) Reserves Reserves

Proposed Budget Presentation From rate increase and/or property taxes: From rate increase and/or property taxes: Present proposed increases Present proposed increases Present amount of revenue derived from increases Present amount of revenue derived from increases From reserves: From reserves: Acts as a storage reservoir Acts as a storage reservoir Part of an overall long-term financial plan (strategic plan) Part of an overall long-term financial plan (strategic plan) Specific goals should be established Specific goals should be established Emergency fund Emergency fund Debt service fund Debt service fund Anticipated capital project funds Anticipated capital project funds Operating reserves based on xxx days (determined by management in strategic plan) Operating reserves based on xxx days (determined by management in strategic plan) Replace what is taken Replace what is taken Cities have different reserves requirements and constraints Cities have different reserves requirements and constraints

Final Approval Board meeting following proposed budget Can have hearing before final approval if needed Take public comments into consideration Board/council approve budget Submit adopted budget to state auditor

What Budget Cuts Are Like Budget Cut Video