© 2015 h. j. umbaugh and associates, certified public accountants, llp. all rights reserved. the...

© 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, UMBAUGHIACC Annual ConferenceDecember 2, 2015


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

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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

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Long-Term Financial Planning


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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

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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

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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


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Long-Term Financial Planning – Possible Findings

• Lack of funding for capital purchases and improvements

• Identification of other funding sources• Budget savings opportunities• Investment opportunities


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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


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

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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.

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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

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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

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Possible Causes ofFunding Shortfalls


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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


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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


CIRCUIT BREAKER CREDITSHow 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


CIRCUIT BREAKER CREDITS

All credits (tax caps) are applied to the gross assessed value

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Property Type Tax Cap

Homesteads 1%

Other residential property, agricultural land, and long-term care facilities

2%

All other real and personal property (commercial) 3%


Circuit Breaker Example

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Taxing District #1

Taxing District #2

Taxing District #3

Property Type Residential HS Residential HS Residential HS

Gross A.V. of Property $100,000 $100,000 $100,000

Circuit Breaker Tax Cap 1% 1% 1%

Tax Cap $1,000 $1,000 $1,000

Net Assessed Value (after deductions) $32,750 $32,750 $32,750

Net District Tax Rate $1.5555 $2.5555 $3.5555

Calculated Tax Liability $509 $837 $1,164Amount in excess of Tax Cap $0 $0 $164


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.

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Sample Taxing District

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In this example, the County would be allocated 21% of total circuit breaker credits.

Allocation ofTaxing Unit Taxing Unit Rate % of Total Rate C.B. Credit

County $0.7469 21.0% $35Township 0.0386 1.1% 2 School 1.0556 29.7% 49 Library 0.0925 2.6% 4 Municipality 1.4530 40.9% 66 Special District 0.1689 4.8% 8

Total District Tax Rate $3.5555 100.0% $164


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!

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What’s the difference between a temporary cash flow shortage and a structural budget deficit?

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Cash Flow Shortage or Budget Deficit? Jan - Mar April - June July - Sept Oct - Dec Totals

Receipts:Property Tax -$ -$ -$ 900,000$ 900,000$ Auto Excise, CVET, FIT - - - 90,000 90,000 CAGIT/CAGIT PTRC - 37,500 - 37,500 75,000 Other Misc. Revenues 13,500 13,500 13,500 13,500 54,000

Total Receipts 13,500 51,000 13,500 1,041,000 1,119,000

Disbursements:Personal Services 195,825 195,825 195,825 195,825 783,300 Supplies 22,380 22,380 22,380 22,380 89,520 Other Services and Charges 55,950 55,950 55,950 55,950 223,800 Capital Outlays - - 8,952 13,428 22,380

Total Disbursements 274,155 274,155 283,107 287,583 1,119,000

Net Cash Flow (260,655) (223,155) (269,607) 753,417 - Beginning Cash 263,800 3,145 (220,010) (489,617) 263,800

Estimated Ending Cash 3,145$ (220,010)$ (489,617)$ 263,800$ 263,800$


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Jan - Mar April - June July - Sept Oct - Dec TotalsReceipts:

Property Tax -$ -$ -$ 900,000$ 900,000$ Property Tax Shortfall (36,000) (36,000) Circuit Breaker Tax Credit (94,000) (94,000) Auto Excise, CVET, FIT - - - 90,000 90,000 CAGIT/CAGIT PTRC 37,500 37,500 75,000 Other Misc. Revenues 13,500 13,500 13,500 13,500 54,000

Total Receipts 13,500 51,000 13,500 911,000 989,000

Disbursements:Personal Services 264,262 264,262 264,262 264,264 1,057,050 Supplies 22,375 22,375 22,375 22,375 89,500 Other Services and Charges 43,750 43,750 43,750 43,750 172,200 Capital Outlays - - - 130,000 130,000

Total Disbursements 330,387 330,387 330,387 460,389 1,448,750 -

Net Cash Flow (316,887) (279,387) (316,887) 450,611 (459,750) Beginning Cash 329,750 12,863 (266,524) (583,411) 329,750

- Estimated Ending Cash 12,863$ (266,524)$ (583,411)$ (132,800)$ (130,000)$

Cash Flow Shortage or Budget Deficit?


What is a balanced budget?

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A B C

Unfunded Budget

Funded(Not

Balanced) Balanced

Budget

Receipts:Property taxes 2,533,800$ 2,533,800$ 2,533,800$ CAGIT 1,274,500 1,274,500 1,274,500 Excise taxes 250,000 250,000 250,000 Fines and fees 181,800 181,800 181,800 Charges for services 660,100 660,100 660,100 Miscellaneous receipts 54,300 54,300 54,300

Total Receipts 4,954,500 4,954,500 4,954,500

Disbursements:Personal services 4,388,600 4,188,600 3,988,600 Supplies 305,700 305,700 255,700 Other services and charges 955,700 955,700 710,200 Capital outlays 200,000 50,000 -

Total Disbursements 5,850,000 5,500,000 4,954,500

Net Receipts/(Disbursements) (895,500) (545,500) - Beginning Cash and Investments 750,000 750,000 750,000

Ending Cash and Investments (145,500)$ 204,500$ 750,000$ 27

Budget Example


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


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


Managing Cash Flow Shortages and Budget

Deficits

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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


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.

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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


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

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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 purchasing35



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

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Common Funds and Uses

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Fund Name Fund Description and UsesClerk Title IV-D #1 Title IV-D incentive payments are distributed in equal shares to the County General Fund, the operating budget of the

Prosecuting Attorney, and the operating budget of the Clerk of Circuit Court. Funds may be expended without appropriation for any purpose for which the operating budgets of the Prosecuting Attorney and the Clerk of Circuit Court may be properly used as long as that purpose is for Title IV-D program activities. Deputies and employees in the offices of the Prosecuting Attorney and the Clerk of the Circuit Court may be paid additional salary from this fund without prior approval of the County Council; however, the additional compensation must be paid as an increase in salary.

Clerk's Record Perpetuation Receipts for this fund are generated from requests for access of public records and include the transmitting of documents by facsimile machine, document storage fees and late payment fees. This fund is to be appropriated and expended for the preservation of records and the improvement of record keeping systems and equipment.

County Economic Development Income Tax (CEDIT)

The receipts in this fund include the economic development income tax certified each year by the State. Current law allows this fund to be used for any lawful purpose and permits permanent transfers from this fund to the General Fund or any other appropriated fund.

Cumulative Bridge This fund is used to accumulate funds for the purpose of construction, maintenance and repair of bridges, approaches and grade separation. The funds can also be used for making the County-wide bridge inspections and safety ratings for all bridges in the County that are not on the state highway system.

Drainage Maintenance This fund is used for the necessary or proper repair, maintenance, study, evaluation of the particular drain or combination of drains upon which the Drainage Board finds that it is necessary.

General The purpose of this fund is to pay for the management, maintenance, operating costs and other costs associated with providing County services.


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Fund Name Fund Description and UsesHealth This fund is used to appropriate money and allocate expenditures for the operation of official county board of health.

Highway This fund is used for construction and maintenance of streets and alleys.

Local Road and Street This fund is used for the construction and maintenance of local road and street systems, payment of principal and interest on bonds sold to finance road projects and the purchase and repair of highway equipment. This fund may not be used to pay salaries and benefits.

Mental Health This fund is used to provide treatment and rehabilitation services to those whose lives are disrupted by emotional struggles, substance abuse and dependency, behavioral difficulties and severe mental illness.

Plat Book Maintenance This fund is used to provide funding sources for maintaining plat books and maps.

Probation User Fees Receipts for this fund include probation user fees paid when a person is convicted of a felony or misdemeanor. This fund may be appropriated only for the benefit of the courts of the County, and it may be used only to supplement probation services and to increase salaries for probation officers.

Property Tax Assessment Appeals This fund holds property tax receipts that are attributable to an increase in the taxing unit's tax rate caused by a reduction in the taxing unit's net assessed value. Money in this fund may be used only to pay expenses incurred by a a County Assessor in defending appeals with respect to property and taxpayer refunds. The balance in this fund may not exceed 5% of the amount budgeted by a taxing unit for a particular year.

Prosecutor Title IV-D #1 This fund receives State funding that has been converted from Federal IV-D program funds. The purpose of this fund is to pay for contracts with local prosecutors and child support enforcement offices.


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Fund Name Fund Description and UsesPublic Safety LOIT This fund receipts in the County's share of the Public Safety LOIT. This fund may be used for law enforcement systems,

emergency ambulance services, environmental clean-up, probation programs, community corrections programs, juvenile detention centers and facilities, jail, communications systems or enhanced emergency telephone systems, medical and health care expenses for inmates, and pension payments for sheriff and other members that provide public safety services.

Rainy Day This fund is used to support County operations and can be used for any legal purpose of the County upon approval of the County Council.

Reassessment This fund is used to accumulate receipts (primarily property tax) to provide funding for property assessments.

Recorder's Records Perpetuation Receipts for this fund are generated from charges for furnishing copies of records produced by a photographic process, for transmitting faxes, for duplicating a computer tape, a computer disk, an optical disk, microfilm or similar media and the supplemental fee for recording a document authorized by ordinance. The County Recorder may use money in this fund without appropriation for the preservation of records and the improvement of record keeping systems and equipment.

Riverboat This fund may be used for any legal or corporate purpose of the County. Money in the fund not currently needed to meet the obligations of the fund may be invested in the same manner as other public funds may be invested. Interest that accrues from the investments shall be deposited in the fund.

Statewide 911 This fund may be used for the lease, purchase, or maintenance of communications service equipment, necessary system hardware and software and data base equipment, personnel expenses the extent reasonable and necessary for the provision and maintenance of the statewide 911 system or a wireline enhanced emergency telephone system, and operational and other costs associated with E911

Surveyor's Corner Perpetuation This fund is used to maintain records of government corners, surveys, plats, maps and drainage records.


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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

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Questions?

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Contact Information

Paige E. Sansone, [email protected]

UMBAUGHIndianapolis Office: (317) 465-1500

www.umbaugh.com

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mailto:[email protected]

© 2015 h. j. umbaugh and associates, certified public accountants, llp. all rights reserved. the...

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