POWER OF 3: VALUE, CHALLENGES OF THREE-YEAR BUDGETING MAC LEGISLATIVE CONFERENCE MARCH 31, 2015

Presentation Outline

Oakland County’s Approach to Budgeting Leadership Process and best practices Monitoring

Navigating the Challenges Myths, misconceptions, and incentives

Realizing Value Incremental changes yield big results over time

Team Leadership

Approach to Budgeting 1st

Board of Commissioners

LEADERS WORKING TOGETHER

Jessica Cooper

Prosecutor

Michael Bouchard

Sheriff

Lisa Brown Clerk

Andy Meisner Treasurer

Jim Nash Water

Resources Commissioner

L. Brooks Patterson

County Executive

Nanci Grant Circuit Court

Elizabeth Pezzetti Probate Court

Julie Nicholson District Court

Elected Officials

THE key players. You need their buy-in to effectively use long-term

financial planning Improved organizational management Ensures stability Better budgeting process More strategic relationship with the CFO

Advantages for Elected Officials Identify problems

Identify financial problems before they hit the headlines. Solve problems

Financial planning helps find solutions to financial challenges, very often before drastic (and painful) action is required

Setting goals, meeting goals Financial planning aligns financial capacity with service goals

Policy Long-term financial planning is good governance

Constituent communication Help elected officials describe to citizens how they are providing good

stewardship over the citizens' taxes

Process & Practices

Approach to Budgeting 2nd

LONG-RANGE PLANNING FISCAL PLAN

Formal strategic plan and financial analysis leading up to the preparation of a triennial budget

Oakland County’s preliminary fiscal plan is balanced through FY 2020

Establish fund equity target levels for Sept. 30, 2020 Minimum General Fund equity target is 20% of the FY 2020 projected

expenditures

Critical to the process - identify the shortfall in the interim periods, if any Accelerate the on-going reductions through budget tasks given to

operating departments in order to avoid adverse operating issues during the interim fiscal periods. Start resolving fiscal issues early!

LONG-TERM FISCAL PLAN

OAKGOV.COM/EXEC

General timing of process:

Fiscal Plan

October Closing of September 30 accounting records

December/January Preliminary long-term fiscal plan analysis prepared (property tax projections, State year-end closing information, revenue consensus estimating conference, Governor’s budget recommendation, etc.)

March / April Fiscal plan analysis produced and distributed to county’s elected officials. (1st quarter forecast report, property taxes near final, etc.)

April / June Triennial budget recommendation produced based on fiscal plan and 2nd quarter forecast

July / September Board of Commissioners review and approve operating budget

Setting Multi-Year Targets

CURRENT FISCAL YEAR

MULTI-YEAR BUDGETARY PLANNING PROJECTIONS FOR FUTURE SUBSEQUENT FISCAL YEARS

FY 0 FY 1 FY 2 FY 3

Beginning Fund Balance

Projected Beginning

Fund Balance

Projected Beginning

Fund Balance

Projected Beginning

Fund Balance

Estimated Rev. – Exp. =

Net Inc. or Dec.

Projected Rev. – Exp. =

Net Inc. or Dec.

Projected Rev. – Exp. =

Net Inc. or Dec.

Projected Rev. – Exp. =

Net Inc. or Dec.

Est. Ending Fund Balance

Projected Ending Fund Balance

Projected Ending Fund Balance

Projected Ending Fund Balance

Shortfall Assigned as Budget Task in

this Period

Portion of Shortfall Assigned as Budget Task in this Period

Portion of Shortfall Assigned as Budget Task in this Period

Amount Needed to Meet Fund Balance Target

BUDGET PRACTICES Multi-Year Budget

Oakland County relies on long-term budgeting

Biennial budgets since 1987

Expanded to triennial budget in 2009

Expanded further to include 2-out years in a summary manner

Two periods within the past decade required intense action

Early 2000’s recession

2007 with the start of the real estate market decline

Timely and frequent budget amendments:

Adjusts current and subsequent years’ budgets

Formal resolution approved by Board

Accurate, interim financial reports submitted to management

Triennial Budget + Quarterly Forecasts + Frequent Budget Amendments = Current Budget + Diligence + Proactive Measures

In addition to 3 years of a detailed line item budget, two additional years beyond that point are also projected but at a higher summarized level. The summarized estimated level of revenues and expenditures for those two “out” years were more formalized as part of last year’s budget process.

BUDGET PRACTICES Current “Rolling” Triennial Budget

A healthy fund balance is an essential ingredient for long-term budget flexibility and sustainability = adequate cash flow

Significant increases in fund balance over the past decade is a result of planned, continuous budget reductions

ATTENTION TO FUND BALANCE

BUDGET PRACTICES Other Controls

Positions Budgeted at Full Employment

Budget for salaries / fringes based on a forecast of each and every authorized position

Position requests require a funding source – new revenues and / or reductions in expenditures elsewhere in the departmental budget

No budget turnover assumed – vacant or under-filled positions create favorable variances

Assures spending control by position

Contributes to a healthy fund equity.

Provides a ‘contingency’

Gosling amendment – when grant funding ends, the operating program terminates

10-year capital plan for buildings and technology

Monitoring

Approach to Budgeting 3rd

Budget Task Force

The Budget Task Force provides

recommendations in support of

County Executive budgetary, financial, and programmatic

strategies

Established by the County Executive in late 2002 in recognition of long-term financial challenges on the horizon

Meets weekly to monitor compliance with budget and to address impending or potential issues

Financial Reporting

At least quarterly & at start of budget process

High-level summary – with talking points

Include simplified balance sheet

Highlight variance analysis Budget to actual Projected year-end Key balance sheet data

Quarterly Forecasts

PA 139 of 1973 requires the Oakland County Executive to report the current financial condition of the County to the Board of Commissioners on a quarterly basis

The County Executive exceeds this requirement by not only reporting the current financial condition of the County each quarter, but also provides a quarterly forecast of the projected financial condition of the County at the close of the current fiscal year

Any recommended budget amendments are presented with the quarterly forecast and individual departments may be called to appear before the Finance Committee

Drill Down Within Department

Myths and misconceptions

Navigating the Challenges

Myths

Some officials mistakenly believe that State law prohibits local governments from “adopting” a multi-year budget Response: State law requires the annual adoption of a

General Appropriations Act, however, it doesn’t prevent a government from adopting a multi-year budget “plan”

Some officials believe that a multi-year budget will result in an outdated stale budget under the false assumption that once a multi-year plan is adopted, it does not get updated more often than the multi-year period Response: The annual budget appropriation AND the

extended multi-year budget plan should be amended to “stay the course”

Misconceptions

Some officials postulate that it is too difficult to predict future revenues or other financial variables outside of their control Response: ensure that reliable data are the foundation in

the analysis and forecasting process, then amend the plan as new data becomes available Don’t let the goal of “perfection” stand in the way of a

long-term plan that can be adjusted along the way Consider the potential range of projected values;

remember 80/20 rule Change mindsets Institutionalize long-term thinking

Misconceptions

Some officials think that implementing a multi-year budget is technically complex and requires a sophisticated financial system

Response: The technical aspect of converting from an annual budget to a multiple-year budget may be the easiest part A budget is basically a compilation of spreadsheets From a technical perspective, expanding the budget for additional

years involves adding additional columns to the spreadsheets

FY2015

FY2016

FY2017

BY2015

BY2017

BY2016

BY2018

BY2017

BY2019

BY2018

BY2018

BY2019 BY2016

BY2017 BY2020

Budget (Ledger)

Budget Prep (Ledger)

Annual Process “Rolling” Triennial Budget

Ledger – Scenarios

Incentives

Navigating the Challenges

Use of Tasks / Incentives

“Central” Tasks vs. Allocated Tasks First, across-the-board “central” reductions are explored to

offset projected budget shortfalls. Examples include:

General compensation changes

Use of available fund balances One-time resource Used over several periods

Any remaining shortfall then results in an allocated “budget task” to Oakland County’s elected officials

Actual fund balance

- Target level of fund balance

Available fund balance

÷ 3 (for three fiscal periods)

Amount for use in each period

Use of Tasks / Incentives

Budget reduction tasks established for each elected official and department head, permitting each to determine program priorities for their areas

All elected officials cooperated and either met or exceeded budget task allocations

“Credits” were given for early reductions – Credits are one-time in nature and could be used to offset

future years’ tasks if needed – Credits are reflected as assignments in fund balance and

segregated by elected official – This approach resulted in implementing structural

reductions sooner rather than later

Good Communications

Don’t play the blame game Help elected officials deliver key

messages No surprises Alter politics Show that it is not all pain Develop and adopt financial policies

Realizing Value

Long-term Stable General Fund Balance

$84,327

$106,267

$149,006

$201,162 $223,429

$242,773 $253,985

$219,870

$190,709

$164,824

$143,587 $127,205

19.6%

25.1%

39.3%

53.8%

57.6% 63.1%

64.0%

52.6%

45.1%

38.7%

33.6% 29.6%

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

FYE 2008 FYE 2009 FYE 2010 FYE 2011 FYE 2012 FYE 2013 FYE 2014 FYE 2015* FYE 2016* FYE 2017* FYE 2018* FYE 2019*

Estimated General Fund Balance (in thousands)

Fund Balance Amount(Actual and Projected)

*Estimated for FYE 2015 - FYE 2019

Target = $85 million (20%)

Note: The above chart represents the estimated level of General Fund balance based on the FY 2015 - FY 2017 Triennial Budget that was adopted in September 2014.

Percentage calculation = fund balance/expenditures

↕

Cumulative savings estimated to be $65 million annually

EXAMPLES OF INCREMENTAL BENEFIT CHANGES

Longevity pay based on service increment was eliminated in 1984 Cumulative salary and fringe benefit savings estimated to be over $130

million since implementation The traditional retiree health care plan was closed for new hires and replaced

with health savings accounts (HSA’s) in 2006 Long-term savings estimated to be $400 million

Nearly 90% of current active employees are now on DC pension plan Plan was closed to new employees hired after 1994 Actual savings in 1996 was $3.1 million Annual savings have grown to approximately $7.5 million annually Cumulative savings estimated to be over $107 million since implementation

Multi-year budgeting is the first step necessary for long-term financial stability . . . Next step, aim for resiliency

Why multi-year budgeting?

Resiliency Characteristics

1. Diversity 2. Redundancy 3. Decentralization 4. Collaboration

5. Fail gracefully 6. Flexibility 7. Foresight 8. Transparency

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QUESTIONS?

PRESENTER CONTACT INFORMATION LAURIE VAN PELT, CPFO DIRECTOR, MANAGEMENT & BUDGET OAKLAND COUNTY

VANPELTL@OAKGOV.COM (248) 858-2163