Clarksville, TN – This is Part II of the information about the proposed 2013 Clarksville City budget.
After several months of work the mayor got the final budget pieces to council members Friday night (June 1st, 2012) and wants the council to conduct its first vote this Thursday (June 7th). I will send out Part III on the budget tomorrow.
The Overall Picture – 3-year Comparison
Revenues – (made up of tax collections, license/permit fees, fine collections, in lieu of taxes and assorted other fees and investment income)
FY 2011 (Actual) – $70,338,921
FY 2012 (Budget) – $77,563,546 (Mayor McMillan’s first budget)
FY 2012 (Amended) – $82,546,471
FY 2013 (Proposed) – $75,150,573
The FY 2012 (Budget) revenue was based on borrowing $2.5 million and taking/transferring $1.5 million from Capital Project Fund.
The FY 2012 (Amend) revenue was based on the borrowed $2.5 million being enlarged to $3 million, the Capital Project Fund and the unexpected tax collection increase of about $3.75 million.
The FY 2013 (Proposed) revenue shows tax collections dropping about $2.5 million and doesn’t appear to be borrowing any money to balance the city general fund budget.
Expenditures – (money spent on city departments, taxes to state, fees to county, joint functions with county (airport, planning commission, etc.), non-profits, city sponsored functions, Transit System, capital projects, debt, etc.)
FY 2011 (Actual) – $72,279,890
FY 2012 (Budget) – $77,544,799
FY 2012 (Amended) – $75,233,462
FY 2013 (Proposed) – $81,045,568
As you can see in most years, at the beginning of the budget cycle preparation, more money is scheduled to be spent than is projected to come in. However, this is not always a financial doomsday setup for several reasons. During the year some projects may be scraped and the money is no longer needed for that purpose, thus expenditures are reduced.
Sometimes projects or equipment cost less than projected and expenditures go down. While grants are always on the city’s platter to go for, they cannot always be counted on to happen. However, unexpected grants help lower expenditure costs. While personnel positions are fully funded for a year people will retire, quit, or be fired and a gap in time and pay saved from when the last worker left and the new worker arrives will occur.
Fuel and maintenance costs may be lower than projected and more savings are recognized. Also, as we saw this year, late budget cuts can be taken to cut expenditures. However, there is a limit as to how far you want to push expenditures beyond revenue projections.
Reserve Fund Balance
It must be noted that it may take the city three or more budget years to collect all taxes, revenues and fees due it. That is why you see terms such as “actual”, “budget”, “amended” and “proposed”. These are snapshots of the various yearly budgets at different phases in their cycle. As an example, budgets in FY 2008 and FY 2009 (not listed in this report) initially showed projected revenue deficits of several million dollars in each of their proposed budgets, but actually had surpluses after several years.
Those surpluses are added to the Fund Balance, which is the city’s reserve or “rainy day” fund. The city’s reserve fund balance policy requires that a minimum of 20% of a projected budget to be set aside at the very beginning. It is the very first pot of money that is locked up and not touched. As the name implies, it is held in reserve (a positive fund balance) and not dedicated to any spending requirement. The reserve fund balance shows the city has backup financial means and has not spent the last “dime” it owns. It also helps when the city borrows money, allowing us to get better interest rates because we are a low risk by having money in reserve.
Many people (and some council members) get confused thinking that when a projected budget shows more spending for a year than incoming revenue, the city is out of money completely and needs to borrow or raise taxes. The reserve fund can build up over time due to unexpected extra collections and lower expenditures over the year. After a 20% reserve is set aside for projected spending, any amount over that can and is often used to make up for any shortfall in the upcoming budget year’s revenues.
You may ask if 20% is enough? Several years ago the percentage was a couple of points higher, but analysis showed we had excess money sitting around doing nothing when there were needs to be met. We could lower the reserve to 18% and not affect our bond ratings or emergency needs, if they arose. However, our city accountants get too nervous when that is mentioned.
While I have been on the council, the reserve fund balance has carried enough extra money above the 20% reserve requirement to offset any unequal revenue-expenditure projections for any new budget. That is until last year with Mayor McMillan’s first budget. The mayor’s initially proposed FY 2012 expenditure budget was around $4.5 million short in revenue and could not support the spending she wanted and maintain the required 20% reserve fund balance requirement.
In order to avoid needed cuts (which some of us were calling for), she chose to borrow $3 million and siphon $1.5 million from the CPRD, including those funds as “revenue” to the city. That is why half the council and myself were pushing hard for at least a couple of million dollars in cuts last year. We didn’t have the money to spend last year unless we borrowed it. The borrowing of money is the only reason we had a “balanced” budget.
The mayor’s budget is showing a surplus for the end of the 2012 budget of $7,313,009 (revenue: $82,546,471 – expenditure: $75,233,462), which she is throwing into the reserve fund balance. That looks and sounds good, but you must understand how the majority of that came about and what we are about to spend in FY 2013. Tax collections were unexpectedly high ($3.75 million), about $2 million of the $3 million in borrowed money for FY 2012 was not spent but kept in reserve (reference my comments in Part I), and the city finally took a $2.3 million budget cut in April which really eliminated the need for the $2 million borrowed (but kept). In addition, some other costs were higher than projected even with the budget cuts, so after working all the pluses and minuses the surplus was $7.3 million.
FY 2011 initially had a projected revenue deficit of over $5.1 million, but the reserve fund balance (even after setting aside 20%) had the excess funds to handle it. By the end of FY 2011, due to revenues and cost cuts still trickling in, the revenue deficit was down to $3.9 million and by the end of FY 2012 it down to $1.9 million. So over a couple of years around $2 million has been returned to the fund balance.
So FY 2012 may end with an incoming reserve balance of $17.5 million, plus the $7.3 million surplus for a total of $24.8 million. A minimum of $16.2 million will be required in the reserve fund balance for the mayor’s $81 million budget expenditure, leaving about $8.6 million for any revenue deficit. That looks and sounds real good. However, recent history seems to show that when the projected revenue deficits reach over $3 to $4 million the reserve fund balance may not ever completely recover. That is why I have shown you data from the FY 2011 budget cycle as an example.
The mayor’s projected revenue deficit for FY 2013 is $5,894,995. Deduct $5.9 million (rounded) revenue deficit from the projected reserve balance surplus $8.6 million you have $2.7 million left. This looks pretty good until you look how the list of Capital Projects will be be paid for. 2013 Capital Projects costs are over $12 million with that full amount appearing to be paid through borrowed money, instead of the usual mix of bonds, general funds and grants. It would also appear that some of the suggested Capital Projects could have (should have?) been listed as city department outlays that would normally be paid out of city general fund revenues or the surplus reserve balance. The borrowing of such money versus spending the revenues on hand pads the surplus, but adds to future debt and bond payments.
For more information, see: 2013 Clarksville City Budget Update – Part 1
Editor’s Note: This article contains the view points of Councilman Bill Summers and may not represent the views of the rest of the City Council, the City of Clarksville or ClarksvilleOnline.
