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Weekly UpdatesWe've all been there. That critical point in the budget process has finally arrived--the day the revenue forecasts are matched up against expenditure requests. "Ouch," we all say to ourselves, as our eyes quickly drop to that bottom line difference between the two. Revenues are not going to be sufficient to cover the proposed expenditures. Departmental budget requests have already been pared down significantly, leaving revenue adjustments as the only desirable action.
We know the drill. It's time to start asking those necessary revenue questions:
* Can we raise our revenue estimates some more?
* When did we last raise those inspection fees?
* Will the Board allow a tax increase?
* How much of our recreation budget should we be directly recovering from citizens? Have we adjusted that percentage in recent years?
* Can we find some new revenue sources to tap instead of proposing a tax increase?
* Are there services for which we might begin charging?
* How large an increase to general fees and charges will the public accept this year?
GFOA has addressed this very scenario in no less than three recent recommended practices: Setting of Government Charges and Fees (1996), Financial Forecasting in the Budget Preparation Process (1999), and Adoption of Financial Policies (2001). While each of these recommended practices addresses the revenue questions from a different perspective, they all share three common threads that are applicable to the situation described above:
* There are many different types of government revenues, each of which has unique characteristics that should be taken into consideration in forecasting and analysis.
* Governments should adopt revenue policies to set the rules for budget forecasts, and these policies need to be endorsed by the governing body.
* All revenues should be regularly reviewed and updated, based on the guidelines in the revenue policies and the unique nature of each revenue source.
This article demonstrates how one government has used this guidance to bring rigor to the revenue adjustment process.
FROM REACTIVE TO PROACTIVE
In developing revenue estimates for the fiscal 2003 and 2004 budgets, finance personnel at the City of Raleigh, North Carolina, worked with budget staff to change its reactionary approach to addressing revenue fluctuations. Consistent with the GFOA recommended practices, what developed was a revenue adjustment manual that established rational revenue adjustment processes based on the nature of the city's revenues. This manual, which was shared with the governing board, complements the city's overall budget policies.
Given the hundreds of fees and charges involved in city operations, the effort had to start with a way to organize all of these revenue sources into common categories that could be treated similarly for the purpose of forecasting and analysis. In the end, the city settled on the following revenue classifications:
Fees and charges that align with the city's cost recovery objectives. Typically, these are based on an objective of recovering a stated percentage of a given program's expenses, such as 75 percent of the building inspection program.
Revenues related to development activities. These charges are based on the city's stated goals and policies related to growth activities. For example, the city might require that builders pay 50 percent of the infrastructure costs of new development.
Charges that must align with local market forces. These are fees or other charges for programs that need to maintain a logical relationship with local market forces, such as parking fees at public facilities located in an area served by private parking facilities.
Revenues that have a relationship to the value of money. Charges in this category are ones that should be subject to ongoing inflationary or other indexes (i.e., privilege license fees).
Fines and violations. These are used as a means of enforcing compliance with city rules and regulations, and must be maintained at amounts consistent with this objective.
Self-supporting enterprise fees and charges. These are fees and charges usually associated with a governmental "business" enterprise, such as water or sewer. Such charges are often based on a formal rate model for factoring in relevant operational, capital, and debt service cost components. While not an absolute, many enterprise fees require regular adjustments to ensure that the full cost of the service is being recovered.
With just this framework established, the revenue barometer shifted significantly from the "subjective" side to the "objective" side, as the city began a more disciplined approach to developing the budget estimates around new objectives unique to each category.
EXECUTING THE PLAN
In sports terms, this first step was equivalent to writing the playbook for a game. The city still had to execute the game plan based on the agreed-upon policies. The city's budget team, comprised of personnel from the Finance and Administrative Services departments, assigned staff to begin using the new revenue classifications to create account-by-account projections. Unlike prior years, when revenues and expenditures were largely developed under parallel but separate processes, the new revenue plan interfaced nicely with the review of departmental budget requests. Consider the following examples:
* The city introduced a more focused effort to create a "fee-for-service" system for the solid waste collection program through the use of a solid waste fee. While envisioned as a multi-year process, management has already begun to educate the governing body about the rationale for recovering some percentage of the cost of solid waste collection.
* Parking operations began a coordinated review to not only determine what constitutes a competitive private parking fee in the downtown area, but also to develop multi-year projections of revenues needed to cover operating costs at new facilities.
* For the first time in recent years, meaningful discussion occurred at both the administrative and political levels on how the costs of new development should be funded. The city established facility fees in 1987, but had never adjusted these fees. During budget deliberations, officials discussed a number of adjustment options, ranging from simple inflationary changes to ones tied to formal cost recovery percentages.
* The city reviewed the costs of responding to false alarms and discussed potential fees and fines for repeat false alarms.
* The city developed comprehensive forecasting models for the water and sewer system, which was undergoing its largest-ever capital expansion. Managers used multi-year operating and debt service expenditure projections to arrive at the rates needed to remain fully self-sustaining and in compliance with legal rate covenants.
The final document--Proposed Revenue Fee Adjustments for the 2002-03 and 2003-04 Fiscal Years--summarized the results of these efforts and included details organized around the six major revenue classifications. For each area, the document included a description of the particular revenue category, information on any pertinent revenue policies, and the proposed revenue adjustments.
The city chose to include in this document only fees and charges, not tax-based revenues like property taxes, sales taxes, and utility franchise taxes. While taxes are the largest and most important source of city revenues, they are influenced to a great extent by factors beyond the city's control, such as the economy, regional growth, and the financial results of other organizations.
NO NEW TAXES
The National League of Cities recently reported that the most common revenue action taken by cities in 2004--and in the previous 17 years--was to increase fees and charges for services. Seventy percent of the nation's largest cities raised user fees in 2004, and more than 50 percent of the small and midsize cities did the same. Changes in property tax rates were much less common, with only 25 percent of the cities reporting increases in property tax rates (7 percent actually reduced property tax rates).
For many years now, cities have shown a preference for adjusting fees and charges to meet their budgetary needs, rather than increasing taxes. Given that the reliance on this form of revenue is likely to continue, it is important that efforts to raise fees and charges be done in a consistent. objective, and rational manner. As the GFOA recommended practices point out, this begins with developing formal revenue policies. Raleigh's experience has shown that organizing these policies around logical revenue categories facilitates the regular review of fees and charges and the consideration of proposed changes. Moreover, the consistent application of revenue policies enhances the integrity of the financial planning process.
Excerpts from GFOA Recommended Practices on Revenues
* Charges and fees should be reviewed and updated periodically based on factors such as the impact of inflation, other cost increases, the adequacy of the coverage of costs, and current competitive rates.
* Information on charges and fees should be available to the public.
* ... the [revenue] forecast, along with its underlying assumptions and methodology, should be clearly stated and made available to participants in the budget process.
* A formal policy regarding charges and fees should be adopted.
* A jurisdiction should adopt policy(s) that identify the manner in which fees and charges are set and the extent to which they cover the cost of service provided.
* GFOA recommends that, at a minimum, [revenue] policies be developed by professional staff and formally adopted by the jurisdiction's governing board.
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