Financial Managementby Jon Lang

Financial Management Why we do it!

“The difference between financial management in the public and private sectors is that in public agencies you get a bag full of money at the beginning of the year and are told to spend it. In private enterprise you get an empty money bag at the beginning of the year and are told to fill it!”

Michael Read

Financial Management How we do it! “Public works departments are not

financed by waving a magic wand. They are created with the money that government is able to take away from its citizens.”

Ludwig Von

Ostrowski

Financial ManagementWho We Do It With! Finance Officers Qualification Test:Add these numbers:

– $1.00– 2.00– 3.00

Financial Management• Budgets

Why We Budget Preparing Your Budget Presenting Your Budget

• Operating Funds General Funding Utility Funding

• Capital Financing Revenue, Debt & Grant Financing Public Private Partnerships

Budgets

A plan for managing your resources

Budgets• Why We Budget• Preparing Your Budget• Presenting Your Budget

Why We BudgetIt’s the Law!• Must have a fiscal year budget• Must be approved by June 30th

• Must be balanced • Can be prepared biannually

Why We BudgetTo Manage Our Resources People• Money• Time

Why We BudgetLocal Policy• Policy Influences Budgets

– Tax Levy Limits– Utility Rates– Franchise Fees

• Policy Gets Established– Public Safety vs. Public Works– Street Cleaning vs. Street Resurfacing

Preparing Your BudgetEstablish Your Mission• What is your PW Mission?• Do you have a Strategic Plan to accomplish

it?• Have you prepared Goals and Objectives?• Has your governing body approved these

items?

Preparing Your BudgetMeasure Your Mission• Asset management

– How many assets do you have?– What condition are they in?

• Benchmarking– What should your activities cost?– How many people do you need?

Preparing Your BudgetPut It In Writing• Incremental Budgeting

(Selective increases or cuts from the current year)

• Program Budgeting(A budget for your objectives)

• Zero Based Budget(Establishes your mission, goals and objectives)

Preparing Your BudgetSome Strategies• You don’t get what you don’t ask for• Just in case budgeting• A chicken in every pot

Presenting Your Budget

Know Your Audiences• Elected Officials

– Short-term view and public desires• Public Works Director

– Long-term view and infrastructure needs• City Manager and/or Finance Director

– Policy and Legal view and an adopted budget• Taxpayers

– Personal view and what I want

Presenting Your BudgetThe Internal Review• Show “good management”

– Follow the rules and be realistic• Don’t surprise the boss!

– Make deals ahead of time• Get budget approval

– Close the sale now!

Presenting Your BudgetThe Public Presentation• Have your supporters present• Use charts and graphs• Focus on:

– Meeting needs (The Mission)– Cost-efficiency– Political and public benefits

Operating Funds

Operating funds are used for operation and maintenance activities

Operating Funds• The Funds• The Color of Money• Permission Slips• Generating Revenue

The Funds – Two TypesGeneral Fund

• Relies on property & business taxes

• Legal limitations on tax amount

• Competition for funds among agency departments

• Limited relationship to cost of service

Utility Funds• Relies on fees charged for

a service• Practical limitations on fee

amount• Limited competition for

funds from other departments

• Usually based on cost for service

The Funds – Their UsesGeneral Fund

• Parks, Police, Fire, Planning, Finance, etc.

• Special Funds– Transportation– Storm Drainage – Street lighting– Cemetery

Utility Funds Sewer Solid Waste Storm Drain? Transportation?

The Color of Money• Each fund is a different kind (color) of

money• Fund monies can only be used within that

fund• But, there are permission slips to use one

fund’s money in another fund

Permission SlipsOverhead Allocations Generally paid by utilities and special funds

• Pay for general services• General management & council costs• Finance• Legal• Purchasing• Information Services

• Allocation formulasBased on labor or total revenue

Permission SlipsInteragency Services Paid by one fund to another fund for providing

services • Why pay another fund for services?

– Policy – Efficiency– Politics

• The issues– Loss of control– Quality of work– Scheduling

Permission SlipsFranchise Fees Paid by enterprise funds to the general fund for the

“right to operate” in the public right-of-way

• Cities can charge franchise fees• Public and private utilities pay• Funds go to general fund

Generating Revenue• Utility Rates

– Customer service fees• Permit Fees

– Non-service fees• Providing Services

– Interagency agreements– Intergovernmental agreements

• Selling Products– Sale of service by-products or unneeded items

Generating RevenueThe Art of Setting Utility Rates• Factors

– Legal requirements– Political considerations– Public considerations

• Strategies– Full cost vs. subsidized cost– Periodic increases– Rate comparisons

Capital Financing• Cash• Debt• Free Money• Private Money

Cash – Current Revenue• System Development Charges

– Paid by new development for capacity– Reimbursement Fees

• Based on prior investment– Improvement Fees

• Based on proposed improvements

• Utility Rates• Taxes

DebtGeneral Obligation Bonds• Used for “public” capital improvements• Require voter approval • Backed by the taxing power and full faith and

credit of the municipality• Usually paid from property tax revenue• Require time to plan, approve, and implement, so

funds are not available on short notice

DebtRevenue Bonds• Used to finance improvements for which fees are

charged• Backed only by the dedicated revenue source• Higher interest rates because of less guarantee• Usually no vote is required• Funds can be obtained in a shorter time

DebtAssessment Bonds• Finance local capital improvements through

an LID or Assessment District• Property owners pay assessments in cash or

payments over 10+ years • Used for water, sewer, streets, stormwater

Free Money? – Grants• Strings attached

– Eligible– Allowable

• Matching funds• Lots of paperwork• The “public” likes them• May not be worth it

Private Money – PPP

Public Private Partnerships (PPP) are any scenario in which the private sector assumes a role greater than the traditional planning, design and construction for a fee in a public project.

Public Private PartnershipsTypical Procurement Packages• O & M on a performance basis• Program management with cost and schedule

incentives• Design-build for fixed fee in fixed time• Project build-operate-transfer (BOT)• Design-build finance-operate transfer (DBFO)• Build-own-operate (BOO)

Public Private PartnershipsPPP Financing Methods• Shareholder equity• Grant anticipation bonds• General obligation bonds• Revenue bonds• State infrastructure loans/funds• Federal grants• Direct user charges

Public Private PartnershipsKey Benefits• Expedited Project Completion• Project Cost Savings• Innovative Materials and Techniques• Access to Private Capital

Public Private PartnershipsRegional Examples• Portland airport light rail

– Bechtel• Portland I-5/I-405 interchange

– Peter Kiewit• Wilsonville water treatment plant

– MWH– CH2M

Final Thoughts

• Budgeting– Getting your budget approved is an exercise in

understanding people.• Operating Funds

– Be creative but realistic in the use of these funds.

• Capital Financing– Keep the tax and utility rates within acceptable

limits.