Finance Advisor June 2009

MRSC FOCUS › Finance Advisor June 2009

MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, Mike Bailey, Finance Director, City of Redmond, and Glenn Olson, Deputy County Administrator, Clark County, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

Amending Your Budget

June 2009

By Mike Bailey, Finance Director, City of Redmond

As we discussed options for this month’s column I looked at the archive of past Finance Advisor articles on the MRSC Web site. I saw lots of articles about financial planning and budgeting but none on amending your budget (Toni touched on the subject in her article of December 2006 on year-end financial issues). I’m hearing of local governments who are re-examining their budgets in these challenging economic times and thought I would spend some time on this topic.

Some Background

First the concepts illustrated here apply to local governments in general but the specific state laws differ somewhat for each type of jurisdiction. We have used citations to city statutes as examples but you should refer to the RCWs relating to your agency type for specific direction.

Let’s remember that the budget is the legislative body’s granting of authority to the administrative body to spend public funds. As Stephen Gauthier of the GFOA points out in Governmental Accounting, Auditing and Financial Reporting, this control function of the budget is one of the distinguishing features between the public sector and the private sector. Our councils and commissions take this responsibility very seriously – as well they should. Once the budget authority is granted (known as an appropriation) the staff and administration of the agency are at liberty to spend funds up to the amount of the budget. The appropriation amount is based on an estimate of available resources (revenues and fund balances). This is regardless of the amount of revenue actually received, which isn’t usually a problem.

Another important point is that budgets are often adopted at the “fund” level. Therefore even though an agency may (and should) track the budget at significantly greater detail than the fund, you only need to change the appropriation amount if you anticipate exceeding the level at which the budget is adopted. (You may want to change it for reasons other than exceeding original appropriation amounts as we will discuss below). State law provides that transfers within a fund are permitted to be an administrative function (not requiring a budget amendment) provided that the budget was adopted at the fund level (the presumption in state law). (RCW 35.33.121 – second to last paragraph (example citation)).

Why Amend Your Budget

In a traditional economy the typical reasons to amend the budget include:

Receipt of additional/unanticipated revenues – the common example here is grant money. If you didn’t know the grant was coming when the original budget was prepared, you will need to amend the budget if the grant funds are to be expended (and the additional expenditure will exceed the appropriation). Note – if you are just receiving more grant funds but don’t expect to expend them during this budget or that the expenditure will cause a fund to exceed its budget then an amendment is not required.
“non-debatable emergency” as defined by RCW 35.33.081 (example citation) would include natural disasters, wars, etc. State law provides that when such an event occurs council can approve an amendment to the budget without notice.
An “emergency” of a lesser nature (RCW 35.33.091 – example citation) is how the statues define those situations where circumstances have changed and the council determines that the change warrants an amendment to the budget. In these cases, the ordinance must be introduced five days before being acted upon and that citizens must be heard in consideration of the ordinance. A majority plus one vote is required.

It is inconsistent with state law to exceed the appropriation levels approved by the legislative body (RCW 35.33.125). There are no state laws chastising you for under-spending your appropriation (or for not having sufficient revenue to provide for all the spending).

Budget Reductions

A more unusual situation exists in today’s bad economy. Councils are re-opening their budgets in order to reduce appropriations. As stated previously the budget or appropriation level is not automatically tied to the available resources. It is initially based on the best estimates for the revenues in the ensuing year. However, these estimates are being revised downward as the economy has deteriorated during the past several months. Therefore a situation could exist where the council granted authority to spend public funds that may exceed available resources.

In these cases, the legislative body and the administration should work together to closely monitor the revenues and manage the agency’s financial position. You have a few choices for action if it appears that revenues will not meet targets and that expenditure reductions will be necessary. In summary they include:

Continue to monitor closely and encourage caution in expenditures. If revenues are under expectations but within a comfort margin - taking agency reserves into account – no further action may be necessary.
Place an administrative watch on spending. This could be everything from seeking care on the part of your employees to intentionally holding positions open to realize the corresponding savings. This would not directly affect the legislative branch but my advice would be to keep your council well informed of your actions and how you believe it will address the issue.
Consider an administrative policy directive such as a hard hiring freeze, reduction or deferral of certain type of expenditures, furlough days or setting a target for general expenditure savings by each director or manager.
Consider a legislative policy directive such as an ordinance to reduce the appropriation amounts for certain budgets. A reduction in the appropriation level (RCW 35.33.121 –last paragraph – example citation) is permitted at council’s discretion. In these instances the change must be approved by a majority of the full council plus one. This should be done with some care as it essentially re-opens the budget process. The same difficult discussions that occurred in sorting out priorities to adopt the initial budget will likely take place (to some extent) again.

The response that may be right for your jurisdiction will depend on your unique circumstances. However a few seem universal to me. They include:

Communicate clearly, honestly and often. Shrinking revenues require additional scrutiny. You may want to increase the frequency of administrative and legislative review and discussion of your financial reports.
Seek input. There are numerous good sources of information. It is unlikely that any one source (such as the finance office) has all the best answers. Encourage the sharing of information, ideas and remedies. Let your employees know what the strategies are as best you can.
Don’t over-react but be prepared. This is a hard balance to seek but still important to think about. Overreaction can come in the form of disaster scenarios that contemplate drastic actions which would affect the lives of those in the community and employ. Being prepared, on the other hand, means thinking about what you would do in certain cases. I like the way the City of Tacoma handled this in their “1 through 4” scenario discussion. In this case 1 was the slightest problem and the smallest reaction. Correspondingly, 4 was what they called their “Katie bar-the-door” scenario. We didn’t learn what type of reaction that would result in, but it was clear they were prepared if the economy got to that point. They used this terminology to keep everyone apprised of where they were in dealing with the economy (as of this writing at stage 2 with a potential for 3 if more deterioration occurred).
Be careful of the quick “gimmicks” if you don’t have a short-term problem. The gimmicks include such things as furloughs, reduced hours, arbitrary reductions in overtimes (with no corresponding change in operations), etc. In many cases these are necessary as intermediate steps but don’t mistake them for the real answers to a long-term financial problem. [On a personal opinion note – the first thing that seems to go is training and training related travel. While I understand that it may look bad to have city personnel in training while services are being curtailed, you need to find ways to “do more with less.” That won’t happen with a staff that is untrained and/or unmotivated.]

The fiscal crisis has generated lots of resources targeted at helping you get through these difficult times. I would refer you to the GFOA’s “Fiscal First Aid” web site, resources on the MRSC web site, trainings from the state and national associations (such as AWC budget workshops this August and the WFOA conference in Bellevue this September).

Toni Nelson is the "Small Cities Specialist" for the Washington State Auditor's Office, providing both on and off site financial training and assistance to smaller cities and towns throughout the state. Ms. Nelson has been working with the Auditors office for 6 years and prior to that was the Clerk/Treasurer for a small town for 9 years. She has co-authored the "Small Cities Manual" a detailed reference guide for new clerk/treasurers on governmental accounting procedures and presents numerous training workshops throughout the state for AWC, WFOA, WMTA, WMCA and local/regional organizations such as EWFOA and SCWMCA. Ms. Nelson is also a member of and conference track coordinator for the WFOA Education Committee.

Toni can be reached at 509.228.9346 or at nelson@sao.wa.gov. For more information, see the Small Cities Assistance Program page on the State Auditor's Web site.

Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.

Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.

Glenn Olson is the Deputy County Administrator for Clark County. He has been in Clark County since 1997, serving in various leadership positions during his tenure there. Previously Mr. Olson served 15 years in the Governors Office of Financial Management overseeing budget forecasts. Mr. Olson chaired the Washington State Public Works Board for Governor Locke. Currently he is the gubernatorial appointee representing local governments on the Select Committee for Pension Policy and on the Law Enforcement Officers and Fire Fighters Plan 2 (LEOFF2) Board, and he is the president of the Washington County Administrators Association.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.