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HomeMunicipalCity Manager’s Office explains FY22 Budget, addresses public concerns

City Manager’s Office explains FY22 Budget, addresses public concerns

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Please Note: Although the time to provide public input during the Budget Hearing has passed, there are still ways to offer input on the FY23 Annual City Budget before the City Council adopts it formerly. Scroll to the end of this post to learn more.

At the May 3rd City Council meeting, City Manager Blaine Cox, Deputy City Manager and Finance Director Kathryn Ambrose, and Deputy Finance Director Mark Sullivan made a 30minute presentation to further explain the Tax Cap, Capital Reserve Funds, and Unassigned Fund Balance. Click here to watch the full video presentation.

Cox began his presentation by acknowledging several public concerns from the previous City Council Workshop where a number of residents protested excess spending, argued against reserve accounts, and urged the council to return the money to the people in the form of property tax reductions.

“One of the things we heard a couple of weeks ago is that we have a ‘Tax and Spending Cap’. So we took a quick look at the Charter provisions to see whether we have both,” said Cox.

Per the City Charter, there are 2 factors that allow an adjustment in the amount to be raised through property taxes including inflation adjustment using the CPI and added taxable property values using building permit values minus demolition values, otherwise known as net new construction. 

The first adjustment uses an inflation factor pegged to the National Consumer Price Index – Urban. Charter section 43-a stipulates “a maximum increase in real estate tax revenues, from the prior budget year, increased by a factor no more than the change in the National Consumer Price Index – Urban…”

Cox specified that this first adjustment pertains to tax revenues — not spending. 

The second adjustment, to the amount to be raised through taxes, is pegged to the amount of net new property value that can be taxed. Charter section 43-a stipulates “maximum increase in real estate tax revenues by applying the prior year real estate tax rate to the net increase in new construction. Net increase in new construction is defined as total dollar value of building permits less total dollar value of demolition permits. 

“Once again, the two factors here pertaining to the amount to be raised through taxation, IE Tax Cap, Charter section 43-a stipulates that total expenditures for any given budget year shall not exceed the amount of funds reasonably calculated to be derived by the tax rate established herein, increased by the other revenues generated by the municipality,” said Cox. “This is the spending limitation portion and ‘other revenues’ implies non-property tax revenues.”

Spending is limited only by the amount of available non-property tax revenues.

According to Cox, “other revenues” include Waste Management host fees, auto registration revenues, grants from federal/state/other sources, and unassigned fund balance. 

“Supplemental Appropriations outside the Annual Budget process are permissible,” said Cox. “They are fully funded by non-property tax revenues and do not increase the amount to be raised by property taxation.”

Supplementals

To further discuss supplemental appropriations and transfers, Deputy City Manager Ambrose pointed to section 44 of the Charter. Ambrose stated that there are multiple reasons to bring forward supplemental appropriations. 

According to Ambrose, some of the more frequent supplementals seen in Rochester are grant opportunities and Economic Development initiatives not aligned with the fiscal year cycle, change in scope or unanticipated expenses in previously approved capital improvement projects, transfers to the School Capital Reserve Fund, and other unanticipated needs or emergencies. 

Ambrose reported that there were 33 total supplemental appropriations to date in FY22, amounting to $17,873,724. The greatest percentage was 37.78%, or $6,753,182, for ARPA and other grant opportunities that occurred off the budget cycle. The second-highest amount at 20.76%, or $3,710,641, to change the funding source from prior approved CIP projects from bonding to General Fund Unassigned Fund Balance. 

“In doing so, it saves the City approximately $510,000 in future interest,” said Ambrose.  

Regarding the General Fund Unassigned Fund Balance, Ambrose explained that it’s called the General Fund Unassigned Fund Balance because it’s within the general fund, not a separate fund. 

The General Fund

“Unassigned Fund Balance is a balance sheet calculation,” said Ambrose. “Balance sheets track Assets and Liabilities, and measure liquidity.”

Liquidity can serve as a measure of fiscal health for the municipality and is a factor in bond ratings. 

“Unassigned Fund Balance can serve as a measure of fiscal health for Rochester and is a factor in our bond rating,” said Ambrose. “Total fund balance is current assets minus current liabilities.”

Ambrose stated that within Fund Balance there are certain classifications or categories, for example, restricted non-spendable. Unassigned Fund Balance is the classification given to the net position of current assets minus current liabilities, less restricted, dedicated, and non-spendable categories. 

Amounts of the net position remain ‘unassigned’ until assigned to a new activity by City Council. Private sector accounting designates this same net position as ‘working capital’. Utilization of Unassigned Fund Balance is governed by City ordinance 7-62 and required a public hearing and 2/3 affirmative vote by City Council. 

Asset Base and Cash Needs

Deputy Finance Director Mark Sullivan began his portion of the presentation by attempting to put the discussion into scale. 

“We’ve been hearing a lot about ‘slush funds’ and ‘cookie jars’ but what we have to recognize is that we have $531MM of assets under management,” said Sullivan. “That’s all the buildings, all the infrastructure, sidewalks, streets, etc. The issue with those is that they depreciate over time. Some quicker than others. The bigger assets will depreciate over a 40-50 year period — but it’s aging.” 

According to Sullivan, 49% of the City’s asset base has been depreciated. 

“That doesn’t mean that we don’t have brand new stuff and it doesn’t mean that everything’s old either,” Sullivan continued. “It means that it’s entering the phase of aging and we have to remember to maintain it, which requires additional capital investments in the future to keep that level of asset base acceptable and safe for everyone.”

Sullivan explained that for each annual O&M and CIP adopted budget, the cash needs are close to $200MM. There is a fresh appropriation each year of nearly $140MM, of all sources, but the City is still working off the prior appropriations, particularly for the capital improvement projects. For the majority of those CIPs that are bonded, the City advances the cash, completes the project, issues the bond, and replenishes the cash.

“If you think about that for a second, [Rochester] isn’t a small village — it’s a growing city with a large asset base,” said Sullivan. “We hold the cash that we have available in short-term investment mechanisms that have to stay liquid.”

Sullivan states that the City doesn’t get much of an interest rate on those but “we get enough brought back as a revenue source.” As the City utilizes Unassigned Fund Balance, Sullivan states that staff is doing so “prudently and in compliance” under the provisions of Ordinance 7-62.

As of June 30, 2021, current assets for the City of Rochester are $58,406,887 in cash or cash equivalents, and $29,161,081 in current liabilities, for a total Fund Balance of $29,245,806. 

“That Fund Balance is the liquidity which is in a 2:1 ratio,” said Sullivan. “That’s the minimum ratio you want to see when you’re operating the type of base that we’re operating. If that had been 3:1 (meaning $3 for every $1 in assets) or 4:1 then it would be leaning in the other direction. What you don’t want to see is 1:1, for sure, because that would mean for every dollar of assets we’d have a dollar of liability, and there’d be no surplus to do anything.”

When looking closer at the contributions that add to the Unassigned Fund Balance in FY21, Sullivan reported that strong host community fees and “incredibly strong” motor vehicle registrations were somewhat unexpected.

“That’s a testament of a [strong] economy and people affording larger, more expensive automobiles,” said Sullivan. “True, volume is part of that, but for the most part, it’s the price of the automobiles that’s used in the calculation used to pay the permit.”

Annual Contributions to the Fund Balance

The City of Rochester had unexpended appropriations of approximately $1.5MM but according to Sullivan, the majority of that was used to pay salaries and benefits. 

In the past year, the City has experienced hiring issues, particularly in the Police Department. There have also been several military deployments in the Fire Department. Sullivan says that those have “contributed greatly to the surplus in that category.” For example, winter maintenance was under budget by nearly $170,000 and county taxes were also under budget at roughly $188,000. The combined net changes added 7MM to Fund Balance in FY21. 

Sullivan went on to display a chart that illustrated what the City had used for Unassigned Fund Balance for the past 6 years. 

According to the chart, there are funds that are appropriated each year during the adopted budget process. There are other supplemental appropriations, changes in funding, and special education appropriations for the School Department in FY 18 and FY20.

“We do have to do supplementals for the transfer into capital reserve funds,” Sullivan explained. “We also have the capital reserve funds that the City is contemplating and also the transfer of the Economic Development special reserve fund.”

According to Sullivan, of the total FY23 revenue required to meet the budget, $73,308,324 is what is allowed to be raised by property taxes, $46,575,555 from non-property tax revenues, and $3,293,250 in Unassigned Fund Balance. 

“The whole scope of the revenue that’s needed to support the budget is over $125MM,” Sullivan concluded. 

Sullivan warned that there are complications to utilizing Unassigned Fund Balance as direct property tax relief. 

First, the Unassigned Fund Balance tax relief would only be for one fiscal year. During the next budget cycle, the amount to be raised by property tax automatically increases and a Tax Cap override is a strong possibility. Without a Tax Cap override, steep budgetary reductions would be required in order to supplant the revenue loss. 

The better approach, according to the Finance Department, is to continue to change bonding projects to cash because it eliminates future principal and interest expenses. They also recommend the Council to continue to use Unassigned Fund Balance as a funding source in subsequent CIP budgets and supplemental appropriations, and utilize Unassigned Fund Balance for investments in capital reserve funds and for Economic Development projects that increase net assessed valuations. 

Capital Reserve Funds

In May 2022, there were 3 capital reserve funds before the City Council. The resolutions pursuant to RSA 34:1 include a fire apparatus replacement, municipal building renovations, and another apparatus replacement for Public Works. Each capital reserve fund is for $500,000, respectively. 

City Manager Cox further acknowledged concerns and questions raised regarding the capital reserve funds, including: 

  • Why aren’t the CRF items included in the upcoming budget? 
  • Are the funding sources different because they are not included in the Annual Budget process? 
  • Why create separate CRF and not simply include them in the Annual Budget process?
  • Why are these proposed capital reserve appropriations not part of a long-range plan?
  • Why would capital reserve fund monies be turned over to the Trustees of the Trust Fund, which incur management fees?
  • How do these management fees compare with the interest earned on investing the funds?

To answer those questions one by one, Cox explained that after the initial creation and first appropriation, all subsequent action will be part of the Annual Budget process. Annual contribution to CRF’s will require Council action and will be requested during the Annual Budget process. Expenditures from CRF’s will be included in 6-year CIP budgets once again requiring Council approval.

The source of funding for these capital expenditures is the same. According to Cox, capital expenditures for fire apparatus have traditionally been funded using Unassigned Fund Balance. Going forward, capital expenditures for fire apparatus using a CFR would still be proposed to use Unassigned Fund Balance.

Cox went on to explain that the proposed capital expenditures are part of a long-range plan. The fire apparatus replacement, city building renovations, and Public Works apparatus replacements are included in the 6-year CIP plan. 

Referring the public to the FY23 CIP book, Cox explained that the respective projects are part of a long-range plan. 

Cox said, “they are a part of the budget process, they have been in the past, and they would continue to be with these new funds.”

To explain why the City would create reserve funds, Cox said that the level annual funding approach eliminates large swings in funding requests which provides budget stability year to year. It also provides department heads a better sense of funding levels into the future, for planning purposes. Lastly, it requires staff to look further into the future when planning expenditures.  

Regarding the Trustees of the Trust Funds, CRF statute RSA 34:6 stipulates, “ the Trustees of the Trust Fund of the city shall have custody of all capital reserves.”

“What the Trustees do in managing the funds is their choice,” said Cox. “Trustees don’t have to turn over CRF monies to third party management company and they can avoid management fees. However, it should be noted that management fees are offset by the rates of return by the third-party management company.”

Monies held by the City of Rochester in liquid investment accounts currently earn as little as .18% or as high as .30% interest. Cox says because they are liquid funds, they don’t earn high rates of return. However, Trustees of the Trust Fund treasury bonds are currently earning 2.7% to 2.9%.

“If we net out the .50% management fee, the results of the return are about 2% held by the Trustees,” said Cox. “So, it is to our advantage.”

Unassigned Fund Balance – Buy Down the Tax Rate

Using the fire apparatus as an example, the cumulative net interest of 2% is estimated to be roughly $89,000 by FY32.

When asked about why the City of Rochester doesn’t use the Unassigned Fund Balance to buy down the tax rate, Cox said that ongoing operating expenses should not be funded using non-recurring revenues and described it as a “basic budgeting principle.”

“Unassigned Fund Balance is a non-recurring revenue,” said Cox. “If we use Unassigned Fund Balance to buy down the tax rate, it could result in major swings… Using non-recurring revenue, such as Fund Balance, under a Tax Cap, is especially problematic.”

Once the non-recurring revenue is depleted, the tax levy is able to be adjusted adequately to make up the loss, without a Tax Cap override. Cox explained that unless major cuts in services were made, a Tax Cap override and an immediate tax rate increase would be required to meet ongoing operating expenses.

Bonding & Tax Incremental Financing

Another concern that was recognized during the presentation was in regard to bonding the new DPW Facility project. Total appropriations for the facility amounted to $22,525,000. In 2020, the City bonded $10,525,000 and the remaining balance to bond was $12,000,000. According to Cox, DPW anticipates a $500,000 surplus, which would be deauthorized. 

“Once again, we did not over-bond for this project… nor could we over-bond for a project,” said Cox.

Another concern that was raised during public input was the closing of the Waste Management landfill, which is projected to close in 2034. The closure will mean a loss of property taxes, host fees, and free disposal of solid waste. To offset the anticipated losses, Cox explained that part of the plan is to “funnel the host fees to Economic Development activities to foster the tax base.”

“Part of that is creation of the [Tax Increment Financing] TIF’s. The net new construction in the TIF district is not factored into the Tax Cap calculation each year,” said Cox. “When those assessed values come back in, after the TIF is closed, the way Tax Cap is set up, it still cannot be factored in as net new construction. It’s going to be gained assessed value that will have the impact of lowering the tax rate or offsetting the closure of the landfill.”

TIF districts do not provide tax incentives or tax breaks. Property taxpayers in TIF districts pay a full tax bill. TIF districts simply allow municipalities to dedicate tax revenues to pay for public infrastructures like roads, water, and sewer.

Cox addressed another statement made during public input in regards to enterprise funds. According to Cox, appropriations and supplemental appropriations for water and sewer do not impact the Tax Cap. The Water Fund and the Sewer Fund are Enterprise Funds. 

Enterprise Funds are self-supported through user fees charged for the services they provide. By contrast, the General Fund is supported mostly through property taxes, along with non-property tax revenues.

Make your voice heard

Although the time to provide public input during the Budget Hearing has passed, there are still ways to offer input on the FY23 Annual City Budget before the City Council adopts it formerly.

  • Click here to find your Ward
  • Click here to contact your respective City Councilor
  • Click here to contact Mayor Paul Callaghan and the entire City Council

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