Utility Financial Management AWWA Intermountain Section Leadership Forum Session Two November 12, 2013 Welcome as Clint and Andrea have indicated. I participated in the Leadership Forum two years ago and found it to be very beneficial.

BUDGET PROCESS I will be discussing the Budget Process Some general information…some specific to KID point of view / processes. Please feel free to ask any questions or interject any comments as they come up.

Outline Who is Involved in Budget Preparation Main Components to a Budget Strategic Plan (Master Plan) Annual Operating Budget Annual Capital Budget Approaches to Budget Preparation Example of Budget Steps / Budget Process

Who Are the Players City Council/Board of Trustees Managers Accounting Department Heads Employee input as appropriate

Strategic Plan Strategic Plan Video Video that describes the benefit and necessity of an effective strategic plan (Please excuse the sales pitch part of it)

Strategic Plan Strategic plan is critical to budget process Defines long-range goals and objectives Starts and evolves around utility mission Provides parameters for short range goals Takes into account other partner entities Top management identifies, implements, and monitors long range goals in plan This presentation is from the perspective of KID. Process will vary depending on size and unique situations of various entities. Mission Statement: To provide quality service to the people of Kearns Improvement District, while supplying safe drinking water and sanitary sewer service. Take Rate Study, Water Master Plan, Sewer Master Plan Jordan Valley – 39% of operating expenses Central Valley – 15% of operating expenses

Strategic Plan Importance of Effective Strategic Plan Dilbert – “Do you prefer that I spend my day planning which doesn’t look like work or should I plunge in to my work with aggressive randomness?” Long term budget planning may ‘not look like work’, but it is much better than working with aggressive randomness. 

Strategic Plan I thought this was appropriate as a sewer collection district. It is important to have a strategic plan with unintended consequences.

Strategic Plan A strategic plan provides the framework to prepare: Annual Operating Budget Annual Capital Budget

Operating Versus Capital Operating Budget Day to Day Revenues & Expenses Payroll, Supplies, Legal & Professional Capital Budget Anticipated Useful Life of More Than 1 Year Significant Value (Determined by Policy) Equipment, Vehicles, Land Acquisition, Infrastructure Projects This presentation is from the perspective of KID. Process will vary depending on size and unique situations of various entities. Jordan Valley – 39% of operating expenses Central Valley – 15% of operating expenses

Annual Operating Budget Refinement & expansion of the strategic plan in the short term Internal financial plan for a one-year period Identifies operating requirements for that one-year period Serves multiple purposes Aids in making short range plans Mechanism to achieve goals Answers “Spend how much for what?”

Capital Budget Expansion of the strategic plan Implementation of specific and prioritized projects Move organization towards its goals Schedule of large expenditures / projects Planned several years in advance May involve additional public hearings, review meetings

Operating Budget Operating Budget: Revenue Expenses

Revenue First step in budget process Can be influenced by external factors Political - Considerable impact through rates Physical - Weather Other factors Business cycles Economic conditions New development Conservation Tonight – Rate Hearing Sometimes hard to follow strategic plan due to political impact – Two Board Members Up For Election Weather – Revenue Fluctuates up to based on weather (hot summer versus wet summer) 2010 wet summer / spring compared to 2011…very hot…19% increase in water sales New Development Impact Fees – 2010 - $427,000 / 2011 - $99,000 Conservation Effective = Less Water Sales = Less Revenue

Revenue Operating Revenue (Normal Course of Business): Water Sales Basic service fees Engineering review and inspection fees Misc. fees: Penalties, reconnection fees, sign-up fees, other income, etc.

Non-Operating Revenue Property taxes Interest income Impact fees (be careful here) Grant Proceeds

Operating Expenses Second step in budget process Expenses Include: Payroll, Payroll Taxes, EE Benefits Water purchases, production, treatment Utilities Maintenance, materials, supplies Contract / professional services Training, travel Legal & accounting fees Vehicle repair and maintenance, etc.

Non-Operating Expenses Debt service Other

Capital Budget Break down into departments Usually larger items requested by department heads Items over a specified amount include: Projects identified in strategic (master) plan Line replacement New reservoir Meter replacement, reading hardware Equipment, vehicle purchases Computer hardware, software

Approach to Budget Preparation Two processes: Top down or bottom up Top Down: Top Management decides the level of expenses Divides them among department as needed Budget developers follow management directives Can be unrealistic, does not incorporate input of those who implement it

Approach to Budget Preparation Bottom up: Department heads submit estimated expenses with justification Budgets are reviewed to eliminate unnecessary spending and spending that can be delayed (let departments know) Helps ensure spending is well-managed and not wasteful Pushes decision making process down through organization freeing senior management resources Department heads can measure own performance and take corrective action as required Can lead to over budgeting causing issues in overall budget

Approach to Budget Preparation Can use a combination of both Department heads submit expenses Top management decides level of expenses based on department estimations and historical information, such as past actuals and YTD projections Budget is developed based on the above steps Department budgets are managed by department heads

Budget Steps / Process Provide Historical Information & Budget Sheets to Managers (Early August) Manager’s Budget Requests Due (Early September) Preliminary (September) Tentative (October) Proposed (November) Public Input Rate Hearing Final (December)

Preliminary Budget Incorporate department estimates into operating budget and capital budget Review 2-3 years actuals, YTD actuals, and projected Estimate revenue, expenses and capital Prepare preliminary budget for council/board review (not required by law but is a good tool) If recommending rate increase, inform council/board Accurate as possible to mitigate future changes and confusion.

Tentative Budget Make adjustments to preliminary budget based on council/board input (show adjustments) Update YTD numbers Update revenues, expenses, and capital budget Prepare tentative budget, present for adoption After adoption Set a public hearing date for approval of budget Set a public hearing date for rate & tax increase (if applicable) Advertise budget hearing & increases in newspaper Post hearing information on public notice website Display tentative budget for seven days before budget hearing date

Proposed Budget Make adjustments to tentative budget based on council/board input Update revenues and expenses (same as tentative process) Prepare proposed budget Present at budget hearing

Proposed Budget Presentation Summarize operating, non-operating revenue and expenses Include capital expenses Determine budget surplus or deficit If deficit, present how will it be covered Rates (advertise and hold public hearing) Property Taxes (Truth in taxation process) Reserves

Proposed Budget Presentation From rate increase and/or property taxes: Present proposed increases Present amount of revenue derived from increases From reserves: Acts as a storage reservoir Part of an overall long-term financial plan (strategic plan) Specific goals should be established Emergency fund Debt service fund Anticipated capital project funds Operating reserves based on xxx days (determined by management in strategic plan) Replace what is taken Cities have different reserves requirements and constraints

Final Approval Board meeting following proposed budget Can have hearing before final approval if needed Take public comments into consideration Board/council approve budget Send adopted budget to state auditor Video - Objective