Budget Process – Submitted & Adopted Citywide Business Plan
Submitted Citywide Business Plan
In April 2014, the residents of Kansas City approved a change in the City Charter requiring the adoption of the Five-Year Financial Plan every year. Most significantly, the Charter change marked an important first step in breaking the pattern of successive, single-year fixes, often implemented without a long-term view. Instead, the Finance Department, City departments, City Council and residents work each year to extend the Citywide Business Plan into the future. Additionally, for the first time in Kansas City history, the Citywide Business Plan is linked to budget decisions. Moreover, the plans of City departments and divisions are relatable to one another as well as to the Business Plan, which serves as the “planning umbrella.” This process builds each year with the submission of an updated draft of the Citywide Business Plan.
Financial Strategies Objectives
The Citywide Business Plan is the City Manager’s playbook to execute the City Council goals through a series of objectives. The Financial Strategic Plan and the corresponding five-year planning model is the financial document, or blueprint, to ensure fiscal sustainability.
The Financial Strategic Plan
Much like its namesake in environmental policy, fiscal sustainability is a series of policies, procedures, and practices that allow the city to achieve its priorities and maintain its service levels in primary outcomes while not overextending or depleting its resources. In essence, fiscal sustainability means maintaining a sound fiscal environment.
Sustainable organizations first “adopt financial policies that promote long-term stability and link financial considerations to operational decisions” through planning, with linked goals and objectives. Planning also includes a long -range forecast, such as the five-year forecast model.
Sustainable organizations “need to reform the budget, moving from an incremental budget to policy- based perspectives such as zero-based budgeting or priority-based budgeting.” Reform efforts include community input such as Citizen Work Sessions. True financial reform efforts also acknowledge and model long-term liabilities, promoting accountability in management.
Fiscal sustainability in Kansas City includes several City Council-adopted financial policies that provide
benchmarks to ensure solvency. The adopted policies include:
- Fund Balance and Reserves
- Structurally Balanced Budget
The Government Finance Officers Association (GFOA) defines a financially resilient government as one that “has recovered its financial stability and gone on to implement strategies, control mechanisms, budgeting techniques and early warning systems to make sure it can withstand future financial shocks.”
Finally, “true resiliency balances service levels with available resources; funds reserves, capital and liabilities, and creates a culture that promotes flexibility and responsiveness.”
The 2017-2022 Financial Strategic Plan adopts the following financial management strategies to meet Council goals.
Fund Balance and Reserves Objectives
(City of Kansas City, Missouri Code of Ordinances, Chapter 2, Article XIV, Sec. 2-1954)
- Achieve within five years a General Fund Unreserved Fund Balance of at least two months operating expenditures.
- Incorporate special revenue funds into the Five-Year Financial Plan and set guidelines for each fund or fund type’s balance and/or reserve levels.
Structurally-Balanced Budget Objectives
(City of Kansas City, Missouri Code of Ordinances, Chapter 2, Article XIV, Sec. 2-1955)
- Adopt ratios for an optimal mix of infrastructure financing methods that protects the City’s investment, minimizes future replacement and maintenance costs, and ensures continued service.
- Develop a policy to guide the financial actions the City shall take in the event of emergencies, natural disasters, downturns in the economy, or other unexpected events.
- Adopt a model portfolio of services and adjust the City’s expenditure ratios as needed to maintain portfolio balance.
(City of Kansas City, Missouri Code of Ordinances, Chapter 2, Article XIV, Sec. 2-1970)
- Seek legislative relief with regard to the five-year renewal of the earnings tax. (Finance and Governance Objective 1)
- Ensure that fee-supported services are self-supporting to the extent practicable.
- Develop an annual tax burden study.
- Review the City’s revenue structure, identify potential new sources of income, and present findings to the Mayor and City Council for consideration. (Finance and Governance Objective 9)
(City of Kansas City, Missouri Code of Ordinances, Chapter 2, Article XIV, Sec. 2-1990)
- Update the City’s debt policy and adopt debt issuance target ratios.
(City of Kansas City, Missouri Code of Ordinances, Chapter 2, Article XIV, Sec. 2-1950)
- Attain a market rate of return throughout budgetary and economic cycles, taking into account the City’s investment risk constraints and liquidity needs.
Strategic planning objectives
- Develop multi-year business/strategic plans for each department that meet service goals while staying consistent with financial realities.
- Link budget allocations to measured service levels.
- Develop a long-range plan in conjunction with collective bargaining groups to fully fund benefit programs including pension, healthcare, and other post-employment benefits. (Finance and Governance Objective 10)
- Address other post-employment benefits liability through either plan design changes, direct funding, or both.
Five-Year Planning Model
The purpose of financial planning is to develop multiple scenarios rather than worst-case financial alternatives. The Five-Year Planning Model is used to monitor long-term financial health, illustrate the impact of policy decisions and potential trends, and create a common set of assumptions and expectations. The baseline scenario begins with goals and objectives based on what we know: the FY 2016-17 Adopted Budget, revenue forecast assumptions, and known changes in expenditures. The baseline scenario is then recast to the balanced scenario to reflect what the City Council wants to achieve:
- Improved financial health
- Improved service delivery in selected areas
- A balanced portfolio reflecting the goals objectives.
With a five-year planning model the City can:
- Assess the current environment and respond to changes;
- Estimate the long-term financial implications of current and proposed policies;
- Develop commitment to the organization’s vision and mission, values and goals; and achieve consensus on strategies and objectives for achieving that mission.
The model forecasts both revenue and expenditures, but in very different ways.
The question answered in a five-year planning model related to revenues is: What is the likely level of resources the City can expect given certain changes in economic and demographic variables? Revenues are impacted by a myriad of variables largely outside the City’s control. Finance Department staff estimates those variables to correlate them to anticipated revenue collections. These revenue models provide a range of future growth rates that are then used to estimate the level of funding available for budget deliberations. Growth rates also inform the model.
The question answered in a five-year planning model related to expenditures is: What changes in funding and/or service levels are required to meet our highest priorities? Expenditures are impacted by economic and demographic variables, but expenditure levels can be controlled through management decisions. Because the City is required to adopt a balanced budget each year, expenditures are matched to available resources.
Traditional forecasting practice is to present current expenditures times a growth rate (for example, each department can increase the budget by 3 percent). Implied in this growth rate are assumptions for inflation, population changes, and expectations for service demand.
The model generates alternative “what if” scenarios based on varying assumptions for population, inflation, mandates, number of employees, salary increases, health care costs, capital requirements, and many more. Although it is common practice to develop pessimistic, optimistic and “most likely” scenarios, planning is more valuable when scenarios chosen are all equally plausible. This allows strategic decisions to be tested against likely outcomes, not potential extremes. And this approach reinforces the idea of the model as a planning tool that can produce financial strategies that work under any scenario.
Scenarios can highlight strengths and weaknesses across a variety of outcomes. Scenarios will not predict what will happen, but will provide the flexible thinking required to respond if something happens. Results are summarized by graphs, benchmarked to City financial policies.
2017-2022 Model Scenarios
For purposes of this report, staff modeled changes in revenue, expenditure, and debt assumptions to produce a Baseline Scenario and a Balanced Scenario.
The Baseline Scenario estimates the impact on financial ratios based on “what we know”: future assumptions with high probability and plausibility.
The Balanced Scenario demonstrates changes in revenue, expenditures, and debt assumptions that, if implemented, would achieve the City’s financial objectives to:
- Achieve a structurally balanced budget
- Develop a time-specific funding plan to meet the City’s adopted goal of maintaining a fund balance of at least two months’ worth of expenditures
Enhancements: The FY 2017-2022 Five-Year Planning model includes, for the first time, detailed scenarios for several key special revenue funds including:
- Capital Improvements Fund
- Convention and Tourism Fund
- Fire Sales Tax Fund
- Health Levy Fund
- Parking Garages Fund
- Parks and Recreation Fund
- Public Mass Transportation Fund
- Public Safety Sales Tax Fund
- Street Maintenance Fund
Scenarios focus decisions on critical values – those that are likely to have large impacts on a scenario. Generally, critical values are items that are at least $500,000 in any one year, or $2,000,000 over the five-year period.
Workforce costs are critical values, because municipal government is labor intensive. It takes people to respond to emergencies, maintain streets, and deliver municipal services. Wage and benefit costs represent more than two-thirds of overall General Fund spending in the FY 2016-17 Budget, and must be addressed thoughtfully as part of long-range financial planning. Growth rates for health and pension costs, representing more than 20 percent of the total General Fund budget, have been one of Kansas City’s primary “budget busters” and are projected to continue to pressure the City’s finances.
Link to the Budget
The model influences budget formulation by identifying financial parameters as part of the strategy to reach fiscal balance. The budget is then used to operationalize the financial plan by implementing specific financial strategies, funding service level preferences, identifying a set of spending assumptions, and linking operating, capital, and debt planning efforts. A successful plan is supported by strong guidance from the City Council on what the organization values and believes to be important as expressed through official policy. Because the model is built to be flexible, staff anticipates annual enhancements to ensure a match between the financial plan and evolving service demands.
Adoption of the Citywide Business Plan
After submission by the Budget Office, and review by the Mayor, Council, and residents, the annual update of the Citywide Business plan is adopted by ordinance pursuant to ordinance 140859 no later than November 1, each year.
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