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A five-year financial plan for a smaller county: linking long-term planning to annual budgeting.

An adopted five-year financial plan has enabled the County of Hanover, Virginia, to identify, budget and fund future service levels and has increased citizens' confidence in the stability of property tax rates.

A county's budget formulation, development and adoption process traditionally is a necessary evil experienced by the department heads, finance department, county administrator and board of supervisors from November through April each year. The clash of limited financial resources with requests for funding desired services often results in a competition between departments, as well as a budgeted deficit between revenues and expenditures. To alleviate this deficit, the avenues most often chosen are to increase the real property tax rate, increase user fees and/or further reduce expenditures. As elected officials have become increasingly reluctant to have property tax rates become the balancing factor in any proposed budget, further expenditure reductions have remained the alternative of choice.

Frequently employed actions for bringing expenditures into line have included across-the-board reductions, maintenance of line-item accounts from the prior year and/or reduction of merit increases for employees. These types of reductions, however, may unfairly cut a lean departmental budget rather than properly rein in another department's budget that was artificially inflated.

After five months of budget formulation, development, expenditure request reductions and perpetual meetings, the board adopts the budget in April for the following fiscal year. Seven months later, this arduous process repeats itself.

Budgeting Shortcomings

The County of Hanover, Virginia, population 66,000, was no exception to this annual dilemma. Located 15 miles to the north of the City of Richmond, the county experienced a 31.1 percent population increase between 1980 and 1992. This growth placed an increased demand upon the county's service levels.

To meet the increased demands, Hanover County's total operating and capital improvements budget increased 148 percent to $104 million between 1980-92. By 1989, the county had constructed two new schools for $40 million and saw its jail become overcrowded, its landfill approach capacity and its governmental facilities outgrown. Previously, the county had relied upon economic development for expanding the tax base and increasing revenues. As the recession slowed the county's economic development and the state reduced funding levels, revenues became increasingly stressed.

Prior to 1989, the budgeting process did not confront the long-term operating and capital improvement impacts of proposed service levels nor consider their on-going funding sources. The question of how balanced operating and capital improvement budgets would be achieved in subsequent years was not addressed. The process was, rather, that the board adopted a one-year balanced operating and capital improvements budget; and as long as the budget was balanced to the satisfaction of the board, all budgetary issues were considered properly addressed.

The capital improvements program (CIP) was not formally adopted or approved; projects in the CIP were considered departmental requests or "Christmas list" projects. The board typically would adjust the first year of the CIP to a reduced level that the county could afford and move the remaining projects to a subsequent year in the CIP. The ability to fund the CIP was not demonstrated in the CIP or any other document.

Beginning in 1989, the county administrator adjusted the CIP to a fundable level for each year and submitted the recommended CIP to the board for adoption, along with a list of the unfunded departmental requests and an explanation of why the requests were excluded from the CIP. The CIP was adopted annually beginning in 1989. Its adoption was a difficult task: the board did not want to tell departments and constituents that they were not going to fund certain departmental projects within the next five years.

The Five-year Financial Plan

The first step in addressing the shortcomings of this process was the development of an internal five-year financial plan that could be linked with an adopted five-year CIP for fiscal years 1989-94. As initially developed by the finance department, the five-year financial plan was not intended to be adopted by the board or to be included in any of the county's publicly disseminated financial documents. It was not balanced throughout the five years; the revenue, operating expenditure and CIP growth assumptions were very broad; and long-term operating impacts of CIP growth were not adequately quantified. The plan did, however, shed some light on what the board could expect to happen over the five years of the adopted CIP.

The 1989-94 internal five-year financial plan was developed to give the board a perspective on how proposed economic development projects would impact the county's tax rate. It illustrated clearly that, even with several large economic development projects, the county would face increasing expenditure growth which, if unadjusted, would not be balanced with anticipated revenues. Internal five-year financial plans prepared in 1990 and 1991 had additional assumptions that included a proposed tax rate increase and annualized assessments. These plans also were not fully funded throughout the five years.

Because these plans were internal documents, the four new county board members elected in November 1991, were not aware of them and their assumptions. It became apparent to all board members and county officials alike that the internal five-year financial plan would be a valuable tool only if the assumptions were enhanced and quantified, the plan balanced to illustrate how existing service levels and any changes to service levels could be funded over a five-year period, and the document made available for the public to review.

Budgeting and the Financial Plan

In preparing for the 1992-93 budget process, the county was mired in a multitude of budget concerns: prolonged recession which stagnated revenue growth, reduction in state funding levels, a 27 percent increase in the 1988-92 quadrennial reassessment with property owners demanding no increase in their tax bills, increased service demands, no merit increases since 1990, reduction of fund balance reserves to fund operating costs of two newly opened schools and a newly elected board of supervisors who did not want to raise the tax bills.

The goal of the 1992-93 budget process was not only to formulate a balanced budget for the coming year but to illustrate to the board, residents and media the financial impact of maintaining or changing existing service levels in each of the ensuing five years. The means for doing this would be an enhanced and balanced five-year financial plan with specific revenue, expenditure and service level assumptions over a five-year period formulated and incorporated into it.

The county publicly presented the 1993-97 five-year financial plan to the board and residents in March 1992. It contained five-year assumptions for the real property tax rate, real property tax revenue growth, other revenue growth, expenditure growth, and allocations to fund education and capital improvement needs. Although it called for a 13.5 percent increase in the real property tax rate, the plan's major assumption was that the real property tax rate would not be raised any higher during the current term of the newly elected board, whose terms would expire on December 31, 1995. This would be accomplished through annual assessments.

Of major concern to the board and residents had been the unstable property tax rate of the past decade. Before 1992, the county relied on quadrennial reassessments. Because property values were not increased annually, any growth in real property tax revenues in nonreassessment years arose from either new construction or an increase in the tax rate. The real estate tax rate was usually the revenue source most often changed; indeed, the county's tax rate changed nine times between 1980 and 1992. This volatility and the need for a stabilized tax rate had become important political issues. The primary change needed for a stabilized tax rate was to perform assessments annually.

The 1993-97 five-year financial plan that was reviewed, amended and adopted by the board in April 1992 raised the tax rate and instituted annual assessments. The plan enabled the board to illustrate to its constituents that the county was not planning to raise the tax rate again during its term and aided board members in garnering community and business support for the need to raise the real estate tax rate 13.5 percent. Once the plan was adopted, any subsequent change in the tax rate proposed by the county administrator would have to demonstrate to the board and residents what specific assumptions were previously made in error and why. This high degree of accountability proved to be the key to the 1993-97 plan's success.

Enhancements for the 1994-98 Plan

The next objective was to further refine and enhance the five-year financial plan's assumptions and the individual departmental requests. The 1994-98 plan contained a greater number of assumptions with supporting documentation that could be monitored throughout the fiscal year. Many of the major budgetary and service level issues had been previously identified in year two of the 1993-97 plan and did not differ materially from them.

The assumption enhancement process enabled revenue-generating departments to identify the variables comprising particular revenue streams and the anticipated changes these variables would experience in the next five years. It also required all departments to identify their service level trends anticipated over the next five years and have funds allocated during the next five years to achieve a desired service level. This included identifying new positions, additional operating costs and additional capital costs that would be needed to achieve the desired service level.

A New Budgeting Environment

The 1993-94 budget process used year two of the previously adopted 1993-97 financial plan as its starting point. Because much of the arduous data gathering and analysis already had been done, this new budget cycle was greeted by county staff, board members, media and residents with much less anxiety and stress than is commonly associated with planning and presenting a new budget.

For the board members, it meant that, by adhering to the previously approved 1993-97 financial plan and focusing only on changes in particular assumptions, they could direct their attention towards the long-term budgetary issues of the county. If board members proposed any budget amendment, the impact to the plan also was reviewed by the board. If the proposed budget amendment balanced the budget within the year proposed but resulted in a budget deficit in any of the subsequent four years, then the budget amendment was revised or a balancing adjustment was made to a subsequent year in the plan. This resulted in no budgetary change occurring during the budget adoption process that negatively impacted any year of the 1994-98 plan.

The budget review period of the board also was improved due to the five-year financial plan. It enabled department heads to present long-range plans to the board to achieve a desired service level where previously they focused upon funding of current service levels to satisfy current needs. For example, the sheriff presented the board with a plan to increase patrol deputies over the next five years to gradually overcome the existing deficiency of this service level.

The public hearing on the budget lasted no more than one hour due to the residents' comfort level with the county having complied with the previous plan. Historically, public hearings exceeded three hours. The concerns of those residents who spoke at the 1993 public hearing were primarily addressed to the budgetary issues in years three through five of the 1994-98 plan.

The 1994-98 financial plan was amended, balanced and unanimously adopted in April 1993. County board members had input for their concerns, and the assumptions and the variables underlying them had been made public. By adopting the 1994-98 plan, the county has clearly indicated to its residents, employees and businesses the service levels that will be provided and funded in the county over the next five years.

Assumptions: Heart of the Plan

The specific assumptions of the five-year financial plan range from tax rate changes to desired student-teacher ratios to employee salary increases. Exhibit 1 lists some of the major assumptions used in the 1994-98 plan. There are some 50 assumptions in this plan, each supported by documentation provided to the finance department from county departments, state and federal sources, commercial and industrial businesses, economic literature and various other sources.

Approximately 125 revenue line-items were separately forecast for anticipated growth and adjusted for any proposed changes to a revenue stream through increased tax rates, changes in user fees or implementation of new programs (e.g. personal property tax proration). The general property tax revenue forecasts included such factors as growth in assessed values, number and value of new residential homes, new commercial construction, number of new vehicles and their values, and levy collection rates. In order to obtain accurate forecasts, the county's finance department worked with revenue generating departments to obtain forecasts and develop a program to have these forecasts monitored in a timely manner.

The county has approximately 50 expenditure appropriation units in the general fund. The 1994-98 plan segregated assumption forecasts between personnel services and operating and capital outlay by department. Employee merit increases, changes in personnel, changes in service levels, the CIP and its ongoing operating budget, and debt service impacts were identified for each department. The local funding of the schools was segregated into five categories: new teachers needed to achieve desired student-teacher ratios, merit increases, operating increases, debt service of school construction projects and operational costs for a new elementary school. The county's finance department worked with all departments and school officials to address their long-term service level objectives.

Data on all of the assumptions were entered into an automated worksheet model, which was designed in-house by finance department staff. The model was designed to be user-friendly, and any change in an assumption updated the entire model instantaneously. This enabled alternative scenarios and sensitivity analysis of assumptions to be performed in a timely manner. Drafts of the plan and assumptions were reviewed and adjusted by the county administrator, based upon overall county priorities, in order to achieve a balanced five-year budget.

A summary of the five-year financial plan, shown in Exhibit 2, is included in the county's Operating and Capital Improvements Budget Document. Through the automated worksheet model, the 1994-98 plan can be presented in a variety of formats based upon the intended audience. All formats were made available to residents, board, media and other interested parties. Formats ranged from the effect upon undesignated fund balance to a detailed report that listed each assumption for each of the five years.

Staff Acceptance

The county department heads and school officials have realized the importance of the 1994-98 plan, which has enabled finance department personnel to acquire an in-depth knowledge of departmental service levels and to work with departmental staffs in allocating funds over a five-year period to meet long-term departmental needs. County and school employees were receptive to the TABULAR DATA OMITTED plan, in part due to the planned stability for compensation which had not existed in the previous years. By having a projected balanced budget with merit increases provided, they had assurance that future budgets would no longer be balanced on the "employees' backs."

The continued support of county staff and their input into the formulation and monitoring of variables that affect specific assumptions is instrumental in achieving the objectives of the 1994-98 plan. The department heads realize that unsubstantiated or overly aggressive variables would only lead to the plan's demise, resulting in reductions to the department's anticipated long-term appropriations and in a need to annually justify the department's current allocations to the board. Careful analysis and monitoring of the variables, therefore, is performed throughout the fiscal year.

The variables provided by the departments in the 1994-98 plan are correlated to departmental work plans, which were instituted in 1992 and enabled the county administrator to muster board support for instituting a link between pay and performance. These work plans form the basis from which departmental service levels are quantified and measured, and departmental managers are evaluated based upon their compliance with the work plan. The work plans also assist the county administrator and board in establishing the priorities of the county. If a departmental work plan has an impact on a variable or priority that materially affects funding of the five-year financial plan, then the plan also is adjusted.

Implentation Costs of the Plan

The only cost in developing the five-year plan was the time spent by county staff in formulating assumptions and in developing, enhancing and revising the automated model. As the plan became incorporated into the budget process, there was not a substantial amount of additional time spent by variable-generating departments because the first year of these variables already was incorporated into the budget process. As a result of the careful review of variables and assumptions by the county administrator, board, residents and media in the 1992-93 budget process, fewer demands on staff time were necessary for the 1993-94 budget process. This enabled the board's attention to continually focus on all five years of the plan.

It is estimated that assumption development and forecasting for the five years of the plan increased budget preparation time for departmental staff by 5 percent. The initial formulation of the automated model involved approximately 50 hours of staff time. This increased staff time, however, is more than offset by the reduction in nonproductive staff time that previously had been spent addressing the questions and the balancing dilemmas associated with a one-year budget. In addition, proposed new initiatives are more readily enacted as the financial impact can be demonstrated by a balanced plan.

Board Commitment to the Plan

Because the 1994-98 plan has some highly sensitive political issues included in the assumptions--such as an increase in the real property tax rate in year four, which is the first year of the next term of the board--the plan and its assumptions must be viewed as a plan, and only a plan, by the board. Adopting a five-year financial plan does not denote that the board has committed the county to all of the assumptions. Rather, the plan is intended to be used as a financial tool with specific assumptions that quantify and fund the anticipated service levels.

Just as budget cuts are used to balance a one-year operating budget, so too are cuts used to balance the five-year plan. For example, the proposed tax rate increase is in year four of the plan and is correlated to an enhancement of public safety facilities. If the board chooses not to increase the tax rate in any of the subsequent plans proposed by the county administrator, then this reduction in revenue will result in a corresponding decrease in expenditures from the applicable deficit year(s) of the plan. This may result in a reduction to the previously proposed public safety facilities and/or other service levels.

The plan's signal achievement, the basis of its success, is that issues that will arise four years in the future are being addressed in the current period and can be further studied and refined for three more years. The board and county staff can allocate the time necessary for making complex and important decisions that may permanently affect the future well-being of the county. As a new board is elected, members will be educated regarding the assumptions of the plan and provided an opportunity to make adjustments. Because the plan and all assumptions are publicly documented, all potential candidates are aware of the funding proposed for anticipated service levels.

The existence of a five-year financial plan means that no longer are long-range financial decisions brought to the board's attention and acted upon within the five-month budget time frame. Future issues are introduced in the plan beginning with year five and are moved forward one year in each of the ensuing four plans. By the time an issue reaches year one on a plan, the issue will have been reviewed, modified and addressed by the board over a five-year period. This results in an increased level of comfort for the board, residents and media that a sufficient amount of time has been provided for all interested parties to address their concerns for the significant issues facing the county.

Continued Evolution

The next evolution of the five-year financial plan is to use it as the basis for formulating a strategic plan for the county. Once a strategic plan is adopted, the financial plan would reflect its goals and would change as the strategic plan evolves.

The methodology that produced the 1994-98 plan will serve as a guide in designing financial plans for the county's other funds. This will be especially beneficial for the county's water and sewer enterprise funds. By linking the growth factors used for the general fund's plan, assumptions can then be easily applied to other funds.

The plan and its assumptions may eventually become the raw material from which campaign platforms for election to the county board are derived. Growth rates, service levels, tax rates and other campaign issues, now quantified and presented in the plan, can provide elected officials and challengers information on which to base their positions.

Identifying the Future Today

The development of a five-year financial plan has allowed the County of Hanover to be proactive, rather than reactive, to any anticipated revenue shortfalls or expenditure deficits by adjusting its service levels accordingly. Prior to the formulation of the plan, multi-year impacts were determined on a project-by-project basis but were not consolidated into a cumulative effect for all projects. Because an immaterial assumption change in year one of the plan may have a significant impact years later, the county is in a position to identify and act on potential budget problems that may arise three, four or five years in the future.

Public access to the plan and all its assumptions has increased citizens' confidence in the county and the board. For residents and the media, there is an increased level of comfort in knowing that sufficient time has been provided

for all interested parties to address their concerns for the significant issues facing the county.

Exhibit 1 EXAMPLES OF MAJOR ASSUMPTIONS FOR HANOVER COUNTY'S 1994-98 FINANCIAL PLAN

Revenues:

* Assessed values of property due to reassessment are projected to increase 2.5 percent in the 1993-94 fiscal year and 4.5 percent therafter.

* Real estate tax rate is assumed to remain at $.67 for the entire four-year term of the current board.

* Implementation of personal property tax proration on January 1, 1994, will generate $600,000 annually.

* Increase of consumer utility tax rate in 1995-96 of $1.50 per monthly bill will generate $925,000 annually.

* Landfill tipping fee revenue will decrease $500,000 in 1994-96 due to privatization of solid waste disposal.

Expenditures:

* Annual merit increases of 4.0 percent in 1993-97 will increase to 5.0 percent of 1997-98 for both county and school personnel.

* Funds are earmarked for additional county and school positions in each of the five years.

* $600,000 is allocated in 1997-98 for operating costs associated with opening a new elementary school.

* County and school operating expenditures will increase 2.8 percent in 1993-94, increasing to 4.0 percent annually in 1995-96.

* Projects that will require a bond referendum or lease revenue obligations will be identified.

JOSEPH P. CASEY, director of finance for the County of Hanover, Virginia, has been a member of the GFOA since 1990. In 1992, he received the MBIA scholarship to attend the GFOA's Advanced Government Finance Institute. CECIL R. HARRIS, JR. is assistant county administrator for finance and administration for the County of Hanover, Virginia. He currently serves on the Executive Board for the Virginia GFOA and has been a GFOA Distinguished Budget Award reviewer since 1992.
COPYRIGHT 1993 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Casey, Joseph P.; Harris, Cecil R., Jr.
Publication:Government Finance Review
Date:Oct 1, 1993
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