Tag Archives: city budgeting

Forecasting Property Tax Base

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This week we conclude our series on property taxes by introducing our method for forecasting municipal property tax base if you want to build your own property tax forecast. We have used these variables to build models to support municipal budgeting and they should be helpful for any community in North Texas.

Components of the Tax Base

When doing the forecast you will get more accurate results by creating separate forecasts for the three major categories of property tax base: commercial real property, residential real property and business personal property. Many economic indicators are logical predictors of property tax base, but the following have consistently been statistically significant and contribute to more accurate forecasts.

Variables for Forecasting Commercial Real Property

Three indicators have been effective in forecasting commercial real property. The first is historical commercial real property tax base. This information can come from old budget documents or from your central appraisal district. The second variable is total commercial construction. This can also be obtained from the appraisal district for past years, but another good source may be your municipal building inspection permit data. One or the other may be significant for your community. The final variable is a national statistic, annual gross domestic product (GDP.) This indicator picks up the overall national business cycle, which can have an impact on commercial finance and employment trends which, in turn, influence local demand for real estate and drive up or depress local property values.

Variables for Forecasting Residential Real Property

We find four variables are significant predictors of residential property tax base. The first is historical residential tax base. The second is municipal population. This can come from the Texas Demographic Center. You may need to do your own estimates to obtain the most recent annual values. The third variable is your property tax rate. The final indicator is a national statistic and a subset of the gross domestic product called residential investment. This indicator represents the national housing business cycle and has proven to be a statistically significant predictor of residential tax base in the DFW area.

Variables for Forecasting Business Personal Property

For most cities, business personal property is the smallest of the three tax base categories, but we found it is the most complicated to forecast. We have settled on five indicators that are necessary to predict it. The first is historical business personal property. The second is the Texas Business Cycle Index, which is compiled by the Federal Reserve Bank of Dallas. The third variable is the vacancy rate for retail real estate. You can obtain this from one of the commercial real estate data vendors. A second real estate variable, and the fourth in our model, is total occupied commercial inventory (office, industrial and retail). Finally, annual gross domestic product is also important.

Running the Forecast

We have been using this mix of indicators for many years to track local tax base performance. The art of forecasting means experimenting with various functional forms of these and other variables until you find the equations that do the best job of explaining your city’s historical tax base change. It is best if you build the forecast model in a statistical software program like Eviews or STATA. Once you have finalize the forecast models you can transfer them to Excel to do sensitivity analysis and run scenarios. If you want to learn more about our process let us know. You can use our contact form.

Next week we begin a series on measuring economic wellbeing and how and why economists developed widely used indicators like gross domestic product.

Property Tax Rates in Dallas County Cities

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Introduction

Tax rates are probably the most important policy decision a city government can make. These rates determine the scope and scale of the city services that the community can afford. The needs of businesses and households differ, and those tax rates are an important signal to them about the type of government services and level of operations they might expect in that community. The property tax is especially important in Texas. This post will summarize how the property tax rates of cities in Dallas County have changed over the last two decades. Tax rates have generally increased in Dallas County, but these increases have been concentrated in some cities and happened during certain periods.

Setting Tax Rates

According to the Texas Municipal League, 89 percent of cities and towns in Texas impose a property tax. This tax accounts for 41 percent of all municipal revenue in the state. The property tax is the most flexible revenue source available to a municipality. The city council may set a tax rate without the need for a referendum. Case law has also shown that the property tax rate, if imposed according to state law, is not subject to repeal by any voter initiative. Before imposing a rate, the city council must approve a budget that reflects a property tax. Upon adoption of that budget, the council votes to set a tax rate. As long as the annual increase in that tax is less than 108 percent of the effective tax rate, the levy is not subject to potential voter challenge. The effective tax rate is the rate that would bring in the same revenue as last year given the changes in appraised values. Senate Bill 2 is now under consideration by the Texas House of Representatives and would reduce the trigger for a roll-back election to 105 percent.

The maximum tax rate a city may impose varies according to its classification under state law. Home rule cities, essentially those operating under their own charter, may impose a rate up to $2.50 per hundred dollars of property value. We are not aware of any city in the state that has imposed a rate anywhere near that level. Most cities have rates that are less than a third of that.  General law cities, depending on type and population, have various maximum rates: Type A over 5,000 population, $2.50, under 5,000 population, $1.50; Type B, 0.25; Type C cities’ maximum rate varies between $0.25 and $2.50, depending on population.

The Data

The following analysis is based on tax rates for the 25 cities that are primarially in Dallas county. These cities are: Addison, Balch Springs, Carrollton, Cedar Hill, Cockrell Hill, Coppell, Dallas, DeSoto, Duncanville, Farmers Branch, Garland, Glenn Heights, Grand Prairie, Highland Park, Hutchins, Irving, Lancaster, Mesquite, Richardson, Rowlett, Sachse, Seagoville, Sunnyvale, University Park and Wilmer. Portions of many of these cities lay in surrounding counties, but they are required to impose a uniform tax rate on all their jurisdiction. The same tax rate applies to all property types: residential, commercial and personal property. We obtained historical tax rates from the Dallas Central Appraisal District for 1998 to 2016. These tax rates were in effect for the fiscal years immediately following. For example, the 2016 tax rate was used to collect property tax revenue for the fiscal year that ends in September 2017.

Changes in City Tax Rates

In Dallas county, property tax rates are generally higher today than in 1998. The average tax rate in 1998 was 0.5772. The average rate in 2016 was .6677. This amounts to an increase in the average rate across all cities of 9 cents per $100 in property value. The median tax rate, that is the rate of the city with the middle tax rate, grew about 8 cents over the period.

This growth was not uniform. The pattern of increase since 1998 is a stair step. Tax rates increased after the 2001 recession and remained level until the Great Recession, when they increased again. This is evident in Figure 1, which shows the median tax rate over the period.

Rates increase after recessions in 2001 and 2008.

The property tax base responds slowly to economic recessions. As the economy declines, appraisals tend to take several years to fully reflect the impact of the downturn. When we look at the five years following the last two recessions, we can see how these Dallas County cities responded. Five years after the 2001 recession, 12 of the 25 cities in Dallas county had higher tax rates compared to the year of the recession. These cities increased their rate by 7 cents on average. Five years after the Great Recession, 18 of 25 cities had higher rates five years later. Their average increase was 8 cents. This is similar to the pattern nationally, where cities struggled with declining appraisals for three years following the end of the recession.

Another interesting feature of this data, is that the difference between the highest tax rate and lowest tax rate each year also increased, especially after the Great Recession. See Figure 2. This gap became dramatic in recent years and probably reflects a combination of factors and sharp tax rate increases in just a few cities.

The range in tax rates across cities has increased in recent years.

Tax rates have changed in Dallas County for many reasons. In some cases, increases in tax rates were a response by cities to recessions. Many of these cities also decreased the rate of growth in their budgets and cut many programs. In other cases, taxes were increase to accommodate higher debt loads. Most cities in Dallas County are relatively mature and have streets and water mains that are reaching the end of their useful life. Decisions about operations and infrastructure will continue to weigh heavily on local leaders.

Next week we will look more closely at the tax base of these cities to better understanding reasons for these tax rate changes.

Texas Property Tax: The Big Picture

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Introduction

This month, we will take an in-depth look at property taxation in Texas. The property tax is the most important source of revenue for Texas cities, accounting for almost half of municipal revenues. The property tax is the primary local revenue source for local school districts. This time of year, property owners will receive their appraisals from their local central appraisal districts’ (CADs.) A certified tax roll will be delivered to local governments in July. That tax roll will be used by city councils, school boards, county commissioner’s courts and various special districts to set property tax rates for the upcoming budget year. This week, we will provide a high-level review of property taxation in Texas for local leaders. In following weeks, we will examine trends in property tax based and rates in the DFW area and methods for forecasting property tax revenues.

History of Property Tax in Texas

Josh Haney provides an interesting history of the property tax in Texas. This tax, in place since before Texas independence was a huge source of both state and local revenue. For much of early statehood it amounted to more than half of state revenues. With local responsibility for administration, tax appraisals varied wildly from community to community. A standardized system, that ended state use of the property tax, also created the local appraisal districts in 1982. This gave us the current form of property taxation still in place today, though numerous statutory and constitutional changes have refined it.

Tax Year Cycle

The property tax cycle can be divided into four phases. Appraisal districts are required to appraise properties based on their value as of January 1 each year. CADs generally complete this process by the end of April and notify property owners of their appraisals. The CAD will also provide local jurisdictions with this preliminary information by the end of April so cities, counties, school districts and special districts can draft their budgets for the following year. This information informs decisions for operating and capital budgeting. Next, property owners can protest their appraisals. Appraisal review boards will complete these disputes by July. CADs must provide local taxing jurisdictions with a certified property tax base roll by July 25th. This value will be used by local governments to finalize budget preparation and set a tax rate. Local governments must set this tax rate after approving the budget and before September 30. The final phase of the tax year begins on October 1 when tax bills are mailed to property owners. Payment is delinquent on February 1 the following calendar year.

Truth in Taxation: Effective Tax Rate and Roll-Back Rate

The concept of truth in taxation, embodied in the Texas Constitution and state law essentially permits taxpayers to assess their property tax burden and influence the local political process that sets budgets and tax rates. The effective tax rate and the roll-back rate are important concepts under truth in taxation.

The effective tax rate is a hypothetical tax rate that would bring in the exact same amount of revenue as collected by local government in the previous year. This rate can change from year-to-year because it depends on changes in appraised values of existing property. If previously existing property appraisals are higher, then the effective tax rate will be lower than last year’s official tax rate. If property appraisals have fallen, such as during a recession, then the effective tax rate will be higher than last year’s official tax rate. The rate is calculated by excluding the value of new real estate constructed during the previous year.

The roll-back rate is a buffer to growth in property taxes that can be implemented by local taxpayers. It reflects the maximum tax increase a city government can adopt for its upcoming budget year without risking a roll-back election. According to the Texas Municipal League, there are half a dozen roll-back elections annually and a small majority are successful in rolling back the tax rate. The roll-back at the time of this writing is 108 percent of the effective tax rate. That means, that a city council can chose to adopt a property tax rate that is equal to or less than its effective tax rate without risk of a roll-back election. Rates set above 108 percent of the effective rate can trigger a citizen petition to call a roll-back election. Proposed legislation in the 2017 Texas Legislative Session would change the roll-back rate to 104 percent and make a roll-back election mandatory, without a petition.

In addition to excluding newly constructed property from the calculations, the effective and roll-back rates only apply to the portion of the tax rate that supports general government operations. The fraction of the tax rate that supports debt service (called interest and sinking or I&S) is not subject to the roll-back provision.

Statewide Trends in Property Values

Property taxes are generally calculated at the local level, by appraisal districts, for each taxing jurisdiction in the state. Changes in property tax bases can vary dramatically from community to community depending on local economic conditions. Given the overall importance of the property tax to local governments, we would like to have some baseline to easily compare tax base performance across the state. The Texas Comptroller provides us with a reasonable metric. It is charged with evaluating the appraisals made by local CADs for all the independent school districts in the state. The primary purpose of the property value survey is to support calculation of state funding formulas for K-12 education. It is not comprehensive, but provides some details to study statewide property tax base trends.

Based on these reports, between 2011 and 2016, the total taxable value of real and personal property in Texas grew 32 percent from $1.7 trillion to over $2.2 trillion. The annual increase was relatively consistent each year at over 5 percent. By comparison, for single-family homes, the statewide total has grown by 39 percent over the same period. Home property values, presented an increasing growth rate in recent years. This seems to reflect home price increases we have seen throughout the state. Annual increases in the last three years have exceeded 9 percent. Next week we will expand our analysis and take a closer look at DFW cities.

Being a Fiscal Impact City: Long-Term Planning

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Introduction

In recent weeks we looked at how adopting a fiscal impact approach to operating and capital budgeting can help a community make more sustainable choices. This week we apply the same logic to long-range fiscal planning.

Framework for Long Term Planning

Long range planning, according to the National Advisory Committee on State and Local Budgeting (NACSLB)  is a process to assess the long-term financial implications of current and proposed policies, programs, and assumptions. This process creates appropriate strategies to achieve a community’s long-term goals. Though finance officers and budget managers are daily working with a city’s budget, revenue and operating numbers, financial planning expands their awareness of how these statistics relate to each other and to external variables like economic indicators and demographic trends. Taking a long-term perspective helps these local leaders improve their awareness of options, potential problems, and opportunities. The range of issues that they can examine with this approach includes revenues, expenditures, and the service implications of changing or eliminating programs or adding new programs, services, or debt.

A summary of the key steps should include:

  1. Analysis of financial trends
  2. Assessment of problems or opportunities facing the city and potential actions to address them
  3. Long-term revenue and spending forecasts
  4. Consideration of how these trends relate to citywide and departmental goals set out in strategic or comprehensive plans

Such a process is not just a forecast. It engages all internal departments, key external stakeholders and the general public in so far as all these have some role in setting and helping achieve key goals.

The NACSLB identifies several best practices that can support the long-range planning process including:

  • Prepare multi-year revenue and spending forecasts using a variety of methods
  • Evaluating and understanding how changes in the tax base and revenues will impact city operations
  • Examination of tax exemptions, incentives and other policies that can reduce revenue
  • Prepare multi-year projections of spending for each fund and for current and proposed programs
  • Evaluate revenue and expenditure options together, and present these relationships so elected officials and the public can understand the implications of changes in service levels and revenues and how they can impact each other.

Role for Fiscal Impact Models

Other best practices are also presented in the report. For our purposes we want to highlight how fiscal impact analysis can help tie these steps and practices together. The goal is to improve fiscal sustainability with the model, not just use it to evaluate individual projects. Using a full fiscal impact model is the most direct way to use this process to analyze revenue, spending and economic data in ways that help policy makers and the public understand the consequences of budgeting decisions. These decisions may appear harmless when looked at in an annual budget presentation. A community risks making very wasteful and politically damaging decisions without taking a longer term perspective.

First, a good fiscal impact model will make use of extensive, custom information on the city’s spending, revenue and staffing. This detailed data is the only way to make meaningful and accurate predictions of the consequences of changes. At a minimum, the historical data in the model should include enough years of data to see how they budget and how revenues change in good and bad financial times. A full business cycle is a good starting point.

Second, the model will connect these municipal financial statistics to activities in the real economy. Service costs will change based on the population, employment level, industry mix and physical form of the city. As these external factors change, local leaders need to be able to predict how their service demands and resources are likely to change, too.

Third, the model should give local leaders a projection that is long enough to help them make good decisions. A five to ten-year projection is usually adequate for most operations and department-level variables. For capital infrastructure or other longer-lived decisions the projection should go out at least as far as the infrastructure is expected to last and to include maintenance and replacement costs.

Because of these features of a good fiscal impact model, a city can combine its revenue, operation and economic forecasting in a single package that will help the community understand where they stand in terms of their goals and the means to achieve those goals. As always, there needs to be extensive citizen engagement in these processes so that when setting sustainable goals, local leaders can win the support of the community. When the community understands the consequences of these choices, and what can happen when there is a downturn, it will be easier to stay the course.

Becoming a Fiscal Impact City: The Budget

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Introduction

Once you decide to become a more sustainable organization by becoming a fiscal impact city, and have had the serious conversations we recommended last week, what’ next?

A good place to start is with your budget process. Budgets are an ever-present feature of local governments. Most cities are either in the process of planning for, developing, approving, implementing or reviewing their budget. The calendar is full of budget-related responsibilities, actions and deadlines. In too many communities, the budget process dominates everything else puts staff into a continuously reactive mode. They may be focusing more on the internal demands of the budget process than on trying to connect their resources and processes to solve community challenges.

With some minor changes, your budgeting process can be reoriented into a tool to improve long-term organizational sustainability and a way to proactively help you realize your community’s vision. There will still be hard decisions. Community engagement and politics will still be a central part. The rest of this post shows how a budget process can be gradually reformed through using a fiscal impact mindset. The result will help cities realize their community vision and build a more sustainable organization.

A Framework for Budgeting

As a reference point, we will be using the budget framework developed by the National Advisory Committee on State and Local Budgeting. This framework, set down almost twenty years ago, is still one of the best starting points for local leaders who want to be proactive and focus on long-term sustainability. We will give a quick overview of this framework then talk about how a fiscal impact mindset can work in it to turn budgeting into a true tool for organizational sustainability and community prosperity. Though they define budgeting as the planning, implementing and evaluating the provision of services and capital assets, we limit our discussion this week to the operating budget. We will look at capital budgeting in a later post.

Qualities of a Good Budgeting Process

The National Advisory Council emphasized the need for budgeting to go beyond annual balancing of resources and options. They intended their report to help governments upgrade all phases of budgeting: planning, development, adoption and execution. To begin with, the entire budget process should be goal-driven. These are goals beyond preserving departmental operations with given resources. The critical difference in a good budgeting process is that it starts with community needs, vision and issues. These should motivate the government’s quest to create a suite of services that can meet those needs, realize that vision and address the issues that are most important. The budgeting process sheds light on cause and effect, the real issues, so management and elected officials can make the tough decisions and tradeoffs that are always necessary because resources are limited.

In addition to being linked to goals, they emphasize that a good budget process:

  • Takes a long-term perspective – cities should look at impacts of budget decisions over many years and use the process to determine the sustainability of programs and services.
  • Is focused on outcomes and results – the outcomes of the resource allocation process are the services the city provides. These should have measurable results – impacts on the community issue they are designed to address.
  • Provides information and incentives to staff (and other stakeholders) – budgeting should inform decisions makers and increase stakeholder participation. It should also close the loop with all stakeholders.

Sustainability Budgeting and Fiscal Impact Analysis

Fiscal Impact Analysis is usually associated with evaluation of specific policies or development projects. How can this approach support annual budgeting? It isn’t cost effective to produce a formal fiscal impact analysis for every little decision. What is important and possible is to start thinking in fiscal impact terms when making these decisions. Stakeholders, elected officials and staff should all be aware of how resource allocation decisions produce winners and losers. Shifting funding from one area to address a priority is a good choice, but it is helpful to understand what the community is giving up with these decisions. Adopting the perspective and language of cost benefit analysis is the first step in applying fiscal impact analysis. Being aware of the consequences of tradeoffs in resource allocation and documenting the likely changes in service levels are concrete ways to start the process.

A further step requires collecting more information so local leaders can understand the costs per unit of service for various programs, the outputs of those programs and the associated changes in community indicators. This additional data does not exactly prove cause and effect, but can give hints of the relative effectiveness of different approaches to solving the same problem. Not all programs are easy to measure and have a more complicated relation to community outcomes. Still, the data collection and evaluation process can improve decision making.

The final step is to conduct a complete fiscal impact analysis of a policy change. This analysis will measure program costs and document the budget, revenue and economic impact of that change so that policy makers can see what it means for the organization and the community. Combined with community indicators and standard program performance measures, a fiscal impact analysis will help those responsible for setting the budget be well informed. Those decision makers can also share this information with constituents so that everyone is clear about the tradeoffs and likely consequences. This type of analysis can be applied to a part of the budget, the major programs or departments or to the entire budget. When applied to the entire budget it is a useful input into long-range financial planning which attempts to evaluate budget, revenue and impact out at least three years.

Becoming a fiscal impact city is more than a resource challenge. It is a major leadership and cultural challenge. The difficulty is building the organizational culture that can function in this more transparent way and building in community engagement and education processes so the public can increase their support for the hard choices local leaders need to make. In the following weeks we will look at other areas where local leaders can improve organizational sustainability by becoming a fiscal impact city.

 

Sustainability Questions for Communitywide Engagement

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Every city can improve its fiscal sustainability. Fiscal sustainability means the providing the services that meet the needs of households and businesses without taxes and fees that harm competitiveness relative to other cities. A core practice to improving sustainability is building a culture that uses the fiscal impact approach through its decision-making processes. This includes its budgeting, planning, capital programs, operations and economic development. Improving sustainability, however may not mean any given city can still maintain the level of services it offers today over the long run. Local leaders need to start a deliberate process where they engage city government and the private sector. That process will help the community come to terms with the capacity of its economy to support its needs. It will also result in types and levels of public services that strengthen and complement the efforts of households and businesses to create value.

High levels of comprehensive municipal services are a relatively recent development. Before WWII, most smaller cities and towns provided very modest services. Fire departments in most communities were volunteer. Police departments were small. Infrastructure was crude. Post war suburbanization, expanded retail sales and federal grant programs for water infrastructure gave most cities the resources to provide a high and consistent level of services to most Americans living in metro Politian areas. That type of easy economic prosperity is available to fewer cities today.

Economic prosperity is the foundation of sustainable city finances. Economic change in recent decades has separated communities into a small number of big winners and a larger number of losers and also-rans. While most U.S. cities have not experienced the absolute economic decline seen in older industrial cities, most have underperformed compared to the small pack of very high growth metro areas. Most communities are facing an ongoing struggle to maintain roads and other infrastructure, pay staff and cover retirement benefits. There are a few options cities try to address this challenge. They raise taxes and fees. They cut services. They make often wasteful bets on economic development subsidies. Eventually service levels will adjust to the ability of the local economy to support them. The challenge and opportunity for cities is to get to that point as quickly as possible. This frees more resources for private initiative. It also improves the effectiveness of the services government continues to offer. The best way to make this transition is to do so deliberately and before a crisis forces a city to make foolish and damaging fiscal choices.

Rationalizing public services with the capacity of the local economy can happen through a thoughtful and inclusive process. This is more likely to happen when cities are proactive and begin before economic circumstances force them. This does not mean a painless process. It is likely, however, that starting this process now will build a stronger community that is more heavily engaged in local government decisions. This type of community building will help implement the policies that result from the deliberate process to become a fiscal impact culture. To start, local leaders can begin a citywide dialogue around collectively answering three questions.

How do we want to define sustainability as a community? The concept of sustainability needs to be defined in ways that all stakeholders can understand. There is no absolute right answer since sustainability is a relative term. Time frame is one variable. A community can set goals that strive for shorter or longer-term sustainability. Effectively answering this question also means refining the community’s vision of itself and its role in the regional, national and perhaps even international economies. Every community aspires for more and better. That was relatively easy during America’s long history of rapid economic growth. Today, in a mature national economy, and one with opportunities for local growth more limited, communities need to take a realistic look at what they can be. This does not mean there is no hope or role for aspiration. It does mean that successfully reaching a vision will require one that is more imaginative than just more of what they already are.

What is the community will to rationally examine service levels, economic capacity and pick an appropriate balance? Once a community has established a creative, realistic vision, it is in the position to explore the role of its services in achieving that vision. Though most Americans are accustomed to the full set of municipal services, not every city will be able to maintain all these services at the level they currently provide. Communities will need to be much more creative is thinking about how they want to achieve the functions of traditional services. For instance, reduced risk from fire is an important goal. Achieving that goal can be helped by changing the building code to increase the fire resistance of buildings and mandating sprinkler systems. These regulations lower the need for firefighting capacity in the long-run. This does not mean eliminating the fire department, but it does mean rethinking how this and every other major municipal service is delivered and funded.

What is the community’s capacity to carry out this process? This is actually the most important question for local leaders to ask and it should come first in their process. We introduced it last since answering it requires a little understanding of the other two questions. This question requires local leaders to evaluate their own motives. It means assessing the culture of their municipal government and the availability of the right skill sets, time and other resources. If motives, culture and resources are up to the task then a city will be able to start the process of building a fiscal impact culture that enables sustainability.

A community that goes through an inclusive discussion of these three questions will gain many benefits. The most important and enduring benefits of this process include shaping a realistic, creative and shared vision for what the community wants to be, rationally rethinking the purpose of local government and identifying the benefits the community wants. This experience will help local leaders build the administrative infrastructure and city culture that makes sustainability the centerpiece of all its major decisions. Then when it comes time to take up a specific tool like fiscal impact analysis or cost-benefit analysis to inform local decision making, it will be in the best position to put those tools to proper use.

Taking these steps may be a frightening prospect for city leaders, but the potential benefits outweigh the risks. It may be far easier than the alternative where economic crisis, either local or national forces changes in even more painful ways. With growing service costs, taxpayer unrest and an uncertain economy, taking these steps may be the only way for local leaders to effectively accomplish the goals they have set for their community in the long run.

Planning for Fiscal Sustainability

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Introduction

We are continuing our series of posts on building a more sustainable community. This week we introduce a framework for long-range planning that can tie together the elements we have introduced over the last several weeks.

Context and Scope

The Government Finance Officers Association provides a good introduction to long-term financial planning. Their definition of long-term planning as a combination of forecasts and strategy is useful in the context of fiscal sustainability. Forecasts are our best educated guesses of how key economic and finance variables are likely to change. Strategy is simply considering how those forecasts may impact our goals and identifying actions to improve the chance we get outcomes we want. This is all easier said than done.

Every city has an annual budget process, but planning adds new dimensions and takes time. It requires more than just looking further down the road. It also requires a more open and transparent process where city staff can support local leader decision making and help the public understand the costs and benefits of different levels of public services.

Though planning takes time, any community can afford some level of forecasting and strategic assessment. The key is finding the right balance. One option is to include phasing the process in over a few years, adding more functions. Another approach is to do long-term forecasts for select departments every few years so that all city operations are addressed at least once every two or three years.

The most important factor is that long-term planning become part of the annual budgeting process. The forecasts can help assess risks and needs in the upcoming annual budget. The extra value comes from the longer-term forecasts and how their results can inform changes in overall financial policy. These forecasts can also identify the need be proactive with operating procedures and capital projects.

Key Elements of the Planning Process

Using the GFOA outline, here are our recommendations for how to set up a long-range planning process:

  • Time Horizon – five years is adequate for operational planning. Economic forecasts are unreliable beyond five years. If a community wants to consider longer term consequences they should identify a number of long-term scenarios with varying economic conditions and service assumptions. They can then simulate how these would impact their budget and key fiscal sustainability indicators.
  • Scope – The plan should cover all major funds. The general fund is the priority, but enterprise fund analysis can be just as important to maintaining the viability of those fee-based operations.
  • Frequency – Communities should evaluate at least some of their economic, revenue and operating drivers annually. This helps make the long-term approach a recognized and expected part of the process for decision-makers and the public.
  • Content – The plan should include all types of financial indicators discussed last week: economic and demographic, revenue, spending and operations, debt and infrastructure.
  • Visibility – The plan needs to be a highly visible part of the annual budgeting process. As we pointed out previously, community engagement is key to making these key decisions with public input.

Willingness to pay for services and decisions on priorities require solid public involvement up front. If not, a community may find it difficult to sustain those efforts down the road.

Engagement and City Staff

If communities are going to become more fiscally sustainable, dialogue is at the foundation of the process. We recommend community engagement at each phase of the process. Citizen advisory councils can help staff and local leaders communicate the complexities to the public. By carefully nurturing this translation process, city staff and local leaders can make sure that citizens can constructively contribute to the discussion.

Running a more open and transparent process may raise staff concerns. Staff may worry about their ability to deliver effective and efficient services if the public has greater access. The opposite may be true, however. Current budgeting practices wait too long to engage the public. Cities build a proposed budget and have a big reveal when elected officials and engaged citizens can react. This process involves too much confrontation and can feed public cynicism about government and bureaucrats. In the public reaction, sometimes the political consequences are that staff knowledge and experience is ignored and decisions are made based mostly on emotion.

That technical knowledge found in city halls across the country can be better used in a well-coordinated long-term financial planning process – if that process is inclusive and transparent. Staff can support public decision making with their skills and experience. They become like consultants to local leaders and the public in the planning process. They can help others understand the costs and benefits of short term budget decisions. They can also help local leaders understand the long-term consequences of major changes in the economy and city services, (or be the translators of that information if provided by outside consultants.) In this way, a more open, long-range planning process should strengthen the role of city staff, help local leaders make better decisions and lead to results that are more satisfying to the entire community.

Next Week

Next week, we begin a series of posts looking at some of the major causes of current city financial stress.  Axianomics can help your community implement a long-term financial planning process. Let us know what you want to accomplish.

Indicators for Fiscal Sustainability

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Introduction

We are continuing our series on building a more fiscally sustainable community. This week we will look at standard fiscal indicators and how they can help local leaders make more sustainable fiscal and economic choices.

Broad Categories of Indicators

There are two broad categories of fiscal and economic indicators. The first category covers economic or social activity outside the organization. These include measures of community population, jobs and other economic and demographic indicators. These are important because they determine municipal resources through the tax base. They also influence need for municipal services and infrastructure spending.

The second class of indicators measure features of municipal operations and finance. These are internal or organizational indicators. These reflect a combination of policy choices by the city and the influence of external indicators.

There are many metrics in each category. Our review will focus on high-level, summary indicators. After starting with these high-level indicators, each community may want to identify more detailed metrics that are important for its circumstances.

Revenue Indicators

Most cities begin budgeting and planning by reviewing revenue performance and projecting future revenue. This is practical, but communities could just as easily start budgeting by looking at service needs. It would be an interesting experiment if a community were to begin budgeting with an ongoing engagement process similar to the one we discussed in recent posts. The goal would be to developed a budget that citizens were willing to pay for. This might support sustainability by starting with citizen willingness to pay rather than automatically budgeting to the maximum available revenue. Whatever process a city uses, key revenue indicators for sustainable finance include:

  • General operating revenue by source in total and per capita terms
  • Grant and other inter-local agreement revenue

Operational / Service Indicators

City revenue sources differ some from state to state, but spending priorities are similar. Public safety, parks, libraries, streets and other infrastructure dominate general fund spending in every city. Detailed studies of major programs can find potential improvement and efficiency opportunities, but tracking overall spending is a good place to start. Important service indicators include:

  • Growth in total and per resident expenses by function or department
  • Total employment by function and department

Operating Position Indicators

A city’s operating position means its ability to balance its budget on a current basis with current revenues. A sound operating position will support day-to-day liquidity and prevent a city from having to dip into operating reserves for ordinary expenses. Every city will experience periodic emergencies, but repeated drawdown of reserve funds is a sign of long-term structural financial problems. In these cases, a city needs to have a serious conversation with taxpayers. The community needs to decide if it is willing and capable of supporting current service levels or whether city operations need to be simplified. The most important operating position indicators include:

  • Total annual revenue minus total spending
  • Liquidity measured by ratio of cash and short term investments to current liabilities
  • Fund balances

Debt and Infrastructure

It can be helpful to citizens and decision makers to report debt indicators with key infrastructure indicators. This will improve understanding of the conditions of city capital assets in the context of debt capacity. Key debt and infrastructure indicators include:

  • Net debt per-capita
  • Total debt-service as a percent of tax base
  • Road, bridge and other asset conditions

External Indicators

There are many economic indicators that help local leaders understand what is influencing city spending and revenue. The most important to track are total population, total households, household income and jobs in the city. Central cities may also be interested in measuring commuting and other indicators of how their services are supporting nonresidents.

Fiscal analysts and economists have identified hundreds of potentially useful indicators. It is a good idea to start with a small set and learn what you can from them. Any community will gain important insights from the few listed above. For more detailed information you can consult the Government Finance Officers Association and the International City/County Management Association.

Next Week

Next week, we will look at the long-term financial planning process for fiscal sustainability. For more information on how Axianomics can help your community build and use a fiscal trend monitoring system, fill out our contact form.

More Community Engagement for Sustainable Planning

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Introduction

Last week, we emphasized the importance of citizen involvement to build a fiscally sustainable community. This week, we focus on specifics to help local leaders and the public move away from reacting to day-to-day challenges and toward a longer-term discussion on priorities.

Stuck in the Present

Local leaders and the public will benefit from an ongoing two-way engagement. Currently, both sides tend to react to limited feedback. Local leaders mostly only hear complaints about specific service problems. Average citizens have a limited concept of municipal operations and tend to lump all public services under “government” no matter what level of government is responsible. For these reasons, current communication tends to support reactionary responses.

Elected local leaders get a general affirmation from success at the polls. Voter feedback is typically responding to high-level priorities promoted by the candidate. Municipal elections seldom depart from generic calls for fiscal responsibility, public safety or more economic development. It is difficult to communicate specifics while campaigning, so there is little detailed information on what exactly the voters are sanctioning the candidate to do. Typically council members and mayors begin exploring options once in office.

Professional city staff like City Managers, Department Directors have detailed knowledge on how to help elected leaders deliver on campaign promises. These staff, however are often overworked and struggle to maintain existing services. They spend much of their time “putting out fires” that are called out by public complaints. It is difficult for staff to have the time to maintain an ongoing dialogue with the public.

The public is also generally reacting to what they perceive as failures in a limited set of municipal services. Missed garbage pickup and slow street repairs are concrete experiences for citizens and can prompt a call or email to their council member or the city’s hotline. Unfortunately, the usual way citizens learn about the more arcane public policies is through a crisis. A good example in the media lately is the serious financial stress of public pensions such as the Dallas Police and Fire Pension Fund or the Illinois Teachers Pension Fund.

Even in circumstances where two-way conversation is possible, such as town hall meetings, the items under consideration are often only incremental changes in the budget. There are few instances where the public has the chance to reflect on long-term policies or discuss the overall vision for their communities.

Tools for Citizen Engagement

Building a community engagement process that shifts a city from reacting to proactive discussions about the future takes time. This is a cultural shift that will need to be implemented over the long-run. There needs to be education all around – for elected and professional leaders and the public. It is best if cities start with a specific issue or take advantage of the rare opportunities that come along with strategic plans or citywide comprehensive plans. Each community should thoughtfully explore how it wants to conduct the engagement process. Some helpful questions to ask include: Is this process for a one-time action like a city strategic plan or comprehensive plan or for ongoing feedback for a city service? Are citizen interests homogeneous or are there specific groups or neighborhoods that are more affected than others? What is the budget in terms of staff time and funding for conducting the engagement process?

With goals in hand, there are many tools for improving community engagement. One-way methods to communicate issues and options to the public include council briefings, reports on city websites (such as budget documents, performance measures or annual financial reports) and citizen surveys. Two-way methods include the notice and hearings process, town-hall meetings, focus groups and facilitated feedback sessions and social media.

Both one-way and two-way tools have a role to play. The important thing is to use the tool with the intention to shift the discussion to questions of long-term priorities and sustainability. This requires asking the public to consider the costs and benefits of city programs, services and investments. It also requires getting citizens to think explicitly about when those costs and benefits will happen. As examples, some choices have high up-front costs and offer benefits over the long-run. This includes investments in infrastructure paid out of current funds. On the other hand, using debt to fund infrastructure spreads costs among taxpayers today and in the future.

Everyday Language and Citizen Perceptions

Once cities select their communication tools, they can focus on the content. City budgets and operations are very technical. Successfully engaging the public means local leaders translating cityspeak into terms the public can understand. One approach is to recruit a volunteer community group to review presentations and reports to identify confusing terms and jargon.

The public also needs to understand the big-picture of city operations, not just the high-profile services they see every day. Police, fire, streets, parks and libraries are visible. The attorney’s office, fleet management and debt service are among the many mostly invisible city functions. Concepts like “overhead” are a useful term for summarizing support departments. Debt burden can be broken out by service area showing what past investments are being paid off. For example: 50 percent for streets, 25 percent for parks and 25 percent is for the new library.

Finally, local leaders can help citizens understand municipal services and finances in the overall context of local government. It is easy for tax payers to confuse what their money is funding. Simple summaries of total local property tax by school district, county and city government help citizens better appreciate exactly what they pay for municipal services. This can help citizens give good, specific feedback on exactly what is important to them.

Next Week

Next week, we will identify some specific metrics that local leaders can use to track and communicate the fiscal and economic health of their communities. For more information on how Axianomics can help your community start a community engagement process fill out our contact form.

Community Engagement for Fiscal Sustainability

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Introduction

Last week, we looked at factors that influence local leader’s ability to put their communities on a more sustainable fiscal path. Today, we will look at how changing the public engagement process is essential to achieving better long-term fiscal outcomes.

Citizen Demands and Changing Economic Circumstances

The U.S. has a strong tradition of community input into local government decisions. Immediately after the American Revolution, local offices that were once appointed by colonial governors became elected positions. The New England Town Hall model practiced direct democracy even earlier. Historically, citizens participated in local politics by voting, campaigning or running for office, attending hearings and keeping up through the local press.

The current mix of municipal services came about through a long-term process of increasing citizen demands for government as the economy grew and changed. This took many decades. As the economy grew and became more complex with industrialization, communities across the country sought new city services: professional police and fire departments, better streets, water supplies and garbage disposal. City budgets grew with their local economies and the changing ideas about the appropriate role of government.

The scope of municipal services has changed very little in decades. Yet, economic and fiscal conditions are very different than in the era of growing local government. Today, many cities face ongoing financial stress. The reasons for this stress come on the spending and revenue sides of the equation. There are growing salary, benefit and retirement costs and a seemingly never-ending list of technology and equipment upgrades. At the same time, the tax base has stagnated, even in communities with growing economies. Growth in services, declines in manufacturing, internet sales and other factors have reduced the share of the economy subject to local taxation. In the face of these new constraints, demand for city services have not changed. Any hope of improving local fiscal sustainability must begin with new conversations with and among citizens.

Reexamining Demand and Costs for City Services

Many cities appear trapped in an incremental budgeting process. They practice an ongoing series of short-term adjustments to deal with what are long-term, structural challenges. The results gradually weaken city services, harm morale and recruitment and increasing citizen frustration. Incremental budgeting is a prudent strategy in good financial times. It slows spending growth. It also works during temporary downturns by managing painful cuts until funding returns to a growth trend. It is not a great strategy when communities face systematic financial stress. Incremental budgeting becomes kicking the can down as financial strain builds.

The solution is a deliberate engagement with the public that goes beyond the annual budget hearing. The challenge is to have conversations on priorities that help local leaders make tough decisions with the full support of their constituents and stakeholders. Local leaders need to begin a new community engagement process if they want to achieve lasting reforms. Historically, public participation in municipal finances was annual outreach for input on the proposed budget. That budget seldom represents a major departure from the previous budget. Town hall participation is usually very low. Programs facing cuts rally friend’s groups or neighborhood associations, but there is little real dialogue and the point of contention is simply a change in funding levels. There is no discussion of priorities in the context of long-term change. There is no really useful feedback to local leaders who what to build a more sustainable city.

Information for Change

The economy is always changing. Recent trends have been hard on local governments. Nationally, job and income growth is becoming more and more concentrated in fewer and fewer localities. Migration, rural to urban, and from north to south weakens the tax base in the cities losing businesses and residents. The destination cities face growing service demands and the risk of budget hangover down the road. State and national government finances are in little better shape so not much help can be expected from them. Cities need to develop a clear picture of their economic foundation and how that is changing. Local governments should be rethinking their services and operations with these long-term changes in mind.

Local leaders also need to develop good measures of the costs and benefits of municipal services. This is the only way to determine what a sustainable level of services might look like. Municipal services can be very technical, but this information needs to be collected and packaged in a transparent way so it can support a serious public discussion. Communities need this information to set priorities and identify when they need to look for alternative, lower-cost ways of achieving their goals.

Armed with this strategic economic and operational information, local leaders can start having conversations with their citizens. This type of engagement can change public perceptions of local government. The current approach wears down citizens and city staff and nurtures nothing but a mindset of diminished expectations. This can be demoralizing and wasteful for a community. When presenting a clear description of the long-term costs and benefits of city services, local leaders help citizens explore and articulate what is most important. The community can begin to feel empowered and in partnership with their government.

Next Week

Next week, we will take a deeper dive into community engagement and look at specific practices to build citizen participation and commitment. Part of the answer is helping citizens reimagine their role in creating a more fiscally sustainable place to live. In the meantime, let us know how we can help your community begin the journey to fiscal sustainability.