Budget Process

One of the final actions taken by the city before the end of the year is that of setting the levy for city taxes to be paid in 2008. In getting to this end a number of actions and activities occurred before a final number was arrived at.

The budget process starts in June typically, this year we started in May, with copies of the financial statements being sent to department heads for them to consider their needs for the coming year. The reason we started in May this year was help us all better understand the budget process and the impact of the Department of Revenue rule change which changes the way power plants are valued for purposes of taxation. That being said the rule change will be phased in over a period of three years, the first resulting in a reduction of value equal to reduction in taxes to be paid by Xcel to the city proposed at $145,000. When the numbers were finally calculated the loss in taxable value of all utility property was $546,206. All utilities will pay an estimated $120,459 less in 2008 than they did in 2007 towards city taxes.

Working through the budget process the council was asked to consider a number of things. Obviously we needed to consider the decrease in tax capacity. We considered budget “growth”. We worked through the contingency plan and identified what items were suitable for consideration in this budget cycle. The plan has identified both revenues increases and expenditure decreases. The council also considered basically 3 budgets from each department. There was a zero based budget, a small increase budget, and a perceived needs budget.

With the wealth of information it took some time to wade through all the factors. It was felt the contingency plan should be reviewed by departments and changes made to reduce operating expenses or increase revenues. Both of these were recommended. It was also felt it difficult to provide for no growth in the expenditure side of the budget. With these considerations the budgets from each department were assembled into a preliminary budget and the impact in terms of tax rate was developed. After some minor changes this became the preliminary budget and associated levy request.

Within Minnesota we’re required to certify a preliminary levy by 15 September. The preliminary levy becomes the cap, or the most that we could levy. From that date until the final levy the city has the opportunity to adjust the levy downward as the budget is better refined and costs become known. With the understanding the budget gets started in May or June the actual expenditures for the majority of the year are unknown at that time. Having the benefit of actual expenditures of 10 months helps with the assessment process in making final cuts.

The Truth in Taxation hearing is held during the first meeting in December. At this time proposed final adjustments to the levy are made. This year we were able to cut an additional $96,581 from that of the preliminary levy. In the end our levy was $49,837 less that that for 2007. Unfortunately with the reduction in Tax Capacity, due to the rule change, the tax rate will increase slightly for 2008.

As we consider the 2009 budget we’ll again need to consider the same factors we did for the 2008 budget period. The need for fiscal prudence continues as we face challenges of tax base and operational expense. Some changes may be made to the process but I think you can agree the budget process involves more than one may think.

Trunk Charges

As a city grows, it develops needs to expand its infrastructure to meet the needs of added population. We may start with new subdivisions but they require the support of wastewater treatment facilities, wells, water towers, lift stations and other trunk facilities to provide the public improvements we all expect to have in a city.

Financing these types of facilities can be challenging and also can be handled by a number of different approaches. Each one has its pros and cons depending on how you look at them and whether you are a developer or not. In Becker we have chosen a number of different approaches to address the costs for infrastructure with charges and fees that support their establishment and replacement. Some infrastructure is supported by taxes, but most are not. They are largely supported by some form of user fees.

One of these mechanisms is that of Trunk Charges. Through a study of the infrastructure needs for water, sewer, and storm sewer the city looked at the need for trunk facilities that would be needed to serve the community when fully developed. Trunk facilities are the wells, water towers, lift stations, and over sized water and sewer mains as examples. They are primarily items we all need for the properly functioning systems we use, but serve the whole rather than individual households. Once we quantified the needs of these types of systems we attached price tags to them, looked at the comprehensive land use plan to ascertain densities of development and determined the “price” for trunk facilities of water, sewer and storm sewer. This becomes a fee a developer pays to the city for developing in the city. This charge is based on a per acre cost for the amount of land developed. In exchange the city pays for and installs these trunk facilities that provide development with the needed public improvements.

In managing this system a few things stand out as concerns. One involves the time of development. The city council in controlling trunk facilities controls the extent of development through capacity in the trunk facilities developed. They also control the timing of construction of these facilities. If a developer wants to move ahead of the city with development and the city doesn’t have the resources to install it, the developer can install these trunk facilities at his expense. This comes with a few provisions. The council needs to be agreeable to the situation, the developer pays all costs associated with the trunk facility that meets our expectations and the developer is not given credit for the trunk facility he installs. He is still expected to pay the city for the trunk costs associated with his development.

One of the cons to this approach is that of cash flow. Essentially the city has to finance the establishment of a trunk facility prior to development taking place. As such, early on there are expenses without cash support. In the middle term cash flow seems to meet needs. As the city becomes more fully developed, cash flow becomes less of an issue. In recognizing that problem a slow and deliberate approach is utilized in managing growth.

There are other methods Becker uses to recover costs which I’ll address another time. Keeping finances in perspective helps in managing growth and its consequences. In the end, maintaining control is in everyone’s best interests.

The Bottom Line at Pebble Creek

Each year the city council sets rates for Pebble Creek Golf Course, this year being no different. The discussion however this year centered around a change that would make the course profitable. Pebble Creek has not made a profit since 2001. There are a number of reasons for the change, most notably that of an increase in golf courses but also a declining number of players.

Pebble Creek continues to be a fabulous golf course in excellent condition. The goals of the council continue to be to maintain the course to that extent but also to bring the charges in line with the costs of running the facility. Steps have been taken to reduce the maintenance budget this coming year by 5-6%. This is on the heads of a reduction in maintenance expenses over the past couple of years.

Looking at balancing the budget, revenues were looked at along with the mix of play between season pass holders and green fee paying customers. It was noted that 75% of the play on weekends was played by season pass holders. With weekend play being the premium time, this is when the course needs a stronger mix of green fee paying customers to generate revenues.

Another factor in dealing with revenues is the cost for a season pass. With many members playing a large number of rounds of golf their cost per round was very low in comparison to green fee rates. This is the advantage of a season pass but the benefit to Pebble Creek was felt to be inadequate in terms of the price paid for a season pass. Making an adjustment to these rates was needed to meet the revenue requirements of the facility along with a rate that was fair and comparable to other area golf courses.

In reviewing these factors and accomplishing a business plan to address expenses and revenue needs a partial change in direction was needed. What was proposed and accepted by council is one season pass rate of $1200. This is an increase of slightly over $200 for non-residents but a large increase for residents of a little more than $500. We recognize that some members will not participate at that rate but part of the goal is to see more green fee paying customers. Freeing up playing time during prime times in the weekend is a benefit with the change of player mix.

The bottom line is we need to change the bottom line and we felt making these changes will improve the finances of Pebble Creek. Without these, the fund balance for golf will run in deficient. The city no longer has an option to keep rates as low as they have been but rather run the course as a business while maintaining a positive cash flow.