BUDGET PROCESS

BUDGET DEFINITION
The budget process consists of activities that encompass the development, implementation, and evaluation of a plan for the provision of services and capital assets. Several essential features characterize a good budget process. Incorporates a long-term perspective Establishes linkages to broad goals Focuses budget decisions on results and outcomes Involves and promotes effective communication with stakeholders, and Provide incentives to government management and employees. Focuses budget decisions on results

These key characteristics of good budgeting make clear that the budget process is not simply an exercise in balancing revenues and expenditures one year at a time, but it is strategic in nature, encompassing a multiexercise in balancing revenues and expenditures one year at a time, but is strategic in nature, encompassing a multi-year financial and operating plan that allocates resources on a basis of identified goals. A good budget process moves beyond the traditional concept of line item expenditure control, providing incentives and flexibility to managers that can lead to improved program efficiency and effectiveness.

MISSION OF THE BUDGET PROCESS

The mission of the budget process is to help decision makers make informed choices about the provision of services and capital assets and to promote stakeholder participation in the process. Communication and involvement with citizens and other stakeholders is stressed. The broad nature of the budget mission allows issues to be addressed that have limited the success of budgeting in the past. Apathy is a serious illness of government. It is in the best interests of government to have involved stakeholders. The term stakeholder refers to anyone affected by or who has a stake in government. This term includes, but is not limited to: citizens, customers, elected officials, management, employees and their representatives (whether unions or other agents), businesses, other governments, and the media. It is vital that the budget processes include all stakeholders. The budget process should accomplish the following: Involve stakeholders Identify stakeholder issues and concerns Obtain stakeholder support for the overall budgeting process Achieve stakeholder acceptance of decisions related to goals, services, and resource utilization Report to stakeholders on services and resource utilization, and serve generally to enhance the stakeholders view of government

The importance of this aspect of the budget process cannot be overstated. Regular and frequent reporting is necessary to provide accountability, educate and inform stakeholders, and improve their confidence in the government. Communication and involvement is an essential component of every aspect of the budget process.

PRINCIPLES AND ELEMENTS OF THE BUDGET PROCESS

The budget process consists of four broad principles that stem from the definition and mission previously described. These principles encompass many functions that cut across a governmental organization. They reflect the fact that development of a budget is a political and managerial process that also has financial and technical dimensions. Each of the principles of the budget process incorporates components or elements that represent achievable results. These elements help translate the guiding principles into action components. Individual budgetary practices are derived from these elements and are a way to accomplish the elements. The principles and elements provide a structure to categorize budgetary practices. Establish Broad Goals to Guide Government Decision Making - A government should have broad goals that provide overall direction for the

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government and serve as a basis for decision-making. o Assess community needs, priorities, challenges and opportunities o Identify opportunities and challenges for government services, capital assets, and management o Develop and disseminate broad goals Develop Approaches to Achieve Goals A government should have specific policies, plans, programs, and management strategies to define how it will achieve its long-term goals. o Adopt financial policies o Develop programmatic, operating, and capital policies and plans o Develop programs and services that are consistent with policies and plans o Develop management strategies Develop a Budget Consistent with Approaches to Achieve Goals - A financial plan and budget that moves toward achievement of goals, within the constraints of available resources, should be prepared and adopted. o Develop a process for preparing and adopting a budget o Develop and evaluate financial options o Make choices necessary to adopt a budget Evaluate Performance and Make Adjustments - Program and financial performance should be continually evaluated, and adjustments made, to encourage progress toward achieving goals. o Monitor measure, and evaluate performance o Make adjustments as needed

CITY OF LAWNDALES BUDGET PROCESS

The budget process is key to the development of Lawndales strategic plan - allowing City Council and staff the opportunity to reassess goals and objectives and the means for accomplishing them. Even though the budget may be reviewed by the Mayor and City Council in April/May and adopted in June, its preparation begins at least eight months prior, in collaboration with the establishment of the mission and broad goals set for the community, by adopting and reviewing the City Financial Policies, Economic Trend Analysis, and the most current Financial Forecast. It is with this groundwork that service program and capital project budgets are developed and subsequently reviewed. This is the foundation of assessing what our current financial conditions are and what needs exist as seen by our citizens, boards, and commissions. Staff will initiate community feedback (which will be considered an important component of Lawndales budget process in assessing citizen satisfaction with services and establishing priorities for the coming budget year) for FY 2005-06. Staff plans to survey the community regarding the aforementioned in the latter part of 2004. Economic and Financial Trend Analysis is becoming an integral part of Lawndales decision making process which includes both short and long range economic and financial forecasts. The Citys current financial condition with existing programs is evaluated as well as future financial capacity, integrating long-range plans, objectives and financial policy. City infrastructure needs (capital improvement projects) are also evaluated and play an important role in forecasting related short and long term operating needs. During this phase, strategic fiscal forecasting assumptions are made, i.e., reserve funding, capital funding contributions, compensation adjustments, and cost/inflation adjustments. These preliminary assumptions result in the Citys forecasted fiscal capacity and provide a balanced financial framework upon which service programs and capital infrastructure project budgets are developed. A budget is a planning tool that identifies the work plan for the City for the fiscal year and matches the financial, material, and human resources available with the requirements to complete the work plan. It also

What is a Budget?

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includes information about the organization, and identifies the policy direction under which the budget was prepared. Although a budget is often discussed as a financial document, the financial portion of a budget means very little without the policy and administrative information that tells a reader what the organization intends to do with the financial resources. The accounts of the City are organized on the basis of funds, each of which is considered a separate entity accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures. Departments are organizational units, formed on the basis of compatible services. Departments provide services based on departmental goals and objectives to fulfill work plans. In some cases, a department will work within several funds. For example, the Public Works Department works within the General Fund and the Gas Tax. How can I find out what a department is doing? Although each of the operations in these funds is different, they are similar enough that efficiencies are obtained by having people who can work on all infrastructure systems. Each department prepares a budget that includes information about the department and matches the financial, material and human resources available with the requirements to complete both the department and the fund work plans. All cities in California are required to adopt a budget annually. State law also defines the fiscal year that begins on July 1 and ends on June 30. Certain parts of the budget document are required by State law such as summaries of revenues and expenditures, showing spending history. and share that information with citizens and decision-makers. The City has made it a top priority to have as much Citizen input as possible. Various meetings are held during the months leading up to the final budget adoption. City staff also welcomes comments and suggestions throughout the year. The final opportunity occurs in June when the City Council holds a public hearing on the proposed budget recommended through the budget hearings. This is the point at which the budget is legally adopted, and is the last opportunity a citizen has to influence the budget process, for the next fiscal year, prior to adoption of the budget.

When can a citizen have input into the budget process?

What is a Fund-Based Budget?

The budget process for the City of Lawndale typically begins in October each year when the Finance Department begins to review the current services provided, the Council Goals and Objectives, the proposed capital improvement program, and the financial plans.

When does budget season start?

Why does a City create a budget?

However, the budget process for the City of Lawndale is actually an ongoing process throughout the year. During each fiscal year, new initiatives for services, new regulations, new funding sources, better methods for providing existing services, and new concerns are brought forward by citizens and staff to the City Council or to a Board or commission for discussion, study, or implementation. City Boards and Commissions spend time throughout the year developing plans for new or enhanced programs to be included in the following years budget proposal. Staff develops projections each year for each type of revenue the City receives in each fund. These projections are based on specific knowledge of some factors and assumptions about others. For example, the City may have been notified that it will receive a $1 million reimbursement grant for a capital project. The capital project is scheduled to last from May in one year until September, one year later. As a result of the construction schedule, this project will

How do you know how much money the City will have?

However, even if there were no legal requirement to budget, Lawndale would complete a budget. The budget process allows City staff to review City Council Goals and Objectives in a formal setting, determine what will be required to meet those objectives, develop an implementation plan,

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cross three fiscal years. Before revenue projections can be finalized for each fiscal year, the project construction (expense) schedule must be set so that reimbursement dates for grant revenues may be determined and revenue budgeted as accurately as possible in each fiscal year. Many revenue estimates must be made based on assumptions about general economic conditions. For example, development related revenues (building permits, system development charges, and requests for new water service connections) are all based on assumptions about what development will do in Lawndale during the coming year. Revenue estimates are made cautiously since estimating too high may result in setting an expenditure budget that will not be supported by current revenues. There are a number of tools used (or will be used) in Lawndale to report on the status of the budget during the course of the fiscal year. These tools examine both revenues and expenditures and compare them to the budget. These include: Capital Project Budget development begins in conjunction with the financial forecasts in the fall. Initial project requests and changes are reviewed by the City Manager and Finance Director for accurate costing, congruence with City objectives and prioritized by a set of deterministic criteria. Financing sources are then sought for the highest-ranking projects. The operating impacts of current and proposed capital projects are taken into consideration by staff when developing their Program Budget plans. Staff also considers City Council Broad Goals and strategic directives as they develop program objectives and work plans for the budget period. Program budgets represent existing base service operating levels. Staff is asked to evaluate programs and/ or positions for possible trade-offs, reduction or elimination, or service level changes to offset inflation, contractual, compensation, and benefit cost increases. Decision packages are balanced to forecasted resource limits. When funding needs exceed funding limits, remedies may be one or more of the following: reduce base budget, identify new revenues, employ process management tools, and/or form partnerships with other programs.

Budget Development Phase

How can you tell if your planning is any good?

Monthly Operating Reports (to be implemented in the second half of FY 2003/2004) these reports provide a quarterly update on the status of achieving the Councils Goals and Objectives; compares revenues and expenditures to the budget and details reasons for variances; updates the status of each departments work plan and the capital improvement program; and provides information on the status of the Citys investments. Comprehensive Annual Financial Report (CAFR) The CAFR is prepared after the close of the fiscal year. It is a schedule of financial statements, which reports on the financial condition of the City. During the budget process, this information is used to compare the projections of revenues and expenditures made during the prior fiscal year to the actual revenues and expenditures for a given fiscal year. Current year and future year assumptions about revenues and expenditures may be changed depending on how close projections were to actuals.

In November, City staff begins to prepare for the coming budget cycle. Staff evaluates current services and identifies issues to be addressed during budget hearings. Primary factors considered by staff in making recommendations include:

What does City staff do to develop the budget?

Relevant federal, state or city regulations or needs that affect services provided by a department. Council position, policy statement, or general consensus regarding a service. Service deficiencies that have been identified through complaints, observations, or citizen survey data. Demographics, neighborhood data, or trends in demand for services. Special interest, neighborhood or professional group input or request for service. Special studies or reports that have identified a need for a service.

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Annual equipment assessments and inventories, which have identified a deficiency. accurate as possible. Departments submit their budget to the Finance Department for review. Staff reviews the budgets in detail, checking for the accuracy and reasonableness of projections, and ensuring that all required elements of the budget are correct. Staff then conducts a technical review with each department to gain a comprehensive understanding of their approach and to quantify their numbers. Once the analysis is completed, each department meets with the City Manager who reviews the budget with department staff to be sure that planned activities are in line with Council Goals and Objectives. The Finance staff then develops a budget document to present to the Public, Mayor, and City Council for review and adoption. Staff presents their service program and capital requests to an Administrative Review Team. Budget recommendations are reviewed to ensure that preliminary base budgets, capital project requests and supplemental decision packages address City Council Broad Goals, strategic directives, and program service needs while maintaining the fiscal integrity of the City (not exceeding our forecasted resources/limits). The City Manager and Finance Director collaborate on recommendation of a balanced five-year financial plan and budget proposal to be submitted to the City Council for adoption.

Prior to the Council setting goals and/or addressing any issues, staff turns its attention to putting numbers on paper. Factors that will play into budget planning at this point include: Known cost factors including such items as postal rate increases, social security costs, contribution rates to employee pension and retirement funds, and other similar costs. Required elements of the budget such as insurance costs, utility costs, and vehicle maintenance costs are developed. Capital projects that have been recommended by facility plans or special area land-use plans, or have been requested by citizens. A price list is developed for anticipated costs on items in the general category of supplies and contractual services. This list includes costs for any anticipated major capital expenditures because expenditures of this nature usually require a considerable amount of budget planning. Cost factors in this area tend to be more susceptible to inflation. The cost of employee salaries is the largest expenditure in the City budget. Therefore, careful attention is given to step increases, cost-of-living adjustments, or any other major change in the employee salary schedule. Changes in employee fringe benefits, such as changes affecting vacation policy, overtime, holidays, uniform allowances, health insurance, and sick leave affect expenditures. General economic fluctuations can be one of the most difficult considerations when preparing a budget. In recent years even the best economists have encountered difficulty in predicting the performance of the economy. Also, any local event impacting significantly on the local economy is taken into consideration. The failure or inability to conservatively consider projected economic activity can cause significant financial problems.

Budget Review /Modification Phase

As with the revenue estimates, fiscal prudence demands that expenditure estimates be as

The City Council considers the proposed budget and holds review sessions and public hearings in April and May. The sessions provide an opportunity for City management, departments, and the general public to offer information and recommendations to the City Council. Legally, the budget must be adopted by the second City Council meeting in June. State law requires the annual Program Budget to be all-inclusive if it is not budgeted, it cannot be legally expended. Therefore, the budget must include sufficient provisions for contingent revenues and expenditures that cannot be accurately determined when the budget is adopted. The ordinance adopting the annual Program Budget currently requires City Council authorization for

Review and Adoption of the Budget

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expenditures from contingency and City Manager authorization for budget transfers within line items. Upon adoption of the budget, staff implements the Program Budget and the five-year Capital Improvement Plan, incorporating all changes from the tentative budget proposal. The Operating Budget/Capital Improvement Plan is published in the Fall. Lawndale programs and activities are periodically reviewed to determine if they are achieving City Councils Broad Goals, accomplishing strategic objectives and making efficient use of resources. City values of plan and innovate for the future and focus on quality customer service along with City Manager directed studies of several service and program areas during the next budget year help communicate this expectation. The City of Lawndale Budget is adopted at lineitem/program level and the Capital Improvement Plan is adopted at a project level. Any transfers between programs or projects and out of contingency require City Council approval. All requests for adjustment require justification and note explaining the fiscal impact, which is reviewed by the Finance Director, prior to approval.

Amendment to the Budget

Implementation and Monitoring of the Budget

During the fiscal year, the Finance Director may transfer any unencumbered appropriated balance between general classifications of expenditures within an office department, or agency. Lawndales budget process is based upon accounting for certain transactions on a budgetary basis, which is a basis other than Generally Accepted Accounting Principles (GAAP). The budgets of governmental fund types (General, Special Revenue, Debt Service, Capital Projects) are prepared on a modified accrual basis. Briefly, this means that expenditures are recorded when the related fund liability is incurred, and revenues are recognized only when they are measurable and available. The major differences between the budgetary and GAAP basis are:

Budgetary and Accounting Basis

Every City service, program or subprograms are expected to conduct self-assessments and develop cost and quality measures of efficiency and effectiveness. Lawndales culture, along with the City value of listen, communicate, and take action stresses open communication and stakeholder involvement determining satisfaction with programs and services and in identifying areas needing added attention. Monitoring of the Citys financial performance is required of all program managers on a monthly basis. Variance from budget explanations and projected impact upon year-end fund balance reporting is forwarded to the budget office. Economic activity Citywide budget-to-actual expenditures, budgetto-projected revenues, impacts to fund balance, capital project updates, grant and special revenue activity are all reviewed and reported monthly by Finance staff to City. City staff is accountable for budgetary control throughout the fiscal year. Expenditure patterns are examined, compared to budget plans, and corrective action, if necessary, is taken during the fiscal year. The Finance Department reviews current demographic, economic and financial trends, which may impact the City, and to plan strategy to ensure the Citys fiscal integrity. City management is also provided monthly financial reports disclosing actual revenue, expenditure, and fund balance performance, as compared to the budget plan.

Certain revenues, expenditures, and transfers are not included on the budget basis, but are accrued and reported on the GAAP basis. For example, increases or decreases in compensated absences are not reported for budget basis purposes, but are presented as revenue or expenditures on the GAAP basis. Indirect administrative cost allocations (including in-lieu property tax and franchise fees) charges to the Enterprise Funds are accounted for as transfers in or out on the budgetary basis, but are recorded as revenues and expenses on the GAAP basis. Capital outlays in the Enterprise Funds are presented as expenses for budget basis, but are recorded as assets along with associated depreciation expense on the GAAP basis. Debt service principal payments in the Enterprise Funds are accounted for as expenses for budget purposes, but are reported as reduction of long-term debt liability on the GAAP basis. All actual amounts

Implementation Phase

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in the budget document are shown on the budgetary basis to facilitate meaningful comparisons. Budgeted funds include the General, Special Revenue, Debt Service, and Capital Projects Fund. In all cases, when goods and services are not received by year-end, the encumbrances lapse. The Comprehensive Annual Financial Report (CAFR) shows the status of the citys finances on the basis of generally accepted accounting principles (GAAP). In most cases, this conforms to the way the city prepares its budget. Exceptions are as follows: Compensated absences liabilities that are expected to be liquidated with expendable available financial resources are accrued as earned by employees (GAAP) as opposed to being expended when paid (Budget). Depreciation expense is recorded on a GAAP basis only. The City of Lawndales Budget for FY 2004/05 is comprised of two segments: Operating Line - item / Program Budget, and the Capital Budget, which includes all capital project budgets. The line-item/program Budget includes a five-year revenue and expenditure balanced financial plan. The five-year plan covers the period 2004/05 through 2009/10 and forecasts results of operations by fund and incorporates the operating expenses of capital improvements for the period. The Capital Budget and Five-Year Capital Improvement Plan are summarized in this publication with more detailed information for each project provided in a separate publication. Capital Budget funding sources are matched with budgeted expenditures. All future year operating impacts are noted in the Capital Budget and included in the five-year balanced financial plan. Expenditures for the Five-Year Capital Improvement Plan are presented on a budget basis. Governmental accounting procedures require adequate budget to pay for an entire contract to be available and appropriated in the period in which a contract is entered; therefore, expenditures are presented on a budget basis as opposed to cash flow basis. For example, a 180 day construction contract entered into in May of fiscal year one would have cash expenditures from May of fiscal year one through October of fiscal year two, however, the entire budget for this contract must be appropriated in fiscal year one, the year in which the contract was entered; any unspent funds at fiscal year-end are carried forward and budgeted again in year two. Revenue sources are presented in the period that the funding will be transferred in order to provide continuity between the Program Budget and the Capital Budget. As a result of presenting the transfer on the cash basis, funding sources do not equal budgeted expenditures in each period, creating a fund balance as cash accumulates for larger expenditures in later years.

Operating and Capital Budget Relationship / Organization

The Comprehensive Annual Financial Report shows fund expenditures and revenues on both a GAAP basis and Budget basis for comparison purposes. Contingency reserve fund use is defined by City financial policy: When additional funds are necessary to offset unexpected revenue shortfalls or expenditure increases so that budgeted citizen service measures can be maintained; and when unanticipated and/or inadequately budgeted events threaten the public health or safety. Use of contingency funds are to be utilized only after all budget sources have been examined for available funds. All requests for use of contingency require justification and note explaining the fiscal impact, which is reviewed by the Finance Director, prior to City Council approval.

Use of Contingency Reserves

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FY 2004-05 BUDGET DEVELOPMENT PROCESS
The City of Lawndale budgets on an annual basis, which means that the budget covers only a one-year period. The adopted budget period ends on June 30, 2005. The City is looking at structuring a biennial budget process, which under good economic conditions would give an agency the ability to plan and manage the development over a longer period of time. However, given the uncertainties regarding revenues and expenses, the City decided to stay with an annual budget for FY 2004-05. This validity of an annual process will is reviewed going into the process for FY 2005-06. The development of the Citys annual budget includes many activities during a twelve-month cycle. In general, those activities include: Identifying community and organization priorities Estimating available revenues and anticipated expenses Developing initial budgets and requests for additional resources Preparing a draft Preliminary Budget Consideration of a revised Preliminary Budget by City Council

Underlying Financial/ Budgetary Policies and Principles

Sound financial, budgetary and economic principles are also part of creating a solid financial plan. Lawndales budget incorporates the following long-term and short-term financial operating policies.

Annual Budget Department review of community economic strengths and financial resources Preparation of a prioritized Capital Improvement Plan (CIP), for the current fiscal year from the five-year CIP Realistic foresight in current and longterm revenue estimating Appropriation of a minimum contingency/reserve to provide for emergencies and potential economic downturns New ongoing operating costs funded with permanent, ongoing revenue sources; one-time operating costs tied to one-time revenue sources to ensure fund balance integrity

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