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City of Long Beach
Evaluation of Financial Condition
by Len Wood and Associates
Agendized as Consent Calendar Item
Long Beach City Council July 1, 2003 meeting
[City Mgt. Recommended action: Refer to City Council Budget Oversight Committee]
This report addresses the Cityís financial condition...The City of Long Beach General Fund has a major structural imbalance. Simply stated, ongoing revenues are insufficient to provide the dollars needed to support ongoing programs. For several years, this problem has been masked by the use of one-time revenues to close the gap. This has created a false impression of solvency.
Favorable financial condition requires solvency--the ability of the City to meet its financial obligations. Solvency, however, has at least three facets.
- 1. Cash Solvency. The City has enough cash on hand to meet its current obligations without having to borrow.
- 2. Budgetary Solvency. The City generates sufficient resources to pay obligations without incurring a deficit during the fiscal year.
- 3. Long-Term Solvency. The City has a favorable relationship between ongoing revenues and ongoing expenditures and can meet existing and future obligations without relying upon - one-time sources.
During the recent years, Long Beach has maintained cash and to some degree, budgetary solvency. Cash solvency has been maintained due to the Cityís healthy cash flow. This has enabled it to meet current obligations without borrowing. Unfortunately, while budgetary solvency has been achieved, it has been done through the use of one-time financial sources. Long-term solvency, however, has not been attained for several years.
There are a number of findings that highlight the City of Long Beach General Fund financial problem. They include:
- During 10 of the 11 years between 1993 and 2003, the City adopted a structurally unbalanced budget.
- Between the period from 1993 to 2003 the City appropriated $86,589,000 more in expenditures than it appropriated in current revenues.
- In 2003, the City appropriated and approved, $368,163,055 in expenditures. On the revenue side, the City budgeted $361,336,443. The budget was out of balance by $6,826,612.
- Over these years, the City has balanced the budget by using carryovers (unspent monies and unanticipated revenues), reserve funds and other one- time financing sources.
- New and increased revenues were used to enhance existing programs as well as funding new programs rather than applying these monies to reduce the structural deficit.
- From 1996-97 through 2002, General Fund expenditures were increased between the proposed budget and final budget. This trend was halted in 2003, when the adopted budget was $368,964 lower than the proposed budget.
- While the cost of programs have increased, General Fund expenditures and revenues have decreased when adjusted for population and inflation.
Expenditures provide a rough measure of a city's service output. Monitoring a city's expenditures can help identify whether expenditures are growing excessively; whether ineffective budgetary controls exist or whether there is growth in programs that create future expenditure liabilities...
Comment: General Fund expenditures increased every year between 1997 and 2003. However, in most years the rate of growth was moderate, except in 2002 when $36 million was added to the budget. This represented a 11.1% expenditure increase.
Revenues set the limits on a 1ocal"government's capacity to provide services. Important issues to consider in revenue analysis are growth, elasticity, flexibility, dependability, diversity and administration. Monitoring revenues helps a city determine whether the revenue base is increasing or deteriorating; whether revenues are estimated properly; and whether revenues are sufficient to cover the costs of service...
Comment: General fund revenues increased every year from 1997-2003 except for 2000. In that year, revenues decreased approximately $2 million or just under one percent. Significant revenue increases were budgeted during the years 2002 and 2003. However, the revenue increase in 2002 was not sufficient to cover the additional budgeted expenses in 2002.
A city can have a balanced budget yet be headed for fiscal problems. Budgets can be balanced by using inadvisable one-time sources such as carryovers, reserves, grants and even debt. An important follow-up question is, "Is it a structurally balanced budget in which ongoing revenues equal or exceed ongoing expenditures?"...
Comment: From 1997 to 2003 the City adopted a structurally unbalanced budget. In 2002 the gap between revenues and expenditures was over $24 million. Looked at another way, current revenues only funded 93% of the adopted budget. Adopting a structurally unbalanced budget was a practice established several years before 1997...
Additions to the Proposed Budget
The City Manager is charged with preparing the proposed budget. The City Manager compiles what is termed a unified budget, in that he reviews all departmental requests, approves or denies them and publishes them in the Proposed Budget (In Long Beach the Proposed Resource Allocation Plan). This budget is transmitted to the City Council for consideration and adoption. Once adopted it is printed and referred to as the Adopted Budget (In Long Beach's case the Adopted Resource Allocation Plan)...
...The biggest increase occurred in 2002 when an additional $5.5 million was added by the City Council. This is somewhat unusual in that proposed budgets are usually kept at the same level or reduced by the City Council. Modifications and additions costing more money are usually offset by reductions in other areas (especially when a structural deficit exists)...
...Examining per capita revenues shows changes in revenues relative to changes in population... As population increases, it is expected that revenues and the need for services would increase proportionately. If per capita revenues are decreasing, the City may be unable to maintain existing services at the same level unless it finds new revenue sources or ways to economize...This [chart in report] indicates that revenues per capita dropped from $661.64 to $618.39 or by $43.25 between 1997 and 2002. This represents a 6.5% decrease over this period.
Expenditures per Capita
...As population increases, it is expected that expenditures and the need for services would increase proportionately. If per capita expenditures are decreasing, the City may not be providing services at the same level as in the past...
Comment: Per capita expenditures followed the same general trend as per capita revenues decreasing from $682.59 to $663.51 or $19.08 during the period 1997 to 2002. However, per capita expenditures increased $28.53 in 2002...
Comparison of Adopted Expenditures to Actual Expenditures
A budget is a plan of action for the organization. Once the budget is adopted, however, it establishes limits on spending which must be adhered to by staff when implementing the budget. Unanticipated issues and problems will come up during the year that change the original assumptions and allocations. Some of these unanticipated items require additional funding. In these cases, the budget should be amended to reflect these new costs. A good budget practice is to retain the original budget amount as the benchmark to see how much the original adopted budget has changed from the actual expenditures...
In five of the six years displayed [on the chart in text], the estimated actual expenditures exceeded the adopted budget. In 1998 and 2002 actual expenditures exceeded the adopted budget by over 4%. This chart will be important when monitoring compliance to the Three-Year Strategic Financial Plan targets. For every doIlar that is added to the adopted budget, an equal amount must be found to offset these additional charges...
Resolving the Fiscal Problem
...The main goal of the Three-Year Financial Strategic Plan is to Balance the General Fund so that recurring revenues exceed or at least equal recurring expenditures...The Long Beach City Council has adopted the Three-Year Financial Strategic Plan and the implementation phase is in progress. There are several issues which should be considered in the implementation phase of the Plan.
The biggest challenge the City faces is to establish and maintain credibility. The City must convince employees, residents, businesses and community organizations that the problem is truly a crisis. For the past several years, money has been found and the spending level has been maintained and even increased. To get everyone to share in the burden, they must be convinced that money isnít hidden or obscured in some account. "Why should we make the sacrifice? They will find a way to get us out of it."
The Interim [now permanent] City Manager [Jerry Miller] has used the word "transparency" to describe his policy of shedding light on the budget process. This is an admirable approach. Credibility will be increased by allowing all parties to observe the inner workings of the budget process.
Experiences in other cities indicate the Long Beach City Council and staff will endure three very trying years of budget workshops and hearings. In order to bring the budget back into structural balance, it will be necessary to make hundreds of painful decisions. There are no easy remedies and each decision will infuriate one or more interest groups. At each decision point, the council chambers will be filled by individuals and groups that will bring intense pressure to preserve their interests. Pleas, tears, requests and threats will be used and the pressure will be unrelenting. The Council can also expect letter writing campaigns, e-mail flurries, phone calls, petitions and protest marches. Notwithstanding the pressure, the City Council must remain steadfast in order to bring the Cityís finances back into structural balance.
Letís Get Through One More Year
There will be continuous pressure to use one-time monies to "get through one more year." Experience shows that the more the problem is deferred, the more drastic the eventual remedy must be. The gap is cumulative. It includes last yearís gap plus any additional gap that is created.
Make An Exception For Us
The City Council will be asked to make specific exceptions to the Three-Year Strategic Financial Plan. "Our group is different; you canít jeopardize the safety of the community; donít make seniors solve your problems in their golden years; donít balance the budget on the backs of employees or you canít devastate the arts," are just some of the pleas the Council will be confronted with.
Unfortunately, itís a zero sum problem. If City Councilmembers decide to exempt a particular program, group or cause, it must find offsetting costs in other areas.
The Three-Year Financial Strategic Plan presents a balanced approach to the problem. Exceptions throw the Plan out of balance. The City Council should consider developing criteria allowing exceptions only when:
1. They disagree with the Planís targeted reductions. 2. They come up with offsetting cuts or new revenues (The revenues should be new and not already planned revenue increases). 3. The City cannot achieve the planned cuts in a particular category...
Whenever positive events occur, pressure will be generated to use the money for a special group or problem. The temptation to spend the proceeds from a positive gain should be resisted until the structural gap is eliminated. At the very least, adjustments to the Plan should be made only when all positive and negative impacts are consider and when the entire plan is reviewed.
When reporting. on the progress in implementing the Strategic Financial Plan, a summary of positive and negative variances to the Plan should be included...
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