Budgeting, CIPs Flashcards
(39 cards)
Capital Financing (Long-term debt)
pledge the “full faith and credit” of the jurisdiction, and commit property taxes by voter referendum
- Secured by pledge of unlimited taxing power (including an increase in property taxes) that could be used to pay back investors
- Vote of people is usually required.
- Interest rate is lower than revenue bonds, certificates of participation, or special or limited obligation bonds. Simpler to issue than these other debt forms.
- Term: typically up to 20 years but no longer than useful life
Obligation Bonds
defines the budget by what will be bought during the fiscal year; lists total departmental appropriations by items for which the city will spend funds
* Adv: Easy to prepare/implement
* Disadvd: Lack of priority assignments/fixed and rigid
Line-item budget (traditional)
arranges governmental operations into service components, identifies the total cost of each municipal service and sets spending levels and priorities; displays mini budgets which show cost of each of the activities that city departments perform
instead of organized by line items, this budget is different in considering the
purpose as a unit, rather considering the separate administrative units.
This type of budget includes expenses and revenues related to one specific program.
Advantage: helps program priority; enables city council and administrator to identify the total cost of each municipal service and set spending levels and priorities accordingly by program
Disadvantage: If incorrect or based on inaccurate info, can be costly
Program budget
tying budget to specific performance objectives for each program; classifies expenditures by administrative units (one step further than program budget)
- **focus on outcomes **of programs: things citizens want tovernment to accomplish, like safer neihgborhoods, better health, or effective schools
- admin units state objectives connected to community outcomes (EX: student test scores for education programs)
- Admin units held accountable for outcomes not inputs, allowing better leeway in how resources are allocated
ADVANTAGE: Improves program performance; tool for reviewing program efficiency
DISADVANTAGE: Focuses on quantitative , not qualitative evaluation; accuracy difficult
Performance budget
Existing programs should not be automatically refunded and they have to justify the continuation as part of annual budget cycle; includes identification of decision units, development of different decision packages for each unit and ranking alternative packages
Adv: increases prioritization
Dis: time consuming, labor intensive, and have to provide training to produce accurate budgets
Very elon
Zero base budgeting (ZBB)
combines a program budgeting model with short and long term planning targets, performance measurements.
It serves as a long-term planning tool so that decision makers are made aware of the future implications of their actions.
These are typically most useful in capital projects. The planning portion of the approach seeks to link goals to objects or expected outcomes from specific outputs, which are then sorted into programs that convert inputs to outputs; finally this helps determine how to fund the program.
ADVANTAGE: Helps in the choice of programs/ projects, allocation of resources on them and performance evaluation; can incorporate future budgetary repercussions
DISADVANTAGE: Difficult to acquire necessary information regarding performance evaluation and cost estimation in an uniform way for all governmental activities; emphasizes physical and financial performance, not qualitative performance
Differes from performance planning by going one step furhter, intergrating a comprehensive plan with the budgeting process and thinking long term
Planning-programming-budgeting-system (PPBS)
Community helps decide how to spend part of public budget
Participatory budgeting
Steps in budgeting process
- **Fiscal analysis and policy choices: ** Local demographic and economic conditions are analyzed to roughly forecast governmental revenues and expenditures. Local government finances and programs are also analyzed to identify general trends. Budgetary policy choices are made.
- Expenditure estimates: At this stage, the government’s various departments help to make the above expenditure estimates more detailed and accurate. Each department analyzes its own programs and services in detail, focusing on salary, equipment, capital, and operating costs.
- **Review of expenditure estimates: (most important) **the point of this stage is “to hammer out the allocation of resources among competing demands.” Department heads advocate their programs and services. Because the relevance of expenditures to policy objectives is tested here, this may be the most important step in the traditional budgeting process.
- Revenue estimates: At the same time as the previous step, the budget officer and individual revenue collecting departments, going into details of how municipality raises revenue: permits, fees, taxes, fines, state grants. Each revenue source is treated separately, and specific trends are identified at the local, state and federal level.
- Budgetary forecasting: Based on the above estimates, budgets are estimated for up to four or five years into the future. This is used to identify long term trends, and is vital to capital improvements programming.
- Budget document drafted: Here, the budget document itself is prepared and presented to the governing body. It represents (and may contain) all of the estimates, projections, administrative decisions, budgetary policies, and proposals (by department, program, and function) that have been prepared to this point.
- Budget review and adoption: Here, the governing body reviews, amends (if necessary), and adopts the budget.
- Budget execution: The budget is adopted and executed.
Revenue Sources
Taxes:
income, property, sales/use, gasoline, cigarette, intangibles
User fees and charges:
admissions, registration, applications, usage
Licenses and permits:
dog and cat, driver’s, contractor’s, marriage, hunting/fishing, operator’s
Grants:
federal/state, “categorical” vs. “block”
Other revenues
debt proceeds, sales of surplus property, reimbursements, assessments, interest
Annual revenue as it is raised.
Capital reserves financed with annual revenues.
Examples:
Charges to property like special assessments, impact, facility, or capital recovery fees
Grants, participation by other governments or private sector
Pay as you go
Typically perform a limited number of governmental functions in a specific geographic area and usually have the power to incur debt and levy taxes
Special Taxing Authorities
- General Obligation Bonds
- Revenue Bonds
- Capital lease debt (government rents a long-term asset to another party (lessor) for a specific period in exchange of periodic interest payments)
- Special obligation debt (bonds or notes where the repayment is tied to a specific revenue source, rather than the general taxing power of the issuer)
- Tax increment debt
- Private activity debt (States and cities, through private activity bonds, are able to borrow on behalf of private companies and nonprofits, lowering borrowing costs for entities that might otherwise turn to corporate bonds or bank loans)
Capital Financing (Long-term debt)
Capital Financing (Long-term debt)
What happens when local government defaults on a general obligation bond?
When a municipal bond defaults, the issuer is unable to pay the bond’s interest and principal as agreed. This can have consequences for bondholders, the issuer, and the local community.
Consequences for bondholders
Bondholders may not lose all of their principal value.
Defaulted bonds can become speculative and be purchased at a discount.
If the issuer successfully emerges from bankruptcy, bondholders who purchased the bonds during the default may gain.
Consequences for the issuer
The issuer may have to raise taxes to make up for the default (i.e. full faith & credit).
The issuer may have to delay or cancel capital projects.
Consequences for the local community
The local community may experience disruptions to its financial markets.
The local community may experience long-term damage to its economy.
The local community may experience changes to its revenue structure.
Causes of a default
The issuer may not have enough money to pay all bills.
The issuer’s cash flow may be too low.
Significant events may occur after the investor purchased the bond, such as a ratings downgrade
Capital Financing (Long-term debt)
pledge specific non-ad valorem tax revenues of self-supporting enterprise (e.g. toll road fees).
- Voter approval not necessary in most states
- Backed by revenue of a specific project (vs. taxing authority); used for projects that generate their own income
- Issuer must agree to covenants concerning rate setting and operation of enterprise
- Coverage: Net earnings to maximum annual debt service
- Interest rates higher than on G. O. bonds (riskier for muni investors)
- Much more common than G.O. bonds
- Term: up to 30 years but no longer than useful life
EX: income from toll road or sewer system, higher-ed facilities, hospital and health care, transportation proejcts like buses adn subway systems
Revenue Bonds
Capital Financing (Long-term debt)
special assessments or charges that are** not based on the value of your property**. They are usually a flat-amount that is determined by the levying body each tax roll year for benefits or other services performed.
Examples are storm water utility, solid waste, security and fire and rescue.
Non-Ad Valorem Assessments
Capital Financing (Long-term debt)
issued to provide public facilities needed to support new, private development
Most often used to create a community redevelopment agency
Secured by increased tax revenue produced by the new, private development. This tax revenue and the new development are removed from the general tax base and are legally set aside to secure and pay the tax increment debt for as long as it is outstanding.
must be established under the guidelines of state authorizing legislation, and typically works as follows:
* A TIF district is established around a blighted area.
* TIF bonds are issued to redevelop this area.
* After the area is redeveloped, the additional property tax revenues earned by the reassessed district (i.e., the “tax increment”) are used to retire the TIF bonds or for redevelopment purposes. Thus, these additional revenues cannot be used by the involved municipalities, school districts, and special taxing authorities until the TIF bonds are retired.
- Can be active for up to 23 years in IL for reference
Tax Increment Financing
Imposes a levy on property, individual lots, or all property in a designated neighborhood or district to pay for improvements.
* Charge to property for public improvements that benefit that property
* Improvements are on-site or near-by
* Generally, not paid until project is done and improvement cost is known
* Authorized by general statute for water-sewer, streets, beach erosion, storm water, etc.
Special Assessment District
Voluntary agencies of downtown property owners and businesses; members raise revenue through property tax levied on real estate within their geographic boundaries to aguement services provided by local government
Services such as increased security, public events, urban design improvements, infrastructure, maintenance, marketing/promotion
- usually for specified term (5 to 10 years and then need to be renewed)
controlled by nonprofit entities formed by property owners
Business Improvement District (BID)
Special taxing district created (under FS Chapter 163) based on finding of slum and blight (data and analysis of physical & economic conditions i.e vacant land & buildings, income levels, infrastructure condition, housing costs, property values, etc.). Must adopt Redevelopment Plan and establish Redevelopment Trust fund for deposit of TIF revenues.
Gets both City and County tax dollars; funds can be used for redevelopment purposes and/or to leverage bonds.
Redevelopment Plan includes projects and programs that Agency will expend funds on and must be consistent with local Comprehensive Plan.
Examples of Agency activities:
* Infrastructure improvements
* Grants/loans
* Land assembly
* Marketing/Promotions
* Cultural/Sports Destination
* Affordable housing projects
* Policing
EX: Commercial Property Improvement Grant with 50% matching reimbursable funding
Community Redevelopment Agency (CRAs)
Special taxing districts-funds in downtown area used for improvements; established by vote of residents.
- independent bodies created by local ogvernments with responsibility for the redevelopment of blighted and economically distressed areas of communities;
- Have eminent domain power which enables them to acquire adn demolish property for purposes of revitalizing neighborhoods and the downtwon
Activities include business development/attraction, improving physical environment/residential quality of life, leveraging private investment, marketing & public relations. Board can be municipal governing body or other stakeholders
Downtown Development Authorities (DDAs)
Non profits that provide services and porgrams to residents within a defined neighborhood; beneficiaries are usually low-income and underserved residents of the community
Non profits established for specific purpose (affordable housing, skills training, poverty reduction opportunities, and even business incubation)
Community Development Corporations (CDCs)
Other NGOs involved in economic dev:
Merchant Associations/Chambers of Commerce
the reduction of, or exemption from, taxes which is granted by a government for a specified period, usually to encourage certain activities such as investment in capital facilities.
Govts want to attract or keep businesses in its community → offer this incentive in the form of a temporary reduction in general business, property (Enterprise Zone) or even federal income taxes (e.g., Empowerment zones)
A tax incentive can be considered a form of this. These are commonly used to encourage economic development to occur, or to stabilize or strengthen the local economy
tax abatement
- Covers a multiyear period (Typically a 5- to 6-year plan)
- Organizes and summarizes major capital projects and plans for the full forecast period (the capital improvements “program”)
- Forecasts the larger budgetary impact of capital expenditures, both project related costs, estimated operating impacts and available v. required revenues
- Budgets for the upcoming year as well (Capital Budget)
- Recurs and is updated annually or bi-annually
- Introduces projects in the later years of the program (the budgeting of future expenditures)
- May be standard-driven, or reflect patronage/usage, or be revenue driven
- May reflect long-term financing or may reflect pay as you go strategy
- May use special assessments, taxes, or fees not available for the operating budget
Capital Improvements Program (CIP)
