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HomeMy WebLinkAbout2002-11-13 Finance Dir Memo to Commission re Section 7.06 City Charter Budget ProvisionsMemorandum To: Jonathan Thomas, Charter Commission Chair From: Charles Hansen, Finance Director CC: Kathleen Miller, City Administrator Item Title/Subject: Budget Provisions in the City Charter Date of Report: November 13, 2002 Section 7.06 of the City Charter contains the sentence: “The Council shall adopt the budget by a resolution that shall set forth the total for each budgeted fund and each department with such segregation as to objects and purposes of expenditure as the Council deems necessary for purposes of budget control.” One of the ways this sentence is significant is that it sets what is known as the level of budgetary control. The sentence is slightly ambiguous, but I think most people would read it as establishing the level of budgetary control on the object level. Understanding this requires some knowledge of accounting terms. Pertinent terms include fund, department, character, and object. A fund is a fiscal and accounting entity with a self-balancing set of accounts that are segregated for the purpose of carrying on specific activities or demonstrating compliance with legal restrictions. For instance, the Water Utility Fund records money collected from water utility fees and demonstrates that those monies were spent on the operation of the water utility system. A department is an organizational unit set up within a fund to perform a specific service. For instance, Police is a department within the General Fund. A fund may have one or more departments. Character is a major subdivision of expenditures within a fund or department. Examples include: personnel costs, supplies, contractual services, capital outlay, debt service, and transfers. Objects are more detailed descriptions of expenditures within character groupings. There may be several objects describing specific insurance or pension costs within personnel; several objects describing types of supplies; separate objects for principal and interest within debt service, etc. The budget is currently prepared, and will continue to be prepared with extensive detail down to the object level. This is not a problem. The problem arises in trying to enforce budgetary control on the object level during the year. Departments prepare their budget requests in the summer of one year for moneys to be expended during the succeeding calendar year. So some expenditures will happen eighteen months after the request was made. During the intervening months, new products and services will become available, old ones may become unavailable, and new services may be mandated by federal or state law, or required by the City Council. Responding to these changes requires some flexibility on the object level of the budget. The quarterly financial report is prepared on an Excel spreadsheet with over 1,750 rows. Many of these are used in heading or total rows, but it would be no exaggeration to say that at least 1,200 are budgeted revenue or expenditure objects. Meeting the changing demands for service will often require a department to overspend the budget in one or more objects. This usually can be offset by under spending other in objects. Defining the level of budgetary control at the object level would mean returning to the City Council for a resolution to approve each change on the object level. Writing the resolutions would take huge amounts of staff time away from meaningful work and clog the Council agendas. Ken Malloy, Principal of MMKR, the City’s auditors, addressed this issue during his Management Report for the City’s financial statement presentation last summer. The Management Report stated: “During our audit procedures it came to our attention that the City has established the level of budgetary control at the “object” level, however, when disclosing expenditures in excess of appropriations only those in excess by department in the General Fund and by fund total in the Special Revenue Funds were disclosed. This disclosure by department and by fund is consistent with former financial statements and with industry practice, but is not consistent with the City Charter. Further this disclosure is to be consistent with the level of budgetary control. We recommend the City review this issue and make changes as needed to report expenditures in excess of appropriations with City policy.” In his verbal comments, Mr. Malloy went on to say that he knew of no other Minnesota city that established its level of budgetary control at the object level. I am recommending that the City Charter be amended to establish the level of budgetary control at the department level in funds with multiple departments and at the fund level in funds with only one department. A resolution of the City Council should be required to change appropriations at the department or fund level. I recommend that the City Administrator be authorized to approve moving appropriations from one character of expenditure to another within a department budget as long as the total department budget is unchanged. Department Directors should be authorized to approve moving appropriations from one object to another within a character of expenditure as long as the total character budget is unchanged.