Point Paper; City of Sheltons Budget Practices and Reserves Background: As with many municipalities, Shelton maintains an approximate

five percent general fund balance (reserve) to offset losses in revenue or operating increases as economic conditions change. This practice allows the city to achieve the best possible interest rate when borrowing. Many states and municipalities typically fund these reserves from amounts raised through the annual budget process. The funding of reserves must be transparent. Current Practice: In Shelton, the reserve is funded when departmental expenditures are less than budget. When expenditures are under budget the general fund balance increases and the reserve is increased. However, the estimated reserve is not visible as it is co-mingled with expenditure line items in each departments operating budget. The problem with this method is that it overstates the operating budgets making it difficult to determine how much of the underrun was designated for reserve and how much is true departmental expense. The significant concern with this method is that spending constraints enacted to increase the reserve may reduce necessary operating expenses and decrease the quality and level of service provided by city departments. To illustrate the current practice, in the table below I analyzed the city audit reports for four fiscal years and found that the city side spending, although only about 28% of the total budget, contributed to most of the underruns. The city (less education and debt) underran their budgets by $4.4 million on average or 13% during the four year period.

FY 2009 FY 2010 FY 2011 FY 2012

FY 2013

City of Shelton Budget Performance (Less education and debt) Budget Actual Underrun 34,154,917 $ 30,156,827 $ 3,998,090 33,432,441 29,752,420 3,680,021 35,231,126 29,579,450 5,651,676 35,285,417 30,926,448 4,358,969 38,704,241 NA

% 12% 11% 16% 12%

From this chart we can see that the actual spending remained flat at about $30 million between 2009 and 2011 while the budget was 11% to 16% higher. Most striking, is the FY 2012 actual expenditure of $30.9 million versus the $38.7 million budgeted for FY 2013. That is a projected increase of 25%. This illustrates that the budget continues to be overstated by co-mingling the reserve amount with city budget expenditures. Much of this overstatement is accomplished by overstated headcount requirements. This practice is flawed and does not promote transparency for the public or city departments.

Alternative Method: The public thinks this balance is a surplus and can be used to fund shortfalls in other areas such as education. To eliminate the public confusion and to make this process more transparent the change would be simple. Add a separate expenditure line item in the budgets general fund for the reserve. *Decrease departmental budget expenses by an amount equal to the designated reserve. Establish a city policy on how all reserves are estimated, managed, and controlled by the City Finance Director. Make the Board of Aldermen responsible for managing and monitoring the reserve balance. THIS CHANGE WILL HAVE NO EFFECT ON THE BUDGET or TAXES. Conclusion This change would provide more visibility to the reserve and hold the departments accountable to budgets that are aligned with their actual work requirements. Further, it would make the budgeting process less complicated by eliminating the need to continually and arbitrarily cut spending or holding back headcount to meet the needed reserve. Benefits Budgets reflect reality and are transparent to the public. NO change in tax rate. Allows departments to focus on resources needed to allow their operations to function efficiently. More accountability. Budget under runs can be accurately characterized as improvements in productivity and efficiency. Opportunity for real productivity. Will eliminate the amount of time necessary to manage and control the reserve in multiple budget line items. Management can focus on departmental quality and their level of service delivery *Changes in Budget Preparation and Estimates: Annual budget should contain a monthly departmental staffing plan that supports the expenses. Should specify full time and part time positions. Monthly Staffing projections should be based on employee expected date of hire, merit, retirements etc, not beginning of the year as default. Salary expenses should be aligned. Every expense line item should be reviewed with regard to actual spending and annual estimates and updated in accordance with the Finance directors zero based budgeting requirement. Develop monthly report on gasoline spending and use of city vehicles that separates business use from personal use. Monthly budget reports must be prepared and distributed in a timely fashion and Board of A&T should review significant spending and headcount variances monthly and follow up with departments to explain variances and monitor transfers. Significant departments should present their actual spending and headcount versus budget quarterly to the BOA, Board of A&T, city auditors, and the public. Comments are relative to the City of Sheltons method used to fund the designated surplus/general fund balance presented on Exhibit F of the FY 2012 audit report.