Five Year Forecast - 2010 Budget Message

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One of the more important financial management practices we have long undertaken is to provide our Board of Commissioners with annual, informal long-range (up to 4 years ahead) financial forecasts. Prior to 2008, we had not publicly reported this internal data, but had referred to it over the years as a tool that allowed us to think more broadly than just the upcoming fiscal year. For the 2008 and 2009 Budgets as well as at mid-years, staff provided and publicly reported multi-year financial projections, which we call our Five Year Forecast. The estimates contained in this Proposed 2010 Budget document include estimated actual projections for the current year (2009), upcoming budget year (2010) and the three years (2011, 2012 and 2013) that follow.

Our Five Year Forecast is a tool we can use to recognize and acknowledge certain fiscal trends and realities. The further one looks into the future, the less accuracy is expected. The forecast presumes current policies of the Township. No attempt has been made to assume any changes in Board of Commissioners’ policy, service delivery levels, programs, staffing, the general economy, healthcare trends, unfunded mandates, reassessment, law changes, societal evolution, unexpected repairs, unusual weather patterns, and so forth.

What our Five Year Forecast obviously shows – even more clearly every time we update it – is the Township’s frequently reported “systemic revenue problem.” Like most local governments in Pennsylvania that rely heavily upon the RET (which will not grow sufficiently without a millage rate increase), the Township will continue to require new revenue enhancements (as earlier reported as having occurred over past decades) at regular intervals to address expenditure and service needs.

Our budget and forecast shows a planned actual gap of approximately $1.6 million for 2010, assuming the addition of about $1 million from the proposed +3.8% RET millage rate increase.

This is lower than 2009’s budgeted $2.1 million GF gap, which we have been able to reduce down to an estimated actual $1.3 GF 2009 gap due to excellent cost savings/containment measures and unexpectedly strong current performance from a small number of business taxpayers.

Deficit spending is again being proposed in an effort to postpone the need for tax and fee rate increases and/or service reductions, and also to reduce the Township’s undesignated GF fund balance to within the fund balance policy goal range of 15% to 18% of annual 2010 expenditures. This “spend-down” (from 23.6% in 2008, to 20.1% estimated for 2009, to 17.1% for the end of 2010) is therefore fully planned in order to conform to the Township’s new GF fund balance policy, and land at a fund balance level that appears to be the preliminary preference of most of the Board of Commissioners. It is because of the excellent budgetary performance in 2004 - 2008 that we have the luxury and ability to plan and budget for GF operating deficits for both 2009 and 2010, knowing that sufficient GF fund balance reserves have been accumulated that can serve this purpose.

The continuing “punch-line” for this fiscal strategy, however, is that we are knowingly presenting ourselves with a much more difficult budgetary year for the 2011 Budget and beyond. Gone will be the excess fund balance reserves accumulated during 2004-2008, having been spent as one-time measures to minimize other budget balancing measures for 2009, 2010 and possibly part of 2011. Also, likely gone will be one-time, unexpectedly-high current business tax performance from a small number of taxpayers, and funding from our base spending for over 20 FTE of regular staffers.

The Five Year Forecast:

 
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Beginning Fund Balance (undesignated)
$11.8
$ 10.5
$ 8.9
$ 3.4
$ (3.7)
Revenues
51.0
50.5
51.2
52.3
53.3
Expenses
52.3
52.1
56.7
59.4
62.4
Surplus/(deficit)
(1.3)
(1.6)
(5.5)
(7.1)
(9.1)
Ending Fund Balance
$ 10.5
$ 8.9
$ 3.4)
$ (3.7)
$ (12.8)

 
Forecast
2009
Forecast
2010
Forecast
2011
Forecast
2012
Forecast
2013
Expenses
$52.3
$52.1
$56.7
$59.4
$62.4
Ending Fund Balance
$ 10.5
$ 8.9
$ 3.4
$ (3.7)
$ (12.8)
Ending FB as a % of Annual Operating Expenditures
20.1%
17.1%
6.0%
-6.2%
-20.5%
Goal Range - Low End
15%
15%
15%
15%
15%
Goal Range - High End
18%
18%
18%
18%
18%

UnDesig Fund Bal

Without any tax or major fee rate increases, the Township’s GF revenue base (netting out the +2% RET increase for 2009 and the proposed +3.8% RET increase for 2010) is forecasted to only grow at a compounded annual rate of less than +0.5% from 2009-2013. This is a lower compounded growth rate compared to last year’s forecast of +1.6% and the previous forecast of +2.1% -- and a clear display of our “systemic revenue problem.” Even including the actual 2009 and proposed 2010 RET millage rate increases, the compounded annual revenues only grow +1.1%.

During this same time period, undeniable economic forces exist of market-based and contractual payroll and employee healthcare costs, materials and service price increases, higher utility rates, new unfunded mandates, and new debt service costs for the Township’s capital improvement program. Added to these realities is the 2008-2009 recession which creates a degree of concern that our financial forecast may be too optimistic.

The compounded annual expenditure growth rate for 2009-2013 is forecasted at approximately +4.5%, a lower compounded growth rate compared to last year’s forecast of +5.1% and from the previous forecast of +5.4%. Contained within this annual growth rate are two expensive cost drivers: employee healthcare and other benefits (+8.7%) and debt service (+6.7%). Making the Solid Waste Fee self-sustaining for 2010 eliminated a third major GF cost increase driver from the General Fund – the annual subsidy.

We have focused on cost containment efforts throughout the organization during 2008 and 2009 and must continue to do so in 2010 and beyond. Netting out our two most expensive cost drivers (employee benefits and debt service), the compounded annual spending increase forecast equates to a much more modest rate of annual expenditure growth of approximately +3.1% for 2009-2013.

Our Five Year Forecast demonstrates the need for the Township to stop planned deficit spending and return to a fully balanced budget for 2011 or possibly 2012. Gone (or nearly gone) will be excess GF fund balance above our goal range of 15% to 18%. We will be faced with the need to make budgetary decisions (cost cutting and/or revenue raising) to close a significant 2011 forecasted gap of approximately $5.5 million.

The Board of Commissioners will need to have the political will to make the difficult budgetary decisions that this Township has always demonstrated in the past. During 2010, as we prepare for our 2011 Budget, further examination of our costs will be necessary and revenue measures, such as a quite-possible double-digit RET increase or other major revenue/spending options for 2011, will need to be considered.

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