MFP Items 2
&
3
June 14,2010
MEMORANDUM
TO:
FROM:
Management and Fiscal Policy Committee
t-\\~
Robert H. Drummer, Senior Legislative Attorney
j{\
Charles
H.
Sherer, Legislative Analyst
fU)J
Resolution to Approve Reserve and Selected Fiscal Policies
Bill 36-10, Finance Revenue Stabilization Fund - Amendments
SUBJECT:
A Resolution to Approve Reserve and Selected Fiscal Policies, sponsored by the Council
President at the request of the Executive, was introduced on May 27, 2010. Bill 36-10, Finance ­
Revenue Stabilization Fund Amendments, sponsored by the Council President at the request of the
Executive, was also introduced on May 27, 2010. A public hearing for both the Resolution and the
Bill is tentatively scheduled for June 22, 2010.
Summary
The Resolution would establish a goal of a structurally balanced budget where only recurring
revenue is used to fund recurring expenses. The Resolution would also gradually increase the target
total reserve over the next 9 years and thereby reduce the revenue available for agency spending. Bill
36-10 would amend the law governing the Revenue Stabilization Fund consistent with the proposed
new fiscal policies governing the reserve. The Bill would modify the method of determining the •
mandatory annual contribution to the Fund and remove the current cap on the Fund.
The major policy issues are:
1.
2.
3.
4.
5.
Should the Council adopt a policy goal of a structurally balanced budget?
Should the Council modify the method of calculating the total reserve?
Should the Council modify the amount of the target reserve?
Should the total reserve have a maximum size? If so, what should it be?
Should the Revenue Stabilization Fund continue to have a maximum size? If so, what should
it be?
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Background
During FYI0, three events occurred that caused the Executive to propose increasing the
County's reserve: 1) the April 22 estimate of General Fund revenues in FYlO was $238 million less
than the estimate the Council made in May 2009 when the Council approved the FYI0 budget; 2)
three huge snow storms cost $57 million more than was in the budget; and 3) Moody's Investors
Service indicated that the County's AAA bond rating might be downgraded, based largely on their
concern that the County's reserve is too low. In a memorandum dated May 21, 2010 regarding
Reserve and Selected Fiscal Policies, the Executive recommended that the Council approve:
a)
a resolution to establish policies regarding reserves, including the Revenue
Stabilization Fund (RSF), and other fiscal matters; and
a Bill to change the RSF law.
b)
The main purpose of the Resolution and Bill is to increase the reserve, which could require
the Council to decrease expenditures and/or to increase revenues. Since revenues are at or close to
their maximum, unless the Council exceeds the Charter limit on property taxes, expenditures are
more likely to be reduced than revenues are to be increased. The Resolution and Bill would make a
number of changes to existing policy and law to achieve the increase in reserve.
The calculation of the target reserve for FYIl using the "old"/current policy compared to
using the proposed new policy is on ©21. The new reserve policy would both increase the percent of
total resources for the target reserve and modity the definition of total resources used to calculate the
target reserve.
The target reserve under the old policy is 6% of total resources, defined as:
1. Revenue in the 4 tax supported agencies;
2. Plus net transfers in from non tax supported funds (such as from the Department of Liquor
Control and the Cable Fund);
3. Plus total reserve at the beginning of the year; and
4. Minus the RSF at the beginning of the year.
The target reserve under the proposed new policy would be
10%
of Adjusted Governmental
Revenue (AGR), defined as:
(1)
(2)
(3)
(4)
(5)
Tax-supported County governmental funds revenues, plus revenues of the:
County Grants Fund;
County Capital Projects Fund;
tax supported funds of the Montgomery County Public Schools, not including the
County's local contribution;
tax supported funds of Montgomery College, not including the County's local
contribution; and
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(6)
tax supported funds of the Montgomery County portion of the Maryland-National
Capital Park and Planning Commission.
Components I and 4 through 6 are the same as is currently used to calculate the amount of
target reserve at 6%. Components 1 and 4 through 6 are listed separately in the definition of AGR to
coincide with the accounting definitions used in the County's financial statements, but they represent
the tax supported revenues in the 4 tax supported agencies. The second and third components are not
currently used, but Finance Department staff recommend including them in the proposed new 10%
goal because the County has to advance County cash and wait for collection or reimbursement for
most of the revenue. The amount of the existing reserve at the beginning of the year is currently used
to calculate the 6% target reserve, but would not be used to calculate the 10% target reserve under the
proposed policy. A simpler way of describing AGR under the proposed new policy would be:
1. Revenue in the
4
tax supported agencies;
2. Plus the County Grants Fund; and
3. Plus the County Capital Projects Fund.
The Grants Fund includes activity relating to operating grants funded primarily by Federal and State
grants. The Capital Projects Fund includes activity relating to the capital improvements program
(CIP) projects.
Because the 6% and the 10% targets are multiplied by different bases, the 10% policy would
not necessarily, but would usually, result in a higher reserve. For FYII, the 10% goal would have
resulted in a reserve at the end of FYI 1 that is $163.1 million higher than the 6% goal, so the Council
would have had to reduce spending or increase revenue by that amount.
To mitigate the impact of increasing the amount of the reserve from 6% of tax supported
resources to 10% of AGR, the Executive proposed phasing in the increase over the
9
year period
FY12-20. As shown on ©22, Finance and OMB project that phasing in the 10% goal would result in
lower spending and a higher reserve each year.
This would be the impact of the proposed new
goal.
Council staff recommends approval of the Resolution and Bill with changes noted below.
Issues
Relating to the Resolution
1.
Should the Council establish a policy goal of a structurally balanced budget?
Action Clause 1 in the Resolution states:
"1.
Structurally Balanced Budget
~Montgomery
County will have a structurally balanced budget, that is, budgeted expenditures should
not exceed projected recurring revenues for that fiscal year. Recurring revenues should fund
recurring expenses. No deficit may be planned or incurred. "
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If
non-recurring revenues are used to fund recurring expenses in one year, and if the non­
recurring revenue does not recur the following year, then there will be a shortfall in revenues because
the expense will recur. Note that neither transfers in nor reserve at the beginning of the year can be
used to fund the budget under the proposed policy. The amount of reserve at the beginning of the
year can and does vary from year to year, so not using it to fund recurring expenses makes sense.
However, at least some (if not most) of the transfers in, such as the transfer from the Department of
Liquor Control (DLC), is recurring, and Council staff recommends that the recurring portion of
transfers in be used to fund recurring expenses. In other words, the ceiling on the operating budget
would be recurring revenues plus recurring transfers in.
Note that the reserve should not be used to fund the budget under the proposed new
policy, so budgeted reserve would never decrease and would continue to increase each year due
to the proposed mandatory contribution to the Revenue Stabilization Fund (RSF) in Bill 36-10,
until the total reserve (RSF plus General Fund) reached the ceiling, if any. (Actual reserve
would of course decrease if revenue were less than budgeted andlor spending was more than
budgeted.)
Budgeted expenditures under the proposed policy cannot exceed recurring revenues (plus
recurring transfers in) less the mandatory contribution to the required reserve.
Council staff recommendation: modify Action Clause 1 as follows:
1. Structurally Balanced Budget
Montgomery County [[will]] must have a
structurally balanced budget", [[, that is,
budgeted]] Budgeted expenditures should not exceed projected recurring revenues
recurring net transfers in minl!§ the mandatory contribution to the required reserve for that
fiscal year. Recurring revenues should fund recurring expenses. No deficit may be planned
or incurred.
2. Should the total reserve have a maximum size?
Action Clause 2 in the Resolution states:
"2. Reserves
Montgomery County will have a goal of building up and maintaining the sum of Unrestricted
General Fund Balance and Revenue Stabilization Fund Balance to an amount equal to approximately
10% ofAdjusted Governmental Fund revenues, representing tax-supported governmental and agency
revenues, including operating grant and ClP revenues. This goal will be reflected in the Revenue
Stabilization Fund law. "
Bill 36-10 would remove the ceiling on the size of the RSF, and the mandatory contribution in
County Code §20-68(a) would permit the size of the RSF to increase without limit, as explained
below in the discussion of the Bill.
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Council staff believes that the Council should specify a maximum size of the total reserve (GF
plus RSF) and recommends that this maximum size be 10% of AGR, as implied by Action Clause 2
above. Council staff believes that there should be a limit on how much taxpayer money is set aside
for contingencies. Finance staff believes that the proposal to eliminate the existing cap described
below in the discussion of the Bill is prudent since the 10% maximum size can only be exceeded by a
mandatory contribution based upon 50% of excess revenue. Finance staff also noted that the 10%
target reserve is less than the 2 months of operating expenses recommended as a target reserve by the
Government Finance Officers Association (GFOA). The GFOA recommendations for the
appropriate level of unrestricted fund balance is at ©23-24.
With regard to the General Fund (GF) reserve, §310 of the Charter limits the reserve in the
GF to 5% of the GF revenue in the preceding fiscal year. The Executive's May 21, 2010
memorandum recommended setting aside this 5% maximum every year. Council staff agrees and
would include this in Action Clause 2.
Council staff recommendation: amend Action Clause 2 as follows:
2. Reserves
Montgomery County [[will]] must have a goal of achieving the Gharter §310 maximum for
the reserve in the General Fund of 5% of General Fund revenues in the preceding fiscal year,
of building up and maintaining the sum of Unrestricted General Fund Balance and
Revenue Stabilization Fund [[Balance to an amount equal to approximately]]
~~~~~
10% of Adjusted Governmental Fund revenues, [[representing tax-supported
governmental and agency revenues, including operating grant and CIP revenues]]
~~~~
in the Revenue Stabilization Fund law. This goal [[will]] must be reflected in the Revenue
Stabilization Fund law.
3.
Should the Council establish a priority for the use of one-time revenues?
Action Clause 3 states:
"3. Use of One-Time Revenues
One-time revenues and revenues in excess ofprojections will be applied first to restoring reserves to
policy levels or as required by law. In the event that the County determines that reserves have been
fully funded, then one-time revenues should be applied to non-recurring expenditures which are one­
time in nature, PAYGO for the CIP in excess ofthe County's targeted goal, or to unfunded liabilities
such as Pension or Retiree Health Benefits Prefunding (OPEB). "
Council staff recommends that the Council add a sentence to this policy statement requiring
priority consideration to unfunded liabilities, Retiree Health Benefits Pre funding (OPEB) and
Pension Benefits Prefunding.
Council staff recommendation: amend Action Clause 3 as follows:
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3. Use of One-Time Revenues
be applied first to
One-time revenues and revenues in excess of projections [[will]]
restoring reserves to policy levels or as required by law. [[In the event that]] If the County
determines that reserves have been fully funded, then one-time revenues should be applied to
non-recurring expenditures which are one-time in nature, PAYGO for the CIP in excess of the
County's targeted goal, or to unfunded liabilities [[such as Pension or Retiree Health Benefits
Prefunding (OPEB)]]. Priority consideration should be given to unfunded liabilities for
Retiree Health Benefits (OPEB) and Pension Benefits Prefunding.
4. Should all of the policy statements be restated as goals rather than requirements?
Action Clauses 4 and 5 are stated as mandatory requirements. The Council cannot adopt
binding fiscal policies through a resolution of this nature. Binding fiscal policies should be
established in County law. Therefore these action clauses should be reframed as goals rather than
requirements, consistent with the remainder of the Resolution.
Council staff recommendation: amend Action Clauses 4
&
5 as follows:
4. PAYGO
The County [[willll should allocate to the ClP each fiscal year as PAYGO at least ten percent
ofthe amount ofgeneral obligation bonds planned for issue that year.
5. Fiscal Plan
The County [[willll shou..!4 adopt a fiscal plan that is structurally balanced, and that displays
expenditures and other uses ofresources within annually available revenues. The fiscal plan
should also separately display reserves at policy levels, including additions to reserves to
reach policy level goals.
Council staff notes that the adoption of a fiscal plan will follow logically after the Council
acts on the Resolution and the Bill.
Issues Related to the Bill
1.
Should the definition in the Bill of Adjusted Governmental Revenue (AGR) be used?
The Bill would add, in §20-65, Definitions, a new definition for Adjusted Governmental
Revenue (AGR) to be used to calculate the mandatory contribution to the RSF. AGR would also be
6
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used as the base for calculating the target reserve under the Resolution. See lines 9-18 of the Bill at
©2. AGR would be the sum of:
(1)
(2)
(3)
(4)
(5)
(6)
Tax-supported County governmental funds revenues, plus revenues of the:
County Grants Fund;
County Capital Projects Fund;
Tax supported funds of the Montgomery County Public Schools, not including the
County's local contribution;
Tax supported funds of Montgomery College, not including the County's local
contribution; and
Tax supported funds of the Montgomery County portion of the Maryland-National
Capital Park and Planning Commission.
As stated above, Components 1 and 4 through 6 are the same as is currently used to calculate
the amount of target reserve at 6%. Components 1 and 4 through 6 are listed separately in the
definition of AGR to coincide with the accounting definitions used in the County's financial
statements, but they represent the revenues in the 4 tax supported agencies. The second and third
components are not currently used, but Finance staff recommend including them in the proposed new
10% goal because the County has to advance County cash and wait for collection or reimbursement
for most of the revenue. The amount of the existing reserve at the beginning of the year is currently
used to calculate the 6% target reserve, but would not be used to calculate the 10% target reserve
under the proposed policy. Since the County has to advance County cash, the County needs some
additional reserve to ensure that the cash is in the bank.
Council staff recommendation:
approve
the definition of AGR as introduced in the BilL
2. Should the Bill include a definition for excess revenue?
The Bill at lines 73-77 at ©4, uses the concept of excess revenue for determining the mandatory
contribution to the RSF. Although the Bill clearly describes the use of the concept, a separate
definition in the Bill would make it easier to use the concept in the Bill and corresponding fiscal
policies.
Council staff recommendation:
add the following definition after line 25 at ©2:
Excess revenue means the amount.
if
positive,
by
which actllal total revenues from the income
tax, real propertY transfer tax, recordation tax, and investment income of the General Fund for
the nscal year exceed the original projections for these amounts.
The term "original projection" is already defined in the law.
The mandatory contribution in §20-68 would be amended as follows:
Amend lines
67-77
as follows:
ll0.
[50 percent of the product of the certified revenues estimated for the current fiscal year
times the difference between:
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(1)
the annual percentage increase in the certified revenues projected for the next
fiscal year, and
(2)
the average annual percentage increase in the certified revenues collected in
the 6 fiscal years immediately preceding the next fiscal year.] 50 percent of
[[the]]
~~~~~~~
[[amount by which actual total revenues from the
and investment income
the original projections for
income tax, real property transfer tax, recordation
of the General Fund for the next fiscal year
these amounts]]; or
3.
Should the RSF have a maximum size?
The Bill would repeal the maximum size for the RSF contained in §20-67. As discussed
earlier, the 10% of AGR goal in the Resolution would have resulted in an additional $163.1 million in
additional spending reductions or increased taxes in FYI1. With the mandatory contributions to the
RSF contained in the Bill and no cap, the RSF can grow to significantly larger size with no control.
As discussed earlier, Finance staff point out that the mandatory contribution to the RSF can only
result in a target reserve greater than 10% of AGR by 50% of excess revenues under the Bill. If the
Council decides to amend the Bill to keep a cap on total reserve, Finance staff would recommend that
the maximum size be greater than the 10% target goaL
The County has some significant mandatory funding obligations. For example, almost 57%
of the total combined FYII agency expenditures are dedicated to the Montgomery County Public
Schools (MCPS). Under the State Education Law, increases in State education funding are
contingent on the County meeting its maintenance of effort level (MOE) or receiving a waiver from
the State Board of Education. An oversized RSF could reduce the County's ability to meet the MOE
level and also reduce the County's opportunity to receive a waiver from the State.
I
Council staff
recommendation: amend the Bill to add a maximum size for the total reserve, which would be the
sum of the RSF and the General Fund reserve.
Add the/allowing definition after line
47
a/the Bill at
©3.
Iotal reserve means the sum of the reserve in the Fund pl1,l§ the Unrestricted General Fund
Balance.
Council staff recommends that the total reserve belO%, which is the target goal in the Resolution.
Amend lines
54-63
at
©4
as/allows:
The State's recent enactment of a new law mandating arbitration to resolve an impasse over the terms of a new
collective bargaining agreement with school employee unions is likely to insert additional pressure on the County School
Board to provide increased salary and benefits for school employees. See Senate Bill 590.
I
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20-67. [Fund sources and maximum size.] [[Reserved.]] Maximum size.
[(a)
The Fund must not exceed 10 percent of the average aggregate annual revenue derived
from the income tax, real property transfer tax, recordation tax, and investment income
of the General Fund in the 3 preceding fiscal years.
(b)
The Director must compute the maximum amount of the Fund annually and report that
amount to the County Council not later than June 15.
(c)
The Fund is in addition to any surplus that may be accumulated under Section 310 of
the County Charter.]
On the date the Council approves the operating budget. the estimated total reserve in the
approved operating budget must not exceed 10% of the estimated Adjusted Governmental Revenues.
The 10% limit on total reserves would also need to
be
reflected in the mandatory contribution set
forth in §20-68. Council staff recommends the following amendment:
Amend lines
65-82
at
©4-5
as follows:
[(a)
Subject to the limit set in Section 20-67(a), the] [[The]] Subject to the limit inSection 20-67,
mandatory annual contribution to the Fund must equal
greater of:
W
[50 percent of the product of the certified revenues estimated for the current fiscal year
times the difference between:
(1)
the annual percentage increase in the certified revenues projected for the next
fiscal year, and
(2)
the average annual percentage increase in the certified revenues collected in
the 6 fiscal years immediately preceding the next fiscal year.]
[[the]]
ms;QIT~
percent of
excess revenue [[amount by which actual total revenues from the
tax, real property transfer
Fund for the next
recordation tax, and investment income
year exceed the original
=:;.;..===
for
Adjusted
of the
amounts]]; or
[[an annual
that does not exceed]] 0.5 percent of the
Governmental Revenues for the current
the current year-end projected Unrestricted General Fund Balance and the Fund to
exceed 10 percent of the Adjusted Governmental RevenuesJJ.:.
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Since both mandatory contributions are based on actual revenues, the mandatory transfer for a
fiscal year would be made as part of the year end closing process as is done under the current law.
The 10% ceiling on total reserves must also be reflected in §§20-69 and 20-70 as follows:
Amend lines 93-100 at
©5
asfollows:
20-69. Discretionary contributions to Fund.
The County Executive may recommend and the County Council may by resolution approve
additional contributions to the Fund [if doing so will not result in the 10 percent limit in Section 20­
67(a) being exceeded] subject to the limit in Section 20-67.
20-70. Transfer of contributions.
The Director must transfer the mandatory contributions required by Section 20-68 and any
discretionary contributions under Section 20-69 from the General [fund1 Fund to the Fund at the end
of each fiscal year, subject to the limit of Section 20-67.
4. Should the permitted uses of the Fund be clarified?
Council staff believes the conditions on using the Fund are unnecessarily complicated and
restrictive. The current law requires certain economic triggers to occur before the Council can
approve using the Fund by majority vote. However, current law also permits the Council to use the
Fund without the economic triggers if approved by a supermajority of 6 Councilmembers.
Eliminating the option to approve a transfer from the Fund by a simple majority of Councilmembers
would both simplify the process and make it more difficult for the Council to approve a transfer from
the Fund.
Council staff recommendation:
amend §20-72 as follows:
Amend lines 106-139 at
©6-7
as follows:
20-72. Use of Fund.
[[(a) After holding a public hearing and seeking the recommendation of the Executive, and
if the Council finds that reasonable reductions in expenditures are not sufficient to
offset the shortfall in revenue, the Council may by resolution approved by the
Executive transfer an amount from the Fund to compensate for no more than half of
the difference between the original projection of total General [fund] Fund revenues
for that fiscal year and a revised forecast of the General Fund revenues projected for
the same fiscal year.
If
the Executive disapproves a resolution within 10 days after it
is transmitted and the .Council readopts
it
by a vote of 6 Councilmembers, or if the
10
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Executive does not act within 10 days after it is transmitted, the resolution takes
effect.]]
[[(b)
However, a transfer must not be approved unless 2 of the following conditions are
met:
(1)
The Director estimates that total General Fund revenues will fall more than 2
percent below the original projected revenues.
(2)
Resident employment in the County has declined for 6 consecutive months
compared to the same month in the previous year.
(3)
The [local] most recent regional index of leading economIC indicators"
published
Q:y
the Center for Regional Analysis, George Mason University, or
E!:
~~~
index determined
Q:y
the Department of Finance, has declined for 3
consecutive months.]]
n(c)
The cumulative transfers from the Fund in any single fiscal year must not exceed half
of the balance in the Fund at the start of that fiscal year.]]
[[(d)
The funds transferred may only be used to support appropriations which have become
unfunded. ]]
[[(e)]] By an affirmative vote of 6 Councilmembers. the Council", after holding a public
hearing and seeking the recommendation of the Executive", may transfer [[amounts]] any amount
from the Fund
(c)]] to
~~~~~~~
[[without regard to the limits and conditions in subsections (a)­
support~ppropriations
which have become unfunded.
Other Issues for Discussion
1.
The two reserves discussed are in the General Fund and the Revenue Stabilization Fund,
because these are the largest. However, six other major funds have or can have a reserve,
which is included in the current 6% goal but would not be included in the new 10% goal.
These funds are Mass Transit, Fire, Recreation, MNCPPC, College, and MCPS (never
budgeted for a reserve but always has some actual reserve at the end of the year, resulting
from not spending the entire appropriation).
The Executive did not propose a reserve goal for these funds, but all of them are funded partly
by property tax revenue, so there is a limit on the amount of reserve they can have, if property
tax is at the Charter limit. In fact, since all resources from all funds are used to calculate
target reserve, but the target reserve is allocated to the GF
+
the RSF, then the reserve
in the remaining funds would be zero.
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Council staff believes the new policy should include these funds and has asked Executive
staff for suggestions.
2.
Should we again consider putting Mass Transit, Fire, and Recreation in the General Fund, to
strengthen the General Fund?
This packet contains:
Bill 36-10
Legislative Request Report
Executive's Transmittal Memo
Reserve Policies Overview
Comparison of Fiscal Policies and Practices
Restructured Balanced Fiscal Plan - FYII-16 (1 0% Reserve)
FYII-16 Tax Supported Fiscal Plan Summary (6% Reserve)
Resolution
FYll Target Reserve Comparison
Target Reserve Phase-in Comparison
GFOA Recommended Reserve Target
Circle
1
8
9
12
13
16
18
19
21
22
23
F:\LA W\BILLS\I 036 Finance-Revenue Stabilization Fund\Combined MFP Memo.Doc
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Bill No.
36-10
Concerning: Finance
Revenue
Stabilization Fund - Amendments
2_
Revised: May 25,2010 Draft No. __
Introduced:
May 27, 2010
Expires:
November 27,2011
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date: --:..:N.:::<lon""'e"----_ _ _ _ __
Ch. _ _
I
Laws of Mont. Co. _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the Request of the County Executive
AN ACT to:
(1)
(2)
(3)
repeal the limit on the size of the Revenue Stabilization Fund;
modifY the requirement for mandatory County contributions to the Revenue
Stabilization Fund; and
generally amend the law governing the Revenue Stabilization Fund.
By amending
Montgomery County Code
Chapter 20, Finance
Article
XlI
Sections 20-65, 20-66, 20-68, 20-69, 20-70, 20-71 and 20-72
By repealing
Montgomery County Code
Chapter 20, Finance
Article
XlI
Section 20-67
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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BILL
No. 36-10
1
2
Sec.
1.
Sections 20-65, 20-66, 20-68, 20-69, 20-70, 20-71 and 20-72 are
amended and Section 20-67 is repealed as follows:
20-65.
Definitions.
In this Article the following terms have the following meanings, unless the
context clearly indicates a different meaning:
[(a)]
Actual total revenues
means the combined total of income tax, real
property transfer tax, recordation tax, and investment mcome.\ as
reported in the County's annual financial report.
3
4
5
6
7
8
9
10
11
Adjusted Governmental Revenues
means tax-supported County
Governmental Funds revenues, plus revenues of the:
12
13
14
ill
ill
ill
(f}
County Grants Fund;
County Capital Projects Fund;
tax supported funds of the Montgomery County Public Schools,
not including the County's local contribution;
tax supported funds of Montgomery College, not including the
County's local contribution; and
15
16
17
18
19
20
21
22
23
24
25
26
27
ill
[(b)
tax supported funds of the Montgomery County portion of the
Maryland-National Capital Park and Planning Commission.
Certified revenues
means revenues derived each fiscal year from the
income tax, real property transfer tax, recordation tax, and investment
income of the General Fund as certified by the Director on or before
June 15.]
[(c)
Debt Service Fund
means the fund used to accumulate funds to pay
general long-term debt principal, interest and related costs.]
[(d)]
Director
means the Director of the Department of Finance.
[(e)]
Fund
means the Revenue Stabilization Fund created under this
Article.
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BILL
No. 36-10
28
29
30
[(
f)]
General Fund
means the general operating fund of the County which
is used to account for all revenues and expenditures, except revenues
and expenditures required to be accounted for in another fund.
31
32
33
34
35
36
[(g)]
Income tax
means the County income tax imposed under state law.
[(h)]
Investment income of the General Fund
means income from the
investment of revenues that is reported in the General Fund.
[(i)]
Original projection
means the projection of total General Fund
revenues for the next fiscal year approved by the County Council in
the "Schedule of Revenue Estimates and Appropriations" resolution
or any similar resolution.
37
38
39
40
41
42
43
44
(0)]
Real property transfer
tax means the tax imposed under Sections 51­
19 et. seq.
[(k)]
Recordation tax
means the tax imposed under Sections 12-101 et.
seq., Tax-Property Article, [Annotated Code of] Maryland Code.
[(1)]
Revised forecast
means any revised projection of total General Fund
revenues for the next fiscal year prepared by the Department of
Finance.
45
46
Unrestricted General Fund Balance
means the residual portion of the
General Fund fund balance that has not been reserved, restricted, or
encumbered for later years' expenditures.
47
48
49
50
51
52
53
20-66.
(a)
Revenue Stabilization Fund.
The Director may establish a Revenue Stabilization Fund to support
appropriations which have become unfunded.
(b)
The Fund is continuing and non-lapsing.
The Fund is in addition to any surplus that is accumulated under
Section 310 of the County Charter.
(0
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BILL
No. 36-10
54
55
56
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58
20-67.
[(a)
[Fund sources and maximum size.] Reserved.
The Fund must not exceed 10 percent of the average aggregate annual
revenue derived from the income tax, real property transfer tax,
recordation tax, and investment income of the General Fund in the 3
preceding fiscal years.
(b)
The Director must compute the maXImum amount of the Fund
annually and report that amount to the County Council not later than
June 15.
(c)
The Fund is in addition to any surplus that may be accumulated under
Section 310 of the County Charter.]
59
60
61
62
63
64
20-68.
[(a)
Mandatory contribution to Fund.
Subject to the limit set in Section 20-67(a), the] The mandatory annual
65
66
contribution to the Fund must equal the greater of:
(ill
[50 percent of the product of the certified revenues estimated for the
current fiscal year times the difference between:
(1)
the annual percentage increase in the certified revenues
projected for the next fiscal year, and
(2)
the average annual percentage increase in the certified revenues
collected in the 6 fiscal years immediately preceding the next
fiscal year.] 50 percent of the amount by which actual total
revenues from the income tax, real property transfer tax,
recordation tax, and investment income of the General Fund for
the next fiscal year exceed the original projections for these
amounts; or
(Q}
an annual amount that does not exceed 0.5 percent of the Adjusted
Governmental Revenues for the current year, but which does not
67
68
69
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71
72
73
74
75
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BILL
No. 36-10
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result in the sum of the current year-end projected Unrestricted
General Fund Balance and the Fund to exceed 10 percent of the
Adjusted Governmental Revenues.
[(b)
A growth or decline in certified revenues which results from either an
increase or decrease in County tax rates must be:
(1)
(2)
excluded from revenues projected for the next fiscal year, and
phased in in the average annual percentage increase calculation
in the third, fourth, fifth and sixth years.
(c)
If actual total revenues from the income tax, real property transfer tax,
recordation tax, and investment income of the General Fund for the
next fiscal year exceed the original projection, then 50 percent of the
excess must be transferred to the Fund if doing so will not result in the
10 percent limit in Section 20-67(a) being exceeded.]
20-69.
Discretionary contributions to Fund.
The County Executive may recommend and the County Council may by
resolution approve additional contributions to the Fund [if doing so will not result
in the 10 percent limit in Section 20-67(a) being exceeded].
20-70.
Transfer of contributions.
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
The Director must transfer the mandatory contributions required by Section
20-68 and any discretionary contributions under Section 20-69 from the General
[fund] Fund to the Fund at the end of each fiscal year.
20-71.
Interest.
All interest earned on the Fund must be added to the Fund. [However, the
Director must transfer interest earned on the Fund when the Fund exceeds 50
percent of the maximum Fund size authorized by Section 20-67(a) to the Debt
Service Fund as an offset to the approved issuance of general obligation debt.]
101
102
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105
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BILL
No. 36-10
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20-72.
Use of Fund.
(a)
After holding a public hearing and seeking the recommendation of the
Executive, and if the Council finds that reasonable reductions in
expenditures are not sufficient to offset the shortfall in revenue, the
Council may by resolution approved by the Executive transfer an
amount from the Fund to compensate for no more than half of the
difference between the original projection of total General [fund]
Fund revenues for that fiscal year and a revised forecast of the
General Fund revenues projected for the same fiscal year.
If
the
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112
113
114
115
116
117
118
119
Executive disapproves a resolution within 10 days after
it
IS
transmitted and the
Council readopts it by a vote
of 6
Councilmembers, or if the Executive does not act within 10 days after
it is transmitted, the resolution takes effect.
(b)
However, a transfer must not be approved unless 2 of the following
conditions are met:
(1) The Director estimates that total General Fund revenues will
fall more than 2 percent below the original projected revenues.
(2) Resident employment in the County has declined for 6
consecutive months compared to the same month in the
preVIOUS year.
(3) The [local] most recent regional index of leading economIC
indicators~
120
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122
123
124
125
126
127
128
129
130
published
Qy
the Center for Regional Analysis,
George Mason University, or
f!:
successor index determined
Qy
the Department of Finance, has declined for 3 consecutive
months.
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BILL
No. 36-10
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133
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135
136
137
138
139
140
(C)
The cumulative transfers from the Fund in any single fiscal year must
not exceed half of the balance in the Fund at the start of that fiscal
year.
(d)
The funds transferred may only be used to support appropriations
which have become unfunded.
(e)
By an affirmative vote of 6 Councilmembers.1 the Council.1 after
holding a public hearing and seeking the recommendation of the
Executive.1 may transfer amounts from the Fund without regard to the
limits and conditions in subsections (a)-(c).
Approved:
141
142
143
Nancy M. Floreen, President, County Council
Approved:
Date
144
145
146
147
148
Isiah Leggett, County Executive
This is a correct copy ofCouncil action.
Date
149
150
151
Linda M. Lauer, Clerk ofthe Council
Date
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LEGISLATIVE REQUEST REPORT
Bi1l36-10
Revenue Stabilization Fund
-
Amendments
DESCRIPTION:
The requested legislation removes the cap from the Revenue
Stabilization Fund (RSF), retains interest earned in the RSF, and
requires mandatory contributions to the RSF to achieve total reserves
of 10%.
The legislation would help ensure adequate reserve levels by
increasing them to 10% over the next ten, or fewer, years.
This legislation, along with the accompanying "Reserve and Selected
Fiscal Policies" Resolution is designed to strengthen the County's
fiscal health, by improving budgetary flexibility and building reserve
levels.
Department of Finance; Office of Management and Budget
To be requested.
To be requested.
To be requested.
To be researched.
Jennifer Barrett, Director, Department of Finance
Joseph Beach, Director, Office of Management and Budget
Kathleen Boucher, Assistant Chief Administrative Officer
N/A
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENALTIES:
N/A
f:\law\bills\1036 finance-revenue stabilization fund\lrr.doc
(f)
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OFFICE OF THE COUNTY EXECUTIVE
ROCKVILLE, MARYLAND 20850
Isiah Leggett
Coumy Executive
MEMORANDUM
May 21,2010
TO:
FROM:
Nancy Floreen, President, County Council
Isiah Leggett, County Executive
SUBJECT: Reserve and Selected Fiscal Policies
In my April 22m! memorandum to the Council on Additional Budget Actions, I
notified the Council of the need for revisions to the County's reserve policies. I made this
recommendation in light of recent severe reductions in revenues, unanticipated expenditure
pressures, and Moody's rating action putting the County on a negative watch list. All three rating
agencies included strong statements of concern regarding the County's reserves and budgetary
structural balance in their most recent ratings.
As I indicated to you in April, I have asked for and received a careful review of
the County's reserve policies by the County's Financial Advisor, PFM. As a result ofthat
review, I am recommending a set of actions and policies which wilJ set the County on a stronger
fiscal path for FY11 and beyond. Attached to this memorandum you will find a resolution
specifying these policies for Council's consideration and action, legislation to change the
County's Revenue Stabilization Fund law, and a restructured balanced Fiscal Plan showing
budgetary levels afforded within projected revenues and my plan for restoration of the County's
key reserves to the recommended policy levels.
Specifically, the recommended reserve levels incorporate current and future risks,
including:
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Nancy Floreen, Council President
May 21, 2010
Page 2
• Potential for future State actions which may negatively affect the County's revenues
and/or place additional expenditure requirements on the County.
• Numerous one-time actions taken to solve the FYIO and FYII budget challenges.
Recommended Actions
The attached charts (Attachments A and B) provide backgroWld on the current
status of the County's most key fiscal policies, detailing the recommendations I made to you in
April, and those that I am making today.
In
addition, I will soon be transmitting to you a report
from the COWlty'S Financial Advisor, PFM, that provides further analysis and detail on the
concerns of Moody's and the other Rating Agencies, and the fiscal circumstances that support
the need for the recommended actions.
Specifically, I am recommending the following policies and actions, which are
further detailed in the attachments:
1. For FYll, budget reserves at the current policy level of 6%, and within 10 years (by 2020),
bring total reserves to 10%
2. Bring General FWld reserves
to
the charter maximum of 5%
3. Require mandatory contributions to the Revenue Stabilization Fund to a combined reserve
level of 10%
4. Restore and maintain PAYGO at the policy level of 10% of general obligation bonds planned
for issue
5. Budget expenditures for a fiscal year only up to the amount ofrecurring revenues for that
fiscal year
6. Direct one-time revenues exceeding projections to the Revenue Stabilization Fund, P AYGO,
Pension or Retiree's Health Benefit pre-funding, and one-time expenditures
7. Achieve a fiscal plan for future years that is structurally balanced - that matches expenditures
to avaHable revenues without any draw down ofreserves or Wlanticipated revenues
8. Review budgeting practices for significant, known expenditures, and ensure adequacy of
appropriations and possible carry-over provisions for Wlspent amounts
The combination of these actions is estimated to achieve structural budgetary
balance and grow reserve levels to 10% by 2020 or sooner, enough to sustain the COWlty through
a variety of the pressures noted above. The reserve amoWlts I am recommending will also help
ensure sufficient working capital through the COWlty'S usual fiscal cycle.
I very strongly recommend restoring General Fund reserves to the maxilmun
allowed Charter level, and planning for a series of mandatory contributions to the Revenue
Stabilization Fund to achieve a total reserve level of 10%. I recommend we strengthen our
policies regarding a balanced budget and use of one-time revenues, and commit to return to our
existing P AYGO policy. This set of actions will provide additional flexibility to the COWlty in
FY12 and beyond to respond to further adverse economic and fiscal conditions.
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Nancy Floreen, Council President
May21,2010
Page 3
These actions are only the beginning of the work before us. I believe that together, we
must steer the County back to structurally balanced budgets and return
it
to
its
fiscally
conservative roots, restoring sufficiently strong reserve levels, to ensure that we do not return to
the budget stresses we currently face. I believe the set of recommendations before you will
ensure that outcome, and I urge your approval.
Enclosures
Attachment A - Reserve Policies - Overview
Attachment B - Compru1son of Fiscal Policies and Practices
Resolution Reserve and Selected Fiscal Policies
Draft Bill - Revenue Stabilization Fund
Restructured Balanced Fiscal Plan - FYl1-16
cc:
Duchy Trachtenberg, Chair, MFP Committee
Timothy Firestine, Chief Administrative Officer
Jennifer Barrett, Director of Finance
Joseph Beach, Director, OMB
Stephen Farber, Council Staff Director.
Kathleen Boucher, ACAO
@)
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ATTACHMENT A
RESERVE POLICIES - OVERVIEW
1.
CURRENT POLICIES
Balanced Budget:
Reserves:
RSF:
PAYGO:
One Time Revenues:
expenditures not to exceed resources (including prior year ending fund balance) .
6% of combined all tax supported (including outside agencies) and revenue stabilization fund
(RSF)
mandatory contribution up to cap, investment earnings go to PAYGO
10% of planned GO Bond issues
whenever possible give highest priority to capital assets or other
non~recurring
expenditures
2.
APRIL
22
nd
MEMORANDUM
Balanced Budget:
Reserves:
RSF:
PAYGO:
One Time Revenues:
Fiscal Plan:
budgeted expenditures should match new revenues projected to occur in that fiscal year
6% for FY11 and ramp up to 8% by end of FY13
General Fund (GF) at Charter Limit - 5% of prior year GF revenues
mandatory contributions to RSF to 3% (total of 8%). remove cap
restore and maintain at 10% policy level
direct in priority order to RSF, PAYGO. Retiree Health pre-funding, and one-time expenditures
achieve a fiscal plan display that is structurally balanced consistent with balanced budget policy
3.
RECOMMENDED - PFM MAY 2010
Balanced Budget:
Reserves:
RSF:
PAYGO:
One Time Revenues:
expenditures not to exceed revenues
6% for FY11, then ramp up combined General Fund and RSF balances over ten years to 10%
of adjusted governmental revenues-
mandatory contributions up to 10% reserve policy, remove cap, investment earnings retained in
RSF
.
10% of planned GO Bond issues
applied first to restoring reserves to policy levels or as required by law. If reserves have been
funded, then one-time revenues should be applied to expenditures which are one-time in
nature, PAYGO in excess of the County's targeted goal, or to unfunded liabilities such as
Pension or OPEB
1
C8
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ATTACHMENT B
COMPARISON OF FISCAL POLICIES AND PRACTICES - CURRENT POLICY/PRACTICE vs. RECOMMENDED
PFM and FINANCE RECOMMENDED POLICIES
CURRENT POLICY/PRACTICE
-------
Structurally
Balanced Budget
Current Fiscal Policy:
Recommended Policy:
It is the fiscal policy of Montgomery County to
balance the budget. A balanced budget has its
funding sources (revenues, undesignated
carryover, and other resources) equal to
its
funding
uses
(expenditures, reserves, and other
allocations). No deficit may be planned or
-------
------
Montgomery County will have
a
structurally
balanced budget, that is, budgeted expenditures
should not exceed projected recurring revenues for
that fiscal year. Recurring revenues should fund
recurring expenses. No deficit may be planned or
incurred.
Recommended Policy:
~urred.
Reserves
Current Fiscal Policy:
The County will maintain total reserves for tax
supported funds that include both
an
operating
margin reserve and the RSF. For tax supported
funds, the budgeted total reserve of the
operating margin and the RSF should be at least
6.0 percent of total resources (i.e., revenues,
transfers, prior year undesignated and
designated fund balance).
Montgomery County will have
a
goal over
10
years
(by 2020) of building up and maintaining the sum
of
Unrestricted General Fund Balance and Revenue
Stabilization Fund
to an
amount equal to
apprOXimately 10% ofAdjusted Governmental Fund
revenues.
Higher reserves are recommended in keeping with:
1) revenue volatility
2) expenditure volatility
3) working capital needs
4) more in line with other large AAA jurisdictions
General Fund
Reserves
Section 310 of Charter:
Retain, but policy reserves above Charter limitation will
With respect to the General Fund, any
be included in target for RSF.
unappropriated surplus shall not exceed five percent
of the General Fund revenue for the preceding fiscal
_Uear.
(§)
2
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ATTACHMENT B (continued)
Revenue
Stabilization
Fund (RSF)
RSF is currently capped at 10% of average of prior 3
years specific revenue sources. Interest earned is
transferred to PAYGO. and mandatory contributions
are based on revenues exceeding estimates.
(See County Code Ch 20 Article XII)
Remove cap, retain interest earned in RSF, and require
mandatory contributions to achieve total reserves of
10% and when revenues exceed estimates:
Mandatory annual contributions to the Fund must
equal the greater of:
50 percent of the amount by which actual total
revenues from the income tax, real property transfer
tax, recordation tax, and investment income of the
General Fund for the next fiscal year exceed the
original prOjection for these amounts.
An annual amount not to exceed 0.5 percent of the
Adjusted Governmental Revenues for the current
year, but which does not result in the sum of the
current year-end projected Unrestricted General
Fund fund balance and the Revenue Stabilization
Fund to exceed 10 percent of the Adjusted
Governmental Revenues.
If actual total revenues from the income tax, real
property transfer tax, recordation tax. and investment
income of the General Fund for the next fiscal year
exceed the original projection, then 50 percent of the
excess must be transferred to the Fund.
I--
.
Use
0
f
One-time
Revenues
Current Fiscal Policy:
Recommended Policy:
~~.quate
In
Mum
y~~.
Except for excess revenues which must go to the
Revenue Stabilization Fund, the County will,
whenever possible, give highest priority for the
use of one-time revenues from any source to the
funding of capital assets or other nonrecurring
expenditures
so as
not to incur ongoing
obligations for which revenues may not be
One-time revenues and revenues in excess of
projections will be applied first to restoring
reserves to policy levels or
as
required by law. In
the event that the County determines that reserves
have been fully funded, then one-time revenues
should be applied to expenditures which are
one­
time in nature, PA YGO for the CIP In excess of the
County's targeted goal, or to unfunded liabilities
such
as
Pension or OPES.
®
3
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AITACHMENT B
(continued)
PAYGO
Current CIP Fiscal Policy:
.It is the County's policy
to
allocate
to
the CIP
each fiscal year
as
PA YGO at least ten percent
of
the amount
of
general obligation bonds plarined
for issue that year.
Recommended Policy: (unchanged)
The County will allocate to the CIP each fiscal year
as
PAYGO
at
least ten percent
of
the
amount
of
general obligation bonds planned for issue that
year.
I
Fiscal Plan
Shows Resources and Uses balanced in the budget
Recommended Policy:
year. To the extent uses exceed resources in future
years. deficit amounts are displayed as Gaps to be
The County will adopt
a
fiscal plan that is
crosed in future budgets.
structurally balanced, and that displays
expenditures and other uses
of
resources within
annually available revenues. The fiscal plan should
also separately display reserves
at
policy levels,
Including additions
to
reserves to reach policy level
goals.
Minimal levels are budgeted for certain known
expenditures, not in line with actual experience.
Budget at more realistic levels, possibly in a separate
account where unused balance can carry over to next
year.
~~~~~~~
Adequacy of
.
budget
appropriations
@)
4
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Total Revenue.
Tax
4 rnveSlment Income
5 OlllerTa"".
6
Other Revenues
7
8
Tolal Revenues
1,440.9
1,214.8
123.4
5.9
185.3
834.6
3,804.9
1,437.8
1.026.3
114.8
1.3
201.0
832.6
3,613.9
0.6%
-12.7%
13.4%
-38.2%
69.0%
-2.8%
-0.7%
1.450.1
1,060.7
139.9
3.6
313.2
811.6
3,779.2
2.7%
6.6%
6.0%
88.3%
2.8%
-2.5%
2.9%
1.489.9
1,130.2
148.3
6.9
322.1
791.7
3,889_1
3.0%
6.2%
-2.2%
95.1%
-32.8%
0.7%
0.5%
1,534.9
1.200.8
145.1
13.4
216.4
797.2
3,907.8
3.1%
5.3%
8.7%
28.0%
2.9%
0.7%
3.6%
1,582.6
1,264.8
157.8
17.1
222.6
803.1
4,048.0
3.4%
8.6%
7.5%
16.8%
2.8%
0.8%
4.~
1.635.9
1,373.6
169.7
20.0
228.9
809.6
4,237.6
2.4%
7.9%
5.1%
8.8%
2.7%
0.9%
4.1%
1,675.3
1,482.6
178.3
21.7
235.1
816.6
4,409.6
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Tolal Revenue. and Transfers Available
Non·Operallng Budgel Use of Revenues
Debl SeIVice
PAYGO
OP Current Revenue
1
3,842.2
251.5
1.3
30.7
(39.3)
3,676.0 1
243.8
0.3
20.9
-0.6%
5.0%
-100.0%
-22.6%
372.2%
n/a
n/o
·90.2%
73.9%
-5.7%
3,820.91
264.0
23.8
2.1%
11.9%
n/a
72.1%
-100.4%
-28.5%
n/a
8916.1%
18.2%
0.1%
3,902A
1--­
0.5%
3,921.41
328.6
32.5
57.4
4.0
4.5
5.4
20.4
102.6
22.5
578.0
3,343.4
3.6%
8.3%
0.0%
41.0%
1.8%
'3.5%
.119.9%
16.4%
18.6%
0.0%
11.6%
2.2%
4,062.0
I
4.7%
6.3%
0.0%
3.9%
4,252.0
378.5
32.5
84.2
4.2
4.8
6.1
34.4
139.8
20.0
704.4
3,547.7
I
4.1%
4,424.4
396.1
32.5
63.4
4.3
4.9
a.5
32.2
146.8
20.0
708.5
3,715.9
-
Monigomery College Reserves
MNCPPC Reserves
Contribution to General Fund Undesignated Reserves
ContribuHon io Revenue Stabilization
ReSGfV6S
Retiree Health Insurcmce Pre-funding
Set Aoide for other uses (supplemenlal appropricllions)
Tolal Olher Uses of Resourws
-
-
2.5
\ll2.3)
(59.3)
60.1
183.6
3,492.4
-
107.1
33.9
-
0.3
246.7
3,595.4
429.1
3,391.8
295.3
32.5
40.9
4.0
4.3
(0.4)
24.3
83.6
22.5
507.1
3,395.3
11.3%
0.0%
40.3%
1.9%
3.7%
1498.5%
·16.0%
22.7%
0.0%
14.0%
·1.5%
356.1
32.5
81.0
4.1
4.6
(1.1)
23.7
121.7
22.5
645.2
3,416.9
1.8%
3.6%
668.3%
44.9%
14.9%
·11.3%
9.2%
3.8%
4.6%
0.0%
-24.7%
1.9%
2.6%
39.3%
-6.3%
5.0%
0.0%
0.6%
4.7%
23 Available 10 Allocale 10 Agencies (Total Revenues-tNel Transfers-Totcd
Olher Uses)
24
25
Agency Use.
26
27
28
29
28
29
Montgomery Caunly Public Schools (MCPS)
Monlgomery CoII,1!" [MC)
MNCI'PC
(wlo
Debl Service)
MCG
Sublotal Aget1CY Use.
2,020.1
217.5
106.6
1.~51.2
3,595.4
3,842.2
(Gap)/Avaliable
0.000
1,989.9
214.5
103.2
1184.8
3,492A
3,676.0
0.000
-S.O%
.0.8%
·13.1%
-7.0%
-5.7%
·0.6%
1,919.8
215.8
92.7
l,163.6
3,391.8
3,820.9
0.0000000
0.3%
1.0%
·1.4%
-0.3%
0.1%
2.1%
1,926.240
217.853
91.331
1,159.870
3,395.3
3,902A
-1.3%
-0.6%
-3.2%
-2.0%
-1.5%
0.5%
1,901.5
216.5
88.4
1 136.9
3,343A
3,921.4
0.000
2.4%
3.1%
0.6%
1.7%
2.2%
3.6%
1,947.9
223.3
88.9
1.156.8
3,416.9
4,062.0
0.000
4.1%
4.7%
2.2%
3.4%
3.8%
4.7%
2,027.1
233.8
90.9
1195.9
3,547.7
4,252.0
0.000
5.0%
5.6%
3.2%
4.3%
4.7%
4.1%
2,127.9
247.0
93.8
1247.3
3,715.9
4,424.4
0.000
30 TOlal Use.
31
0_000
Notes.
1. FY12-16 property tax revenues are at Ihe Charter Umll assuming a lax credit. All olher talC revenues al currenl rales excepi as noled below.
2. Revenue. reflect Energy Tax and Wireless Telephone Tax Increases approved
by
Ihe County Coundl on May 27,2010. Energy Tax Increase .unsets allhe end of
FY12.
3.
PAYGO restored 10 policy level 0110% 01 planned GO Bond borrowing In FrI2.16. See
Row
14 above.
4. FYl1
Revenues ....llect one year redirection of Recordalion TaK Premium ($8 M.) and Recordallon Tax for MCPS CIP and College IT ($5 M.j.
5. Retiree Health Insurance Pre·fundlng assumed 10 resume
at
scheduled conlrlbutlon levels in
FY12.
See Row 20 above.
6. Prolected
FY12-16
rale of growth of Agency U.... constrained 10 balance Ihe fiscal plan In
FYI2·16.
7. FY11 R _ s reflect reslorallon of reserve. to currenl6% (of laIC supported resources) policy level. FYIO ana
FYl1
reserve. (see Rows 34-42 below) Include all County and Outside Agency laIC supported reserves.
8. FYll·16 Unrestricted General Fund Reserves are reduced in cerlaln years 10 refleclcompllance wllh Section 310 of Ihe (ounty Charter on maximum
sin
01 the general lund balance (shall nof exceed 5% of prior
year general fund revenues). OUlsfde Agency reserves are excluded from Ihese amounls and are dlsplqyed separalely (see Rows 29 and 30 above).
9_ FY11-16
Re.erves reflect proposed new reserve policy Including Increa... In reserve levels and Induslon 01 <apllaf projects and granl revenues as part of Adiusfed Govemmenlal Revenues.
®
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--------------Ccmnty"ExeC1Jflve's-Re-cumrmm-cted-FY1-1
.,6I'ubli~es_Pt'"o_gt'"am-
- - - - ­
5InMUlion.)
32
33
34
Beglnnlng
Raeryel
App.
FVl0
Est.
FYI
0
%
eng.
FV10.11
Ree.
FYll
%
Chg.
FYll-12
Projected
FY12
%
Chg.
FY12-13
Projecled
FY13
%
Chg.
FYl3·14
Proiecled
FYI4
%
Chg.
FY14-15
Proieded
FY15
%
0.9.
FY15·16
Projecled
FY16
35
Unrestricted
General
Fund
36
37
115.5
112.0
-74.3%
29.7
360.4%
136.8
.0.3%
136.4
3.9%
141.8
-0.8%
140.7
4.3%
146.8
38
39
laggmons to
Hepryu:
40"
..
.
41
42
43
44
45
-39.3
0.0
·39.3
76.2
119.6
195.8
I
Fosmg !,v":JVes
46
47
49 Reserves as a
%
of
Total Tax Supponed Reven..es Plu. CIP
&
Operating
49
50
51
I
Grant Revenues
Rail..... Heallh Ins"rance Pre-funding
52
Monlgomarv Counly
Public
School.
(MCPS)
53 I MonlgQme:y College
(Mg
I
53.2
64.B
1.2
76.4
1.3
87.7
1.4
6.1
44.6
92.1
1.5
54!:MNCPPC
(w/o
Dabt Service)
55 MCG
56
Sublotal RetIree Health In,,,rance
Pre.fu~dlnll
I
I
.I
1.0
4.4
25.0
83.6
5.1
31.5
102.6
5.6
38.4
121.7
6.4
46.8
146.8
139.8
8)
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TOlal Resources
Revenues
Beginning Reserves Undesignated
Beginning Reserves Ouignated
4,237.6
158.4
14.4
4,410.4
685.4
4.1%
7.5%
0.0%
3.0%
4.2%
1.1%
4.7%
4,409.6
170.3
4,594.7
693.3
10 Agencl ....
AgenqU....
3,595.4
3,492.4
I
-5.7%
3,391.8
I
3.2%
3A99.8
-0.6%
3A78.5
2.4%
3,561.4
4.6%
3.725.0
3,901.5
I
Montgome.y County Public Schools (MCPS)
Monfgome.y College (Mq
(w/o
Debl Service)
3,595.4
·1.2%
53.2
1.0
4.4
25.0
83.6
64.8
1.2
5.1
31.5
102.6
9.6%
591.0
10.1%
76.4
1.3
5.6
38.4
121.7
650.5
5.4%
87.7
1.4
6.1
44.6
139.8
685.4
1.1%
92.1
1.5
6.4
46.8
146.8
693.3
I
Reliree Health Insurance Pre-Funding
Monl9 ornery County Public Schools (MCPS)
.
Montllomery College (Mq
(w/o
Debl Service)
Sublotal Reliree Heallh In.urance Pre.Funding
362.2
295.6
26.7%
458.8 I 17.6%
539.3
(Gap)/Avallable
Noles:
1. FY12-16 property lax revenues are allhe Ch"rter limll a ••uming a lax credil. All other I"x revenu.... al currenl rales excepl as noted below.
2. Revenues reflect Energy Tox and Wireless Telephone Tox Increases approved by Ihe Counly Council on M"y 27, 201 O. Energy T"x Incre".e sunsets "Ilhe end of FY12.
3. PAYGO reslored to policy level of 10% of pl"nned GO Bond borrowing In FY12-16.
4. FYl1 Revenue. rellecl one ye"r redlrecllon of Record"llon T"x Premium ($8 M.) and Record"tlon Tax for MCPS CIP and College IT ($5
Mo).
5. Reliree Health Insurance Pre-Funding "ssumed 10 resume at scheduled contribution levels in FY12.
6. Prolecled FY12.16 rale of growth of Agency Uses conslralned 10 balance the flsc,,1 plan In FY12-16.
7. Reserve$ ore reflecled allhe currenl pollq level of 6% of lol.d resources In FYll-16.
C0
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Resolution No:
Introduced:
May 27, 2010
Adopted:
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
----------------­
By: Council President at the Request of the County Executive
SUBJECT:
Reserve and Selected Fiscal Policies
Background
1.
Fiscal policy corresponds to the combined practices of government with respect to revenues,
expenditures, debt management, and reserves.
Fiscal policies provide guidance for good public practice in the planning of expenditures,
revenues, and funding arrangements for public services. They provide a framework within
which budget, tax, and fee decisions should be made. Fiscal policies provide guidance
toward a balance between program expenditure requirements and available sources of
revenue to fund them.
As a best practice, governments must maintain adequate levels of fund balance to mitigate
current and future risks (e.g., revenue shortfalls and unanticipated expenditures) and to
ensure stable tax rates. Fund balance levels are a crucial consideration, too, in long-term
financial planning. Credit rating agencies monitor levels of fund balance and unrestricted
fund balance in a government's general fund to evaluate a government's continued
creditworthiness.
2.
3.
4. In FYlO, the County experienced an unprecedented $265 million decline in income tax
revenues, and weathered extraordinary expenditure requirements associated with the H1N1
flu virus and successive and historic winter blizzards. The costs of these events totaled in
excess of $60 million, only a portion of which was budgeted and planned for.
5. In a memorandum dated April 22, 20 I 0, the County Executive recommended that the
County Council restore reserves first to the current 6% policy level for FYIl and also to
revise and strengthen policy levels in order to more appropriately position the County to
weather economic cycles in the future, and to achieve structural balance in future budgets.
6. The County's financial advisor has recommended that the County strengthen its policy on
reserves and other fiscal policies to ensure budget flexibility and structural stability, and has
provided specific recommendations, which are reflected below.
Action
The County Council for Montgomery County, Maryland, approves the following policies
regarding reserves and other fiscal matters:
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1.
Structurally Balanced Budget
lvfontgomery County must have a structurally balanced budget, that is, budgeted
expenditures should not exceed projected recurring revenues for that fiscal year.
Recurring revenues should fund recurring expenses. No deficit may be planned or
incurred.
2.
Reserves
Montgomery County must have a goal of building up and maintaining the sum of
Unrestricted General Fund Balance and Revenue Stabilization Fund Balance to an
amount equal to approximately 10% of Adjusted Governmental Fund revenues,
representing tax-supported governmental and agency revenues, including operating
grant and CIP revenues. This goal must be reflected in the Revenue Stabilization Fund
law.
3.
Use of One-Time Revenues
One-time revenues and revenues in excess of projections must be applied first to
restoring reserves to policy levels or as required by law. In the event that the County
determines that reserves have been fully funded, then one-time revenues should be
applied to non-recurring expenditures which are one-time in nature, PAYGO for the elP
in excess of the County's targeted goal, or to unfunded liabilities such as Pension or
Retiree Health Benefits Pre-funding (OPEB).
4.
PAYGO
The County must allocate to the CIP each fiscal year as PAYGO at least ten percent of
the amount ofgeneral obligation bonds planned for issue that year.
5.
Fiscal
The County must adopt a fiscal plan that is structurally balanced, and that limits
expenditures and other uses ofresources to annually available revenues. The fiscal plan
should also separately display reserves at policy levels, including additions to reserves to
reach policy level goals.
This is a correct copy ofCouncil action.
Linda M. Lauer, Clerk of the Council
F:\LA\V\BlLLS\l 036 Finance-Revenue Stabilization Fund\Reserve Policy Resolution 5-24-10.Ooc
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A
B
c
o
------
1
PROPOSED NEW POLICY, May 2010
2 How is the target reserve
calculatedinthe()l~~% polic¥aJ1~i,n
the new 1
0%~~~"'~~~~~~~~~~~_-+-_~~~~~~~~~
_ _ _ _ _ _ _ _
---1
3
5
6
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ------------~
----I
7
8
9
10
11
total reserve
County grants fund
County capital projects fund
Total
r~~~!lr~e~(~ld)/Adjuste~g()\l~l111TIental
revenues (new)
Less RSF at the
of the
!
Plug, using total minus other #s
I
Ratingagency presentation, p8
~
%
14 Target
$
Increase reserve in FYII for new policy
IF
in effect in FYII.
This is the amount spending would have had to be reduced in
NA
10.0%
394.1
6.0%
236.5
17§pending
~~~~~~~~~~
_____________________
18 Reduction in
Xyl1ifl'l~w £<:)li~}'\V~re
in e_f_fe_c_t_.
_~~~~~~~~~~~~~~~~~~~~~~~_--L
19 To mitigate the impact of
the % reserve from 6% to
I
20 the 9 year period FY12-20.
_ _ _ _- - ' -
3,674.5
(5.4)
the CE proposes to phase in the increase over
I
nnnmm[
®
F:\LAW\BILLS\1036 Finance-Revenue Stabilization Fund\Revised Reserve Policy May 20 I O.xls, FY 11,
6/9/2010,
7: 13 PM
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ABC
~SERVE,
D
E
F
G
H
J
Pl{9POSED NEW POLICY, May 20!_D_ _
-----1
2
What is the
--------------
in spending permitted
difference
the old 6%
and the new 10.%
,
._------------
,------­
3~hase
in the increase from 6% to!D% over the 9 yearperioci-.fY12-21:
--+
4
Agency spending excludes debt
current revenue funding of the CIP,
5
prefunding of retiree health insurance.
6
Agency spending in old
from FY12-16 is from the
20.10
Revised Balanced Fiscal Plan FYll-16
7Ag~ncy SP!_~c!.~gi~new
pol_i9' from FY 12-16 is from undated
0
M B - - - - - , - - - - - ­
8
.
________
____
___
____
_ _ _L _ _ _ _
_ _ _ _ __
~
9
I
10
131
14
15
16
17
:~
I
it
Old
I
--1--------­
Agency
% reserve
I
Spending
_ _ _
~.D%l--
3,391.8
12
m_--I~:O%
m+--
3,416.2
13
6.0.%
_, .
3,364.3
14
§.Qr~3,~31.
7
15
6.0.%
1 -
!
3,567.6
o
16
6.DYo
!
3,731.3
New
Agency
% reserve
Spen~d~in~g4~~~~iW
_ _ _
+- _____
-+---___~
__
--I
6.0.%
6.3%
f
__
~,391.~
i__
3,395.3
3,343.4
___
6.9~o_1
~~%
7.8%
0
I
In
3,416:~_1
___
-'---~t--
_ _ _-!--_
_
--+_ _ _
-+-----_.
m _ _ --- ------
I
8.4Yo
I
3,547.7
3,715.9
~
.
(15.4):
©
F:\LAW\BILLS\1036 Finance-Revenue Stabilization Fund\Revised Reserve Policy May 201O.xls, FY 11-16, 6/9/2010, 7: 15 PM
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.
BEST PRACTICE
Appropriate Level of Unrestricted Fund Balance in the General Fund (2002 and 2009) (BUDGET
andCAAFR)
Background. Accountants employ the
termJund balance
to describe the net assets of governmental funds
calculated in accordance with generally accepted accounting principles (GAAP). Budget professionals commonly
use this same term to describe the net assets of governmental funds calculated on a government's budgetary
basis.! In both cases, fund balance is intended to serve as a measure of the financial resources available
in a governmental fund.
Accountants distinguish up to five separate categories of fund balance, based on the extent to which the
government is bound to honor constraints on the specific purposes for which amounts can be spent:
nonspendable
Jund balance, restrictedJund balance, committedJund balance, assignedJund balance,
and
unassignedJund
balance.
2
The total of the last three categories, which include only resources without a constraint on spending or
for which the constraint on spending is imposed by the government itself, is termed
unrestrictedfund balance.
It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g.,
revenue shortfalls and unanticipated expenditures) and to ensure stable tax rates. Fund balance levels are a crucial
consideration, too, in long-term financial planning.
In most cases, discussions of fund balance will properly focus on a government's general fund. Nonetheless,
financial resources available in other funds should also be considered in assessing the adequacy of unrestricted
fund balance (i.e., the total of the amounts reported as committed, assigned, and unassigned fund balance) in the
general fund.
Credit rating agencies monitor levels of fund balance and unrestricted fund balance in a government's general
fund to evaluate a government's continued creditworthiness. Likewise, laws and regulations often govern
appropriate levels of fund balance and unrestricted fund balance for state and local governments.
Those interested primarily in a government's creditworthiness or economic condition (e.g., rating agencies) are
likely to favor increased levels of fund balance. Opposing pressures often come from unions, taxpayers and
citizens' groups, which may view high levels of fund balance as "excessive."
Recommendation. The Government Finance Officers Association (GFOA) recommends that governments
3
establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund.
Such a guideline should be set by the appropriate policy body and should provide both a temporal framework and
I
For the sake of clarity, this recommended practice uses the terms GAAP fund balance and budgetary fund balance to
distinguish these two different uses of the same term.
2
These categories are set forth in Governmental Accounting Standards Board (GASB) Statement No. 54,
Fund Balance
Reporting and Governmental Fund Type Definitions,
which must be implemented for financial statements for periods ended
June 30, 2011 and later.
J
Sometimes restricted fund balance includes resources available to finance items that typically would require the use of
unrestricted fund balance (e.g., a contingency reserve). In that case, such amounts should be included as part of unrestricted
fund balance for purposes of analysis.
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specific plans for increasing or decreasing the level of unrestricted fund balance, ifit is inconsistent with that
policy.
4
The adequacy of unrestricted fund balance in the general fund should be assessed based upon a government's own
specific circumstances. Nevertheless, GFOA recommends, at a minimum, that general-purpose governments,
regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular
general fund operating revenues or regular general fund operating expenditures. s The choice of revenues or
expenditures as a basis of comparison may be dictated by what is more predictable in a government's particular
circumstances.
6
Furthermore, a government's particular situation often may require a level of unrestricted fund
balance in the general fund significantly in excess of this recommended minimum level. In any case, such
measures should be applied within the context oflong-term forecasting, thereby avoiding the risk of placing too
much emphasis upon the level of unrestricted fund balance in the general fund at anyone time.
In establishing a policy governing the level of unrestricted fund balance in the general fund, a government should
consider a variety of factors, including:
• The predictability of its revenues and the volatility of its expenditures (Le., higher levels of unrestricted
fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if
operating expenditures are highly volatile);
• Its perceived exposure to significant one-time outlays (e.g., disasters, immediate capital needs, state
budget cuts);
• The potential drain upon general fund resources from other funds as well as the availability of resources
in other funds (Le., deficits in other funds may require that a higher level of unrestricted fund balance be
maintained in the general fund, just as, the availability of resources in other funds may reduce the amount
of unrestricted fund balance needed in the general fund);
1
• Liquidity (Le., a disparity between when financial resources actually become available to make payments
and the average maturity of related liabilities may require that a higher level of resources be maintained);
and
• Commitments and assignments (Le., governments may wish to maintain higher levels of unrestricted fund
balance to compensate for any portion of unrestricted fund balance already committed or assigned by the
government for a specific purpose).
Furthermore, governments may deem it appropriate to exclude from consideration resources that have been
committed or assigned to some other purpose and focus on unassigned fund balance rather than on unrestricted
fund balance.
Naturally, any policy addressing desirable levels of unrestricted fund balance in the general fund should be in
conformity with all applicable legal and regulatory constraints. In this case in particular, it is essential that
differences between GAAP fund balance and budgetary fund balance be fully appreciated by all interested parties.
Approved by the GFOA's Executive Board, October, 2009.
See Recommended Practice 4.1 of the National Advisory Council on State and Local Budgeting govemments on the need to
"maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of
temporary revenue shortfalls or unpredicted one-time expenditures" (Recommended Practice 4.1).
5
In practice, a level of unrestricted fund balance significantly lower than the recommended minimum may be appropriate for
states and America's largest govemments (e.g., cities, counties, and school districts) because they often are in a better
position to predict contingencies (for the same reason that an insurance company can more readily predict the number of
accidents for a pool of 500,000 drivers than for a pool of fifty), and because their revenues and expenditures often are more
diversified and thus potentially less subject to volatility.
6
In either case, unusual items that would distort trends (e.g., one-time revenues and expenditures) should be excluded,
whereas recurring transfers should be included. Once the decision has been made to compare unrestricted fund balance to
either revenues or expenditures, that decision should be followed consistently from period to period.
1
However, except as discussed in footnote 4, not to a level below the recommended minimum.
4