MFPITEM]
&2
June 24, 2010
Worksession 2
MEMORANDUM
TO:
FROM:
Management and Fiscal Policy Committee
Robert H. Drummer, Senior Legislative
Charles H. Sherer, Legislative Analyst
(3#
i
~.tt~rney
f\..
fLU
SUBJECT:
Resolution to Approve Reserve and Selected Fiscal Policies
Bill 36-10, Finance - Revenue Stabilization Fund - Amendments
A Resolution to Approve Reserve and Selected Fiscal Policies and Bill 36-10, Finance ­
Revenue Stabilization Fund Amendments, both sponsored by the Council President at the request of
the County Executive, were introduced on May 27, 2010. A Management and Fiscal Policy
Committee (MFP) worksession for both the Resolution and Bill was held on June 14. A public
hearing was held on June
22.
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:
].
2.
3.
4.
5.
I
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 ofthe 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
itbe_?________________________________________________________
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Background
During FYIO, three events occurred that caused the Executive to propose increasing the
County's reserve: I) 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 FYIO 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. The County's financial advisor, Public Financial
Management, Inc. (PFM), prepared an overview of the County's financial risks and recommended
several policy changes. See the PFM presentation at ©25-35. 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 FYI1 using the "old"/current policy compared to
using the proposed new policy is on ©2I. The new reserve policy would both increase the percent of
total resources for the target reserve and modify the base used to calculate the target reserve.
The target reserve under the old policy is 6% of total resources minus the RSF. The base is:
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 ofthe 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)
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;
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(5)
(6)
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.
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 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.
Although the 6% and the 10% targets are multiplied by different bases, the 2 different bases
are similar in size. Therefore, the proposed 10% policy would always result in a higher reserve. For
FYIl, the 10% goal would have resulted in a reserve at the end of FYI I 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
FYI2-20. 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
Resolu~~n
and Bill
~~hanges
noted
below./
June 14 MFP Worksession
The Committee discussed the proposed Resolution and Bill with Executive staff and the
County's financial advisor, Nancy Winkler of PFM. The Committee did not vote on the Bill or the
Resolution. Committee Chair Trachtenberg and Committee member Ervin preliminarily agreed with
the Executive's proposal to remove the cap on total reserve, subject to further discussion. Committee
member Navarro asked staff to develop options for a cap. The Committee is scheduled to meet again
on June 24 to make recommendations to the Council.
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Public Hearing
Jennifer Barrett testified in support of the Resolution and the Bill on behalf of the Executive
at the public hearing on June 22. See ©38.
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"
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 and/or 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:
I.
Structurally Balanced Budget
Montgomery County [[will]] !!lust have a goal o(a structurally balanced
budget~
([, that is,
budgeted]]
Bud~
expenditures should not exceed projected recurring revenues plus
recurring net transfers in I1l:inus the manqatory contribution to the required reserve for that
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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:
'42. 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% ofAcijusted Governmental Fund revenues, representing tax-supported governmental and agency
revenues, including operating grant and CIP 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 pennit the size of the RSF to increase without limit, as explained
below in the discussion of the BilL
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 25% of AGR. 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% target can only be exceeded by a mandatory contribution based upon 50% of
excess revenue. Finance staff also noted that the 10% target reserve is only 36 days, which is much
less than the 60 days or 2 months of operating expenses recommended as a target reserve by the
Government Finance Officers Association (GFOA). The GFOA recommendation for the appropriate
level of unrestricted fund balance is at least 2 months of expenses. See ©23-24.
A 2 month reserve would be 17% of AGR. A 3 month reserve would be 25% of AGR. Based
upon the GFOA recommended minimum of 17% of AGR, a maximum total reserve of 25% AGR
would balance the County's need for a sufficient reserve while still limiting how much taxpayer
money is set aside for contingencies.
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
achi~ving
the Charter
§31Q
maximum for
the reserve in the General Fund of 5% of General Fund revenues in the preceding fiscal
y~
an.Q of building up and maintaining the sum of Unrestricted General Fund Balance and
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Revenue Stabilization Fund [[Balance to an amount equal to approximately]] reserve t() 10%
of Adjusted Governmental Fund revenues, [[representing tax-supported governmental and
agency revenues, including operating grant and CIP revenues]] as defined in the Reveflue
Stabilization Fund law. This goal [[will]) must be reflected in the Revenue Stabilization Fund
law. The budgeted total reserve must not exceed 25% of Adjusted Governmental Fund
revenues.
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 Prefunding (OPEB) and
Pension Benefits Prefunding.
Council staff recommendation:
amend Action Clause 3 as follows:
3. Use of One-Time Revenues
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
non-recurring expenditures which are one-time in nature, PA
yao
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 shoulci be given to. unfunded liabilities for
Retiree Hea1thBenefit!) (OP.gB) 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:
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4. PAYGO
The County IIwillJJ should allocate to the CIP eachjiscal year as PAYGO at least ten percent
ofthe amount ofgeneral obligation bonds planned for issue that year.
5. Fiscal Plan
The County /IwillJJ should adopt a jiscal plan that is structurally balanced, and that displays
expenditures and other uses ofresources within annually available revenues. The jiscal 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.
5. Would a policy of always funding the General Fund reserve at the 5% Charter maximum
reduce the Council's authority to control use of the total reserve?
The total reserve is made up of the General Fund reserve and the RSF. The General Fund
reserve can be used:
a.
To fund additional unbudgeted expenses, such as a major snow storm. The Executive
cannot 'spend the General Fund reserve unless the Council approves a supplemental or
special appropriation; or
To offset a shortfall in revenue, such as occurred in FY 10 with the income tax. In this
case, no action by the Council is necessary to "use" this reserve.
b.
The RSF can only be used to fund appropriated expenditures that have become unfunded due
to a shortfall in revenue. The Council must approve any withdrawal of funds from the RSF.
Therefore, once the budget is approved, the Council only has control over the portion of the total
reserve in the RSF. The General Fund reserve can be used by the Executive to fund appropriated
expenditures without Council approval. If most of the total reserve is in the General Fund reserve,
the Council has less control over its use. One solution would be to establish a policy that the
approved budget place at least 50% ofthe total reserve in the RSF.
If the County reaches the new 10% AGR target goal, more than 50% of the total reserve
would be in the RSF since the 5% General Fund reserve is approximately 3.5% of the total reserve.
However, while the County is ramping up to the 10% goal, a policy of placing 50% of the total
reserve in the RSF would continue to provide the Council with significant control over the use of the
total reserve. Council staff recommendation: add the following sentence after the second sentence
in Action Clause 2:
Tile approved budget should place at least 50% of the total reserve in the Revenue Stabilization Flmd.
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As shown in ©40, this additional language would decrease the reserve in the General Fund
and increase the reserve in the RSF by the same amount only in FY12 and FY13. Starting in FY14,
the reserve in the General Fund would be at its maximum and the reserve in the RSF will account for
more than half of the total reserve. As a result, the allocation of reserve would be the same starting in
FY14 with or without this additional sentence.
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 definition for Adjusted Governmental Revenue
(AGR) to be used to calculate the mandatory contribution to the RSF. AGR would also be 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. Since the County has to advance County cash, the County needs some
additional reserve to ensure that the cash is in the bank. 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. 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:
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Excess revenue means the amount. if positive, by which actual total revenues from the income
tax, real property transfer tax, recordation tax, and investment income of the General Fun4 for
the fiscal year exceed the originaLQrojections 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/allows:
li!}
[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]] any excess revenue [[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
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 $163.1 million less spending
or increased taxes in FYll. With the mandatory contributions to the RSF contained in the Bill and
no cap, the RSF can grow larger with no control. As discussed earlier, Finance staff pointed 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. Finance staff and the County's financial advisor stated that a 10% reserve is roughly equal to
only 36 days of cash on hand to pay the County's operating expense, which is not enough. The
GFOA notes that AAA rated counties should have at least 2 months, which would require a 17%
reserve. A 3 month reserve would require a 25% reserve.
The County has some significant mandatory funding obligations. For example, almost 57%
of the total combined FYIl 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 (MOE) level or receiving a waiver from
the State Board of Education.
An
oversized RSF could reduce the County's ability to meet the MOE
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level and also reduce the County's opportunity to receive a waiver from the State.
1
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 Jollowing definition after line
47
ojthe Bill at
©3.
Total reserve means the sum of the reserve in the FuIld plus the Unrestricted General Fund
Balance.
Council staff recommends that the maximum size ofthe budgeted total reserve be 25%.
Amend lines
54-63
at
©4
asJoliows:
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. theestima!ed total reserve in the
~proved
operating budget must not exceed 25% of the estimated Adjusted Governrnental Revenues.
The 25% 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 Jollows:
[(a)
Subject to the limit set in Section 20-67(a), the] [[The)] Subject to the limit in Section 20-67,
the mandatory annual contribution to the Fund must equal the greater of:
llU
[50 percent of the product of the certified revenues estimated for the current fiscal year
times the difference between:
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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(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]] any excess revenue [[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
{hl
an annual amount [[that does not exceed]] equal to the lesser of 0.5 percent of the
actual Adjusted Governmental Revenues [[for the current year, but which does not
result in the sum of the current year-end projected Unrestricted General Fund Balance
and the Fund to exceed]] or an amount needed to obtain a total reserve of 10 percent of
the Adjusted Governrnental Revenues.
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 25% 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 Secti(!n 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 [fund] Fund to the Fund at the end
of each fiscal
year~uQiect
to the limit ofSectiQn 20-67.
If
the Committee decides to approve the Executive's recommendation to remove the maximum
size of the RSF, Council staff would recommend amending lines 65-82 to clarify the mandatory
contribution in §20-68 as follows:
Amend lines
65-82
at
©4-5
as follows:
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[(a)
Subject to the limit set in Section 20-67(a), the] The mandatory annual 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]] any excess revenue [[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
.G:U
an annual amount [[that does not exceed]]
~to
the lesser of 0.5 percent of the
actual Adjusted Governmental Revenues [[for the current year, but which does not
result in the sum of the current year-end projected Unrestricted General Fund Balance
and]] or the amount needed to obtain a total reserve [[the Fund to]] of [[ exceed]]
lQ
percent ofthe Adjusted Governmental Revenues.
None of the recommended amendments to §§20-67, 20-69, or 20-70 would be necessary.
addition of a definition for "total reserve" would still be necessary.
The
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/allows:
20-72.
Use
of Fund.
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([(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
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
Qy
the Center for Regional Analysis, George Mason University, or
~
successor index determined
Qy
the Department of Finance, has declined for 3
consecutive months.]]
[[(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 ofthat 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 Counci1.. after holding a public
hearing and seeking the recommendation of the Executive.. may transfer [[amounts]] any amount
from the Fund to the General Fund [[without regard to the limits and conditions in subsections (a)­
(c)]] to support aPP!Qpriations which have become unfunded.
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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 - FY 11-16 (1 0% Reserve)
FY11-16 Tax Supported Fiscal Plan Summary (6% Reserve)
Resolution
FYl1 Target Reserve Comparison
Target Reserve Phase-in Comparison
GFOA Recommended Reserve Target
June 14 PFM Presentation
Fiscal Impact Statement
Testimony of Jennifer Barrett
Allocation of Total Reserve
Circle
1
8
9
12
13
16
18
19
21
22
23
25
36
38
40
F:\LA W\BILLS\I 036 Finance-Revenue Stabilization Fund\MFP Memo 2'ooc
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Bill No. _ _ _ _ _-->::.3=6-....!.1=0_ __
Concerning: Finance
Revenue
Stabilization Fund - Amendments
Revised: May 25,2010 Draft No. __
2_
Introduced:
May 27,2010
Expires:
November 27, 2011
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset Date: _Nl.2o><..!n...."e'--_ _ _ _ __
ChI _ _, 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 ofthe 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
XII
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
XII
Section 20-67
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface bracketsD
* * *
Heading or defined term.
Added to existing law by original bill.
Deleted from existing law by original bill.
Added by amendment.
Deleted from 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
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.
2
3
4
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
reported in the County's annual financial report.
Adjusted Governmental Revenues
means tax-supported County
Governmental Funds revenues, plus revenues of the:
mcome~
5
6
7
8
9
as
10
11
ill
County Grants Fund;
County Capital Projects Fund;
tax supported funds of the Montgomery County Public Schools,
not including the County's local contribution;
12
m
ill
13
14
15
ill
ill
[(b)
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.
16
17
18
19
20
21
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.]
22
23
24
25
26
27
[(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
[(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.
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
[(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.
(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
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.
52
53
(fl
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BILL
No. 36-10
54
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56
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20-67.
[Fund sources and maximum size.] Reserved.
[(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.
58
59
(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.
60
61
62
63
(c)
The Fund is in addition to any surplus that may be accumulated under
Section 310 of the County Charter.]
64
65
20-68.
Mandatory contribution to Fund.
[(a)
Subject to the limit set in Section 20-67(a), the] The mandatory annual
66
67
68
contribution to the Fund must equal the 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
69
70
71
72
73
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
74
75
76
77
78
(Q)
an annual amount that does not exceed 0.5 percent of the Adjusted
Governmental Revenues for the current year, but which does not
79
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BILL
No.
36-10
80
81
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.]
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
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].
97
20-70.
Transfer of contributions.
98
99
100
101
102
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
103
104
105
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.]
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BILL
No. 36-10
106
lO7
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
IS
108
109
110
111
112
113
114
115
116
117
Executive disapproves a resolution within 10 days after it
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
prevlOus year.
(3) The [local] most recent regional index of leading economIC
indicators.,. published
Qy
the Center for Regional Analysis,
George Mason University, or
118
119
120
121
122
123
124
125
126
127
128
129
130
.a
successor index determined
Qy
the Department of Finance, has declined for 3 consecutive
months.
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BILL
No. 36-10
131
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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,. the Council,. after
holding a public hearing and seeking the recommendation of the
Executive.,. may transfer amounts from the Fund without regard to the
limits and conditions in subsections (a)-(c).
Approved:
141
142
143
144
Nancy M. Floreen, President, County Council
Approved:
Date
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
Bill 36-10
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
NI
A
PROBLEM:
GOALS AND
OBJECTIVES:
COORDINATION:
FISCAL IMPACT:
ECONOMIC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
SOURCE OF
INFORMATION:
APPLICATION
WITHIN
MUNICIPALITIES:
PENAL TIES:
NI
A
f:\law\bills\1036 finance-revenue stabilization fund\lrr.doc
(j)
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OFFICE OF THE COUNTY EXECUTIVE
ROCKVIllE. MARYLAND 20850
Isiah Leggett
Counry
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 22
nd
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 watchlist. 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 of that
review, I am recommending a set of actions and policies which
will
set the County on a stronger
fiscal path for FYJ 1 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
May21,2010
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 FYI1 budget challenges.
Recommended Actions
The attached charts (Attachments A and B) provide background 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 County'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
FYIl,
budget reserves at the current policy level of 6%, and within 10 years (by 2020),
bring total reserves to 10%
2. Bring General Fund 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 P AYGO 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 of recurring revenues for that
fiscal year
6. Direct one-time revenues exceeding projections to the Revenue Stabilization Fund, PAYGO,
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 available revenues without any draw down of reserves or unanticipated revenues
8. Review budgeting practices for significant, known expenditures, and ensure adequacy of
appropriations and possible carry-over provisions for unspent 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 sustai'n the County through
a variety of the pressures noted above. The reserve amounts I am recommending will also help
ensure sufficient working capital through the County's usual fiscal cycle.
I very strongly recommend restoring General Fund reserves to the maximum
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 PAYGO policy. This set of actions will provide additional flexibility to the County in
FY12 and beyond to respond to further adverse economic and fiscal conditions.
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Nancy Floreen, Council President
May 21,2010
Page 3
These actions are only the beginning of the work before us. I beJieve 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 - FY
11-16
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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ATIACHMENTA
RESERVE POLICIES - OVERVIEW
1.
CURRENT POLICIES
Balanced Budget:
Reserves:
RSF:
PAYGO:
One Time Revenues:
expenditures not to exceed
resourc~s
(including prior year ending fund balance)
6% of combined aU 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
fully 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 OPES
@J
1
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ATTACHMENT B
COMPARISON OF FISCAL POLICIES AND PRACTICES - CURRENT POLICY/PRACTICE vs. RECOMMENDED
PFIVI and FINANCE RECOMMENDED POLICIES
I
i
CURRENT POLICY/PRACTICE
Current Fiscal Policy:
Recommended Policy:
r-~~
Structurally
Balanced Budget
I
I
It is the fiscal policy
of
Montgomery County to
balance the budget A balanced budget has its
I
funding sources (revenues, undesignated
~
carryover, and other resources) equal to its
funding uses (expenditures, reserves, and other
allocations). No deficit may be planned or
incurred.
Reserves
CUrrent Fiscal Policy:
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:
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
I
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%
of
Adjusted 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
Retain, but policy reserves above Charter limitation
will
be included in target for RSF,
I
~~
~-
General Fund
Reserves
Section 310 of Charter:
L
Wt1h respect to the Genera/ Fund, any
unappropriated surplus shall not exceed five percent
of the General Fund revenue for the preceding fiscal
vear.
@)
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.
Use of One-time
Revenues
Current Fiscal Policy:
Recommended Policy:
Except for
excess
revenues which must go to the One-time revenues and revenues in excess of
Revenue Stabilization Fund, the County wilt,
!
projections will be applied first to restoring
whenever possible, give highest priority for the
reserves to policy levels or
as
required by law. In
use of one-time revenues from any source to the the event that the County determines that reserves
funding of capital assets or other nonrecurring
have been fully funded, then one-time revenues
expenditures
so as
not
to
incur ongoing
should be applied
to
expenditures which are one­
obligations for which revenues may not be
time in nature, PA YGO for the CIP in excess of the
adequate in future years.
County's targeted goal, or
to
unfunded liabilities
such
as
Pension or OPES.
@
3
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ATTACHMENT B
(continued)
, PAYGO
I
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 planned
for issue that year.
Recommended Policy: (unchanged)
The County will aI/ocate
to
the CIP each fiscal year
as PAYGO
at
least ten percent of the amount of
general obligation bonds planned for issue that
year.
Fiscal Plan
Shows Resources and Uses balanced in the budget
year. To the extent uses exceed resources in future
years, deficit amounts are displayed as Gaps to be
closed in future budgets.
Recommended Policy:
The County will adopt
a
fiscal plan that is
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.
Budget at more realistic levels, possibly in a separate
account where unused balance can carry over to next
year.
----------------------------------~
Adequacy
of .
budget
lappropriations
Minimal levels are budgeted for certain known
expenditures, not in line with actual experil9nce.
@)
4
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Total Revenues
1
2
Properly Tax (I.... PD.)
!ocomeT""
Tronsl.rlRecord. Tax
!nVf»fment Income
"
5
<>
7
8
9
11
Other To...
Other Revenues
TOlol Revenues
Net Transfers In (Out!
1,440.9
1,214.8
123.4
5.9
185.3
834.6
3,804.9
37.2
3,842.2
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%
·O.w.
-0.6%
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%
4.7%
1,635.9
1,.373.6
169.7
20.0
226.9
809.6
4,237.6
I
2.4%
7.9%
5.1%
8.8%
2.7%
0.9%
4.1%
1,675.3
1,482.<>
178.3
21.7
235.1
816.6
4,409.6
10
Total Revenues ond Transfers Available
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
26
29
20
3,676.0
I
3,820.9
I
2.1%
3,902.4
I
0.5%
3,921.4
I
3.6%
4,062.0
I
4.7%
4,252.0
I
4.1%
4,424.4
Non.Operatlng Budget Use
of
Revenues
DabiService
PAYGO
OP Current Revenue
Montgomery College Reserves
251.5
1.3
30.7
243.8
0.3
20.9
5.0%
-100.0%
-22.6%
264.0
23.8
11.9%
n/a
72.1%
MNCPPC Reserve.
Contribvtion to General Fund Undesignated Reserves
Contribution fo Revenue Sfabilization Reserves
Reliree Health In.urtlnce P,...Fvnding
Sel Aside lor olher uses "'upplemenlal appropriotians)
Tolal Oiber Uses of Resources
Av.lllable to AIIOCGfe
10
Agencies (Tolal Revenues+Net Tronsfers·Tot,d
Other U.....)
Agency Uses
(39.3)
.
(82.3)
(59.3)
372.2%
.
nla
n/a
-90.2%
73.9%
·5.7%
107.1
33.9
.
2.5
246.1
3,595.4
60.1
183.6
3,492.4
0.3
429.1
3,391.8
·100.4%
·28.5%
n/a
8916.1%
18.2%
0.1%
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%
328.6
32.5
57.4
4.0
4.5
5.4
20.4
102.6
22.5
578.0
3,343.4
8.3%
0.0%
41.0%
1.8%
'3.5%
·119.9%
16.4%
18.6%
0.0%
11.6%
2.2%
356.1
32.5
81.0
4.1
4.6
(1.1)
23.7
121.7
22.5
645.2
3,416,9
6.3%
0.0%
3.9%
1.8%
3.6%
668.3%
44.9%
14.9%
·11.3%
9.20/.
3.8%
378.5
32.5
84.2
4.2
4.8
6.1
34.4
139.S
20.0
704.4
3,541.7
4.6%
0.0%
.24,7%
1.9%
2.6%
39.3%
-6.3%
5,0%
0.0%
0.6%
4.7%
396.1
32.5
63.4
4.3
4.9
8.5
32.2
146.8
20.0
708.5
3,715.9
Montgomery County Public Schools {MCPSI
Montgomery College (Mq
MNCPPC
(wlo
Deb1 Service)
MCG
29
Subtotal Agency Uses
2,020.1
217.5
106.6
1~51.2
1,989.9
214.5
103.2
1 184.8
3,492.4
3,676.0
0.000
3,595A
3,842.2
-5.0%
-0.8%
-13.1%
·7.0%
.5.7%
·0.6%
1,919.81
215.8
92,7
1163,6
3,391.8
3,1120.9
0.0000000
0.3%
1.0%
-1.4%
-0,3%
0.1%
2.1%
1,926.240
217.853
91.331
1159.870
3,395.3
·1.3%
-0.6%
.3,2%
-2.0%
.1.5%
0.5%
1.901.5
216.5
88.4
1136.9
3,343.4
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%
2,027,1
233.8
90.9
1195.9
3,541.7
4,252.0
0.000
5.0%
5.6%
3.2%
4.3%
4.7%
4.1%
2.127.9
247.0
93.8
1,247.3
3,715.9
4,424.4
0.000
30
Total
US""
3,902A
0.000
4.70/.
31
(Gop)/Avcdloble
0.000
No_
I. FY12-16
propertyl<lll revenues are althe Charter LImit assuming
0
lax credll. All other lax revenues
III
currenl rates exc:epl as noted below.
2.
Revenues reflect Energy Tax and Wireless Telephone Tax Incr_ approved by the County Council on May
27, 2010.
Energy Ta" Increase sunsels at the end
of
FY12.
3. PAYGO restored
10
policy level
of
100/.
of planned GO Bond borrowing In
FYI2.16.
See Row
14
obove.
4.
FYII
Revenues reflect one year redirection of Recordotlon Tax Premium ($8 M.) Qnd Recordation TaK for MCPS CIP and College IT
{$5
M.j.
Ii.
Rellree Health Insurance Pre-Funding assumed to resume Qtschedule!f contribution levels In
FY12.
See Row
20
above.
6.
Prolected
FY12·16
rate of grow!h
of
Agency U_ constrained to bolance the flscQI plQn in
FYI 2·16.
7.
FYll
Reserves reflect restoration
of
reserves ta current
6%
{of tax supported resources) policy level.
FYI
0 and
FYI I
reserves (see Rows
34.42
below) Include all County and Outside Agency lax supported reserves.
8. FY12·16 Unrestricted General Fund Reserves are reduced In <_In years to reflect compliance with Section
310
of the County Charter on mClldmum size of ibe general fund balance {shall not exceed
5%
of prior
yeQr general fund revenues). Outside Agency reserves 'Ire eK<iuded from these amount. Qnd are displayed sepQrQtely {see Rows
29
Qnd
:10
Qbove).
9.
FY12·16
Reserves reflect proposed new reserve pOlicy Including Increase In reserve levels Qnd Inclusion of capital prolects Qnd granl revenues os part of Adiusted Governmenl,,) Revenues.
®
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32
33
34
35
36
37
38
rTiu
rT1U
"fIU .. 1I
rTll
rTlI"U'
rn"
rTJJ:-lv
rIh)
rn"'''J4
rfl4
r1l4"1;,:I
BegInning Ressrves
Unrestricted Gena,.,1 Fund
115.5
112.0
.74.3%
29.7
360.4%
136.8
.0.3%
136.4
3.9%
141.8
·0.8%
140.7
4.3%
146.8
!~
I
~glTl!,!$ t~
Keser«t!
41
42
43
InS
RQMryes
44
45 Unrestricted
Ga.
46
47
·39.3
0.0
·39.3
76.2
119.6
195.8
39.3%
.6.3%
0.5%
5.8%
16.3%
11.8%
I'Dd
48
49
50
51
a. a
%
of Total
1""
Supparled Reven"e$ PI"5 CIP
&
Operqling
Revenues
r--------------------------------------------+----------------t---------------+--------------4--------------+-------------+------------4------------4
Redr.... Health In",rance Pre.Fundlng
53/1.
52
Montgomery
County Public Schocls IMCPS)
53 Montgomery
ColI.g.
(MC)
54
MNCPPC
!wlo
Debt
Service)
55 MCG
64.8
1.2
5.1
31.5
102.6
76.4
1.3
5.6
38.4
tl.7 I
87.7
1.4
6.1
44.6
92.1
1.0
4.4
1.5
6.4
46.8
146.8
25.0
Subtotal Rell ...... Health In5"l'<In<e P....
Fu~dlng
83.6
56
139.8
8)
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Tolal Resources
4,237.6
158.4
14.4
4.1%
7.5%
0.0%
4,409.6
170.3
14.9
I
Montgomery County Public School. (MCPS)
Montgomery College (Mq
(w/o
Deb! Service)
Retiree Health Insurance Pre-Funding
I
Montgomery County Public Schools (MCPS)
Monlgomery College (Mq
(w/o
Debt Service)
Subtotal Reliree Health Insurance Pre-Funding
362.2
295.61
26.7%
458.81
17.6%
53.2
1.0
4.4
25.0
83.6
539.3
9.6%
64.8
1.2
5.1
31.5
102.6
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
(Gap)/AvaUable
Noles:
1. FY12-16 praper1y lax revenues are al the Charter Limit assuming a lax credit. Ali olher lax revenues at current rate. except as noted below.
2. Revenues rellect Energy Tax and Wireless Telephone Tax Increa.es approved by the County Council on May 27, 2010. Energy Tax increas. sunsets at the end of FY12.
3. PAYGO restored to policy level
of
10%
of
planned GO Bond borrowing in FY12-16.
4. FYl1 Revenues rellect one year redirection
01
Recordallon Tax Premium ($8 M.l and Recordation Tax lor MCPS CIP and College IT ($5 M.j.
5. Retiree Heallh Insurance Pre-Funding a$Sumed to re.ume at scheduled contribution level. in FY12.
6. Projected FY12-16 rate
01
growth
01
Agency Uses constrained to balance the Iiscal plan in FY12-16.
7. Reserves are reflected at the current policy level of 6% of total resources In FYII-16.
(0
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Resolution No:
Introduced:
May 27, 20 I 0
Adopted:
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the Request of the County Executive
SUBJECT:
Reserve and Selected Fiscal Policies
Background
I.
-----------------­
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 FY1O, the County experienced an unprecedented $265 million decline in income tax
revenues, and weathered extraordinary expenditure requirements associated with the HINl
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, 2010, the County Executive recommended that the
County Council restore reserves first to the current 6% policy level for FYII 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
Montgomery 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
J
0% of Adjusted Governmental Fund revenues,
representing tax-supported governmental and agency revenues, including operating
grant and ClP 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 ClP
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 ClP each fiscal year as PA YGO at least ten percent of
the amount ofgeneral obligation bonds planned for issue that year.
5.
Fiscal Plan
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:\LAw\BlLLS\ I 036 Finance-Revenue Stabilization Fund\Reserve Policy Resolution 5-24- IO.Doc
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A
I
.
B
I
:
c
l
--
o
-~~~--~~~- .~-----I
~
3
PROPOSED NEW POLICY, May 2010
2J-:Iow is the target reserve
calculat~d in~he
old 6%
polic~and
in the new 1
O~.
0
policy?
--,-------,-­
RESERVE'
I---\~--
New 10%
4
5 Revenue in the 4 tax
6
Nettransfersin
7
8
I
9
10
11
12
13
14
County capital projects fund
Total resources
(old)1
Adjusted
gov~fI!Illental
revenues
Less RSF at the
of the
Net resources
%
reserve
T(i.rget
$
reserve
___ .__
Increase reserve in FYl1 for new policy IF in effect in FYll.
This is the amount spending would have had to be reduced in'
15 FY 11 if new
were in effect.
16
NA
NA
113.0
48.7 Plug, using total minus other #s
.Rating
agel1c~_l~J:esen~(ltion,
p8
NA
10.0%
394.1
231.0
6.0%
236.5
I
~---~---
I
17
18
19
20
3,516.9
3,674.5
Reduction in FYll if new policy were in effect.
i
~
(163.1)
(5.4)
Io mitigate the impact of increasing the % reserve from 6%
t~l
0%, the CE proposes to phase in the increase over
the 9 year period FYI2-20.
I
I
I
SEen~ing
.
I
3,680.61
163.1
I
®
F:\LAW\BILLS\l 036 Finance-Revenue Stabilization Fund\Revised Reserve Policy May 201 O.xls, FY 11,
6/9/2010,
7: 13 PM
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ABC
r--I--~-----C---~-'
-~
D
~-~,--
~
E
F
~~
G
~
H
L _ _ _ _ __
1
J
K
2
3
4
5
6
PROPOSED NEW
- ,-
May 2010
I
,
POLICY,
_ _ _ _ _--'-______--'- __ __
___
What is the difference
in
sp~~~i!lKP~f!!1itted
the old 6%
Phase
in
the increase from 6% to 10% over the 9
~~_J?~)'~~e~i!1g_e~clu~es d~~~s~rvi~e,
current_revenue funding
of~h~ g~,prefuP-(l}ng
of!etiree health insurance.
Ag~~c~~e~diIlg
inoldp?licl'Jl:?.m FY12-16
i~from_O~-'-1:'eflecting_
C"-l!Ilcil appr()ved budget for FYll.
Agency spending in new
from FY12-16 is from OMB, reflecting Council approved budget for FYIl.
_~~_~,
___ , _ _ _- " - - - _ - - ' " - _ _
-1-_, _ _
_
;
$~ill=n[~_-
1:
12
11
I-F:-~:,resem S;~~I-B-r:~!~:dtrese~e s~;;~g Br~:~~ ~~::ren::ngl;~~::: ~~:%e
I
t- __
J::--]--]=--~--1-=-~~I~--'----~~--+ --.".---,--~~-
I
M
11
12
'_.6.0 %
..
6.0%
.~.t.3.-.'_.391.'.8.
1-...
242.3 . .6,.0%
.
3,416.2
.
I
23.-.1.1 6.3%
275.7
3,391.8
231.1
255.0
___0.'0.1, . -._.
(20.9)1
-0.6%
o.-~oQ.~.
6.0
6.3
~!
15
~!
15
16
-~:~~ --~:!~!:~l~
-
~;f~---~:~~~
_6,Q'!.>_P:58S:2!_
6.0%
I
3,754.7 1
~4.6
~~~:;
3,715.9
~~~~~~-~-~~:~~
_- (37.5)1_ -1.0%
(38.8)1
-1.0%
79.3
108.8
~:~
7.8
8.4
16
7.8%
8.4%
343.9
384.5
@F:\sherer\eXCel\ReSerVepOliCYMaY2010#2.XIS' FYII-16,
6/17/2010,13:39
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"
BEST PRACTICE
Appropriate Level of Unrestricted Fund Balance in the General Fund (2002 and 2009) (BUDGET
and CAAFR)
Background.
Accountants employ the term
fund 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.
I
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
fund balance, restrictedfund balance, committed fund balance, assignedfund balance,
and
unassignedfund
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
establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund.
3
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.
3
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 of long-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 (i.e., 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 (i.e., 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);?
• Liquidity (i.e., a disparity between when financial resources actually become available to make payments
and the average maturity ofrelated liabilities may require that a higher level of resources be maintained);
and
• Commitments and assignments (i.e., 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 fuIly 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 governments 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 governments (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 offifty), 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.
? However, except as discussed in footnote 4, not to a level below the recommended minimum.
4
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Montgomery County, Maryland
County Council Work Session
Proposed Fund Balance Poliry Resolutions
&
Bill 36-10:
Revenue S
tabili~tion
Fund
-
Amendments
June 14,2010
presented
by
Nancy
Winkler, MlUl4ging Director
Financial Advisor to lheCounty
Public Financial Management, Inc.
lS~h
Two Logan Square
&
Arch Streets, Suite 1600
(215) 56Hl00
Fax (215) 5674180
www.pfm.com
Presentation Overview
I.
Overview of Financial Risks and Recommended Policy Changes
Rating Agency Commentary
Summary of PFM Recommendations and County Response
GFOA Best Practices
II.
III.
IV.
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Overview of Financial Risks and
Recommended Policy Changes
3
Summary of Rating Action Taken by Moody's
Investors Service
• On April 2, 2010, Moody's Investors Service notified the County that it
has been placed on "Watchlist Negative" meaning that Moody's was
intending to take action on the County's rating within ninety days
• TIlis rating action was based on a number of factors including (but not
limited to):
»
A multi-year decline in County unreserved, undesignated General Fund
and Rate Stabilization Fund balances to levels that are inconsistent with a
Aaa rating
»
Notwithstanding recent accomplishments in slowing budgetary growth,
the County has a recent history of structurally imbalanced budgets
»
Economically sensitive revenue sources within the County's revenue base
produced far less than projected for three consecutive years
• There are two outcomes to being placed on "Watchlist Negative":
1. Downgrade, most likely to the Aallevel in the County's case
2. Removal from "Watchlist Negative" and affirmation of Aaa rating
14
@
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PFM Made a Series of Recommendations in
Response to Moody's Action
---_._---­
• In response to Moody's action, the County asked PFM evaluate the
County's financial situation, focusing especially on the County's:
:.. Reserve policies, and
:.. Budgetary practices
~
FY2011 budget
• PFM made a series of recommendations to the County, which are
. reflected in a report delivered to the county and in the County
Executive's proposals to Council
Fund Balance Provides Liquidity to Protect
Against Current and Future Risks
-------------------------
A well designed fund balance policy will consider:
• The cash flow timing - liqUidity needs of a government;
• The need to have contingencies for unexpected expenditures, such as
extraordinary snow removal or emergencies;
• Predictability of revenues and the volatility of expenditures - higher fund
balance may be needed if revenue sources and or expenditures are
unpredictable;
• The potential need to fund unexpected capital situations;
• The ability to respond to any revenues shortfall with expenditure adjustments
within a fiscal year
• How a government will replenish any draws on fund balance;
• A policy on structural balance so the budget does not use nonrecurring
revenues (which is fund balance, sale of assets, etc) for recurring expenditures.
• How many years (or months) of exposure the government wants to protect for
(3 months is often the standard).
• How cyclical the government's revenues are, and what other exposures are (for
example, is the government dependent on a large employer that can cut back
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The County's Income Tax Revenue Has Been Hit
Especially Hard by the Economic Downturn
Montgomery County, Maryland
Budgeted vs. Actuallneome
Ta.
Revenues Only, FY 2005-261 0
-Actual
---Actuallnoomt Tal.tt·YeJI\K ..
%
otTatll1
RIt\'elure.
: J7.QO.
Il
310
e •
0::
Ii
t
~
'3
29U·.
't
~
nO"~
Montgomery County's Cash Flow Position
• Certain revenues are seasonal:
}>
Property tax
Income tax
»
• Expenditures are generally not seasonal:
»
Salaries and benefits
»
Contractual payments
;I>
Actions to eliminate expenditures may take some time
• Fund Balance needs to provide for any mismatch in the timing of
receipts and expenditures
18
@
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Proposed Target Reserve Levels through 2020
The
following reserve levels are reflective of PFM's recommendations
with the goal of setting aside reserves equal to 10% of Adjusted
Governmental Fund Revenues
by
2020
10.0%
8.0%
6.3%
6,9%
10.3%
1U"h
1tQ';L
7.2%
7,B"
6.4%
12.4%
13JJ%
8.8%
9.2%
139%
9.8%
Rating Agency Commentary
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The County's Credit is Currently Being
Reviewed by All Three Rating Agencies
• All three Rating agencies have expressed concerns with the County's
reserve balances and budgetary flexibility
• In reports related to the County's recent bond issuance in April of 2010,
all three rating agencies expressed concerns that may lead to an
eventual downgrade:
}>
"Placement on Watchlist for possible downgrade reflects deterioration of the
County's financial
po~ition
driven primarily by income tax revenue shortfalls,
which is expected to result in the use of a significant portion of the County's
General Fund and Revenue Stabilization Fund as offiscal 2010 (year ends June
30th). Future rating relliew8 will factor (a) management's ability to mitigate the
projected current year operating deficit, gil'en identification of a number of
potential gap closillg measures that are largely non-recurring in nature; (b) steps
taken in the 2011 budget to restore structurally balanced operations and (c)
de1>elopment of a plall to restore the financial flexibility to levels in keeping with
the current rating category."
(Moody's Investors Service, April 2010)
- - - - - - - - - - - - - ------.-- 41";'111
The County's Credit is Currently Being
Reviewed by All Three Rating Agencies
}>
"Failure to restore resen'es to levels consistent with the 'AAA' rating alld the
county's long-standing policies could place downward pressure on Ihe raling."
(Fitch Ratings, March 25, 2010)
"The
counly has slated that by fiscal 2012
it
will eliminate the currently projected
$212 million structural deficit and
will
restore reserves
10
its
6%
policy_ Fitch's
current rating and Stable Outlook assume the county
will
be successful, bul failure
to achieve the fiscal 2011 and 2012 financial goals could result in a credit profile
that is inconsistent with the current rating category."
}>
(Fitch Ratings, March 31,2010)
}>
"The
stall/e outlook reflects the in/lerent strength of Ihe county's economy and
Standard
&
Poor's expectation that the county will continue to take the steps
necessary to restore ils financial footing by addressing ongoing reuenue declines. If
Ihe county fails to take actions to slabilize its finances, we may revise Ihe outlook to
negative."
(Standard
&
Poor's, March 31,2010)
112
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One of the Key County Weaknesses is
Volatility in its Tax Revenue Streams
• The County can accurately predict and budget for property tax
revenues mainly due to the Homestead Tax Credit
• The County has experienced much greater discrepancies between
budgeted and actual income tax, transfer tax and recordation tax
revenues
• The County has historically projected that total tax revenues will be
equal to or higher than prior year actual revenues in its budgetary
process; this approach worked during FY05-07, this same approach
became problematic in the face of the current recession
• 'The county's revenue base includes a number ofeconomically-sensitive
revenue sources (income, recordation and transfer taxes) that generated
significant budgetary surpluses during the real estate market boom period of
fiscal 2004 to fiscal 2007 but are driving the current financial deterioration."
(Moody's Investor Service, April 5, 2010)
Summary of PFM
Recommendations
and County Response
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Recommendation #1: Act swiftly and decisively as part of the FY
I~'
2011 hudget process to significantly restore target fund balance levels \.\
fl
J;
• The combined fund balances of its unreserved, undesignated General
Fund Balance and Revenue Stabilization Fund ("RSF") in FY 2011
should be restored to its current policy goal of 6% of tax supported
resources
• Simultaneously, the County should institute a multi-year plan to phase
in a new policy which establishes higher unreserved undesignated
General Fund Balance and Revenue Stabilization Fund to levels which
reflect the County's specific liquidity needs given its cash flow and
economically sensitive revenue streams
,'~115
Recommendation #2: Amend local law with
respect to the
RSF
• Remove the provision which establishes a maximum amount
permitted in the RSF
• Provide for a mandatory contribution to the RSF equal to 0.5% of
Adjusted Governmental Fund Revenues. This provision would require
a budgeted annual contribution until the combined ending balances of
the General Fund and the RSF equals 10% of Adjusted Governmental
Fund Revenues
116
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Recommendation #3: Establish and meet targets for the
combined ending General Fund and RSF balance by FY 2020
• FY 2011 unreserved General Fund balance must be restored to 5% of
prior year General Fund revenues
• FY 2011 RSF must be restored to at least 1.0% of General Fund
Revenues
• Further, PFM recommends that the County needs to target and
maintain a reserve balance (made up of unreserved, undesignated
General Fund reserves and the Revenue Stabilization Fund) equal to
10% of Adjusted Governmental Fund Revenues
• The County should plan to reach the reserve balance target no later
than 2020
• This reserve target provides 36 days of working capital reserves, and
should be sufficient to withstand shocks created by another recession
of the same severity as the 2008-2010 recession
Recommendation #4: Strengthen its budget policy requiring
the County to adopt a structurally balanced budget
• PFM supported the County's revision to its FY2011 income tax revenue
projections to remove any level of optimism in the income tax
projection, which led to the need to make further difficult cuts
• PFM suggested the County add the following language
to its
Balanced
Budget Policy
~
Montgomery County will have a structurally balanced budget. Recurring
revenues should fund recurring expenses. No deficit may be planned or
incurred. In the event that the County determines that reserves have been
fully funded, then to the extent that there are surplus reserves, these funds
should be budgeted to fund any of the following non-recurring
expenditures which are one-time in nature, fund pay-go for capital in
excess of the County's targeted goal for pay-go or to advance fund
unfunded liabilities such as OPEB. (The County may want to add in other
non- recurring items)
'~'118
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County Executive has Recently Proposed Resolutions
Reflective of PFM's Recommendations
• On
May 21, 2010, County Executive recommended new fund balance
policies and changes to the Revenue Stabilization Fund law
• On May 27, 2010, County Council introduced a new resolution with
new fund balance policies
• County Council also introduced Bill 36-10 - Revenue Stabilization
Fund ("RSF") Amendments
• County Council passed revised FY2011 budget with changes to
increase revenues (energy tax, telephone tax) and lower expenditures
reaching the current 6% fund balance policy level
• Maryland Board of Education has recently approved the County's
Maintenance of Effort ("MOE") waiver request, also assisting with the
budgetary process
119
GFOA Best Practices
20
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GFOA Best Practices Recommendations
• The Government Finance Officers Association (GFOA) recommends
that governments 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 specific plans for
increasing or decreasing the level of unrestricted fund balance, if it is
inconsistent with that policy
• 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
• 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
121
GFOA Guidelines Concerning Establishing
a
Reserve Fund Policy
--------~------------
• 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
.... Its perceived exposure to significant one-time outlays (disasters, immediate
capital needs, state budget cuts, etc.)
.... The potential drain upon general fund resources from other funds as well
as the availability of resources in other funds
.... Liquidity (if there is a disparity between when financial resources actually
become available to make payments and the average maturity of related
liabilities)
.... Commitments and assignments (i.e., 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)
122
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OFFICE OF MANAGEMENT AND BUDGET
Isiah Leggett
County Executive
Joseph
F.
Beach
Director
MEMORANDUM
June 21, 2010
TO:
FROM:
SUBJECT:
Nancy Florecn, Council President
Joseph F. Beach,
~
Bill 36-
J
0, Finance -- Revenue Stabilization Fund - Amendments
The purpose of this memorandum is to transmit a fiscal impact statement to the Council on
the subject legislation,
LEGISLATION SUMMARY
The proposed bill was included in a package of recommendations the County Executive
transmitted to the County Council on May 21, 2010 which also included revisions to the County's reserve
policy and changes to the County's fiscal practices to address stl'uc111ral imbalances in the budget. Taken
together, the actions are intended to increase reserve levels to 10% by 2020 or sooner and to achieve
structural budgetary balance. The proposed legislation will amend the Revenue Stabilization Fund law to
remove the cap on the Fund, retain interest earned in the Fund, and require mandatory contributions to the
Fund to achieve total reserves of
J
0%.
FISCAL AND ECONOMIC SUMMARY
Compared to existing law and current reserve policies, the proposed amendments removing
the cap on the maximum size of the fund and requiring mandatory contributions to achieve a total reserve
level of 10% will have a positive fiscal impact by ensuring that the County has adequate reserves to fund
its operations through its annual revenue and expenditure cycle, and also is intended to assure that the
County will continue to receive the highest possible ratings on its general obligation bonds and the lowest
costs of borrowing. The mandatory direction of resources to reserves will limit the amount of resources
available to spend on agency operating budgets or other uses, including capital investment.
This latter impact can be seen by comparing the two fiscal plan displays attached to this
memorandum, versions of which were included in the COllncil's discussion packet on this bill on June
14,
20 10. The first display assumes current policy and existing law, while the second incorporates the
recommended changes to reserve and fiscal policies and the Revenue Stabilization Fund law.
While the proposed changes will most directly impact the amount of resources available for
agency spending, they will more impOItantly set the County on a stronger fiscal path for
FYI1
and
beyond. The changes will strengthen the County's capacity to withstand severe revenue declines or
Office of the Director ,
101 Monroe Street, 14th Floor' Rockvme, Maryland 20850 • 240-777-2800
www.montgomerycountymd.gov
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Nancy Floreen, President, County Council
1une21,2010
.
Page 2
unexpected expenditure needs such as those experienced in the last year. They will also help ensure there
is sufficient working capital throughout the County's uneven revenue collection cycle. And, as
highlighted by the County's financial advisor, the proposed changes to the Revenue Stabilization Fund
will allow totall'eserves to increase to a level more in line with other AAA-rated counties across the
country. Overall; tllis set of actions will provide additional flexibility to the County to respond to further
adverse economic and fiscal conditions.
The proposed legislation is
110t
expected to have a material economic impact. The
following contributed to and concurred with this analysis: Karen Hawkins, Deparlment of Finance.
JFB:ae
Attachments
c: Kathleen Boucher, Assistant Chief Administrative Officer
Rebecca Domaruk, Offices of the County Executive
Jennifer Barrett, Director, Department of Finance
Karen Hawkins, Department of Finance
Alex Espinosa, Office of Management and Budget
John Cuff, OffIce of Management and Budget
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Testimony: Bill 36-10,. Finance - Revenue Stabilization Fund - Amendments
Good afternoon, I am Jennifer Barrett, Director of the Department of Finance,
and I am here to testify on behalf of County Executive Isiah Leggett on Bill 36-10
Finance - Revenue Stabilization Fund - Amendments. The County Executive urges
the Council to support Bill 36-10 which, along with the accompanying "Reserve and
Selected Fiscal Policies" Resolution, is designed to strengthen the County's fiscal
health, by building reserve levels to sufficient amounts to support County operations,
and to provide a sufficient contingency based on the County's unique revenue and
expenditure needs.
Bill 36-10 provides for a series of fixed-level mandatory contributions to the
Revenue Stabilization Fund (RSF) that are in addition to the existing revenue-based
mandatory contributions, and the bill removes the cap on the size of the RSF. The
requirements are designed to build up the County's reserves to the new, ten percent
policy level (10% of Adjusted Governmental Revenues) recommended by the
County's Financial Advisor, Public Financial Management (PFM). The 10% goal is
viewed as only modest, given the County's heavy reliance on volatile, economically
sensitive revenue sources, such as the income tax and transfer and recordation taxes,
and based on the County's cash flow needs in relation to the timing of the collection
of its primary revenue sources. Therefore, the recommended legislation removes the
cap on the Revenue Stabilization Fund, so that, after the targeted policy level is met
with fixed-level mandatory contributions, the existing provisions for revenue-based
mandatory contributions will continue, if triggered, and allow the fund to grow
further. This further growth will occur only if revenues come in higher than
projected, and then only fifty percent (50%) of the overage will be deposited into the
Revenue Stabilization Fund.
The legislation and accompanying policy resolution before you will set the
County on a stronger fiscal path in FYl1 and beyond. The needs for these actions are
many, and include our recent experiences with severe reductions in revenues and
unanticipated expenditure pressures; the remaining 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 FYI0 and FYl1 budget challenges; and strong statements of concern regarding the
County's use of reserves, reserve levels, and budgetary structural balance contained in
all three Rating Agencies' most recent ratings reports.
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
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County through a variety of the pressures noted above. The reserve amounts will also
help ensure sufficient working capital through the County's usual fiscal cycle.
I urge the Council to approve Bill 36-10, as well as the Resolution to Approve
Reserve and Selected Fiscal Policies. Guided by this set of actions, we will restore
General Fund reserves to the maximum allowed Charter level, and plan for a series of
mandatory contributions to the Revenue Stabilization Fund to achieve a total reserve
level of 10%. We will have strengthened our policies regarding a balanced budget
and use of one-time revenues, and commit to return to our existing PAYGO policy.
Although the Council's actions to adopt this legislation and policy resolution is
important, it is equally important for the County to adhere to these policies, and set
the County on a stronger fiscal path for FY12 and beyond, ready to respond to further
adverse economic and fiscal conditions that will inevitably occur at some point in our
future.
Thank you for your time.
June 22, 2010
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Allocation of Total Reserve
App.
FY10
1
2
3
4
5
6
7
8
9
10
11
Unrestricted General Fund
Revenue Stabilization Fund
Total Ending Reserves
76.2
119.6
195.8
29.7
60.4
90.1
136.8
94.3
231.2
255.0
280.7
140.7
162.7
303.4
146.8
197.1
343.9
155.3
229.2
384.5
Executive's Ending Reserves
Unrestricted General Fund
Revenue Stabilization Fund
Total Ending Reserves
Reserves as a % of Adjusted
Governmental Revenues
76.2
119.6
195.8
29.7
60.4
90.1
136.8
94.3
231.2
136.4
118.6
255.0
141.8
139.0
280.7
140.7
162.7
303.4
146.8
197.1
343.9
155.3
229.2
384.5
Est.
FY10
($ in millions)
App.
Projected
FY11
FY12
Projected
FY13
Projected
FY14
Projected
FY15
Projected
FY16
6.0%
6.5%
7.1%
7.4%
8.0%
8.6%
®