The Minuet Of Municipal Finance

The Minuet Of Municipal Finance
By Stan Austin- Lakewood Observer City Council Reporter

Council president Robert Seelie called the May 15, 2006 meeting to order at 7:38 PM. The meeting began with a resolution presented by Mayor Thomas George and passed by council commending Captain James G. Petz of the Lakewood Fire Department for his many years of service.

Lakewoodites have a keenly-developed appreciation for excellence in property renovation and maintenance. This is recognized annually by the Heritage Advisory Committee. In a slide presentation, chairman Rick Sicha used his architect's skills in describing the category winners, pointing out the details that make a project noteworthy. It is, in effect, a tutorial which outlines elements of quality and authenticity in home and business restorations. Michael Fleenor of the Cleveland Restoration Society briefly described his organization's capabilities and how they can advise prospective renovators to achieve quality restorations.

The most significant portion of the meeting involved the City's finances. It centered on ordinances of issuing notes, fiscal officer's certificates, bonds and many terms of which the reader might have memories from a college economics course or watching the business channels on television. The mission of the Lakewood Observer is to help citizens know more about ourselves and our city. Occasionally, that entails a basic primer in different functions of local government. Adding to our collective knowledge base can only help promote vigorous civic debate. With that in mind, the Lakewood Observer sat down with Acting Finance Director Jennifer Pae for a class in municipal finance- notes and bonds.

The best way to understand why notes and bonds are issued is to follow the timeline of the capital budget. The definition of a capital item has been determined by the Government Accounting Standards Board to include projects and equipment that have a cost of over $5,000 and have an expected life of over one year. An obvious example would be a police car. The vehicle costs about $25,000 and has a service life of five years. Another example would be the reconstruction of a street that could cost one million dollars and has a life of 30 years.

Department directors begin to assemble their capital budgets in June, based on year-to-date expenditures and the identification of capital needs for the upcoming year. Each item must meet existing criteria such as a new police car replacing one that has reached the end of its useful life. A director might want an entirely new and different piece of equipment. That director must justify its need. Large capital projects like street resurfacing are scheduled years in advance based on ongoing infrastructure assessments.

In August, the upcoming year's tax budget is prepared and submitted to the County. This certifies estimated revenues for the Finance Department, and sets the parameters for next year's budget. The Finance Department works with its bond counsel to determine what will be the size of the upcoming year's capital program based on what can be financed within the legal direct and indirect debt limits. The capital budget is then developed with various departments for submission during the January and February budget hearings with Council.

The City typically uses short-term financing, or bond anticipation notes, since it only knows the budgeted/estimated costs of capital projects at the time of issuance, which is based on the amounts in the annual capital budget. This short-term financing tool helps the City because if a project does not occur, or comes in over or under budget, it is not locked into long-term debt. The anticipation notes give the City time to make the purchases or have the engineering phases completed so only the true cost is captured when the bond is issued, and this has been done in a two-year cycle. By selling notes for capital expenditures the city can receive the total amount and thus regularize its purchasing. It also makes the money more liquid or available than waiting for tax receipts which can fluctuate.

In January budget hearings are held where the individual departments present, explain, and justify their budget requests to council. After these hearings, council adopts the annual budget which is passed in February or no later than March 15. Lakewood uses A.G. Edwards to underwrite or sell the notes. Observer readers may have a brokerage account with that firm and recognize as one of its offerings different state and municipal financial instruments.

Last Monday's council meeting in relation to the time-line was the third and final reading to approve issuance of notes. Proceeds of the note sale will arrive in the city account in about a month and then money will be available to pay for the capital expenditures. The notes are typically due the following year, plus interest. After a year the notes can be reissued, or "rolled over," or it might be decided that it is advantageous to issue a bond to replace the note. A bond typically has a maturity of five to thirty years.

That is the process by which capital purchases are made and financed, or paid for. It calls for a clear and common agreement between the administration and council as to the longer-term needs of the city. It requires expert advice from a skilled finance department along with advice from outside counsel. If you purchase a municipal bond fund, you are part of the cast that completes the play or production of municipal financing. That's how new police cars start to patrol city streets or how that paving machine shows up in front of your house.

The theme of finances was continued with a communication from council member Edward Fitzgerald (at large) who proposed a "rainy day fund" or a reserve fund that would be the first item of consideration in making the annual budget. Fitzgerald indicates that surpluses have declined in recent years and having a reserve would be prudent.

While not disputing the benefit of having a reserve or carry-over balance, finance director Pae would like to see that fund level determined within the overall budget process. "I am afraid it would tie the hands of the city if we started with a fixed number," Pae said. She added, "My experience tells me that a reserve fund, just like any other budget item, is dependent on the predicted situation of the City. Therefore, it is best determined within the budget process, not at the beginning."

Reported by Stan Austin- Lakewood Observer City Council Reporter
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Volume 2, Issue 11, Posted 6:06 AM, 05.26.06