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01-30-2007 Workshop )171 /7-Ag c/ie 4,, / Lj � CJ/7C PART VI FINANCE, BUDGETING, AND DEBT CHAPTER 21 : BUDGETING I. Review of revenue sources 3 II. Role and purpose of budgeting 4 III. The budget process 5 A. Budget responsibility 5 B. Budget format 5 1. Uniform chart of accounts 5 C. Budgeting techniques 6 1. Line item budgeting 7 2. Performance budgeting 7 3. Planned programming budget system 8 4. Zero based budgeting 8 5. Program performance budgeting 9 D. Estimating revenues 10 E. Estimating expenditures 10 F. Budget checklist for councils 11 G. Budget execution 12 IV. Long-term budget planning 13 A. Long-term financial plan 14 B. Capital improvement budgeting 14 C. Signs of financial stress 16 1. Long-term debt 16 2. Short-term debt 16 3. Total interest payments 16 4. Tax per capita 17 HANDBOOK FOR MINNESOTA CITIES 21:1 This chapter last revised 1/3/2007 5. Unfunded local pension or other liability 17 D. Use of financial indicators 17 E. Better budgeting guidelines 18 V. How this chapter applies to home rule charter cities 18 21:2 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CHAPTER 21 Chapter 21 Budgeting Minn.Stat.§275.065(truth-in- Although budgeting is the first and most essential ingredient of any efficient taxation law). system of administration,it has sometimes been a neglected,poorly implemented,and ignored fundamental of city government. All cities are Minn.Stat.;412.651.suhd.7 and required to prepare a proposed annual budget and submit it to the county Minn.Stat.§§412.701 to 412.731 auditor. Larger cities are required to hold a property tax hearing,and give (for Plan B cities). notice of the proposed budget adoption. Cities with the Plan B form of government also have additional budgeting requirements. Likewise,many home rule charter cities may have additional requirements in their charters. A budget is a comprehensive financial plan for a specific period of time. It outlines city activities and service levels,and contains estimates of probable costs and available revenues during the coming year. This chapter discusses some of the fundamentals of budgeting. More See League research memo complete discussions of the subject,including detailed directions on Guidelines for Preparing City budgeting procedures under the truth in taxation statutes,are discussed in Budgets(215b.1). the League research memo Guidelines for Preparing City Budgets(215b.1). This chapter covers the following topics: I. Review of revenue sources II. Role and purpose of budgeting III. Budget process IV. Long-term budget planning I. Review of revenue sources See Handbook,Chapter 20,for a Before preparing the annual budget,the council should inspect the total city discussion of revenue sources. revenue. First,the council should determine if the city is making the best use See also League research memo of its taxing powers. This includes deciding whether the tax rate,within any Guidelines/or Preparing City home rule charter tax levy limitations,if applicable,is adequate to meet the Budgets(215b.I). revenue needs of the city. A second advisable feature is a review of available intergovernmental grants and aids. Cities should seek to utilize these types of aids if this assistance is available. Finally,councils must give a regular, thorough study to the adequacy of other sources of city revenue. In particular,this review should attempt to answer three questions: HANDBOOK FOR MINNESOTA CITIES 21:3 This chapter last revised 1/3/2007 CHAPTER 21 • Are license fees and charges for city services adequate to cover the city's costs and expenses for such programs? • Should the city establish fees for other city service programs that are currently provided free of charge?When the city initiates a new program, such as a swimming pool,the council should decide whether or not to charge program users. It is always easier to begin charges when the city first provides the service,than it is to initiate fees at a later date. • Are the council and other boards properly managing the city's fund balances?A regular review is the only way to ensure maximum and equitable use of present revenue sources. The revenue side of the city financial statement is the chief concern of city councils. As governmental costs continue to increase,and as further demands for public services lead to new governmental programs,the strains on cities'pocketbooks have increased--particularly in small cities that often face decreasing or stagnant property values. The traditional way to meet this challenge has been to strive for greater efficiency in the present programs. See League research memo Guidelines for Preparing cr„ I I. Role and purpose of Budgets(215b.1). budgeting Budgeting is critical for city finance and administration. Proper budgeting can assist the council in the performance of five vital functions: • It is a vehicle through which the council can obtain estimates of the expected revenues for the coming year and plan city spending. • Once the council has allocated available money among the various city services,the budget can help control expenditures. • Because budget preparation involves necessary decisions about the use of money,it facilitates important decision-making. • At the conclusion of the budget year,the budget document can help the council evaluate the level and quality of city services provided during the year. • By measuring the level and quality of services citizens received for each dollar spent,the council can measure the efficiency of providing each service. In this way,a budget serves as a check on administrative operations. 21:4 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CHAPTER 21 See League research memo Guidelines lor Preparing city III. The budget process Budgets(215b.1). The basic steps involved in budgeting are:preparation;consideration, final adoption; and implementation of expenditure controls. Preparation consists of developing estimates of the necessary expenditures for the coming year, for each city activity,as well as developing the revenues available to pay for them. Consideration and final adoption of the budget constitutes the second stage of the process. Finally,the process ends as the expenditure controls established in the budget are implemented. A. Budget responsibility Ultimately,budgeting responsibility resides with the council. The council must accept or reject the budget,and insist upon standards of budget enforcement. Generally,cities delegate budget execution or enforcement to the chief executive or administrative officer of the city. Minn.Stat.§412.651,subd.7. The statutes impose these duties on the manager in Optional Plan B cities. Although the law does not require it,the responsibility should logically go to the clerk or administrator in cities operating under Plan A. See Handbook Chapter 1,Section In Standard Plan cities,the council might use either of two procedures. It n B.Types of cities b,government might delegate the task of coordinating departmental budget requests to a structure. council committee. It may make either this committee or an administrative officer responsible for budget execution. The council may also give the responsibility for both budget preparation and execution to the clerk,deputy clerk or other official responsible for the supervision of all city activities. B. Budget format See League research memo Two aspects of the budget format need consideration: the actual forms city Guidelines/or Preparing ing c,,, officials use in preparing the budget,and the classification of accounts or Budgets(215b.1). account titles for summarizing data. Sample budget forms are included in the League publication, Guidelines for Preparing City Budgets. 1. Uniform chart of accounts See OSA web site for a uniform The Office of the State Auditor sets a standard chart of accounts that may be chart of accounts, used for city budgeting. The"Classification of Accounts for Use by Fiscal Officers in Cities"can be used as the basis for most city budgets. Every city should consult this chart of accounts for maintaining financial records and for preparing the annual budget.Although cities may modify this chart the state auditor requires use of this format for the annual reports every city must file with the auditor's office. HANDBOOK FOR MINNESOTA CITIES 21:5 This chapter last revised 1/3/2007 CHAPTER 21 C. Budgeting techniques This discussion was taken in part Generally,the purpose of any budget is to serve as a policy document that from Management Policies in sets goals and tracks performance. This policy helps city managers and other Local Government Finance,3rd edition(ICMA),pp. 153-156.See decision-makers make choices about allocating resources among competing also,The Municipal Yearbook needs. Decision-makers must find the budgeting techniques that work best 1995(ICMA),pp.42-52. for their city. City councils face peculiar problems: • A city nearly always has limited resources due to rising costs and citizen demands. • City officials face uncertainty about which programs and what level of service to offer. • Cities problems with resource allocation. While cities cannot eliminate these problems,they can diminish their impact through sound budgeting. A budget system should outline priorities,conduct program evaluations,allow for management implementation and reporting, and provide sound financial resource planning and management. There are many types of budgeting techniques. Some of these are: line item, performance,planned programming budget systems(PPBS),zero based budgeting(ZBB),and program performance budgeting(PPB). An analysis of each functional area for each budget type indicates the advantages and disadvantages of each system. Generally,there are seven functional areas to consider: • Structure of the budget,or how it appears on paper. • Effectiveness of the budget for planning. To be effective,the budget must establish goals for future direction. • Evaluation--the budget must critically examine the past. • The budget must set forth the available resources. • An effective budget should establish program priorities. • Finally,the tool should aid management by helping monitor and evaluate performance. 21:6 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CITY OF SCANDIA CITY COUNCIL AGENDA Workshop Meeting Tuesday, January 30, 2007 7:00 p.m. to 9:00 p.m. 1. Call to Order 2. Roll Call 3. Training Video—Minnesota Open Meeting Law (approx. 30 minutes) 4. City Budget and Finances (approx. 45-60 minutes) a) Budget process/calendar b) 2006 budget outcomes/ fund balances c) 2007 budget overview d) Future budget/finance issues 5. Other Training Needs (approx. 15 minutes) a) Emergency Management—NIMS b) Other? 6. Adjournment CHAPTER 21 1. Line item budgeting The line item budget is the most traditional type of budgeting for cities. This approach divides the city into departments and divisions. For instance,the parks and recreation department prepares its own line item budget. The budget lays out a one-year financial plan,detailing each individual expense category. This type of budget allows evaluation on the basis of expenditure trends. The council can compare last year's expenditures with the current year's projected expenses. Resources to fund a line item budget are usually supplied from the general fund. Typically,capital expenditures and major improvements are separate. Perhaps the strongest feature of a line item budget is its high degree of control. The document details each line item expense. Management can monitor a line item budget by examining the financial reports. The degree of complexity of a line item budget varies according to a city's size and needs. 2. Performance budgeting Performance budgeting is an outgrowth of the line item budget. Its purpose is to help decision-makers analyze service production. A program budget, like a line item budget,has a structure consisting of departments and divisions. The performance budget includes a plan that defines the amount of service that can be produced for a given amount of resources. Evaluating a performance budget requires examining the amount of output produced at a defined workload based on some unit of production. To control the overall plan,this technique examines general expense categories and not individual line items. This tool helps set priorities and allows decision-making based on a more results-oriented approach. The performance budget is a useful managerial tool because it helps monitor workloads and can compare actual results against the plan. Performance budgeting assists in managerial decision-making. Its biggest shortcoming is that it only emphasizes output. Performance budgeting will show how much a department produced,but it will not show how well or poorly the department delivered the service. HANDBOOK FOR MINNESOTA CITIES 21:7 This chapter last revised 1/3/2007 CHAPTER 21 3. Planned programming budget system The planned programming budget system(PPBS)helps councils compare programs and the services provided. The planning technique sets very high and general goals. A typical goal is to improve the public health,safety,and welfare,as opposed to hiring three,new public safety officers. A major weakness of PPBS is that it is general rather than specific. Evaluation is a problem because PPBS lacks objectives against which to measure performance. Control is also difficult because it usually gives a bottom line figure,for example: $200,000 budgeted to improve public safety. Prioritizing is difficult since the information is so general;therefore, priorities tend to depend on value judgments. Finally,PPBS is of limited use for management analysis because it aims only at general annual goals. 4. Zero based budgeting The theory behind zero-based budgeting(ZBB)is to force each department to start from zero and justify its service. The structure of ZBB consists of decision units,which are not complete programs but pieces of programs. The ZBB method allows planning for incremental objectives starting from zero,but cities generally start at 80 percent below current funding because it is impossible to cut services altogether. Evaluation is on the basis of decision packages that define the resources needed to accomplish a given level of service. As with the other methods,it identifies only the general fund as a resource. Control through ZBB is similar to control in performance budgeting. The method identifies expense objectives,rather than just bottom line figures. The city establishes priorities through incremental rankings,forcing managers to rank priorities by stacking up decision packages to determine need. This approach can create situations where decision-makers must choose between service levels that are difficult to compare. For example, how can the need for five new swingsets be evaluated against the need for an additional police officer?ZBB can be useful because of the forced annual rankings. Councilmembers examine these rankings and finance the most important city services. The use of ZBB has several advantages: • First,ZBB encourages organizational assessment by forcing department heads to critically assess their departments. • Second,it allows for departmental involvement and,thus,more satisfied workers. 21:8 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CHAPTER 21 • Third,ZBB forces decision-makers to come up with alternative implementation techniques and establish objectives. However,there are some disadvantages to ZBB: • First,when using ZBB,the starting point is not zero,but probably about 80 percent below current funding due to statutory and contractual obligations. • Second,ZBB increases paperwork and administrative workloads because of its many decision packages. • Third,there is a possibility of misuse because each department manager decides exactly what goes into each decision package. • Fourth,annual reassessment of service rankings may be too frequent. In some situations,review is necessary only every three to five years. • Ranking of priorities is impractical in some cases. 5. Program performance budgeting Another budgeting technique consists of a mix of the favorable parts of other budgeting techniques.A program performance budget(PPB)has a structure that shows programs and departments. Typically,there is a broad service area,and a general and specific program description. This planning technique lists specific service targets that are well-defined goals for the city to accomplish. Evaluation is complete and provides information about the need for the service,the city's response,the cost,and the impact of each service or program. The PPB method differs from other budgeting methods in that it examines total resources,and not just the general fund. Control is strengthened because there is a summary of each program,along with a line item chart of accounts. The strongest factor is the PPB's ability to assist in setting priorities. The technique promotes rational choices by comparing a service- cost balance. The PPB is a useful managerial tool because it provides regular performance reports,as well as detailed financial reports. Program performance budgeting pleases the public and city officials because it provides an understandable document,and the service-cost balance shows the importance and cost of different services. The intent of a PPB is to provide an analysis of demand,workload, productivity,and effectiveness. HANDBOOK FOR MINNESOTA CITIES 21:9 This chapter last revised 1/3/2007 CHAPTER 21 • Demand(need)can be measured by factors such as applications and requests for a service,complaints received,population changes,and external deficient conditions. • Workload(response)is indicated by production of units,construction, maintenance,processing,people served,and time spent. • Productivity(cost)is measured by efficiency per unit. Ratios that PPB uses include dollars/units,units/dollars,time/units, or units/time. • Effectiveness(outcome)is measured by qualitative factors, responsiveness,customer satisfaction,problem reduction,and achievement of objectives. D. Estimating revenues See Handbook,Chapter 20,for The first step to estimating revenues is to identify and isolate the revenue discussion of sources of revenues. sources. The city should then look at each source and its past performance and future expectations,taking into account any trends or institutional changes that might disrupt the pattern. After estimating all other revenues and assessments,the city must determine the amount of money needed from property taxes. This sum should be an amount sufficient to balance the budget. The tax levy may not,of course, exceed any tax levy limitations for various funds,nor may it exceed any home rule charter levy limitations. No single formula is available for estimating city revenue. Each individual revenue estimate depends on individual,relevant factors. E. Estimating expenditures Cities must estimate several kinds of expenditures such as current expenses, See League research memos capital outlay expenditures,and debt redemption. Certain current expenses, Guidelines for Preparing Cirr sometimes called operating expenditures,consist of relatively fixed charges Budgets(215b.1)and Public and are comparatively easy to estimate. These are items such as rent,interest Purpose Evpendinures(215h2.1). expense,salaries,contractual costs,and other charges the city establishes by agreement that cannot be reduced during the budget year. Budgetary estimates of these costs can be on the basis of past experience, plus necessary increases based on inflation. It is generally only these increases,and not the basic costs themselves,that the budget officer or the council can alter. The only manner in which the city can change such costs is to discontinue the program,reduce the program's quality,or look for opportunity to provide the service cooperatively with another unit of government. 21:10 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CHAPTER 21 Other current expenses,sometimes called supplemental expenditures, are those related to new policy and administrative proposals, such as the costs of expanding an existing work program or starting a new city service. Supplemental expenditures entail important policy questions because they require the council's close scrutiny and careful consideration. Councils should ask for public opinion on such proposals during the development of the budget and at the Truth-in-Taxation public hearing. The distinction between basic and supplemental expenditures has a twofold importance in the budget process. It stresses that each city has a large burden of fixed costs that the council can manipulate to only a minor extent,and which cannot be substantially reduced without curtailing existing services. Also,it places special emphasis on the policy matters in the budget,and helps to relate the costs of government with the quality of government services. F. Budget checklist for councils Minn.Stat.§412.241. After the budget officer has prepared the preliminary budget,the council Minn.Stat.§275.065. must assume full responsibility for reviewing and approving it in its final form. In this review,the council should consider several questions: • Does the budget meet the needs of the community?Are there some services the city should reduce or eliminate to provide funds for new programs,for the expansion of existing programs,or in order to reduce the property tax levy? • Does the budget provide proper balance between activities,especially between more essential and less essential services? • Will the level of service funded in the budget ensure adequate standards of service? • Is the proposed budget sound and honest?Is the estimate of revenues realistic?Does it include all expenditures and conceivable contingencies?Does it contain a contingency appropriation for emergencies? • Is the budget economical,providing the greatest value per dollar? • Does the budget discharge a city's responsibility for the future?Is it consistent with the city plan and with other long-term policies for the development of the community? HANDBOOK FOR MINNESOTA CITIES 21:11 This chapter last revised 1/3/2007 CHAPTER 21 Minn Stat. 412.711. Whether or not a city is operating under Optional Plan B,approval of the budget in its final form should be as a resolution of the council. An ordinance is not necessary. A simple majority of the council will suffice to pass the resolution. The resolution,which Plan B cities must adopt by Oct. 1, should set forth the total amount budgeted for each purpose or fund. The resolution should also contain whatever detailed breakdown of expenditures the council deems necessary for adequate budget control. G. Budget execution The preparation of a budget is meaningless unless the council makes sure See Handbook Chapter i,Section city employees follow it. The controls needed for an adequate system of II B. Types ofciaes hi•government budget execution depend on the size of the city and its form of government. structure. Larger cities should use the system of allotments and encumbrance accounting,in which the money budgeted for any specific purpose(the police department,for example)is allocated to that purpose(the police department). Additionally,cities may wish to consider adopting a legal level of budgetary control based on categories of expenditures. This prevents exhaustion of the appropriation before the end of the calendar year,and places limits on the amount of expenditures that can be made by a department without seeking additional approval. There are two minimum controls every city should exercise,regardless of size.While responsibility for these controls belongs to the council,either an administrative officer responsible to the council or a council committee may implement the controls in actual practice. The first of these controls is a requirement that no expenditure should occur until a designated person has checked to see whether or not adequate funds are available. In other words,no expenditure occurs unless the council authorized the expenditure in the original or a subsequent budget resolution. Once a city adopts a budget,only the council should authorize any deviations. The second essential control is a budget reporting system. The council should require a monthly or quarterly report that details each budget item, the amount budgeted,the amount already spent,the amount not yet spent but committed for a particular budget item,and the budget amount that remains unspent and uncommitted. With this information,the council can scrutinize administrative operations,exercise greater control over future spending,and make any needed adjustments in the budget. 21:12 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CHAPTER 21 Minn.Stat.;412.731. Note: In a Plan B city,the council may only modify the budget by a four- fifths vote of all members of the council in the following situations: • On a resolution to reduce the sums appropriated for any purpose by the original budget resolution,or • On a resolution to authorize the transfer of sums from unencumbered balances of appropriations in the original budget. Minn.Stat.8 462.358.subd.2a The 2006 Legislature made changes to subdivision regulation law that could affect city budgets. Effective Aug. 1,2006,a city or town may require that an applicant seeking subdivision approval establish an escrow account or other financial security to reimburse the municipality for direct established costs relating to the review,approval,and inspection of the project. In addition,this law establishes a 30-day deadline for release and return of an applicant's financial security when the municipality's conditions for approval are met. Once an applicant vouches,by certified letter,that all of the city's subdivision requirements are met,the city has 30 days to release and return to the applicant any and all financial securities tied to the requirements—if the city does not release the financial security within 30 days,the city must pay any accrued interest to the applicant. If the city determines that the conditions for approval are not met by the applicant,the city has seven days from receipt of the certified letter to provide written notice to the applicant indicating which specific conditions are not met.A municipality must require a maintenance or performance bond from any subcontractor that has not yet met all the municipality's remaining requirements. A reporting system is the most important facet of any expenditure control program. Budget reports should include a summary of work accomplishments under the budgetary appropriation to-date. Only with this information in hand,can the council maintain an adequate check over the enforcement of the budget and the administrative activities of its subordinates. IV. Long-term budget planning While cities only prepare their budgets for the next 12 months,councils must be aware of the long-range financial problems and demands facing the city. HANDBOOK FOR MINNESOTA CITIES 21:13 This chapter last revised 1/3/2007 CHAPTER 21 A. Long-term financial plan In addition to the annual budget,a long-term city financial plan includes the following: Public services program--a long-range plan for all public services, estimating future needs for recreation, fire protection,police protection,and so on. The plan measures the objectives and needs for each city department, the standard of services,and the impact of such services on the annual operating budget. Capital improvement program--a major public infrastructure and planning tool includes a comprehensive list of projects and facilities the city needs or will need to carry out public services. (Public services, in this context,mean the basic facilities,services,and installations needed for the functioning of a city,including transportation,water, stormwater, wastewater plants and pipes,and so on.) Long-term revenue program--a tentative revenue policy that develops long-term plans for financing public services and capital improvements. Capital budget--this summarizes,on a five-or six-year period,the capital or money requirements for capital improvements or purchases. A capitol budget lists a priority for each anticipated investment in community facilities,and balances this with the availability of revenues. B. Capital improvement budgeting When cities prepare their budgets for the upcoming fiscal year,councils must be aware of the long-range financial problems and demands facing the city. In addition to the annual budget,a city would be well served to prepare a long-term financial plan that includes a capital improvement program, Capital budgeting is a list of needed capital improvements(sewer and water infrastructure,public buildings,equipment or land purchases),their order of priority,and the means of financing. The capital budget summarizes,for a five or six-year period,the capital or money requirements for capital improvements or purchases.A capital budget allows a city to build up a fund balance for capital improvement projects. Priorities in the capital budget program remain tentative and the council should review them annually. 21:14 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CHAPTER 21 A capital improvement plan often provides many advantages,including: • reducing or stabilizing the property tax rate; • preventing peaks and valleys in a city's debt retirement program; • allowing the city to move gradually to a pay-as-you-go program of capital expenditure financing; and • Helping to preserve the city credit rating by preventing an over- extension of credit and maintaining a credit reserve for emergencies at all times. Although capital budgeting may appear cumbersome and unwieldy to a small city,this is actually not the case.A capital budget provides protection to the small city,helping it avoid commitments and debts that would limit its ability to later pay for needed necessary,but costly, capital improvements. The responsibility for capital budgeting is usually the responsibility of the chief administrative officer,the clerk,clerk-administrator or city manager. Aiding this person should be the council,a committee of the council,the city planning commission,and the treasurer or chief fiscal officer. Capital budgeting usually involves the following procedures: The chief administrative officer makes up a priority list of anticipated capital improvements that the city will need within the next few years,usually five to 10 years. A careful evaluation follows with the elimination of those capital improvements that overlap or duplicate. The end result is a priority list of capital improvements on the basis of need, considering the community's present and future program of public services. The city then puts these improvement projects into a multiple-year capital improvement program on the basis of the established priority. When the council reviews it in light of the community's financial situation, it may find the city should defer some of the projects beyond the improvement period and other projects indefinitely. Following this,the budget officer recommends projects for the coming budget year. The recommendations,in effect,become the recommended program. Priorities in the capital budget program for the following years remain tentative,and the council should review them annually. At that time,the council should consider the addition of new projects and the deletion of others. HANDBOOK FOR MINNESOTA CITIES 21:15 This chapter last revised 1/3/2007 CHAPTER 21 Although capital budgeting may appear cumbersome and unwieldy for the small city,this is actually not the case. A capital budget provides protection to the small city,helping it avoid commitments and debts that would limit its ability to later finance more important capital improvements. C. Signs of financial stress Financial analysts do not agree on how to predict future city financial problems. Certain indicators are useful in measuring any city's financial stress position. Periodic evaluations should allow the council to take steps to head off any developing financial emergency. The five most effective financial indicators include long-term debt,short-term debt,total interest payments,tax per capita,and unfunded pension or other liabilies. 1. Long-term debt The amount of long-term debt varies greatly depending on the kind of community,its maturity,and the extent to which it has undertaken a consistent,long-term capital improvement program. However,cities may find it useful to compare their long-term outstanding debt with other communities of similar size and demographic traits. 2. Short-term debt The dollar amount of short-term debt outstanding is usually less significant than the year-to-year trend of that debt. Most Minnesota cities must,by law, pay off each issue of tax or revenue anticipation debt by the end of the city's fiscal year. Such tax anticipation certificates or warrants,which the city retires by taxes and does not refinance by another short-term issue,present no real cause for alarm. However, if a city makes extensive purchases on open account,uses temporary improvement financing extensively,or uses any other obligations that force it to go into the money market at a particular time,consequences can be severe. When the only possible means of paying off such debt is to go into the money market,default is inevitable if the market rate is above the permissible statutory rate or,in the bond raters' and buyers'judgment,the city's financial position is so shaky as to make the city's bonds a bad investment. 3. Total interest payments See Handbook chapter 24,Debt This index will not completely be a function of the outstanding debt. The and Bo, mg, mix of long-and short-term obligations,the timing of the various offerings, and the bond raters' and buyers'perceptions of the soundness of the community all influence this indicator. 21:16 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 CHAPTER 21 4. Tax per capita The tax per capita(or tax levied by the city on a per person basis)of all the overlapping local governmental units,determines the amount of capacity to respond to a financial emergency. If the local tax rate in a city is high in comparison to other cities,and particularly in those cities in the same region, any increase will likely result in a loss of tax base,resulting in a decrease in tax revenue. This can have a negative long-term effect on the ability of a city to maintain financial stability and current service levels. In such circumstances,there is little opportunity to meet local increased revenue demands. 5. Unfunded local pension or other liability See the League's HR Reference Cities may need to budget to cover any shortfalls in the number of local Manual,Chapter 4.See also pension plans,such as the pension plans for a volunteer firefighter relief League research memo Guidelines for Preparing City Budges association. There are also specific reporting requirements and actuarial (215b.1). surveys that must be done. Minn.Stat.;69.772,subd.6. Typically,cities contribute a set amount to the volunteer firefighter's pension fund. However,if the fire relief association changes their bylaws it See Guidelines for Preparing Cin can have a significant impact on the relief association's pension benefits. In Budgets.section c.2 Volunteer most cases,the city council must approve these changes before they can take Firefiehters'Relief Associations. effect. The council should carefully consider the possible financial impact of such changes. The council should have the city clerk or other qualified financial expert review the financial implications before ratifying the changes. Failure to properly calculate the special fund requirements could cause the special fund to run short. This could mean the city would have to substantially increase its tax levy for the relief association. D. Use of financial indicators Cities should use these five indicators(long-term debt,short-term debt,total interest payments,tax per capita,and unfunded local pension or other liability)for comparing one community with other communities of similar size and maturity. For example,a suburb that has sprung from largely undeveloped land in the last 20 years should not compare itself to an old, free-standing community with a stable population. HANDBOOK FOR MINNESOTA CITIES 21:17 This chapter last revised 1/3/2007 CHAPTER 21 Comparisons should provide a good basis for evaluating the local financial health of a city. A high standing in any one of the five areas should not be particularly alarming if the other areas are low. However,even a single, high-standing index may provide reason to look carefully at that area,in order to see if changes might improve the city's prospects for economic stability. See OSA web site(OSA Reports: Statistical information for the purpose of making these comparisons is Listing of Government Information available in reports of the state auditor on revenues,expenditures,and debt Reports) . of Minnesota cities. Information on pension funding is available from the Legislative Commission on Pensions and Retirement. E. Better budgeting guidelines The following six-steps are guidelines toward better budgeting. In processing their annual budgets,cities should: • Coordinate budgeting and accounting procedures. • Devise good working papers for the preparation and execution of the budget. • Prepare a budget calendar. • Create an annual budget that considers all city operations from a long- range approach rather than a piecemeal,short-range approach. • Extend the budget-making process to include citizens. • Establish effective methods to control expenditures in accordance with the budget plan. Budgeting,both as a long-term financial guide and as a short-term,annual plan of operation is an indispensable part of city administration. V. How this chapter applies to home rule charter cities Some city charters contain limitations or standards on how the council should develop the budget. 21:18 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 ,2W1?-7- C-fiveS 2 , Minn,Stat.§645.08151. For most other public bodies,a majority of its qualified members constitutes a quorum. B. Open meeting law 1. Purpose of the open meeting law St.Cloud Newspapers,Inc.v. The open meeting law requires that meetings of public bodies must Dist. 742 Community Schools, 332 N.W.2d 1(Minn. 1983). generally be open to the public. It serves three vital purposes: • Prohibits actions from being taken at a secret meeting where the interested public cannot be fully informed of the decisions of public bodies or detect improper influences. • Ensures the public's right to be informed. • Gives the public an opportunity to present its views. 2. Groups governed by the open meeting law Minn.Stat.*§ 13D.01,subd. 1; Under the Minnesota open meeting law,all city council meetings and 465.719,subd.9. executive sessions must be open to the public,with only a few exceptions. The open meeting law also requires that meetings of any committee, subcommittee,board,department or commission of the city council be open to the public. The governing bodies of local public pension plans, housing and redevelopment authorities,economic development authorities, and city-created corporations are subject to the open meeting law. The Minnesota Supreme Court has held,however,that the governing body of a Southern Minnesota Municipal municipal power agency,created under Minn. Stat. §§ 453.51-453.62,is Power Agencv r.Borne,578 N.W.2d 362(Minn. 19981. not subject to the open meeting law because the Legislature granted these agencies authority to conduct their affairs as private corporations. 3. Gatherings governed by the open meeting law Moberg v.Indep.Sch.Dist.No. The open meeting law does not define the term"meeting."The Minnesota 281,336 N.W.2d 510(Minn. Supreme Court,however,has ruled that under the open meeting law, 1983);St.Cloud Newspapers, Inc.v.Dist. 742 Community meetings are gatherings where a quorum or more of the council or other Schools,332 N.W.2d 1(Mine• governing body or of a committee,board,department or commission of the 1983). council or other governing body,are present,and at which the members intentionally discuss,decide or receive information as a group on issues relating to the official business of that body. HANDBOOK FOR MINNESOTA CITIES 7:11 This chapter last revised 1/3/2007 CHAPTER 7 As a result,the open meeting law does not generally apply in situations where less than a quorum of the council are involved. However, serial meetings in groups of less than a quorum that are held in order to avoid open-meeting-law requirements may be found to violate the law,depending on the specific facts. a. Interviews Mankato Free Press r.City o/ A 1997 Minnesota Court of Appeals' decision considered a situation where North Mankato,563 N.W.2d 291 (Minn.Ct.App. 1997). individual council members conducted separate interviews of candidates for a city position. The district court found that no"meeting"of the council had occurred because there was never a quorum of the council present. The court of appeals sent the decision back to the district court for a determination of whether the council members had conducted the interview process in a serial fashion to avoid open-meeting-law requirements. Mankato Free Press v.Cut of On remand,the district court found that the individual interviews were not North Mankato,Apo,No.. , 677 done to avoid open-meeting-law requirements. This decision was also (Minn.Ct.App.Dec. 15, 1998) (unpublished opinion). appealed,and the court of appeals,in a 1998 unpublished decision, affirmed the district court's decision.Cities that want to use this type of interview process with job applicants should first consult their city attorney. b. Informational meetings St.Cloud Newspapers,Inc.v. The Minnesota Supreme Court has held that informational seminars about Dist.N.W.2d Community Schools, school board business,3usness whichthe entire board attends 32 1(Minn.1983). > >must be noticed and open to the public. As a result,it appears that any scheduled gatherings of a quorum of a public body must have proper notice and be open,whether or not the public body takes or contemplates taking action. This includes meetings where members receive information that may influence later decisions,but excludes chance or social gatherings. A quorum of members of a public body,however, cannot discuss or receive information on official business in any setting under the guise of a private social gathering. 7:12 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 Thuma v.Kroschel,506 N.W.2d Under certain circumstances,it may be possible for a quorum of the city la(Minn.Ct.App. 1993). council to attend a meeting of another public body without violating the A G.Op.63a-5(Aug.28. (996). open meeting law even though notice of a special council meeting is not provided. For example,when persons constituting a quorum of a city council attended a meeting of the city's planning commission,the Minnesota Court of Appeals ruled that there was a violation of the open meeting law—not because of the council members' attendance at the meeting—but because the council members conducted public business in conjunction with that meeting. Based on this decision,the attorney general has advised that mere attendance by additional council members at a meeting of a council committee,held in compliance with the open meeting law,would not constitute a special council meeting requiring separate notice. The attorney general advised,however,that the additional council members should not participate in committee discussions or deliberations absent a separate notice. Compare St.Cloud Newspapers, It is not clear whether the participation of a city council in a training Schools,Inc.v.D 332t. N.42 Community ro am sponsored bythe League of Minnesota Cities to developvarious N.W.2d 1(Minn. program P � 1983)with A.G.Op.63a-5 skills would be defined as a meeting under the open meeting law. The (Feb.5, 1975). determining factor may be whether or not the program includes discussions of specific matters relating to an individual city's business. c. Technology Moberg v.Indep.Sch.Dist.No. It is not entirely clear how the open meeting law applies to technology, 281 336 510(Minn.achsuch as e-mail or telephone calls. Although the law does not specifically 1983);See League researchP g P Y memo,Meetings of City address the use of e-mail and other technology,it is likely that any form of Councils(140B.I),for more communication between council members or members of other public information. bodies could violate the open meeting law under certain circumstances. See LMCIT risk management As a result,city councils and other public bodies should not use e-mail, memo,Electronic co,nn„mications Bete een telephone calls,and other technology to communicate with other members Council Members. of the public body when both of the following circumstances exits: • When a quorum of the council or public body will be contacted regarding the same matter. • When city businesses is being discussed. 4. Open meeting exceptions The open meeting law is designed to favor public access. Therefore,the few exceptions that do exist are carefully limited to avoid abuse. HANDBOOK FOR MINNESOTA CITIES 7:13 This chapter last revised 1/3/2007 CHAPTER 7 Minn.Stat.§§ I3D.01,subd.3; Before closing a meeting under any of the following exceptions,the public 13D.04,subd.5;See The Free Dress co,,,,r, o/Blue Earth. body must state on the record the specific grounds that permit the meeting 677 N.W.2d 471 (Minn.Ct. to be closed and describe the subject to be discussed. The same notice App.20041(holding that the requirements that apply to open meetings also apply to closed meetings. county's statement that it was closing a meeting under the attorney-client privilege to discuss"pending litigation"did not satisfy the requirement of describing the subject to be discussed at the closed meeting). a. Labor negotiations Minn.Stat.§ I3D.03,subd. I The city council may,by majority vote in a public meeting,decide to hold a Ib1. closed meeting to consider its strategy for labor negotiations,including negotiation strategies or developments,or discussion of labor-negotiation proposals. The council must announce the time and place of the closed meeting at the public meeting. Minn.Stat.* 13D.03,subds. 1 After the closed meeting, a written record of all members of the city Id),2. council and all other people present must be available to the public. The council must tape-record the proceedings at city expense,and preserve the tape for two years after signing the contract. The tape-recording must be available to the public after all labor contracts are signed for the current budget period. Minn.Stat.§ 13D.03,subd.3. If someone claims the council conducted public business other than labor negotiations at the closed meeting,a court must privately review the recording of the meeting. If the court finds the law was not violated,the action must be dismissed and the recording sealed and preserved. If the court determines a violation of the open meeting law may exist,the recording may be introduced at trial in its entirety,subject to any protective orders requested by either party and deemed appropriate by the court. b. Not-public data Minn.Stat.§ 13D.05,subd.2. The general rule is that meetings cannot be closed to discuss data that are not public under the Government Data Practices Act. A meeting must be closed,however,if certain not-public data is discussed. For example,any portion of a meeting must be closed if expressly required by law or if any of the following types of not-public data are discussed: • Data that would identify victims or reporters of criminal sexual conduct,domestic abuse,or maltreatment of minors or vulnerable adults. 7:14 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 • Active investigative data created by a law enforcement agency,or internal-affairs data relating to allegations of law enforcement personnel misconduct. • Educational,health,medical,welfare or mental-health data that are not public data. Minn.Stat. I3D.05,subd. 1 Other not-public data may be discussed at an open meeting without liability il'1't`l or penalty if the disclosure relates to a matter within the scope of the public body's authority,and is reasonably necessary to conduct the business or agenda item before the public body. The public body,however,should make reasonable efforts to protect the data from disclosure. Data discussed at an open meeting retains its original classification,however,a record of the meeting shall be public. c. Misconduct allegations or charges Minn.Stat.§ 13D.05,subd.2 A public body must close one or more meetings for"preliminary 1bi' consideration"of allegations or charges of misconduct against an individual subject to its authority. If the members conclude discipline of any nature may be warranted,further meetings or hearings relating to the specific charges or allegations that are held after that conclusion is reached must be open. This type of meeting must be open at the request of the individual who is the subject of the meeting. d. Performance evaluations Minn.Stat.§ 13D.05,subd.3 A public body may close a meeting to evaluate the performance of an (a);and See"Employee Discipline individual who is subject to its authority. publicbody The must identifythe and the Open Meeting Law," Minnesota Cities,Sept.1997 for individual to be evaluated prior to closing the meeting. At its next open more information. meeting,the public body shall summarize its conclusions regarding the evaluation. This type of meeting must be open at the request of the individual who is the subject of the meeting. e. Attorney-client privilege Minn.Stat.§ 13D.05,subd.3 A meeting may be closed if permitted by the attorney-client privilege. ]b). Meetings between a governmental body and its attorney to discuss active or Brainerd Daily Dispatch,PLC threatened litigation mayonlybe closed,under the attorney-client privilege, v.Dehen,693 N.W.2d 435 g Y P g (Minn.Ct.App.2005);Prior when a balancing of the purposes served by the attorney-client privilege Lake American v.Mader,642 against those served by the open meeting law dictates the need for absolute N.W.2d Northwest 729 Mica.2002); confidentiality. The need for absolute confidentialityshould relate to Northwest Publications,Inc.v. City of St.Paul,435 N.W.2d 64 litigation strategy,and will usually arise only after a substantive decision (Minn.Ct.App. 1989); on the underlying matter has already been made. This privilege may not be Minneapolis Star&Tribune v. Housing and Redevelopment abused to suppress public observations of the decision-making process,and Authority in and for the City of does not include situations where the council will be receiving general legal Minneapolis,251 N.W.2d 620 opinions and advice on the strengths and weaknesses of a proposed (1976). p p p underlying action that may give rise to future litigation. HANDBOOK FOR MINNESOTA CITIES 7:15 This chapter last revised 1/3/2007 CHAPTER 7 f. Purchase or sale of real or personal property Minn.Stat.§ 13D.05,subd.3 A public body may close a meeting to: 1c1. • Determine the asking price for real or personal property to be sold by the public body. See Minn.Stat.§ 13.44,subd.3. • Review confidential or nonpublic appraisal data. • Develop or consider offers or counteroffers for the purchase or sale of real or personal property. Minn.Stat.§ 13D.05,subd.3 Before holding a closed meeting under this exception,the public body must 1c1 identify on the record the particular real or personal property that is the subject of the closed meeting. The meeting must be tape-recorded. The recording must be preserved for eight years and must be made available to the public after all real or personal property discussed at the meeting has been purchased or sold or after the public body has abandoned the purchase or sale. The real or personal property that is being discussed must be identified on the tape.A list of members and all other persons present at the closed meeting must be made available to the public after the closed meeting. The actual purchase or sale of the real or personal property must be approved at an open meeting,and the purchase or sale price is public data. g. Security reports Minn.Stat.§ 13D.05,subd.3 Meetings may be closed to receive security briefings and reports,to discuss ]dl. issues related to security systems,to discuss emergency-response procedures and to discuss security deficiencies in or recommendations regarding public services,infrastructure,and facilities,if disclosure of the information would pose a danger to public safety or compromise security procedures or responses. Financial issues related to security matters must be discussed and all related financial decisions must be made at an open meeting. Before closing a meeting under this exception,the public body must when describing the subject to be discussed,refer to the facilities, systems,procedures,services,or infrastructures to be considered during the closed meeting. The closed meeting must be tape-recorded,and the recording must be preserved for at least four years. 5. Penalties Minn.Stat.§ I3D.06,subd. I. Any person who intentionally violates the open meeting law is subject to personal liability in the form of a civil penalty of up to$300 for a single Claude v.Collins,518 N.W.2d occurrence. The public body may not pay the penalty. A court may take 836(Minn. 1994). into account a council member's time and experience in office to determine the amount of the civil penalty. 7:16 HANDBOOK FOR MINNESOTA CITIES This chapter last revised 1/3/2007 Minn.Stat. 13D.06,suhd,2. An action to enforce this penalty may be brought by any person in any court of competent jurisdiction where the administrative office of the governing body is located. Minn.Stat. 13D.06,suhd.4; The court may also award reasonable costs, disbursements,and attorney See LMCIT Risk Management memo,memo,Open fees of up to$13,000 to any party in an action alleging a violation of the Aferi,tg La„ DcJ',tse co,rrage, open meeting law. The court may award costs and attorney fees to a for information about insurance defendant only if the action is found to be frivolous and without merit. A coverage for open-meeting-law violations. public body may pay any costs,disbursements or attorney fees incurred by or awarded against any of its members. Minn.stilt.§ 13D.06,suhd.4 No monetary penalties or attorney fees may be awarded against a member (d);Coo/well I. A9urrar.No. C6-95-2436(Minn.Ct.App. of a public body unless the court finds there was a specific intent to violate Aug 6, 1996)(unpublished the open meeting law. decision). Minn.Stat.` 13D.06,subd.3 If a person is found to have intentionally violated the open meeting law in (a). three or more actions involving the same governing body,that person must forfeit any further right to serve on the governing body or in any other capacity with the public body for a period of time equal to the term of office the person was serving. Minn.Stat.§ 13D.06. If a court finds a separate,third violation that is unrelated to the previous suhd.3(h). violations,it must declare the position vacant and notify the appointing authority or clerk of the governing body. As soon as practicable,the appointing authority or governing body shall fill the position as in the case of any other vacancy. Minn.cons`.art. VIII. 5. Under the Minnesota Constitution,the Legislature may provide for the Jacobsen v.Nagel,255 Minn. removal of public officials for malfeasance or nonfeasance. To constitute 300,96 N.W.2d 569(Minn. malfeasance or nonfeasance,a public official's conduct must affect the 1959). performance of official duties and must relate to something of a substantial nature directly affecting the rights and interests of the public. Jacobsen v.Nagel,255 Minn. "Malfeasance"refers to evil conduct or an illegal deed. "Nonfeasance"is 195 );Claude v 569(Minn. described as neglect or refusal,without sufficient excuse,to perform what 1959);Claude v.Collins,518 g N.W.2d 836(Minn.1994). is a public officer's legal duty to perform. More likely than not,a violation of the open meeting law would be in the nature of nonfeasance. Although good faith does not nullify an open-meeting-law violation,good faith is relevant in determining whether a violation amounts to nonfeasance. Sullivan v.Credit River Minnesota courts have generally refused to invalidate the actions taken at Township,299 Minn. 170,217 an improperlyclosed meeting. 502(Minn.1974);In re D&A Truck Line,Inc.,524 N.W.2d 1(Minn.Ct.App. 1994);Lac Oui Parle-)'cllour Bank N"atershed Dist v. If ollsehlagcr.No.C6-96-1023 (Minn.Ct.App.Nov. 12. 1996) (unpublished decision). HANDBOOK FOR MINNESOTA CITIES 7:17 This chapter last revised 1/3/2007 TECH WINDOW Open MeetingLaw and Electronic Communications By Ann Gergen -mail correspondence can be an Another is through written correspon- dence,or conference calls. These members participate in a listsery or any officials to violate the Minnesota scenarios would create concern if the chatroom sort of forum.Because these open meeting law(OML),Minn. group discussed city business. distribution lists may include a quorum Stat.§13D. Cities should imple- ment E-mail makes a serial meeting easier of the council, one councihnember's policies related to how and by allowing council or committee comments will be viewed by other f when councilmembers or corn- members to forward messages. Imagine members. If the topic has to do with mittee members are allowed to one councilmember e-mailing another city business and another councilmember communicate through e-mail or other to suggest the pros and cons of a particular replies to the listserv,it could prove electronic means as a way to avoid city decision.The recipient forwards the problematic under the OML. Again, violating the law and incurring penalties. e-mail,along with his or her comments the city might consider a"no reply" The basic requirement of the OML and interpretations.Even if the last rule,or perhaps have council-members is that meetings of at least a quorum of councilmember to receive the e-mail send ideas for postings or responses to the city council or one of its committees doesn't reply,the three members have the clerk or administrator to manage. to discuss city business must be publicized discussed city business outside a public Remember,too,that official city and open to the public,subject to a few forum.A violation could be found committees are subject to the same exceptions.A primary purpose of the where serial e-mailing is used to reach open meeting requirements and should law is to ensure deliberations about city a decision. be similarly educated about correct business take place publicly,followed Many cities are moving toward e-mail use. by a final and public decision. electronic meeting packets,often sent Regardless of precautions,there may The law applies to any discussion via e-mail attachment. This one-way be times when councilmembers find about city business, not just voting or distribution of information is fine in themselves accused of violating the OML, official actions, and to any gathering of terms of the OML. City officials should perhaps by unintentionally engaging in a quorum of the council or committee. start to get concerned,though,when one of these sorts of conversations. One In most cities,a quorum is three or one or more councilmembers"reply to way to diffuse concern is to immediately more council or committee members. all"to respond to the content of the release copies of all e-mail correspon- Violating the OML carries with it materials,or otherwise begin an e-mail dence to anyone who wants to see it. penalties,including personal liability discussion about the packet.This can While this doesn't negate the possible for up to$300 per occurrence and begin to look a lot like non-public violation,it shows good faith and lack forfeiture of office for officials who discussion of city business. of specific intent to violate the law. intentionally violate the law three One suggestion is that councilmembers E-mail exchanges tend to be treated times. Reasonable costs and attorney never communicate to one-another less formally than other written cone- fees can also be awarded if the court using e-mail,but instead treat e-mail as spondence or in-person meetings,but finds specific intent to violate the law. a way to receive information from the create the same sorts of open meeting The OML has a number of tricky clerk or administrator. If a council- concerns. It's important to educate aspects—not the least of which results member has information to share via city elected officials about the OML from increasing reliance on e-mail e-mail,he or she might send it to the requirements and provide guidelines communication between council or clerk and ask for it to be distributed by for e-mail exchanges. If you'd like committee members. the clerk to everyone else (by e-mail additional information, check with your It's easy to imagine where a quorum or in paper form). Using the clerk for city attorney or contact the League. might gather—coffee at the local cafe, information distribution is probably a pre- or post-meeting discussions,or a safer alternative than councilmembers community celebration are all common communicating directly by e-mail. spots for councilmembers to meet.There If councilmembers are engaged in are also some not-so-obvious ways a e-mail discussions,it's wise to do so quorum might meet,for instance in a only between two members.A"no Ann Gergen is technology services director serial meeting. Councilmember A talks forwarding"rule might be a good way with the League of Minnesota Cities. to councilmember B,B talks to to ensure the OML isn't unintentionally Phone: (651) 281-1291. E-mail: councilmember C,and C talks to A. violated through e-mail. agergen@lmnc.org. OCTOBER 2004 MINNESOTA CITIES 25