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This paper is part 4 of a united 6 document set. This one is the only one that specifically delineates studying financial considerations of the private sector as it relates to the local government, i.e. taxes, bonds, etc...Is it possible to review this paper for accuracy, regarding some of the financial terms and how they are used?
Financial Overview Paper
Explain the difference between expenditures, expenses, and encumbrances
Capitalized accounts are the basis of assets. Expenditures are used to acquire or upgrade physical assets such as property, buildings or equipment. When a government entity spends to add towards the value of a fixed asset, it is considered expenditure. Activity-based costs incur during the month the expense took place. Once an asset is used, it is classified as a capital or depreciable expense. Expenditures basically are the things government spends money on.
Historically, expenditures in the public sector are based on taxation. The federal government taxes corporations and income. The state derives income from sales taxes, while local governments tax property for the bulk of its money supporting infrastructure and services. The size of government is measured by expenditures from a) purchase of goods and services; b) transfers of income; and c) interest payments on borrowed funds. Itemized expenditures are referred to as a budget. Budgets occur during fiscal years. Article I, Section 9 of the Constitution rules that budgets be published annually. (Rosen 2004) Education, public welfare, and highways constitute the largest amount of state and local expenditure.
Municipalities are encumbered by limits to the title of property. Individuals, corporations and entities are entitled to the use of property through leasing or ownership and required to pay annual sums for the use (i.e. property tax). Reserved fund balances are used to separate funds for encumbrances. Funds for inventory, for example, cannot be appropriated and are 'set-aside' for long-term budgeted circumstances. Unfulfilled contracts and purchase orders are committed to by governments to purchase goods and services authorized by budgets.
Describe the government's capital project, general, and proprietary funds.
Efficiency questions whether municipalities achieve their objectives. Questions within this sphere ask if the government is spending money on the right things. Consequences are not necessarily unintended, because externalities (the cost from transactions that external parties receive) impact the decision maker and all those affected by a decision. Collective or economic utility result from 'internalization of the costs and benefits however not feasible or the costs uncertain.' (Wikipedia 2007) The residents of upper middle class Grosse Pointe (GP) continually upgrade their neighborhoods and business district. An enhanced presence of public safety, elimination of convenience stores, bars and gas stations with extended hours appeases community fears of crime, drugs and prostitution that abutting Detroit battles frequently. Hampered cooperation and magnification of perception both shelter and isolate this local area. I work for Staples, one of the few commercially, public, viable businesses in the area that is not a supermarket or fast food restaurant frequented by many in GP and accessible to Detroiters across the border, across the street.
The capital project fund for the city accounts for financial resources used to acquire or construct major capital facilities. Recently the city has financed improvements to the local schools and built a new municipal library. Other fund types include general funds and proprietary funds. General funds account for unrestricted resources not applicable to other funds, while proprietary funds refer to income-determination funds resulting from business activities of a government (capital enterprise) and its internal services (cost reimbursable). Use of the full accrual basis of accounting records these expenses as paid not when they take place, decreasing the value of capital assets of the government- yet not accounted for as cash expenses, their value as an asset or liability is realized in the long-term. Proprietary funds do not take into account the purchase, use of and bills resulting from, expendable finances. Basically it f=refers to a city's 'spending money'. Earned from investment, grants and procurement.
Several funds account for resources and activities of government in fund accounting. The restrictions placed from Congress, grantors and private groups often 'restrict' these funds for specialized uses. In addition, the general fund holds money in reserve to pay for utility expenses, or earmarks it with the donor's wishes (school donation). Modified accrual accounting balances books in a short-term budgeting window. Major municipal functions part of the general fund (streets, public safety, and administration) is static. 'The nature of organizations divides funds into categories of resource restriction not functional operations.' (Granow 2004) Unlike businesses, capital assets are recorded as expense when they occur, not as cash income. Unrestricted revenues and resources, investments, and received taxes are recorded like cash. Government establishes a minimum amount of funds to comply with statutes and efficiently operate.
Capital project funds are restricted, arising from bond proceeds. Citizens pass bond initiatives that finance road improvements or build new facilities. Capital asset cost of construction, labor, materials saved for future use are legally obligated to be invested because they are mandated to be spent. Unused expenses from other areas can also divert to this fund, a politically expedient choice reinforcing commitment to planned activities. Proprietary funds consist of enterprise and internal service funds. Like private business, depreciation and financial performance are measured in a full accrual base. Everyone benefits from utility service, bus lines and revenue bonds that can restrict payments and interests from that fund! This ensures that the governments will not shutdown even if the department has to cutback. In 1996 the federal government did just that, because of a lapse in fund of Continuing Resolutions and filibustering over the budget. Michigan Governor Granholm plans to shut down selected departments in May following the failure of the Legislature to enact an across the board 2% services tax to alleviate a $386 million deficit. Internal service funds provide services between departments and bill government for their continued use. Possibly Staples sells office supplies to departments in GP. It may be recorded through measurement focus as a separate account, realized as revenue in one department, or revealed as an expense in another. Purchasing department and general funds would work in tandem in this kind of arrangement to manage the amount spent for procurement and adjust budgets for additional expenses, such as purchase of extended warranties and service plans. Itemized budgets at the department level include a major proprietary fund, unique to the city and based on its location. Next to Lake St. Clair, the city pumps its own water, maintains upkeep of sewer facilities, but has the waste treated from the Water and Sewerage Department of Detroit. Recently hikes of up to 9.25% were imposed on suburbs, and the city capped its rates from $50 to $60 per cubic foot per household. 'The city accounts for water and sewer operations, municipal parking and the city marina. These major funds provide a large sum for city operations within these departments and provide detailed information from which to derive revenue expenses.' (City of GP 2005)
What are the main revenue sources? and
Describe the budgetary levels. Are items budgeted at the department level, program level, other?
Main revenue sources of the GP budget are property taxes (69%); grants and contributions (10%); state revenues (7%); and charges (7%). Charges for services to other funds like the marina, and water extraction from the lake filtered and pumped to other GP named towns provide a bulk of money to city general funds. Overall, major revenue comes from an amalgamation of general funds appropriated by department. Department level itemization of budget is done in principle, according to the minutes of the GP city Council. However, by 2005 a city audit itemized and detailed fiduciary expenses also. Business-type activities increased city net assets by $183,861 in FY 2005 designed to build cash reserve for anticipated future capital expenditures. Concern over property values reflected in 75% of the city revenue coming from property tax assessments. A more useful measure of the funds assesses city finances based on the inflow, outflow and the balance of spendable resources. Nearly equal to the unreserved balance of 2 million dollars is the designated balance of the same amount reserved for restricted spending. Higher costs in salaries, overtime for public safety (council seeking sheriff patrols in area to offset higher costs, now cities share patrols among the GP's with assistance at times from Detroit patrols) planning costs and legal fees increased expenditures in FY 2005.
Describe the long-range spending and short-range spending plans.
Which departments/programs receive the largest appropriations?
Spending plans of both long and short range are relative to the ongoing improvements. Capital asset funds of 20 million are invested in land, buildings, machinery and equipment. Long term spending is offset by a 4 million obligation to pay building authority and general obligation bonds backed by the full faith and credit of the federal government. Yet deferred revenue in governmental funds prevents capital assets of nearly 28 million from paying debt toward accumulated depreciation. Eventually the excess of revenues over expenditures resulted in a fund balance of approximately $315,000. Over the long term the government will provide funds to pay into a street fund. State appropriation and privatization saved the city almost $500,000 for the upkeep of roads. The city's environmental presence is maximized by its lake frontage, marina and dedication to forestry programs. This dedication helps improve the reliability of related departments and public use utilities that are affected such as recreation, lighting, phone and cable services, public works, health, animal control and others. A significant cost is absorbed by depreciation of these same services like use of water, maintenance of parks, the marina and parking systems. Zebra mussels and lake sturgeon are exhausted in the ballast of ships and eat up the active wildlife in the lake, and natural habitat. Drinking boaters distress the peaceful enjoyment of the resource, and continued pollution from Michigan factories externalizes the problem, but the citizens internalize the problems and make them their own, giving the area some of the clearest water near mechanized industry. Its location near Harsens Island, Peche Island, and Mt. Clemens make its citizens feel they are part of Macomb County rather than Detroit in regional ways. Short term solutions favor and anticipate the redevelopment of the Village shopping district, funding for recreation and payment towards fiduciary funds (pensions) of nearly $31 million. Most local governments invest this money in securities and mutual funds over the long term.
Among the mix of funds, long term obligations are reported as liabilities. The debt issues as other sources, discounts as other income, while the debt service expenditures express issuance costs. The tentative plans that are subject to change (non spent money) and restricted funds are part of fund equity that legally has to be reported. Thus, short term investment, operating expense and appropriation historically is kept low in order to break even. This is because of the inherent nature of the city to 'profit' from the services it provides and the investment of its citizens back into the community.
Explain how public policy translates into the government's short-range and long-range spending plans.
Public policy translates into the city's short and long range plans by realizing a goal for the future, committing both government and residents to improve the area. Major issues of land use in a majority residential community weigh against its largest landowner (Bon Secours Hospital) who pays no property tax. Expansion of the Village shopping district has succumbed to a stronger mix of businesses like the CVS that has brought a drive thru pharmacy, but lost the Jacobson's Department Store to condo developers. City plans to also build a multi deck parking structure for shoppers, following the trends set in SEMCOG reports and city planning committees. Parking egress, abuttal of major county arteries and changing demographics of a growing older community pose challenges to the mature, pedestrian friendly community keen on retaining its way of life. A majority of services remain private and useful to the population, yet antagonisms have developed over entrenchment strategies such as cut off access for Detroiters to drive through their communities, lack of access to parks by non residents, elimination of stores that sell alcohol near the border, and racial profiling from police. SEMCOG notes in the GP Master Plan of a decline in school age children and a growing number of seniors in the region by 2030. 'These changes (in socioeconomic conditions) tend to be cyclical. All...service providers must be aware and prepared to respond. Schools may be used as senior facilities..." (GP Master Plan 2005) In the city two thirds of homes are owner occupied and median income is nearly $80,000. Neighboring Harper Woods, like the other Grosse Pointes, shares use of the school system. Another bordering suburb, Eastpointe, changed its name from East Detroit to avoid the 'stigma' of being labeled Detroit. It did not change much for their property values either. In fact recent trends are showing that Detroit itself it burgeoning at the borders with homes, businesses and development that naturally go where the money is, holding on even though some 30,000 people leave the big city yearly. Grosse Pointe Park is nearest the most distressed areas bordering the city, and has voted Democratic for John Kerry, almost voted in a State Senator from Highland Park by 3 votes and elected Tim Killeen county commissioner. This is in an area that enacted tougher residency requirements following the fallout of Detroit schools, and intended to convert a whole area of two family flats into single family homes because the impression of too many cars on the streets would disrupt the character and charm of the city. Retail districts in the area adhere to 9-5 hours except for Staples and most if not all the businesses, are quiet doctor offices, insurance companies, stamp shops, fabric stores, antique dealers and the like. But distinguishing itself from the urban environment will require upkeep, maintenance, expenses and revenues to deal with crumbling infrastructure built with 20th century methods. The Detroit Edison numbering system that provides housing numbers is set in stone. The telephone numbers keep adding new area codes, bus services will have to get downtown people to the suburbs to work where the jobs are, and people with money in the big city are closing in rapidly making the borders almost transparent. It is this transparency that will either divide or conquer.
Bibliography
Rosen (2004). Chapter 1, Getting Started. Retrieved from eResource week 1.
Rosenbloom (2004). Chapter 6. Budgeting and Finance. Retrieved from eResource week 2.
Externalities. (2007) Retrieved from http://en.wikipedia.org
Granow (2004) Fund Accounting. Chapter 2. Retrieved from eResource week 3.
Rosen (2004). Core Concepts of Government and Not for Profit Accounting Backmatter. Chapter 1e. Retrieved from eResource week 1.
City of Grosse Pointe MI (2005) Financial Statements and Supplementary Information. Audit by Rehmann Robson CPA, as reported to the Michigan Department of Treasury Auditing Procedures Report. Retrieved from http://www.822100Grosse Pointe City 20060130_149306_7.pdf.
SEMCOG (Southeast Michigan Council of Governments) (2001, revised 2007) 2030 Regional Development Forecast for Southeast Michigan.
The City of Grosse Pointe Comprehensive Master Plan. (2006) Retrieved from http://www.grossepointemi.us/f/master_plan.pdf
Arthurs, J. City Clerk. Grosse Pointe City Council Meeting Minutes. (May 15, 2006) Retrieved from http://www.gmach.citymax.com/f/Minutes_May_15_06.pdf
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