Director of Finance Summer Fleming on May 1 presented financing scenarios to City Council to receive direction on preparing the plan.
While the plan cannot perfectly predict the future state of finances for the city, the modeling helps city leadership plan a baseline for future budget processes that can be modified when those budgets are created.
“This plan is not a forecast, it is intended to provide outcomes given certain sets of assumptions, and it is an integral part of the budgeting process,” Fleming said.
City Council did not take action on a specific model presented, but did recommend further exploring scenarios to see changes to project funding and tax rates.
Breaking it down
Projections for governmental services expenditures in 2030 show public safety having the most expenses, representing 47% while public works is expected to make up 27%.
Fleming explained that the baseline model presented covered finances that the city knows will happen, such as wages, debt services, inflationary growth and projected revenue.
The tax rate in this baseline model is set at the No New Revenue Rate, which is the rate in which the city would bring in the same tax revenue as the prior year. This rate is the current fiscal year budget used.
Alongside the baseline model, two scenarios were presented, one keeping city reserves at 50%, while the other reduces reserves to 30%.
Fair Oaks Ranch policy is to keep reserves at 50%, which represents around six months of operating expenses. Fleming explained that the recommended reserve for cities is more than two months of operating expenses, according to the Government Finance Officers Association.
In the two scenarios, the tax rate does increase above the No New Revenue Rate, resulting in a slight increase in taxes paid by property owners year over year.
What they’re saying
Council member Keith Rhoden said no matter the scenario chosen, the city should prioritize adjusting the tax rate to cover expenses, then use unallocated fund balance for capital improvement or drainage projects.
In all presented scenarios, the expenses outweigh the revenue, utilizing unallocated fund balance to cover those costs in exchange of keeping the tax rate as low as possible.
In a scenario where unallocated or reserve funds were not used to offset the tax rate, the rate would be increased for residents.
Covering drainage and other capital projects with the cash flow could lead to a reduction in the number of Certificates of Obligation or other debt the city would need to complete those projects.
Council member Laura Koerner said property tax is the primary revenue for the source, so disasters like fires or tornadoes could cause complications for the city budget.
“Since we are not diversified in our revenue source, we are very susceptible to a natural disaster and the impact to our city,” she said.
Since the city policy is to have a reserve of 50%, any reduction in reserve policy would require a resolution approval from City Council.
What’s next?
With the direction from City Council to try a model where reserves were used to fund projects while the tax rate balanced revenue and expenses, the plan will be revisited at a future City Council meeting.
City Manager Scott Huizenga said the goal is to have the plan approved by June 5, which is when the city would need to submit a notice of intent to issue debt and prepare for the next budget cycle.
