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Redmond’s Financial Strategy A six-year long-range financial strategy A joint work product of the Mayor and City Council of the City of Redmond Washington Revision Number 5 Originally Developed November 2005 Presented Mayor John Marchione Adopted April 17, 2018 Angela Birney, Council President David Carson, Council Vice President Hank Margeson, Chair – Finance, Administration and Communications Committee ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 2 I P a g e Foreword 1 What is a long-range financial strategy? The long-range financial strategy is the framework, which the City of Redmond uses to make budget decisions over future budget cycles. It encourages a deeper understanding of the City of Redmond service commitments to our citizens and our plan to meet those commitments in a sustainable and responsible manner. How does the development of this financial strategy help us? The City has shifted the manner in which we think about the budget. This shift moved us from a process that focuses on incremental cost to one that focuses on results. Our community understands what it expects from its city and our budget should directly focus on these expectations. Why did we change the budgeting paradigm? Local government fiscal environments are always changing. The traditional budget model, budgeting for cost, leads to a spending profile that attempts to sustain existing programs and services – without the financial resources to support those services or the mechanisms to easily explain the need for new resources. Cities struggle to sustain programs when revenues do not keep pace with costs. A budget that first asks what results our community desires, stratifies those results in order of importance, and then allocates the limited resources across those results is preferable to the traditional budget for cost approach. In this way, regardless of the ability to fund existing programs, a results oriented approach will help insure that the results that matter most are funded. What are the guiding philosophies for this long-range financial strategy? 1. Recognize that there is a limited amount of resources that any community wants to invest in its governmental services. 2. Acknowledge the relationships between taxes, the economics of businesses and individuals, perceptions, and the services delivered to the community. 3. Continue to shift the City of Redmond’s financial planning towards service priorities and results in support of citizen expectations. 4. Define the priorities for services to be delivered from the perspective of the service recipient. With these issues and philosophies in mind, the Redmond City Council in partnership with the Mayor and his Directors Team, has developed this long-range financial strategy. It is intended to be a working framework document and subject to frequent discussion with at least biennial review. 1This forward is based in part on that which was included in the “Navigating the Rapids” documenting the Council’s Long Range Financial Strategy dated November 2005. For more information on this previous work, see Appendix B. ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 3 I P a g e Table of Contents Foreword 2 Purpose and Background 5 Our Vision for the Community and its Government 5 Why we developed (and maintain) a Long Range Financial Strategy 5 A brief history of the Long Range Financial Strategy 6 The Philosophy 7 Balancing the financial burden on the community with the service 7 Being intentional in how the revenues are structured 7 The Strategy 9 Community based budgeting – the context for our approach 9 The “Price of Government” 9 Revenue Philosophy 10 Long‐range financial planning 11 Financial planning goals 11 Reserve level targets 12 Budgeting by Priorities 12 “Buying Results” 13 The “Value Proposition” (performance 14 Financial and Performance Reporting 14 Capital Investments 15 Maintaining the prior investments 15 The “Capital Facilities Plan” as an element of the Comprehensive Plan 15 The “Capital Investment Strategy” 15 The “Capital Improvement Plan” 16 Tools 17 Financial policies 17 The budget process 17 Available resources (revenues) to cities in Washington State 19 Development Fees 19 Business & Occupation Tax – Gross Receipts Tax 19 Business License Fee 19 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 4 I P a g e The Business Transportation Tax * 19 Utility Taxes 19 Property Tax – Council Authority 19 Property Tax – Voted 20 Parks Bond Measure 20 Transportation Bond Measure 20 Other User Fees 20 Additional Options 20 Other City plans (with a relationship to the financial strategy) 23 Appendix 24 1. A more detailed history of the LRFS 24 2. How the Price of Government is determined 25 Glossary – of select terms 27 Index 28 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 5 I P a g e Purpose and Background Our Vision for the Community and its Government Redmond city government is committed to engaging with the community as we strive to understand its needs and interests. The work of the City is not done in isolation. This work occurs in the context of the role of a city as described by the State of Washington. The Growth Management Act (GMA)2 clarifies that cities are urban service providers. The GMA calls for the setting of growth targets for cities as well as a planning model for providing services to meet resulting community needs and interests. The adopted growth targets for Redmond call for 44% increase in population by 2030. Of that increase, 67% is slated to occur in the urban centers of the Downtown and Overlake areas. Sixty percent of new commercial space is expected to occur in the urban centers as well. As a result, our vision needs to preserve the character of our community while accommodating the growth that that is slated to occur. The vision is to realize Redmond’s future as a city with two vibrant urban centers, where connected neighbors are preserved, and provide high quality responsive services in partnership with an engaged community. To fulfill our vision, the City’s infrastructure investments reinforce the urban centers, Downtown and Overlake, as the primary growth areas and preserve the character of Redmond’s residential neighborhoods. Light rail will be arriving at stations in the Overlake and Downtown Urban Centers in 2023 and 2024, respectively, generating additional growth. Also anchored by a new light rail station, the new local center of Marymoor Village is further anticipated to add over 1,400 dwelling units and one million square feet of new office space by 2030. Development of the Downtown urban center is progressing, with thousands of new housing units having come online and many hundreds more programmed over the next several years, complemented by strategic investments in new parks and reconfiguration of Redmond Way and Cleveland Street. Planning efforts are currently underway to refine design standards, zoning district regulations, parking management, and wellhead protection in the Downtown. Overlake is thoughtfully evolving into the envisioned urban center. Major proposed redevelopment of the Microsoft campus will generate new opportunities and new challenges for the city’s infrastructure and services as more than 8,000 new jobs are located in the area. Other large projects like Esterra Park, for example, have seen this largely suburban area start to take on a more urban feel, replete with needs for large-scale infrastructure investments much like the recently-completed regional stormwater vaults and a the proposed pedestrian bridge over State Route 520. These improvements are in addition to major infrastructure investments by other entities, like Microsoft and Sound Transit. The Comprehensive Plan articulates the vision for growth in our centers that is supported by state law, regional planning approaches, several functional area plans, and numerous project-specific efforts that implement our vision. Why we developed (and maintain) a Long Range Financial Strategy Cities operate in a continuum of intended financial stress. By design, cities are challenged to meet a wide range of community needs and desires while utilizing as little of the community’s resources as possible. 2 Chapter 36.70A RCW ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 6 I P a g e This stress is evidenced by the on-going debates over what services and levels of those services are really needed by the community and how much should they have to pay (in taxes and in other forms) for their city government to provide the service. A budget is the political process where these policy issues get debated and resolved. In order to accomplish this important policy responsibility the City can look to “best practices” for guidance in how to do it well. The Government Finance Officers Association is a recognized leader in such matters. Their best practice, “Long Term Financial Planning”3 states that “financial planning is the process of aligning financial capacity with long-term service objectives” (emphasis added). To state it another way, providing sustainable, long-term services requires sound financial planning. The intent of the LRFS is to insure smooth, uninterrupted delivery of services into the future. The LRFS will evaluate the goals of the city’s financial planning, the tools available to the City to do this work and results of how we intend to use these tools to manage this important responsibility. A brief history of the Long Range Financial Strategy Redmond’s LRFS got its start in 2005 when some members of the Redmond City Council felt the need to clarify policy guidance for future budget development. At the time, the subtitle of the LRFS was “Navigating the Rapids” referring to the challenges of keeping the city’s fiscal ship afloat (and avoid the known problem areas ahead). There was significant concern that fiscal stress was going to be severe for the next biennial budget. The Council wanted to prepare for the upcoming budget process, in part, by having the policy discussions about level of service and amounts of needed community revenue early. One aspect of this approach was to advise the Mayor (who is charged with proposing a preliminary budget from which the Council’s work would start) of the policy parameters that Council preferred. While the initial effort accomplished the goal of clarifying policy intent, it did not result in some of the desired organizational change. The budget process was largely consistent with past efforts (focusing on incremental costs and not adequately addressing community outcomes). The clarification of policy intent was more instrumental in the 2008 budget process (for the 2009/2010 biennial budget). It was then that many of the tools and processes cited in the current LRFS got their start. Another outcome from the development of the LRFS was a clarification of the revenue options available to the City and when the Council might find it advisable to make changes to the revenue profile. Examples of resulting changes include submitting a property tax levy lid lift to the voters (passed in 2007) and other changes in taxes and fees, which were at the Council’s discretion. A more complete history of the LRFS and the changes in the revenue profile can be found in Appendix A. 3 Long‐Term Financial Planning ‐ Best Practice, approved by GFOA's Executive Board: February 2008 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 7 I P a g e The Philosophy Balancing the financial burden on the community with the service The City of Redmond believes the city exists to “deliver our community’s priorities in support of a dynamic Redmond where all can live, work, play and invest4.” In order to excel at this mission, the city requires resources. These resources come primarily in the form of taxes and user fees (representing 22% and 27% of total resources respectively). Balancing the amount of resources required with the value of the services provided is an important policy responsibility of the Redmond City Council. In their book, “The Price of Government, Getting the Results We Need in an Age of Permanent Fiscal Crisis”5, David Osborne and Peter Hutchinson suggest that finding the right “price of government” is the policy art-form of balancing revenue requirements with real community needs. They observe that if the “price” is too high then communities will object to the high tax and fee rates. If the rates, and resulting resources, are too low then the services being provided will likely not meet community expectations. Finding this right “price of government” is a key policy obligation of the city. Also note, Osborne and Hutchinson include the phrase “an Age of Permanent Fiscal Crisis” in the title of the book. This is recognition of the ongoing challenge of making the case for local government resources with a skeptical public. The tension between finding the right “price” and addressing the right levels of service for community priorities is healthy but difficult. While there may (or may not) be a “permanent fiscal crisis”, the City of Redmond recognizes the importance of building strong credibility with our community with regard to spending community resources on (priority) results that matter to them. Being intentional in how the revenues are structured The “Price” is made up of all the resources available to the city, not just taxes. From a citizen or business taxpayer perspective, there is no clear distinction between many of the different taxes or fees collected by the city. They all add up to represent the financial burden on the community for the provision of services. In one respect, the City has very limited options for its tax related revenues. Within the constraints of state law (and some federal laws), the city is confronted with several limitations and procedural requirements as to how it can raise tax revenues. User fees (such as utility rates or park user fees) generally experience fewer imposed constraints by other levels of government. Additionally, the uses of certain taxes and fee revenues are restricted to certain types of services to be provided by the city. For example, water rate revenues can only be used for those costs associated with providing water service to the community. A tax related example is the use of taxes on transient lodging (hotel / motel tax) is restricted to enhancing the attractiveness of additional transient lodging activity. In a different respect however, the Council has significant discretion in aligning the levels of taxes and fees with the corresponding level of city services. For example, if the city had a very high level of water service (and corresponding high water rates), it could choose to forgo future increases in water rates (or even lower the water rates) and lower the amount or quality of water related services to the community. This revenue capacity (from a community wide perspective) could then be shifted to an area where higher 4 City of Redmond mission statement 5 “The Price of Government”, Osborne & Hutchinson, 2004 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 8 I P a g e service levels were desired. This ability to manage the levels of service among city services by adjusting the corresponding tax and fee rates is an important consideration in structuring city revenues. The following overly simplified illustration will clarify this point. A historic relationship exists between the different revenue sources and their appropriate uses. After some community input and policy discussion, council can adjust the sources of revenues in response to the desired mix of services and levels of service as illustrated on the right. Existing Relationship Preferred Relationship Resources Uses Resources Uses In addition, the City does not work in a vacuum of governmental service providers. Other levels and types of governmental agencies are also assessing taxes and fees of different types. King County, the Lake Washington School District, King County Library are just a few of the other jurisdictions that levy some type of fee or tax on Redmond residents and businesses. While the City of Redmond does not yield its responsibility to address the community services that the city provides, it is aware of how these different layers of governance interact. The overall governmental burden on our community is important to understand. The City may choose to interact with these other governments with regard to the overall mix of tax / fee burden and addressing community needs. This illustration portrays the property tax burden on a typical Redmond resident as of the 2017 tax year. Property tax Sales tax Utility rates Park user fees Public Safety Park and Recreation Services Utility Services Property tax Sales tax Utility rates Park user fees Public Safety Park and Recreation Services Utility Services The revenue and services profile on the left illustrates that park user fees pay part of the costs of the park and recreation services. The balance is provided by taxes (general revenues). On the right, if we want to maintain the “price” but grow parks and recreation services we could reduce utility rates (and service levels for utilities) thus creating capacity for revenue that is appropriate to spend on enhanced park and recreation services. Additional property tax Lower utility rates Higher park service / lower utility service Total Annual Property Tax for Redmond Residence ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 9 I P a g e The Strategy Community based budgeting – the context for our approach The City provides services to the Redmond community. State law requires some City services, while other services are essential in an urban environment. Additionally, the City provides optional services that are important to its residents and businesses. In all cases, the services provided by the City should be of value to the community. The City of Redmond uses a community based budgeting approach that validates the use of public resources to meet community needs and interests. It is likely that not all elements of the community will agree on the right set of services to be provided by the City. Therefore, the City should strive to find the right mix and level of services that address the majority of community’s interests. A community-based approach relies on good feedback from the community about what it wants from its City government. The City of Redmond will work to maintain strong feedback from the community, in a variety of forms, as the basis for its spending choices. The resulting financial plans should illustrate how this community input results in the spending choices made by the City. The “Price of Government” Osborne and Hutchinson devote a significant amount of space in their book to finding the right “Price of Government”. As previously described, the right “price” is essential to maintaining support for the level of services provided to the community. To arrive at a “price of government” they divide all the governments’ revenues by “community income” (per-capita income times the population). The resulting ratio reflects how much of the community income is invested by that community in city services. In Redmond, we have analyzed the “price” going back to 1997. The chart depicts that ratio over time broken into three different types of city revenues. Each layer is additive such that the total “price” is typically between 5% and 6% of community income. A few exceptions occur in the form of large one-time contributions or spikes in the economy as described in the chart. The analysis of the “price” looks primarily at the City’s own history rather than at comparisons or external benchmarks. Each city is unique and attempts to compare among cities are frustrated by these unique characteristics. A sense of the total burden of City revenue on the Redmond community helps the “how much revenue is enough” policy discussion that every city council should have. In Redmond, the City Council has evaluated this data and determined that the “right price of Redmond City government is between 5% and 5.5% of community income. Note that the analysis above projects the “price” out into the future. The up-tick in the price in 2016 is attributable to one-time revenues (real estate excise tax and impact fees) from the development surge the ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 10 I P a g e City is experiencing. Other drivers such as the anticipated Microsoft development agreement for the redevelopment of the company’s campus will also figure into the price. A sense of the anticipated burden on the Redmond community along with alignment to longer-term financial planning helps the City prepare for economic changes. The goal is to create stability for the community (as to the “price”) and for the City as it works to provide financially sustainable services and amenities. Revenue Philosophy In addition to established financial policies related to City revenues, the Council has developed the following philosophy related to City revenues. These philosophies are intrinsic in Council deliberations related to City revenues and are a foundation for establishing future and revised fiscal / revenue policy. • Assess and maintain fair, equitable and stable sources of revenue Given the parameters in State law, the City needs to look for stable and progressive tax streams in the context of the price of government. • Prioritize less volatile revenues sources over revenues more sensitive to changes in the economic climate, such as sales tax and sales tax on construction. Issues of volatility should be reflected in the decision making process, whereas sources with a low volatility rating are prioritized. Core services should be provided via revenue sources with lower volatility. • The “total” tax bill should be considered when increasing rates When assessing total tax impacts to taxpayers, increases in non-general fund rates need to be included in the total cost. Additionally, broader tax and utility fee obligations imposed by all taxing jurisdictions should be considered, recognizing that Redmond has little control of these assessments. • Limits to Taxation / The right “Price of Government” for residents and businesses There is an acknowledgement that there is a limit to total revenues available to operate Redmond city government. The residents are pressured by an increasing cost of living from many factors, plus increases in taxes from other levels of government. There should be an appropriate and community-accepted ‘price of government’ expressed as a percentage of personal income6. Impact of price of government falling too low. There should be a clear “value proposition” which enables evaluation of the benefit received for being located in Redmond versus the cost of doing business in Redmond. There is a risk that increasing the cost of doing business in Redmond will cause businesses to move or shift some of their functions to other locations. If tax and fee increases are too significant, the result could cause a net decrease in revenue. • Voters should be asked to approve tax increases when the proposed increase is above historical rates It is the policy of the City of Redmond to fully include Redmond taxpayers in deliberations over service level options and tax rate increases, particularly where tax rates approach the limits of the acceptable price of the services the City intends to provide with those tax revenues. To achieve high value for the dollars invested, apply a more regional approach by leveraging internal dollars with those available from other governments and organizations through grants and partnerships. 6 See Appendix for how the “price of government” is determined ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 11 I P a g e Long-range financial planning The GFOA’s best practice cited earlier calls for governments to plan “five to ten years into the future”. In their book, Osborne and Hutchinson recommend a “five by five” where five essential numbers are forecasted five years into the future (the five essential numbers are beginning fund balance, revenues, expenditures, net difference and ending fund balance). The City of Redmond has been developing a long- range financial plan for several years now. This plan is the basis for illustrating the interconnection between revenues, anticipated expenditures (to maintain current services) and the financial burden on the community (the “price”). The most recent long-range financial plan is contained in the 2015-2016 adopted budget and is illustrated below: Consistent with our adherence to other elements found in “The Price of Government” the City uses a “five by six” approach in its long-range financial plan. The five essential numbers over a period of six years (as five years does not coincide with a biennial budget). The long-range financial plan illustrates a common principle known as “the crossing lines”. In local government, the incremental costs of doing business typically exceed the anticipated incremental revenues. Budgets balance these “gaps” every budget cycle (every two years here in Redmond). This is a common phenomenon. Financial planning goals Managing the long-term financial well-being of the city is enhanced by consistent focus on certain goals. These include stability in resources, equity in the financial burden imposed on our community, sustainability of core programs and services and others. City of Redmond, WA Long Range Financial Plan – 2017‐2018 Budget ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 12 I P a g e To meet these goals the City has adopted financial policies. These policies are found in each biennial budget (which is located on the City’s web page – www.redmond.gov/budget The City will review and update these financial policies at the beginning of each biennial budget planning period. It is the intent of the City that the combination of the strategies contained herein and the financial policies result in stable, long-term predictability of the City’s revenue (tax) burden, services and financial well- being. Reserve level targets One way the City addresses the financial and service goals above is to preserve resources for unexpected circumstances. These resources, and their respective target levels, are found in the City’s financial policies. Establishing these reserves is a GFOA best practice7.The City’s financial policies call for a 12.5% reserve for general operations as well as various reserve levels for the utilities, capital equipment replacement and statutorily required reserve funds to guarantee debt service. These policies are reviewed during each budget cycle. The focus of the appropriate level of reserves is to provide for the continuity of operations where potential disruptions can come from economic seasons of distress to natural calamities. Budgeting by Priorities The City uses a “Budgeting by Priorities” (BP) type budget. This is also known as “Budgeting for Outcomes”. It is very similar as the methodology described in “The Price of Government”. In Redmond, we use BP for several different reasons, including: Focusing the budget on community priorities (not City departments) – Cities typically budget based on last year’s funding levels (incremental budgeting) and around the construct of how they are organized (departments) rather than community needs (priorities). At the City of Redmond, several community meetings in 2008 formed the basis for the six priority areas, which are the focus of the City’s budget planning. These priority areas are depicted in the chart below (and illustrated in each budget) in a way that indicates the amount of community resources invested into each priority area. The six priorities are revalidated with each budget cycle through the annual citizens survey (in 2017 79% agreed that these remain the right priorities). The City conducts community outreach each budget cycle to also gather feedback about what types of investments are desired within each of the priority areas. Citywide Collaboration – Most city budgets are a “win / lose” proposition. Departments are motivated to “win” more of the budget resources so that they can 7 Appropriate Level of Unrestricted Fund Balance in the General Fund - Best Practice, approved by GFOA's Executive Board: September 2015 Funding by Priority 2017-2018 Budget ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 13 I P a g e deliver more service. (The fact that departments are motivated to deliver more service is a positive testament to the desire for public servants to provide service). However, this does not always result in the best overall outcome for the city. Those that “play the budget game” better than others do tend to get the resources. Redmond uses BP to encourage a citywide approach to building “the best budget for the City”. In this way, we ask participants to think about the City as a whole and not just their program, service or department. We also ask staff to think about the budget from the community’s perspective. This is unusual in local government budgeting as well. In fact, budget offers (proposals) encourage interdepartmental cooperation to deliver value to taxpayers. Increases the Level of Financial Awareness – As described below, the City uses “Results Teams” to help develop recommendations to the mayor for the preliminary budget. These teams are made up of staff and community members who would otherwise not be exposed to the issues described in this financial strategy. The increased level of financial awareness helps sensitize City staff to the importance of using community resources as wisely and carefully as we can. Value Delivered – As described next, BP is focused on value. Most budgets describe what is being spent. Few budgets describe what value is being delivered. Buying Results BP focuses on results. Briefly, staff and community teams (known as “Results Teams”) aligned by priority describe the types of results being sought. These teams then evaluate budget proposals (called “offers” as in offer to deliver results) as to how well they illustrate the right results being delivered. The offers include a description of who benefits (the customer), what is being delivered, and why it is important to deliver this service to this customer (what for who and why). All community resources approved for spending on community services and amenities has this type of explanation. These offers are then scrutinized by the Results Teams as to how well they describe the benefits of funding the proposed service in the context of the priority. The Results Team provides candid feedback to the sponsors of the offers as well as eventually a recommendation to the mayor as to which offers to fund and at what level. The mayor has the ultimate responsibility to propose a balanced preliminary budget to the City Council8. The City Council has the ultimate responsibility to adopt a balanced budget for the ensuing biennium9. 8 RCW 35.33.055 9 RCW 35.33.075 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 14 I P a g e The “Value Proposition” (performance measurement) In order to ensure the result being delivered is of the right quantity and quality, the City will use a robust performance measurement program, integrated with the budget offers. The “value proposition” has been defined as value= (quality + quantity) / cost. For example, if the cost is constrained, typically the quality or quantity of a service will also be constrained. The value of a budget proposal is illustrated within each offer by the use of a logic model. The model illustrates what the desired result of the offer is (on the right) and the intermediate results (or outcomes) need to achieve that result (progressively from the left). These models describe service increments generally. The model is reinforced with data that portrays the service increment (to the extent possible, in some cases a representative element of the service increment is portrayed by the data). The City uses these logic models to evaluate the value being delivered to the community by each offer within the budget. Redmond aspires to use the analysis of the data contained in the models in an on- going assessment of the value actually being delivered to the community. To this end, the City seeks to develop the means to adjust service delivery methods and quantities to meet the needs and expectations of the Redmond community. Financial and Performance Reporting The City has a long tradition of transparency and accountability. Redmond publishes its financial results each month on its web site in a timely fashion. The City provides an in-person review of financial results to the City Council each quarter (see www.redmond.gov/finance )and provides all its vendor payments (whether paid through check, wire transfer, or credit card) on its “open data portal” (see http://data.redmond.gov The City has provided performance reporting as well. Redmond staff aspire to provide performance reporting as thoroughly and frequently as it does financial reports – as appropriate (many of the performance indicators do not change much from month to month). Reports will be focused on a citywide performance dashboard or measures illustrating the desired results at the overall priority level. Beyond that, reports will reflect the many indicators of successful results and/or gaps illustrated in the budget offers. ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 15 I P a g e Capital Investments One of the more important choices the city makes is which capital facilities to invest in. While the City provides services and programs, it also provides public facilities (such as parks and recreation centers), transportation systems (roads, sidewalks, trails and bikeways), utility infrastructure (water, wastewater and surface water systems), and other amenities. Once created, these facilities need to be maintained in a safe manner and preserved to maximize the investment value. This section of the LRFS describes how the City will manages its capital investment responsibility. Maintaining the prior investments One of the top priorities of the City is to maintain the facilities that have already been developed. In the feedback from our community described above, the City consistently hears that maintaining the value of prior investments is very important to the Redmond community. In fact, “maintaining what we have” is consistently the top concern of our community with regard to capital investments. As a result, Redmond conducted a facilities strategic plan cataloging the maintenance needs of all city facilities. The strategic plan will be an integral part of investments in the future. The “Capital Facilities Plan” as an element of the Comprehensive Plan The Comprehensive Plan is a comprehensive land use policy described earlier in this strategy. This plan interprets the obligations of the City within the context of the state Growth Management Act (GMA)10. The plan adopted by the City describes how the City will manage the growth and provide the required amenities of a city under the GFMA. An important element of the Comprehensive Plan is the permitted land uses around the City and how those land uses are to be enabled (and even prosper) by City investments in necessary facilities. To make this connection between planned land uses and development of a city and the needed capital investments each Comprehensive Plan is required to include a “Capital Facilities Plan” (CFP)11. The CFP is required to include An inventory of existing capital facilities owned by public entities, including locations and capacities; a forecast of the future needs for such capital facilities; proposed locations and capacities of expanded or new capital facilities; at least a six-year plan that will finance such capital facilities within projected funding capacities including anticipated resources; and a requirement to reassess the planned land uses if funding falls short of meeting needs. The CFP is to include a utilities, transportation, and park and recreation facilities. The City of Redmond embraces the opportunity presented by the GMA in both its management of the overall city planning as well as the CFP. Consistency with the Comprehensive Plan is the primary criteria for the development of the City’s Capital Facilities Plan. The “Capital Investment Strategy” (add context to the CIS discussion) To realize the potential of the role that capital facilities can play in encouraging the type of development desired by the City and documented in the Comprehensive Plan, the City has created a “Capital Investment Strategy” (CIS). The CIS describes the long-term projects, costs, sequence, forecasted revenues, and strategic actions needed to deliver Redmond’s long-term vision. While the Capital Facilities Plan under the GMA calls for a six-year plan of capital investments, the City of Redmond believes that looking six years into the future is not sufficient. The CIS planning horizon mirrors the Comprehensive Plan (through 2030). As a result, the CIS includes assessment of needed projects through 10 Growth Management Act – RCW 36.70A 11 CFP required under RCW 36.70A.070 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 16 I P a g e 2030 to provide for the needed public facilities to support the land uses provided for under the Comprehensive Plan. The CIS is the capital investment planning context for City budgets and is used to provide the necessary analysis to construct the six-year Capital Investment Program (CIP). This element of the CIS will comply with state law regarding identification of the planned capital investments, including location and funding. The “Capital Improvement Plan” The City biennial budget will include a Capital Improvement Plan. This plan, once approved by City Council as part of the budget, represents the anticipated capital investments for the next six years. The plan will be balanced with anticipated resources. In order to be included in the CIP, a project must cost $50,000 or more, have a useful life of five years or more, be a cost directly related to a project and/or be a planning effort that results in a specific capital improvement. The first two years of planned investments (in the form of either projects or programs) will be included in the appropriation ordinance approving the budget. As a result, these projects approved for development with no further council approval required prior to the expenditure of funds. The projects can take a variety of forms. For instance, a project may be a study that is approved for further consideration of options prior to commencement of a capital investment. Additionally, a project may be approved for design, but not yet approved for construction. The CIP will clearly illustrate level of approval for each project. ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 17 I P a g e Tools Financial policies As described above, the adoption of financial policies is a “best practice” recommended by the GFOA. The GFOA recommends that the policies include the following topics: 1. General fund reserves. Policies governing the amount of resources to be held in reserve and conditions under which reserves can be used. 2. Reserves in other funds. Policies for other funds (especially enterprise funds) that serve a similar purpose to general fund reserve policies. 3. Grants. Policies that deal with the administration and grants process. 4. Debt. Policies that govern the use of government debt, including permissible debt instruments, conditions under which debt may be used, allowable levels of debt, and compliance with continuing disclosure requirements. 5. Investment. Policies that provide guidance on the investment of public funds, including permissible investment instruments, standards of care for invested funds, and the role of staff and professional advisors in the investment program. 6. Economic development. Policies that address a local government’s use of subsidies or other incentives to encourage private development. (Note: Washington State law essentially precludes the city’s offering of subsidies or incentives. As a result the City of Redmond does not have this policy) 7. Accounting and financial reporting. Policies that establish and guide the use of an audit committee, endorse key accounting principles, and that ensure external audits are properly performed. 8. Risk management and internal controls. Policies that address traditional views of risk management and internal control, as well as more modern concepts of "enterprise risk management." 9. Procurement. Policies that are most essential for adoption by the governing board in order to encourage efficient, effective and fair public procurement. 10. Long-term financial planning. A policy that commits the organization to taking a long-term approach to financial health. 11. Structurally balanced budget. Policies that offer a distinction between satisfying the statutory definition and achieving a true structurally balanced budget. 12. Capital. Policies that cover the lifecycle of capital assets, including capital improvement planning, capital budgeting, project management, and asset maintenance. 13. Revenues. Policy guidance through the designing of efficient and effective revenue systems that guarantee the generation of adequate public resources to meet expenditure obligations. 14. Expenditures. Policies addressing a range of issues around how the money is expended, including personnel, outsourcing, and funding long-term liabilities. 15. Operating budget. Policies that describe essential features of the budget development process and form, as well as principles that guide budgetary decision-making. Governing Magazine (an authoritative resource for local government management) publishes “Guides to Financial Literacy”. In their volume 2, they identify the adoption of financial policies as a way to improve organizational financial health. The City will review its financial policies during each biennial budget cycle. This review will start with a staff review, followed by a review of the designated Council Committee (currently the Finance, Administration and Communications (FAC) Committee) and, if changes are proposed by the FAC Committee, the full council. The budget process As described above, the City uses a “Budgeting by Priorities” (BP) budget process for all city resources. This includes operations as well as capital investments. This approach helps to ensure that all community ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 18 I P a g e resources are invested in community programs, services or amenities in the context of community priorities and input. The budget process is a key decision making framework for any local government. The type of budget process helps determine how investing public resources align with desired outcomes. The City’s use of BP requires more effort and time than the traditional incremental approach. However, as described above, the City uses a BP approach to achieve the benefits previously described. Each budget cycle will start with the development of a calendar to describe the elements for that budget. The calendar will be reviewed by the Finance, Administration and Communications Committee and adopted by the City Council. The primary elements of the budget process in Redmond, in chronological order, are: 1. Development of a budget calendar – approved by City Council 2. Initial community input, including a statistically valid community survey a. Community input may also include other forms such as neighborhood meetings, focus groups, on-line feedback, etc. 3. Review of the Long-range financial plan and the Price of Government for resource context 4. Budget planning retreats – administrative and / or council retreats to set the policy guidance for the upcoming budget 5. Council provides input to mayor regarding overall policy approaches, allocation of resources, areas of emphasis for use in developing the preliminary budget. 6. Appointment of Results Teams – both staff and community teams a. Results Teams develop preferred strategies to address priority areas b. Capital Investment Strategy work product is also reviewed and updated at this time 7. Communication of parameters and instructions to staff for preparation of the budget / CIP 8. Development of budget offers a. Preliminary review of offers by Results Teams – with feedback b. Final review and stratification of offers by Results Teams with recommendations to the mayor. 9. Mayor and Director’s Team review of recommendations by Results Teams a. Includes discussions with each team b. Mayor and Directors finalize Preliminary Budget 10. Preliminary Budget presented to City Council a. Public hearing on Preliminary Budget (note: this hearing will satisfy RCW 84.55.120) b. Council workshops to review and comment on Preliminary Budget 11. Council accepts Mayors recommendations and commences work on the “Final Budget” 12 a. Public hearing on “Final Budget” 12. Council adopts Biennial Budget 13. Administration implements the budget An assessment of the effectiveness of the budget process is conducted at the end of each budget cycle with all the participants. The feedback helps inform changes for subsequent processes. As a result, the above process is expected to change (to some degree) each budget cycle. 12 RCW 35.33.061 Budget — Notice of hearing on final budget ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 19 I P a g e Available resources (revenues) to cities in Washington State Development Fees Council supports the philosophy of an overall recovery target range. The overall recovery target for fees is full cost recovery. Development fees are to be updated annually for inflation and reviewed in each budget cycle. A periodic review will be performed on the cost recovery basis for the fees. Parks and Recreation Fees Council supports the “pyramid methodology” adopted in 2017 to set the levels of cost recovery for parks and recreation fees. Council believes a basic level of park and recreation service is free (supported by tax revenues) and fees are a responsible and necessary supplement. In addition, programs that support the community as a whole should be tax supported while those that support individuals should be funded through fees. In terms of cost recovery, the larger the individual benefit the higher the cost recovery rate will be taking into account considerations such as, economic climate, alternative providers and market rates. Finally, fee reductions will be available in the case of economic need. Business & Occupation Tax – Gross Receipts Tax Council does not support a Gross Receipts Business and Occupancy Tax. Council believes that this type of taxation is counter-productive to the goal of maintaining a positive economic climate in Redmond. Business License Fee Council believes the concept of a business tax/fee based on Full Time Equivalent (FTE) employees is a positive structure based on relative business size. Council will review for inflationary increases during each biennial budget. The Business Transportation Tax * The Business Transportation Tax is assessed in the same manner as the Business License Fee and shall be considered and adopted concurrent with the Business License Fee. Council will review inflationary increases during each biennial budget. Eligible uses of the Business Transportation Tax shall include all programs and services identified in the TIP/TFP, including maintenance of transportation infrastructure and travel options programs, as well as expenses related to traditional transportation capital investments. Council will get input on the use of these resources from the Business Fee and Tax Advisory Committee (BFTAC). *note: The Business Transportation Tax revenues do not go to the general fund, rather the revenues help fund and go directly to the Capital Improvement Program or to the Transportation Demand Management (TDM) budget. Utility Taxes Council increased the utility tax to the 6% of gross revenues of the electric, gas, telecommunications utilities as allowed by law in 2006. (Note: utility taxes can exceed 6% with a vote of the people) Council instituted a 3% utility tax on cable services in 2015. Council understands in the future that a utility tax could be levied on the City provided utilities (water, sewer, storm drainage, cable television). At this time, however, Council does not generally support levying a tax on City provided utilities. Property Tax – Council Authority Council intends that the total price of government not exceed the policy boundaries discussed elsewhere in this document. To that end, alternative assumptions related to property taxes will be included in the ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 20 I P a g e long-range financial forecasts as part of this strategy. Adopting longer-term thinking will enable the council to balance the intent of keeping property taxes low with maintaining services within the overall price of government. A review of different scenarios will illustrate the overall effect of each assumption. Property Tax – Voted A remaining piece of the financial strategy is the option to present property tax options such as a levy lid increase to the Redmond voters. Additional options include providing voters with questions regarding use of property taxes to support specific capital improvements (i.e. tax supported bond proposals).- Council placed a general levy lid increase before the voters in 2007, which was effective in 2008. The voters approved increases in the levy in the amount of $5 million (for improvements in fire, police and parks maintenance services). Additionally, council placed two different six-year, limited term property tax initiatives before the voters in the amount of $.35 per $1,000 of assessed value on the August 2015 ballot. The measure would have provided for safety and park improvements. The measures both fell short of the needed votes to pass. Parks Bond Measure Council has contemplated a ballot measure to fund Parks acquisition and development as a priority. The Parks Board and Parks & Recreation Department have been working towards identifying the proper funding level to place before the voters. Included would be a list of capital improvement projects to be funded with the bond measure and a separate maintenance and operation levy ballot measure. On an interim basis, the City has leased space to relocate Redmond’s Community Center. The leased space will be taken into account as a more long-term solution is developed. Transportation Bond Measure Council has identified mobility of people and property as a top priority and recognizes that adequate infrastructure adds to the economic vitality of the City. The City Council reserves the option to ask voters to support a transportation bond measure to secure funding to implement the Transportation Master Plan. Other User Fees The City will periodically review other fees and charges to ensure those costs for services have been taken into consideration in terms of its overall revenue strategy. Additional Options Other actions include a regular review of revenues consideration of a regular levy lid lift to stabilize property taxes, and efforts with State Legislators to address additional revenue sources available to cities. Council could consider the formation of a Metropolitan Park District as a funding strategy for regional park facilities (requires voter approval). Council could also consider a Transportation Benefit District as authorized by state law. The table below illustrates the revenue options described above. Revenue Source Current Rate Authority Limit Indexed? Decision Maker Volatility Rating Property Tax $1.25/$1,000 1% year No Council Low Limited Duration Levy Lid 0 $3.10 / $1,000 Yes Voters Low General Levy Lid Increase 1 0 $3.10/ $1,000 No Voters Low Utility Tax2 6% 6% No Council Medium Utility Tax - cable services3 3% 6% No Council Medium ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 21 I P a g e Tax on City Utilities 0% None No Council Low Sales Tax .85% .85% No Council High Gross Receipts (B&O) 0% Yes Council Medium Business License 4 $48.00 None Yes Council Medium Business Transportation Tax5 $64.00 None Yes Council Medium Development Review Fees Full Cost Recovery None Yes Council High Recreation Fees Direct Cost Recovery None Yes Council Medium ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 22 I P a g e 1 “General levy lid increases” have been approved by voters as follows: When For What Amount (historical) 2007 Fire Service $2,201,858 2007 Police Service $2,051,300 2007 Parks Maintenance & Operations $205,806 1989 Parks Maintenance & Operations $300,000 These amounts are now part of the base city property tax levy. 2 – The history of changes in utility taxes over the past twenty years includes: When For What Service Rate 2014 (ord. 2716) Fire suppression services Water 0% 2013 (ord. 2673) Fire suppression services Water 8.53% 2010 (ord. 2545) Fire suppression services Water 9.23% 2006 (ord. 2281) General Government Purposes Elec. Tele. Nat. Gas 6.0% (was 5.8%) 2004 (ord. 2239) General Government Purposes Elec. Tele. Nat. Gas 5.8% (was 5.5%) 1996 (ord. 1923) General Government Purposes Elec. Tele. Nat. Gas 5.5% (was 4.5%) 1995 (ord. 1867) General Government Purposes Elec. Tele. Nat. Gas 4.5% (was 5.5%) 3 - The history of changes in utility taxes in cable services over the past ten years includes: When For What Rate 2015 (ord. 2769) General Government Purposes 3.0% 4 - The history of changes in business license fees over the past ten years includes: When For What Rate 2017 (ord. 2862) General Government Purposes $48.00 2016 (ord. 2862) General Government Purposes $45.00 2015 (ord. 2770) General Government Purposes $42.90 2013 (ord. 2667) General Government Purposes $35.00 2004 (ord. 2238) General Government Purposes $28.25 2000 (ord. 2088) General Government Purposes $12.50 1998 (ord. 2003) General Government Purposes $10.00 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 23 I P a g e 5 - The history of changes in business transportation tax over the past ten years includes: When For What Rate 2015 (ord. 2770) Transportation Capital Improvements $64.00 2013 (ord. 2667) Transportation Capital Improvements $57.00 2011 (ord. 2567) Transportation Capital Improvements $56.00 1996 (ord. 1924) Transportation Capital Improvements $55.00 Other City plans (with a relationship to the financial strategy) Within the context of the Comprehensive Plan are “Functional Area Plans”. These are detailed professional assessments of existing conditions, current and future facility needs, service targets, and projected funding to implement the Comprehensive Plan. These plans are adopted by the City Council and incorporated into the Comprehensive Plan’ Capital Facilities element by reference. Other local jurisdictions, such as the Lake Washington School District, also prepare functional plans.13 As an element of the Capital Facilities Plan, the Functional Area Plans indicate anticipated future improvements to provide for the growth and development of the City. They provide context for consideration of future investments in the development of the City’s Capital Investment Strategy. 13 Capital Facility Planning – Comprehensive Plan page 12‐7 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 24 I P a g e Appendix A 1. A more detailed history of the LRFS In 2005, the Redmond City Council was advised by the administration that a period of unusual fiscal stress was approaching. The Council wanted to be proactive in addressing the concern. In addition, the Council wanted to provide longer-term (strategic) policy direction to the administration regarding financial matters. The result was the development by the Council’s Public Administration and Finance Committee of the first Long Range Financial Strategy. Known at that time as “Navigating the Rapids”, the strategy was intended to acknowledge that the expected fiscal issues were somewhat similar to navigating a waterway through a period of “rapids”. The expectation was that while the upcoming fiscal stress may represent a limited period of time, however the longer-term view was important. The Council was concerned with the sustainability of its decisions over time and under different types of fiscal stress. Once developed, the LRFS provided Council with the context from which they would review proposals by the administration. As documented in the revenue history above, the Council has taken action several times since the initial LRFS in maintaining a current revenue profile to provide for community needs. The actions taken soon after 2005 are a direct reflection of the influence of the LRFS on the policy decision-making at that time. Since then many changes have occurred. The chart below reflects the evolution of the City’s financial management program in the context of the issues described within this document. Created Long Range Financial Strategy Proposed voter levy for property taxes Developed and implemented the initial BP process Reported on contracted out services; First use of long term financial planning; Developed department offer tracking; Added 7th Results Team for CIP; Conducted GFOA review of BP process Began employee innovation initiative; Implemented Microsoft Dynamics AX 2012; Initiated Capital Investment Strategy; Initiated focus on performance measures in BP; Confirmed priorities Initiated logic models into BP offers; Began performance reporting at priority level to City Council; added Civic Results Team made up of Redmond community members. Initiated quarterly performance reports; implemented Capital Investment Strategy decision making process; instituted LEAN process improvement structure through Organizational Excellence initiative. Continued to build on the lessons learned from past BP processes. 2018 2016 2014 2012 2010 2008 2007 2005 ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 25 I P a g e 2. How the Price of Government (POG) is determined The price of government is the total city resources divided by community income. The 2016 price of government calculations are below. Calculation Explanations Taxes make up 40% of all revenues. Other taxes include real estate transfer tax, transient lodging tax, gambling tax and leasehold tax. Permits are primarily for development while licenses are primarily business licenses User charges are the fees paid directly by beneficiaries of city service, including water, wastewater and surface water utility customers. Development user charges include such things as plan review, entitlements, etc. Intergovernmental covers capital grants and payments for intergovernmental services. Total resources are divided by community income. Community income is per-capita income times the population. The American Community Survey (a division of the US Census Bureau) provides per-capita income. Forecasts for future years use estimates from the State Office of Forecast Council and the City’s financial forecasts. Delete 2014 table ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 26 I P a g e 2016 Taxes Property Taxes 23,967,392 Sales Tax 27,572,501 Utility Taxes 15,708,790 Other Taxes 9,187,332 Total Taxes 76,436,015 Fees and Charges Licenses/Permits 11,709,714 User Charges General Government 3,275,303 Security 15,910,768 Utilities 55,111,729 Transportation 372,214 Development 12,309,674 Recreation/Arts 2,651,408 Total User Charges 89,631,096 Total Fees and Charges 101,340,810 Intergovernmental 9,184,604 Other Interest Earnings 1,457,106 Fines 568,774 Rents 843868 Operating Grants 351,487 Sales of Assets 2,665,964 Miscellaneous 8,204 Total Other 5,895,403 Total All Resources 192,856,832 Community Income Per Capital Income 56,498 $ Population 60,560 Total Community Income 3,421,548,616 Price of Government 5.64% ---PAGE BREAK--- Glossary – of select terms Best practices – Generally a point of reference for a recommended approach. Specifically the Government Finance Officers Association (GFOA) provides a variety of “best practices” as a result of research and analysis. The GFOA best practices are recommended by member committees and adopted by their executive board. The GFOA best practices can be found at www.gfoa.org. Budget by Priorities (BP) – Also known as Budgeting for Results, this method of budget organizes the development, decision making and reporting around community priorities or desired results. Budget offers – A proposal for a program or service with the City’s BP system to accomplish specific results. Capital Facilities Plan (CFP) – The CFP is a required element of Comprehensive Plans under the Growth Management Act. The CFP is to identify existing facilities as well as the needed future facilities that enable growth and development consistent with the goals of the Comprehensive Plan. The CFP is to estimate the costs, sources of funds and general location of needed facilities as well. Capital Investment Strategy (CIS) – A method to align necessary or desired capital projects that enable the City to pursue the goals of the Comprehensive Plan. The difference between the CFP and the CIS is the length of the plan and the strategy to align funding with needed infrastructure investments. Comprehensive Plan – The official land use plan of the City under the Growth Management Act in the State of Washington. The Comprehensive Plan is the foundation of many other policy decisions including needed infrastructure to support growth, growth targets and strategies, and functional area plans to describe specific service needs. Fund – A method of differentiating the financial activities from one purpose to the next. Funds are specifically used to segregate different resources and tracking that those resources were used on related expenditures. Examples of funds where the resources are restricted to a specific expenditure would be utility rates (water fund or stormwater fund), capital funds, and “special revenue funds” where the revenues are restricted (hotel / motel fund, real estate excise tax fund). Examples of a fund where the restriction on use of resources is only limited to legal governmental purposes is the City’s general fund. Growth Management Act (GMA) – A state law adopted in the mid-80’s setting the stage for much of the capital improvement budgeting and planning in Washington cities. For example, the GMA requires a Capital Facilities Plan to provide for infrastructure needs that enable the growth called for in the Comprehensive Plan. Government Finance Officers Association (GFOA) – An international association of finance professionals providing research, guidance, consulting services and other resources to enable and improve the quality of financial management within state and local government. The GFOA has a membership of about 18,000. www.gfoa.org Infrastructure – Term used to capital assets intrinsic to systems. In this context, infrastructure refers to streets, roadways, sidewalks, trails, parks, utility systems and other capital assets required to enable the related services. Long Term Financial Planning (LTFP) – A method of budget planning extending at least two years beyond a budget period. GFOA recommends LTFP of at least five years. The “Price of Government” authors recommend a LTFP of five years (in their “five by five” description.) ---PAGE BREAK--- Redmond’s Long-Range Financial Strategy φτυό 28 I P a g e Long Range Financial Strategy (LRFS) – A summary of history, philosophy, high level choices and policy guidance adopted by the Council to provide clarity and advice to the City administration and the community with regard to the City’s financial affairs. Mission – A statement of purpose for an organization. City administration adopted mission is: To deliver our communities priorities in support of a dynamic Redmond where all can live, work, play and invest. Navigating the Rapids – The title to the 2005 version of the Long Range Financial Strategy referring to the anticipated fiscal challenges of the period. Overlake – A neighborhood in Redmond designated as an urban center. Overlake is already a significant jobs center but will undergo extensive change in the coming years due to increased urbanization and the arrival of light rail service in 2023. Price – The amount that a community is willing to pay for governmental services. Mathematically it is total city resources divided by total community income. Results Teams – Part of the BP budget approach, results team’s development outcome maps for each of the priorities as guidance to offer writers. The results teams review offers and provide feedback to the offer writers and others in the city. Lastly, results teams provide advice to the mayor in developing the preliminary budget. Results teams are made up of either cross department city staff and / or community members. The staff teams and community members may do some or all of the above tasks. The Price of Government – A book written by David Osborne and Peter Hutchinson, which is the basis for much of the City of Redmond’s approach to financial management. The Price of Government can also refer to the amount a community pays for the services it receives. Vision – A statement of future intent for an organization. The vision of the City of Redmond is to realize Redmond’s future as a city with two vibrant urban centers, where connected neighbors are preserved, and provide high quality responsive services in partnership with an engaged community. Index Capital Investment Strategy, 21 GMA, 5, 15 Government Finance Officers Association, 5 Growth Management Act, 5, 15 Long Term Financial Planning, 5 LRFS, 6, 22 Navigating the Rapids, 2, 6 The Price of Government, 7, 11, 12 Vision, 5, 25