Municipal Finance

Revenues pour in and expenses rage out. Some revenues are received in advance of their need while others slowly arrive well past their dependent expense.  Examples: water revenue arrives steadily while pumping and pipeline maintenance is but a drip of expense in comparison. Yet in 50 years large sections of pipes must be dug up and replaced; where then are the dollars found to pay the bills? From reserve funds built steadily over the years as accounting protocols provide through depreciation and set-asides. Thus some revenues are received in advance of their expense and they are saved for the future in special reserve funds.

Roadways are built by bonds or current revenues yet their depreciation of usefulness advances steadily and quickly. Most roads need replacing every 10 to 12 years. Others need major maintenance attention every 5 to 6 years. Curbs and gutters hold their function much longer but they too fall prey to freeze thaw cycles and cars and trucks running over them. Fuel taxes collected at local gas stations are paid to the state from which they are dispensed back to municipal governments 3 or 4 months later, usually much after maintenance costs have been incurred. Yet the revenue flow is expected and accounting practices make use of these dollars via budgets and short term loans from other funds set aside for other purposes; as long as these practices are well known and used on a short term basis the dollar use and flow is well tracked and the overall income and expense report remains in positive territory.

So too does the ‘balance sheet’, the accounting of which is owned outright and what is owed to others to buy or maintain that which the municipality owns.  So, fund accounts are set up to keep track of all of these ins and outs of funds. General Operating Fund, Water/Sewer Enterprise Fund, Bond Fund, and so forth comprise a family of funding accounts where dollars are parked short or long term depending on their eventual use.  When dollars are in short supply bonds are sold for good and practical purposes of acquiring capital goods such as buildings, roads, Stormwater management systems, and the like. As revenues are received to pay for these items the bonds are retired on a long term schedule.

Most municipalities maintain a healthy balance sheet of these accounts. For Warrenville, Illinois, a small city of 13,000 in west suburban Chicago, owned infrastructure totals over $130 million (maybe as high as $200 million). Most of these assets are underground and out of sight – sewers, water supply systems, sewer pump stations, Stormwater pump stations, and other underground utilities. Others are in plain sight but our of our conscience – looming water towers, curbs, gutters and streets; traffic lights and countless signs – all with values that appear on the balance sheet by decree of federal accounting standards.

Such municipal assets are large compared with annual operating budgets. Warrenville’s operating budget is in the $20 million neighborhood while extra dollars are used for major projects. Such projects add to the budget figures but are paid for from idle funds accumulated for such purposes – road reconstruction projects, extension of sewer and water lines, replacement of fully depreciated water and sewer system elements.  Because these dollar flows are accounted for but not a ‘current’ expense in the normal sense of the term, they affect Fund Balances set aside for their purpose. On the balance sheet such fund balances would decline for the project but the asset value of the work done to the asset being worked on (water/sewer/roads) those asset balances would be improved or increased. Thus the balance sheet retains value or increases.

Such expenditures are long term projects paid for from long term fund accumulations designed for such purposes. They do not constitute deficit spending in the normal sense of the word.

What is deficit spending? Here are some examples:

1. Balance Sheet declines of a steady nature; erosion of the municipality’s overall dollar value
2. Sale of bonds to finance an ever-increasing array of infrastructure growth or replacement that is underfunded by long-term revenue streams
3. Use of bond fund balances for operating expenses because operating revenues are not available sufficient to pay the bills

Detroit, Michigan experienced some or all of these examples. Over time it destroyed the financial fabric of the city and led to bankruptcy. When obligations of a city exceed its ability to pay current expenses, the government is broke. To repair the problem much is needed to be done:

1. Fix dangerous infrastructure for bare minimum health and safety of the people
2. Restore to functionality all working systems necessary to support basic functions of the municipality: education, traffic flow, water and sewer system operations
3. Maintain and attract commercial interests to locate their firms within the city to provide jobs for residents and economic activity which produces tax revenues for the local government; revenue flows as well to repay outstanding obligations, some of them newly created to attract new businesses and repair broken infrastructure
4. Maintain and attract new residents to fill abandoned buildings and homes and help restore the city to a healthy status once again.

Cities and towns not in Detroit’s condition are well aware of how to maintain their operations to avoid a meltdown similar to Detroit’s. Careful planning, budgeting and care to acquire only manageable debt are the order of the day.

At this time Warrenville is spending dollars accumulated for the designed purposes, avoids most debt, has no bonded indebtedness and continues to build a healthy balance sheet. A community such as this continues on its road of success by investing in the future for the benefit of this and future generations of residents.

Warrenville, Illinois is an excellent example of how things are done right. Other towns ought to pay attention!

September 4, 2013