A five-year financial plan for a smaller county: linking long-term planning to annual budgeting.

• Author: Casey, Joseph P.

An adopted five-year financial plan has enabled the County of Hanover, Virginia, to identify, budget and fund future service levels and has increased citizens' confidence in the stability of property tax rates.

A county's budget formulation, development and adoption process traditionally is a necessary evil experienced by the department heads, finance department, county administrator and board of supervisors from November through April each year. The clash of limited financial resources with requests for funding desired services often results in a competition between departments, as well as a budgeted deficit between revenues and expenditures. To alleviate this deficit, the avenues most often chosen are to increase the real property tax rate, increase user fees and/or further reduce expenditures. As elected officials have become increasingly reluctant to have property tax rates become the balancing factor in any proposed budget, further expenditure reductions have remained the alternative of choice.

Frequently employed actions for bringing expenditures into line have included across-the-board reductions, maintenance of line-item accounts from the prior year and/or reduction of merit increases for employees. These types of reductions, however, may unfairly cut a lean departmental budget rather than properly rein in another department's budget that was artificially inflated.

After five months of budget formulation, development, expenditure request reductions and perpetual meetings, the board adopts the budget in April for the following fiscal year. Seven months later, this arduous process repeats itself.

Budgeting Shortcomings

The County of Hanover, Virginia, population 66,000, was no exception to this annual dilemma. Located 15 miles to the north of the City of Richmond, the county experienced a 31.1 percent population increase between 1980 and 1992. This growth placed an increased demand upon the county's service levels.

To meet the increased demands, Hanover County's total operating and capital improvements budget increased 148 percent to $104 million between 1980-92. By 1989, the county had constructed two new schools for $40 million and saw its jail become overcrowded, its landfill approach capacity and its governmental facilities outgrown. Previously, the county had relied upon economic development for expanding the tax base and increasing revenues. As the recession slowed the county's economic development and the state reduced funding levels, revenues became increasingly stressed.

Prior to 1989, the budgeting process did not confront the long-term operating and capital improvement impacts of proposed service levels nor consider their on-going funding sources. The question of how balanced operating and capital improvement budgets would be achieved in subsequent years was not addressed. The process was, rather, that the board adopted a one-year balanced operating and capital improvements budget; and as long as the budget was balanced to the satisfaction of the board, all budgetary issues were considered properly addressed.

The capital improvements program (CIP) was not formally adopted or approved; projects in the CIP were considered departmental requests or "Christmas list" projects. The board typically would adjust the first year of the CIP to a reduced level that the county could afford and move the remaining projects to a subsequent year in the CIP. The ability to fund the CIP was not demonstrated in the CIP or any other document.

Beginning in 1989, the county administrator adjusted the CIP to a fundable level for each year and submitted the recommended CIP to the board for adoption, along with a list of the unfunded departmental requests and an explanation of why the requests were excluded from the CIP. The CIP was adopted annually beginning in 1989. Its adoption was a difficult task: the board did not want to tell departments and constituents that they were not going to fund certain departmental projects within the next five years.

The Five-year Financial Plan

The first step in addressing the shortcomings of this process was the development of an internal five-year financial plan that could be linked with an adopted five-year CIP for fiscal years 1989-94. As initially developed by the finance department, the five-year financial plan was not intended to be adopted by the board or to be included in any of the county's publicly disseminated financial documents. It was not balanced throughout the five years; the revenue, operating expenditure and CIP growth assumptions were very broad; and long-term operating impacts of CIP growth were not adequately quantified. The plan did, however, shed some light on what the board could expect to happen over the five years of the adopted CIP.

The 1989-94 internal five-year financial plan was developed to give the board a perspective on how proposed economic development projects would impact the county's tax rate. It illustrated clearly that, even with several large economic development projects, the county would face increasing expenditure growth which, if unadjusted, would not be balanced with anticipated revenues. Internal five-year financial plans prepared in 1990 and 1991 had additional assumptions that included a proposed tax rate increase and annualized assessments...