Long-range financial planning: new strategies for old problems.

• Jurisdiction: United States
• Author: Vehaum, David
• Date: 01 April 1998

Crisis reactions - such as across-the-board spending cuts and hiring freezes - gave way to multiyear budgeting and five-year financial plans in Rock Hill, South Carolina.

Limited financial resources are not a new problem for local governments, and cities have devised many tried-and-true methods to deal with this challenge. Budget offices in some cities use a strategy of "slash and burn" to balance tight budgets - actions that may include across-the-board cuts in expenses, a hold-the-line strategy for line-item expenses, freezes in hiring, or even layoffs in certain circumstances. These reactive changes often lead to unfair cuts in departments that have tried to hold the line on expenses, while already inflated departmental budgets may find it easy to absorb a hit with no substantial impact on operations. In applying across-the-board cuts, the budget office makes no evaluation of whether a department should continue to receive the same level of resources. Where evaluation is used to consider whether some departments should receive increased levels of funding to achieve city council or managerial goals, the budgeting process often looks no further than the next 12 months; one year later it is tune to start the whole process over.

The City of Rock Hill, South Carolina, has joined those local governments that have significantly changed their way of dealing with these kinds of problems. A multi-year approach to budgets is Rock Hill's response.

Rock Hill: The Problem

Located just 20 miles south of Charlotte, North Carolina, Rock Hill has a population of 48,700. Long-range financial planning and budgeting had its origin in the city in the late 1980s, a time when the city experienced tremendous growth resulting in a significant strain on the city's ability to meet the rising demand for services. The city had not issued general obligation bonds since 1972, nor sold utility revenue bonds since 1968; it had avoided issuing debt by using utility cash reserves to fund ongoing general government and utility capital projects. These cash reserves dried up, however, in the early 1990s, when fund balance reached a low of just greater than $100,000 by 1991 while the demand for services continued to increase. At the same time, the federal government began to substantially eliminate grants to local governments, which had funded many of the city's utility capital and general government projects.

As a result of these financial stresses, Rock Hill looked to the bond market to continue infrastructure improvements. Between 1986 and 1994 the city issued $90 million in utility, tax increment, and general obligation bonds. This allowed the city to solve current problems and make a significant investment in the future; however, the bonds left the city with the responsibility of repaying approximately $8.2 million in annual debt service payments.

By 1989 the city was covering approximately 60 percent of general fund expenses with transfers from a profitable electric utility fund. With the increase in debt service payments, the ability of the utility fund to continue covering general fund expenses began to diminish. The city's wholesale supplier of electricity also began a series of rate increases to the city, resulting in an increase in electric expenses and a substantial reduction in revenues available to the general fund.

Exacerbating all of this was the fact that the city had very little room to increase utility rates or taxes: 1990 electric rates were already among the highest in the state, and the water, sewer, and tax rates were among the highest in the region. Consequently, city officials began to prepare for a future that included a reduction in expenses, minimal rate increases, and a commitment to reduce the transfer from the utility fund to the general fund.

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