In the summer of 2018, the Wright County Board of Commissioners was facing a dilemma when it started its budget process. Due to decisions made years earlier by a previous county board, a significant payment on the county’s jail bonds was going to contribute a massive spike in the 2019 levy – a whopping 17.3 percent increase.
As a result, Commissioner Darek Vetsch and Auditor/Treasurer Bob Hiivala began work on a financial modeling program that would forecast potential levies for future years to avoid a scenario like that happening against for Wright County taxpayers.
“The previous county board did its job, but recognized the compression of the jail bonding was going to be an issue at some point,” Hiivala said. “I knew there was a big (levy) year coming and it was only a matter of time. This board looked at that and determined we had to do something to avoid this happening again.”
Vetsch said the financial modeling process was the direct result of the poor handling of the jail bonding project, which began during the height of the economic recession in the late 2000s. At the time, the county was struggling to prevent laying off workers. A hiring freeze was put in place and expenditures were kept as bare bones as possible.
The method used to ride out the worst of the recession was to institute zero growth budgets and make bond payments initially low on the jail project with a balloon payment set to come 10 years into bond repayment – the 2018 budget process for 2019.
“We started working on financial modeling in 2017 and really solidified it in 2018,” Vetsch said. “That was when we saw how the bond payments were going to impact the county budget. I’m not sure why the previous board set it up that way, because it set us up for a huge spike coming in 2018. We’ve been using financial modeling in the last two budget cycles and it has worked well for us.”
Vetsch said he was surprised how the county did its budgeting before he joined the board in January, 2017. While the county had the tools available to factor in long-term impacts and different modeling scenarios, it wasn’t being utilized.
“Shortly after taking office, I realized that the county was literally budgeting year to year without looking at what damage we could be creating down the line by the decisions we were making now,” Vetsch said. “It really came to heart when we realized that there were decisions that had been made in the past that were coming to a boiling point. That motivated me to put something together to avoid situations like that happen down the road. My goal was to find a way to have a tax rate that was predictable and sustainable.”
As the county prepares to start its annual budget meetings with department heads, the commissioners were presented a forecast of potential levies for future budgets with correlating tax rates based on assumed tax capacity growth.
Educated metrics are used to predict increased expenses and revenues based on past practices. This modeling allows the county board to vet out expenses and revenues to determine potential taxpayer impacts. The financial modeling currently shows the county to be in good financial health with significant funds in reserves to absorb unexpected expenditures. However, the modeling is unable to consider any changes that may occur on the state level which may change impacts to taxpayers if tax rates are shifted from commercial to residential properties as the state works to shore up its deficit and find relief for retails businesses.
As the county board prepares for the 2021 budget cycle, an unanticipated new factor will come into the play – the impact COVID-19 will have on revenue shortages and increased expenditures to combat the coronavirus. The hope is to use the modeling of known expenses and revenues and factor in the “new normal” to come up with budgets that will take county growth into account to develop a 2021 budget that will be effectively neutral in terms of property tax increases at the county level.
Hiivala said every budget cycle is a balancing act between funding the core functions of government and determining what quality of life improvements can made and afforded.
“Budgeting is always like walking a tightrope,” Hiivala said. “Budgets are estimates of the future. Financial modeling will use the 2020 revenues and expenditures as part of its guide, but this is an unprecedented circumstance we find ourselves in with COVID-19. The good part about modeling is that we can change factors in the model and see what impact something we may decide to do now will have four or five years down the road.”