City of Royal Oak: Central Services Cost Allocation Plan
In 2005, the City of Royal Oak was facing a $5.1 million General Fund operating deficit. Recognizing the severity of the financial challenges faced by the City, management and elected officials developed a plan to balance the budget in two and one-half years. In addition to cost reductions and revenue enhancements, a key component of the plan was to have “all Non-General Fund activities pay their own way.” This goal was accomplished through the development of a Cost Allocation Plan. Municipal Analytics staff conducted the study, and provided the City with a working allocation model that has been incorporated into the City’s financial management plan. According to the City Manager’s budget letter in 2008, “The Cost Allocation Plan has saved the General Fund over $500,000 per year. Because we put it into effect at the end of the 2005-2006 fiscal year, we are now starting the fourth year of the plan, and the General Fund has saved well over $2 million.”
If saving this kind of money in your General Fund is important to you, contact us to discuss whether a cost allocation model could benefit your community.
Charter Township of Shelby: Five-year Financial Forecasting Model
This community of 70,000 had prepared plans to construct a new $20 million justice center building to house its police department and district court operation. The Board was firmly committed to funding the project without increasing taxes. Prior to issuing debt for the project, we were engaged to conduct an analysis of the feasibility of paying for the debt service and operating costs of the building, without a tax increase. Our five-year financial forecasting model identified several weaknesses in the Township’s finances, which resulted in cancellation of the project. The model continues to be used to help the Township make financial planning decisions for a number of budget proposals and operational strategies. The Township is currently discussing options to construct a police facility for less than $5 million, to be paid for with cash reserves. Cost savings as a result of utilizing the financial model: over $15 million.
Based on the effectiveness of the financial model for the feasibility analysis, the Township has expanded the model to include more funds. Over the past two years, the model has been used to help develop annual budgets and support the Township’s position in labor negotiations. The forecast of future financial conditions in Shelby helped the Township win significant concessions in an ongoing labor contract arbitration case, which will save the municipality hundreds of thousands of dollars in the first couple of years of the new contract.
Many local governments contact us to develop financial models, which can be used for a range of financial analysis. If you are looking for a cost effective tool to significantly improve your financial decision making, you should consider a Five-Year Financial Forecasting Model.
City of Novi: Shared Services Cost Analysis
The City of Novi, MI, has an emergency dispatch operation, serving the City as well as two neighboring communities. A cost sharing agreement had been in place for many years, but the City was uncertain of the basis for the costs included in the agreement. When a third neighboring community approached the City about joining the regional dispatch service, Novi decided it would be a good time to determine the true costs of the dispatch operation, and develop a rational, justifiable cost allocation methodology that could be applied to all contracting communities. Our staff worked with the City’s Police and Finance departments to identify all costs associated with the dispatch operation. We then evaluated a number of allocation methods, trying to find an approach which was fair, understandable and based on measurable inputs. The analysis concluded that the two existing contract communities were paying less than their “fair share,” and that it would be cost ineffective for the third community to join the regional dispatch operation. Based on the study’s findings, Novi was able renegotiate its dispatch agreements with the original two contracting communities, and is phasing in the cost increases over several years. The value of the contracts will increase from $70,000 prior to the study, to over $150,000 per year.
As you explore opportunities to save costs through shared services with other municipalities, it may be valuable to first conduct a Shared Services Cost Analysis to ensure your community would benefit financially. Find out how to get started.