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BCC Minutes 12/03/2001 W (Budget & Finance Workshop)December 3, 2001 WORKSHOP MEETING OF DECEMBER 3,2001, OF THE BOARD OF COUNTY COMMISSIONERS DECEMBER 3,2001 LET IT BE REMEMBERED, that the Board of County Commissioners in and for the County of Collier, and also acting as the Board of Zoning Appeals and as the governing board(s) of such special districts as have been created according to law and have conducted business herein, met on this date at 9:12 a.m. in WORKSHOP SESSION in Building "F" of the Government Complex, East Naples, Florida, with the following members present: CHAIRMAN: JAMES D. CARTER, Ph.D VICE CHAIRMAN: JIM COLETTA DONNA FIALA TOM HENNING FRED COYLE ALSO PRESENT: TOM OLLIFF, County Manager MICHAEL SMYKOWSKI, Budget Director JAMES MITCHELL, Finance Director WILLIAM REAGAN, Financial Advisor JIM MUDD, Deputy County Manager Page 1 NOTICE OF PUBLIC MEETING BOARD OF COUNTY COMMISSIONERS, COLLIER COUNTY, FLORIDA BUDGET & FINANCE WORKSHOP Monday, December 3,2001 9:00 A.M. - 12:00 P.M. All interested parties are invited to attend a Board of County Commissioners Budget and Finance Workshop to be held on Monday, December 3, 2001, 9:00 A.M. to 12:00 P.M. in the County Commissioners' Boardroom, 3r~ Floor, W. Harmon Turner Building (Building F), Collier County Government Center, 3301 Tamiami Trail East, Naples, Florida. BOARD OF COUNTY COMMISSIONERS COLLIER COUNTY, FLORIDA James D. Carter, Ph.D., Chairman DWIGHT E. BROCK, CLERK By:/s/Maureen Kenyon Deputy Clerk December 3, 2001 COMMISSIONER COLETTA: Please rise, and we'll say the Pledge of Allegiance to the flag and begin this meeting. (The Pledge of Allegiance was recited in unison.) COMMISSIONER COLETTA: Good morning. BOARD MEMBERS: (Unanimous response.) CHAIRMAN CARTER: Good morning to the morning board members. Welcome to yet another workshop meeting. COMMISSIONER COLETTA: It seems like we just did this. CHAIRMAN CARTER: What is it? One meeting every week or two meetings a week? MR. OLLIFF: It's about three meetings a week in the last couple of weeks. CHAIRMAN CARTER: Just for statistical information, when you've got some free time between 1:00 or 2:00 in the morning, if you could find out what this present commission has done in the past year as far as meetings go overall as compared to the year previous, it would be very interesting information, I think, for the present commissioners and possibly the public out there. MR. MITCHELL: Commissioner, for your information, Jim Mitchell with the board's finance department, our board minutes and records department does have that information. It's actually a project that I have been working on. It's actually prepared last year to this year to date, so we do have that information. And if you want, I can give it to you now. CHAIRMAN CARTER: Okay. COMMISSIONER FIALA: Geez, we have the right guy sitting here. CHAIRMAN CARTER: We sure do. MR. OLLIFF: What we've got for you this morning is, what I believe, is one of the more important workshops that we have scheduled with you. It is a budget and finance-related workshop, and Page 2 December 3,2001 we've broken it down into three different sections. In essence, what we want you to know as a result of this workshop is, one, in very simple terms, where does the County get its money; what does it do physically with the money once it gets it; what are the investment policies of this county and this commission; what role does the commission play in developing investment policies; understanding the relationship and the distinctions, especially in Florida county governments between the role of your office of management budget and the role of the clerk of courts. And then, finally, we've got who will actually start off our workshop is Bill Reagan who is your financial advisor. He can give you a little better and broader picture about where are we in terms of our current debt load, what are the debt mechanisms that are available to counties, and to walk you through that process. As with any workshop, this is an opportunity for you to be able to ask questions. We want you to able to leave this workshop with a good, full understanding of the financial side of this business. So we've broken this down, but we've got it in sections and segments. And we've got Powerpoints and all that, but don't let that stop you :from jumping in and asking questions. We've brought the experts in who can answer the questions for you. With that, I'd turn it over to Mr. Mike Smykowski, your director of office management and budget. MR. SMYKOWSKI: Good morning. For the record, Michael Smykowski, budget director. Each of you should have gotten a package. There are three components, as Mr. Olliff indicated. One's going to be a budget component, one a finance department component, and then one that Mr. Reagan's going to talk about is a bonding and available capacity, etc., so you'll have three separate notebooks. So feel free to take notes as those are yours as reference materials, so feel free. And there are some extras available of the Page 3 December 3, 2001 various packages as well if need be. With that, I'll turn it over to Mr. Reagan. He's going to talk about some of the basics of financing operations, issuance of bonds, available capacity, etc., and he also has a previously -- a previous commitment in terms of time. He has a flight to catch. So I'm going to turn it over to him and let him get started. Bill. MR. REAGAN: Good morning. For the record, I'm Bill Reagan. I'm a senior vice-president with William R. Hough & Company. I serve as your financial advisor for the county. Several years ago -- I'll give you a little bit of history, and then I'll stop with my history lesson -- when I first became a bureaucrat back in the early '70s, if we were to have a workshop like this, there would be one person sitting at this table. Back then the clerk, administrator, budget officer, auditor, and just about everything else. I remember the first budget I did in 1973, I quickly realized there was something very seriously wrong with the county government to have the clerk to the budget. So I -- at that time the elected official was -- state rep. Was Mary Hawkins. And I went to her, and I filed a bill separating the budget office from the clerk's office, which I thought was an absolutely marvelous idea. Unfortunately, I didn't realize the power struggle between the clerk's administrators back then. And about 60 percent of the clerks in the State of Florida called me and told me not come to the next association meeting or you'll be dead. But somehow we did pass it, and it's been, I think, really, really terrific for county government to have a separate budget office. It makes it more like a metropolitan form of government versus a rural form of government, and I'm probably the few that use that board. Most places have these other fancy boards of charter, noncharter, mayor, foreman, and all these other great things. Page 4 December 3,2001 Anyhow, I apologize, I do have to step out. I wanted to stay for the whole workshop, but we started planning this workshop several months ago, and it got delayed once or twice. And, unfortunately, I can't spend the whole time here, but Mike did ask me, and Tom did ask me to give you a quick overview. Some of the stuff I'm going to talk about today is very elementary. And, please, if ii insult anybody -- I'm going to move very quickly. I just want to try to describe some of the things that I do for you. And probably, first and foremost, what you should know is, is that I sit on your side of the table in this whole transaction. What I serve is, I make sure that I walk you through the capital markets. Whenever you have to borrow short term or long term, I'm here to work with your staff and with this county commission to be sure that you get the kind of financing that's flexible and the lowest possible cost. That's really my job. I don't sit on the side of the underwriters. ! don't sit on the side of the bondholders. Many of the other players that you will come across, you'll notice, that we'll discuss, have different roles. But most important is that we work prior to the financing and not after the financing. What our work goes into is developing financial plans prior to any kind of financing to determine whether the financing is something that you need to get yourself involved in. Just a quick overview of the kind of outstanding debt -- and all of this is in those little books. You can read those books. The books are more interesting than I am, but you might just like listening to my voice also. You have about $2.2 million, which is probably one of the lowest that you can get in general obligation debt. And I think that's going to be paid off very shortly, within a year or two, ! believe. Your non-ad valorem revenues, this was done prior to this issue that you proved last week. Page 5 December 3, 2001 So that number has gone up somewhat. We financed about $20 million, and we added $30 million. So you have a little bit over $100 million right now in your non-ad valorem revenues. Your water/sewer, all your different -- your enterprise funds, you have approximately eleven hundred and eleven million dollars. It's a total of $190 million. You're over $200 million now, which in a comparison and understand, ratios are something people like to talk a lot about. I charge counties large sums of money to go in there and say, "Gee, tell us how we compare to everybody else." And before I do those types of things, I say, "Why? Why is that important to you?" If you go up the road just a few counties up and you do a comparison, say, with Charlotte County, you will find that they have five times as much enterprise fund debt as you do. It all depends on the number of cities. It all depends on the type of services. It all depends on what that particular place that particular time needed to finance. So it doesn't really do a lot for you to do your peer comparisons, even though I have done those for many, many counties around this state that they like to see what their brother is doing, for whatever reason it is. But nine times out of ten after we do the report, you'll quickly recognize that, listen, we have our own set of circumstances, our own problems, our own needs. And some needs could be five times as high as this, and maybe that's what they want. Some people have, and I think this county has, a good revenue flow where you don't have to have as much indebtedness. You'll probably see higher indebtedness in counties that have less revenue streams which is kind of the typical. We talk about debt capacity, and you've had a number of workshops already talking debt capacity and debt affordability. I perform different functions called debt capacity where we take all the different available revenues. Anything that's outstanding we evaluate what the coverage levels are, meaning that if you have $100,000 in Page 6 December 3, 2001 sales tax and you want to bond all of it, that doesn't mean you get to use the full $100,000 to pay debt service. There's certain coverage levels that are required by the insurers and rating agencies, which I'll talk to you a little bit later about, but we do that capacity test. That's much different than affordability. And I think probably more important than capacity is affordability, is that if you go ahead and bond all your sales tax, all your gas taxes, which you have been talking about, you quickly recognize that you have nothing to maintain the roads. There have been some stories in this great state of ours that you seen them build a 500-bed jail facility and no way to open it. It does happen. You could probably talk to your previous county administrator. He can probably tell you that stow. If you get a mandate from the federal government to open up 500 beds, you take your sales tax to do it and all of a sudden realize, gee, we have no way to furnish it. So affordability is probably the most difficult analysis to determine. You want to take all your gas tax now, bond it all up. How much excess revenues after debt service do we have to maintain our roads? Biggest part that you have to consider. We have some warning trends that you need to look at. And this is what I do, along with the finance office and the budget office. We make sure that your revenue's per capita. This is simple ratios, simple statistics. The revenues per capita hopefully are going up. When we start to see the revenues going down and your capital going up, we know we start to see some problems. The same thing with expenditures, that we're seeing more expenditures, less people coming in, less money coming in. You're in the inverse relationship you need to be. You always want to be in upward trends in those sort of things. Along with your sales tax and your gas tax, you realize statistic revenues. You want to make sure those have somewhat of a static or upward trend. If you plan on -- Page 7 December 3, 2001 for some type of bond capacity. There's some counties who will say, a few years back, sales tax and gas taxes are not attractive revenues to use as bonds because you take a place like Escambia County, who will sit three times with a hurricane in 30-some months, all of a sudden those sales tax, gas taxes, because they closed down roads, people didn't come for tourism, all of a sudden they lost their capacity to issue bonds. So it's much more difficult. So you try to do ten-year trend lines to make sure that they have the kind of facilities that they need. Property tax revenues. The property tax revenues don't have to show that they're going up, but you like to make sure that you're collecting as many as you can. And if you start seeing a higher delinquency rate is the first sign that you know that there's something gone amuck with your property taxes. A few years back when we were having some crisis in California, it affected this market. It was the first time that there was any real discussion that maybe GEOGH tax was not the all-great tax it was set up to be, meaning that when we issue general obligations, it requires a referendum of the people. And then you also have an unlimited tax, meaning that whatever it is, we can raise taxes. But you can raise taxes as much as you want. But if the property has no value, then it has no capacity to issue debt. So that was probably the first time, at least time in the 25 years that I've been doing this, that I've actually seen the discussion by the rating agencies that maybe property tax is not the most stable force. Kind of an interesting twist. Consistent shortfalls in budgeting, you don't have that in Collier. Some places do. Tighter budgets, probably higher debt analyses, but your budgeting and your actuals to budgeting are falling apart. But in this particular county you don't have that problem. A couple quick things about bonds. It's nothing more than a contract. You agree to pay some principal and interest in specific times, and you Page 8 December 3,2001 agree to pay it back from a specific source of revenue. No one cares about your operations. If I buy a Collier County bond, I want to know that you're going to pay me back with gas tax, sales tax, or some other revenue you have agreed to pay me back. I don't care whether you can't open up that building. This is the interesting thing about the bond market. You close the building down, you just give me your gas tax. It's a little different than, say, a home mortgage where, you know, you need to keep the place up and running. We don't want it to go into default. Bondholders don't care. They want their money. And we pay well to do it. And you get -- you know, you have a tax- exempt interest, so you're at a much lower interest rate than, say, government bonds. Bonds are long-terms; notes are short-terms. Commercial paper are the short-term notes we always talk about when we come before you. They're usually less than. five years. Governments by federal law, in accordance with the 1923 law and then again 1986 law, you've been issued your debt on a tax-end basis, meaning that the person that buys the tax, the interest earned on it is not taxable. That's why the interest rates are low levels. For instance, you'll often hear people, if we sell rates at 5 percent, the taxable equivalent, if you were to go out to a bank and invest your money, would be, say, 8 percent. It all has to do with your income levels. So you always and should always borrow at less levels. It doesn't mean you can't borrow in the taxable markets. Why a government would borrow in the taxable markets would be somewhat odd for a local government, but it may not be for some of your authorities, such as your housing authorities, maybe your industrial development authorities who have specific needs. The biggest problem with borrowing tax exempt for those authorities, just to give you a quick overview here, is that the federal law entanglement of Page 9 December 3,2001 public-private purpose gets to be too much. And after awhile you just say, the heck with it, let's borrow with taxable. If we have to pay 200 basis points higher, the deal still works, we'll go ahead and do it. Because one of the things that the capital markets offers to that private group is that it's long-term access, nonrecourse, generally debt that that individual has. For instance, if you go to a bank, they usually say, "We'll give you a variable rate for 5 to 7 percent." Capital markets will say, "Give me your wife, kids, and house." The capital markets will generally say, "Give me your revenue stream, and I'll fix it for 30 years. So those are some of the advantages, very quickly. Who buys municipal bonds? You'll have a lot of Wall Street firms who will strut through here to you sometime in the next five years if you're going to continue to issue debt and tell you that we've got 5,000 registered brokers sitting in the City of Naples and will clean $50 million up within matters of hours. Believe me, it's baloney, okay? Institutional facilities, insurance companies, bond funds buy the majority of municipal debts. Always have, always will. You have a small component of retail buyers we call. Those are the $5,000 pieces and maybe $50,000 and some at $100,000 blocks but not much more than that. And you may be able to deliver 5 to $10 million out the door in specific tax. Big problem you have today is interest rates are so incredibly low, who wants to be in the market for two years with the taxes and bond for a point and a half, 2 percent, 3 percent? You go out 30 years, and you get 4 1/2 percent? Not a lot of takers on that. The only takers you find in the municipal market for those sort of things are people who are managing bond portfolios. They need to -- they'll hedge. They hedge back and forth. The individual buyer is not all that active in the market. Pre '86 days, the individual buyer Page 10 December 3, 2001 was very active in the market. They're not nearly as active. And it's hard to determine because so much now has municipal bond funds. And those are nothing more than people buying a piece of stock. GEOGH bonds we refer to, general obligation bonds secured by the taxing powers as your ad valorem taxes. I think everybody knows that. Revenue bonds -- and I wish I could say that I could make it more interesting, but the truth of the matter is, is no matter how difficult we probably try to say we have a very complicated business, there are only really two kinds of bonds, GEOGH and revenues. You're going to hear when you go to an association meeting about COPS, SWAPS, TRANS, RAMS, every other kind of acronym that some yo-yo comes up with. Truth of the matter is, it's a revenue bond. Some, you know -- I mean, I know the county commissioner from ex-county's going to belly up to you and say, "Gee, we just did a forward refunding with a TRAN and reversed out with a COP." You know what he did? He did a financing. That's all he did. He used the same revenue stream that you have, and there's nothing else. All those things are nothing more than avenues of how to do specific financings. I threw in here also special assessments. They're a little different. They're nothing more than a revenue also, but they're usually for specific purposes. And we're seeing more and more special assessment bonds being issued in the state. In fact, most of the land development that is being done now within the State of Florida probably have their infrastructure done by special assessments. They create districts. The special assessments then are assessed against the property, and they provide all the roads and water/sewer and infrastructure. A lot of resistance a decade ago, not much resistance anymore today because as you can take a look around your community, there's probably -- if there's ten major land developers, eight of them abuse Page 11 December 3, 2001 special assessment bonds and probably have a fine-looking community to boast about, and it seems to work pretty well. Counties generally don't use special assessments. You can, but you don't always have to. One of the problems with special assessment bonds is that as a stand-alone, special assessment, it's not a good credit. Rating agencies and insurers don't like special assessments because they worry about the value or if someone goes out of business. If it's a totally built-out area, when I say totally built-out, 90 percent or more, it becomes more attractive, and you can probably get it insured. But less than that it becomes somewhat difficult. When I play the underwriter's side, I issue a lot of special assessment bonds around the State of Florida that were what we call difficult credits. I guess they give the guy that's been around for a while the difficult credits. What is the project for cash versus borrowing? The most important thing you want to figure out is, is this an essential purpose? It sounds easy, but projects do have certain essential purposes and have certain priorities. The useful life, pay as you acquire, which we call cash. There's fiscal responsibility if you can afford it. You pay for all your debt, and there's nothing wrong with not having any outstanding debt. It also provides you with flexibility if you want to continue to pay for debt or if you want to borrow at that time. You have flexibility to do either/or and you are not restricted by covenants. Reduce the interest cost. Obviously, if you don't borrow, you don't have the interest cost. Improve your borrowing terms if you go out and borrow. If you go to a rating agency or insurance and say, "I have no outstanding debt and my revenues have been static or increasing," you can probably end up with a better rate. The borrowing capacity goes up. Pay as you use. We borrow money. And I'm not using and plugging in any philosophical or theoretical thoughts about what you Page 12 December 3,2001 want to do. Fortunately for me, that's your job. You have to decide whether you want to borrow or cash. And pay as you use means that if you want a 40-year road, why would you pay for it all now? Reduce your current payments. It doesn't suck all the money out of your -- out of the bank. Acquisitions as-needed. You don't wait to save up for it; you can go ahead and do it now. General equity and then repayment of less expensive dollars. The theory there is that if you borrow now with constant present value rates going up, it should be less to pay for it now than to pay for it in the future. CHAIRMAN CARTER: Bill, can I interrupt you for a second, if I might? MR. REAGAN: I saw you frowning. I saw a question coming. CHAIRMAN CARTER: It's not really a frown. It's more of one that says there's a lot of the logic to that, isn't there, if you look at just taking any -- what's happened in terms of what's happening to our dollar, the value of the dollar. If you look at it over a 1 O-year period, can you project out towards the next 10 years or 20 years if you borrowed today to do the roads or any infrastructure? How does that really translate for us? I agree what you're telling me, but are we on a trend line that says, this is a pretty secured trend line, better to do it that way and then save and pay as you go? MR. REAGAN: Not to borrow at all from a purely fiscal standpoint. I tend to have problems with. It's almost -- and maybe I can draw a simple analogy. It's almost like a person who has bad credit with no borrowings. If you do not have a credit card or have any bank relationships and then you go to borrow something, they say, "What's your credit rating?" You have none. That's one theory. That's one thought. So we should always try to borrow something. Page 13 December 3,2001 The second thought is, is that from a cash management standpoint, you have all these dollars over here in the clerk's office that are being invested. It's also good cash management and marketing to also borrow money to hedge yourself against the influx and outfluxes of the interest levels and trends. The third thing is, is for you not to borrow and use all -- and use all your cash on-hand to build projects or wait until you have sufficient cash. It would probably mean you would do very little, not unless all of a sudden county governments qualify for the Lotto. It would be very difficult for you to proceed on. And it's just very simple, your own personal cash management. Very few people have the -- do not have the ability to go out and pay cash for everything they buy in their homes and things of that nature. CHAIRMAN CARTER: Well, I may be way ahead of your presentation -- I apologize for that but if you have low interest rates and you have a major demand and you can secure what you have to do, isn't this an opportune time to be using relatively cheap dollars to get done what you have to do on a projected future knowing that these low interest rates won't hold? They never have. Two, as things go up and dollars become inflated, you're right back to your scenario. So I would see this, if I'm thinking correctly, as a window of opportunity to look at some long-range financing on key projects as long as your revenue streams can support it. MR. REAGAN: Absolutely. I mean, there's no better time than to borrow right now. We haven't seen it in 20 years like this. So, I mean, you're on point, and you're not ahead of the presentation, by the way. CHAIRMAN CARTER: Thank you. MR. REAGAN: Revenue analysis. When we go into and start doing different bond transactions, we start looking at the revenues that we want to pledge. What are the restrictions on those revenues, Page 14 December 3,2001 whether it's a general government revenue or an enterprise? Each one of them has specific purposes. There may be specific reasons why we may have a previous pledge. If you have a previous pledge, meaning that you borrowed against that money already, you need to take a look at the bond covenants to understand. If we do additional borrowings, there's such a thing as what we call additional bonds test, which is nothing more than a coverage analysis of how much debt we have. Your availability to pledge versus affordable to pledge. And that's what we talked about very early on is that your real concern when you do these borrowings is to make sure that you don't hurt your operations. You may have that capacity and you may have that additional bonds test capacity and that coverage leverage, but you may not be able to afford to just purely do it without hurting your existing revenues. Your bond rating for credit analysis rating for the project, underline rating of the county. Under bond rating there's really three; S&P, Moody's -- MR. MITCHELL: Fitch. MR. REAGAN: -- and Fitch. Thank you, Jim. My mind just went blank there for a second. In this last transaction, to give you an idea, we did two things. We did Moody's and S&P as an underlying rating for the sales tax bonds. And Moody's gave us an A-1, which is very good. And S&P gave us a AA minus, which is very good. That's slightly up from three years ago that we did the other one, Jim? So we're consistently improving our financial standings. On top of that -- and then that gives you that rating to go into the market, and that rating simply means that this is a very good probability that these bonds will always be paid back. The AAA rating means, which is at the top, means that absolutely, not unconditionally, but probably has the best possible rating to have Page 15 December 3,2001 these bonds paid back. You also go in with credit enhancers where we can have an insurance company who does nothing but insure municipal bonds. Now, the insurance, if you meet their test and their criteria, they give you a AAA rating, and that's what we did in this transaction. We bid that out. We analyzed their bids and selected the insurer which gave us a AAA rating and also an underlying rating of an A, as we talked about before. Why do you have both the AAA and then an underlying? For security purposes in the market with the volatility of the market today. While we are in low interest rate environments, this market is sloppy, meaning that we don't know what it's like from day to day. We're kind of sitting on pins and needles right now with this one transaction because all of a sudden with these low interest rates, we see huge volume coming into the market next week, huge volume. Everybody's rushing to the market. When you have huge volume, it becomes a problem for underwriters to sell bonds because people don't like to take down bonds. There's not a lot of update coupled with it's at the end of the year. So all your big institutional folks that I talked about before are closing up shop. They're getting ready for the holidays, don't want to take any more risks, just a lot of different activities going on. So it's not exactly a great time, which provides you some comfort by having that underlying rating. So if you're in the market, you're in a tough time. You have a AAA insured on top and an underlying rating and the guy down the street from you only has a AAA insured, buyers will tend to buy that underlying rating. Underlying ratings today in our economic time are probably more meaningful -- this is Bill Reagan, not the bond market -- more meaningful than the insurance companies because we don't know exactly always who and when and what's behind the insurance Page 16 December 3, 2001 companies. It tells the buyer that, wait a second, somebody outside -- this credit analysis was done by a separate S&P or Moody's, and they're saying they have a very strong opportunity to repay this debt, no matter what happens to the insurer. So that's one of the reasons we added to it. The cost, by the way, is included in the insurance policy. We don't pay twice for it, so it works out pretty well. You also can secure your debt, very briefly, with a letter of credit provided. That's what we do on a short-term basis. Commercial paper, there's a letter of credit or AA letter of credit behind it. And really what happens is, the county takes on that credit of the letter credit. Nonrated bonds, I would never see the county in an opportunity or a place to issue nonrated bonds. However, you can never tell. I have issued nonrated bonds for communities in the State of Florida. Brevard County's an example where I did nonrated bonds. They got themselves into a problem with the courthouse they built 15 years ago. New commissioners came in and found out it was a COPS, which is nothing more than a lease purchase, and then the commissioners then decided to try to cancel the lease. The bond community got very upset with them. They needed to issue new bonds for a stadium that they promised the Florida Marlins. We were hired to underwrite the bonds, and we did them in a nonrated mode and got them done. Those are a few of the reasons you would do it, but I don't see yourselves getting into that particular -- if all of a sudden you take a look at your municipal market and for whatever reasons you don't want to go through the exercise of having an underlying rating or insurance or you can't get it and you want to issue municipal bonds and it works for you, you would do it. But I don't see anytime in the future that you're doing it. It's purely a market acceptance. Type of offering, negotiated versus competitive. You heard a lot Page 17 December 3, 2001 of ballyhooing about this more in, I would say, years back. We should always do our offerings competitively. As a financial advisor, I'm not a believer in that. Each deal has to be analyzed by itself. When we do a negotiated transaction, we still issue requests for proposals, still analyze the fees, and it gives us the ability to go through the process and negotiate the terms. You get a selection of your bankers; you use their assistance in structuring. If you do a competitive offering, you do not have those things that I said above. What you do is, is you prepare the official statement in-house, set a specific date and time that people shall submit bids, and then you go from there. And the standard is, is that mail out the prospectives, they come back, and you then analyze who has the lowest true interest cost. We also have what you call Intemet bidding which the county has viewed a couple times. That's something new where people submit their bids over the Internet. A little tense at times because it's not like the bids are mailed in or somebody walks over with a check. If your bid says everybody must have their bids in by noontime on December 1 st, the bids come over the Internet literally two and three minutes before noontime. So you're sitting there looking at a blind screen saying, "Oh, my gosh, there are no bids for Collier County." And all of a sudden they start popping up on the screen. It's new. It's technically concerning the same. If something goes amuck or power failures, thunderstorms in the afternoon, things like that -- so we, if we do them, we do them early in the morning during the summer, let's put it that way. I think Jim and you and a few of the other county officials viewed one we were doing for the City of Clearwater. Is that Pinellas County, something like that? MR. MITCHELL: Yes, right. MR. REAGAN: And it was. It was like that. It was very short and to the point. Page 18 December 3, 2001 I think if you were to do GEOGH debt, if you were to ask me what do you prefer, if you're doing general obligation debt, unlimited debt, you'd probably go with a competitive offering. If you're doing sales tax, gas tax in this market, I would recommend that we go through a negotiation process with underwriters as we did in the past. I think the bad rap that negotiated deals got years ago is there was a lot of campaign contributions and a lot of mix-up of the money and people got concerning that they were buying votes. All of that now has been put to bed since -- by being a licensee we are no longer allowed to contribute to public officials, and I think that has probably helped the business. In a day like today, for instance, we're printing your official statement for your sales tax transaction. How am I doing on time here? This is the benefit. If we were doing a competitive deal, I would not want to be in the market next week because we're doing a negotiated transaction. We are holding up. We're going to see what happens to the market. We get to play it day by day a little more, so it gives us some flexibility. One of the reasons we went that way. Who is part of a bond issue? First, I've explained my role as financial advisor. Next is your bond counsel. While he's hired by you and indirectly represents you, his true role is to represent the bondholders. He writes the opinion, among other things, for the bondholders telling them that this is a tax-exempt issue. And that's the key factor that a bond counsel does besides drawing up and structuring documents along with the financial advisor. Underwriters, you select them. They're the people who sell your bonds. In this particular case, your county staff and our office really did all the structuring, all the transaction work. What we're using the underwriters for is purely for the sales of the bonds. Underwriters also have their own counsel. Page 19 December 3,2001 And then the county also has what we call a disclosure. The county's disclosure counsel is the person who is required or responsible for creating the disclosure document, the official statement. Well, a lot of times that was done. And in some instances, it was done by the underwriter's counsel. As things progress and as you issue more debt, it's better to have your own counsel doing that. And, by the way, the fee is lessened within the underwriter's spread, we call it. Trustee bank. If we have some sort of an enterprise fund where we need to flow money into a trustee, the trustee bank would then act as the trustee disbursing construction money and holding monies and doing more trustee functions. But, generally, everything flows right into the county's coffers, and it's handled by the clerk's office. Your structuring market, you have a sale on -- I'll kind of buzz through these things. These are just how we structure. These are the different things that we use to provide it. A couple things in 'there is, you know, the length of the maturity, length of the transaction, call provisions, meaning that if someone buys a 20-year bond, they know they won't be called out until 8 or 10 years. The lower the call, meaning that if you can get called out earlier, the higher the interest rate. So we have to play the market exactly the same way on that. Marketing current and economic conditions, as we are right now, I discussed. Sale and process. After the sale the bonds are invested through the clerk's office accounting on the funds, which Jim's going to talk about. We do have ongoing reporting functions. I'll just briefly mention that a few years back the SEC -- that's not the Southern Southeastern Conference; that's the Securities Exchange Commission -- they said that we want municipal bonds to look more like stocks, meaning that if you go out into the secondary market and you want to buy a Collier County bond that was issued in 1985, you want to have Page 20 December 3, 2001 some sort of a reporting form that says, "This county's in good shape. Their audits are great," and you want to have that ability to access that. Now, you're required to do that sort of stuff. Every year we have to file with these different agencies that anybody can go in and check your official status and your annual reports. You have to spend down your proceeds within specific times. Rule of thumb, 36 months after the time you issued it. If you need an extension, you can get an extension. It's part of the old days, which is nothing more than a duplication of what we called arbitrage bonds. There were some communities in this state, and who knows, this one could have been one of them themselves. They would issue bonds to make money. You could borrow bonds at 5 percent and reinvest them at 8 percent and keep the 3 percent spread. The federal government said, "We don't like that, okay." So they knocked that out. And then we -- probably if you'll hear some things about black box bonds, that means nobody knew what was in the black box because there were no projects. They just made money on the bonds. And they were terrific. And some counties have made a great living off those bonds through the early '80s. iNow they want you to get rid of your proceeds immediately, and you're not allowed to reinvest your monies at a higher yield. If you do, you have to give it back. It happened to underwriters. They called it yield-burning deal, a little different, but the same thing happened. Restrictions on uses; if you're in an enterprise fund, water/sewer, you don't want to use the proceeds out building roads. If you're using your sales tax money and you say you're going to build a courthouse, you don't want to start building roads. Try to be specific on your projects. Not that I would argue with your buying counsel that he wants to come back and amend the resolutions, let's try to avoid that if we can. And that's it. And I'm open for any questions. CHAIRMAN CARTER: Members of the Board. Page 21 December 3,2001 COMMISSIONER HENNING: Bill, where are we at with the present bond that we -- with the $5 million? MR. REAGAN: Right. COMMISSIONER HENNING: Where's it at in the stream right now? MR. REAGAN: Well, two things. In the stream, it's being printed today as we speak. We'll put it into the market tomorrow, meaning that it will go out to all buyers. We hope that we could -- we probably will not price it next week, okay? We held back a few days here because we were concerned about the tax collector's building, which we're taking out of the transaction. I don't know if you know that or not, but we're going to take that out of the transaction. It's not a big hurt to the transaction or to anyone else, but it was something that, because it was a state function that we kind of had some concerns about, but if we can get into -- slip into the market into the week of the 17th of December, during that week we'll do it. If we don't like the market, we're going to wait until January. COMMISSIONER HENNING: Well, that brings up another question then. Where are we at with the tax collector's building? MR. REAGAN: I knew I shouldn't have opened up that can. I just knew it. As I said, I'm probably not qualified to answer it, but -- well, I'll answer it, if you'd like me to. Do you want to take that mic, or do you want me to take it? MR. OLLIFF: I'll take it. There is an attorney's opinion-- and just so the board understands what the building's function was, was going -- or is, is going to be to allow the tax collector to provide certain driver's license functions that are currently a state responsibility because there are some questions about whether it is truly a county function or a state function being provided by the tax collector. There was a question about whether it could be financed Page 22 December 3,2001 through a county-issued bond. So rather than risk that or any of the other projects that are included in that issue, it's much simpler for us, I think, and a better recommendation for us, at this point in time at least, to remove that project from the project list so that there is no question about the rest of the balance of the projects that are being financed. COMMISSIONER HENNING: I know that Guy Carlton is going to be banging on our doors, so hopefully -- well -- MR. OLLIFF: It doesn't make any difference in terms of the tax collector. It's more a question about our-- how we're going to pay for that building. And I think that we were trying to pay for it over a period of time because it is a capital facility with a life expectancy of over 30 years and was a good candidate for the issue. But we had originally, when the project was brought forward, not intended to finance it in the very beginning in the first place. And I think its current structure is going to be paid for out of Guy's budget. We will recognize less in terms of tutu-back or carry-forward from his budget, in the fiscal year '03 budget. But, in essence, it becomes a cash transaction as opposed to a financing transaction. CHAIRMAN CARTER: So it's a nice check we get back from the tax collector. It won't be coming forward because we have to take off for the facility. MR. OLLIFF: Well, I think it will be significantly less in fiscal year '03. But I think, bottom line on that project to us and to the tax collector, is that it is a public service function that, frankly, needs some major improvement from our perspective. And I think Guy's agency will be able to provide a much improved public service from not only his operations, but from a new facility there on Airport Road. CHAIRMAN CARTER: Short-term debt and the return? MR. OLLIFF: Yes, sir. Page 23 December 3,2001 Other questions for Mr. Reagan? MR. MITCHELL: I just want to make one comment ifI could, Tom. Commissioner Carter had asked about the feasibility of financing today, basically borrowing for future projects. You have a finance committee. It's made up of Mr. Smykowski, Mr. Reagan, the other representatives of Tom's office, and that's exactly what they do. They look at each and every project, not only the current projects that are on the book, but also financings that have already taken place. And what you saw come due to you on Tuesday night was something that was derived from that finance committee. So Tom's staff is doing a great job in analyzing current projects and also analyzing past financing to see how it can improve the county's position in the market through the interest rate. CHAIRMAN CARTER: Well, I appreciate that, Jim. And my remarks weren't in any way to say that we're not doing what we need to do, just to make sure we as commissioners, understand what our opportunities might be and looking to you, the finance committee, to guide us in what would be the most feasible way for us to meet the demands that are in front of us and how we can best accomplish that without what I call mortgaging the future or creating a crisis downstream because we're only doing short-term band-aiding problems that we have inherited that we don't want to continue to pass that along in the inheritance process. MR. OLLIFF: The only other thing I wanted the board to get out of this particular portion -- if you guys are going to cover this someplace else, just tell me to be quiet. But there is very basic categories that bonds can be issued in, and generally it's a GEOGH bond or a revenue. Or he did mention special assessment bonds, but I'd like for you to be able to give the board -- and it may be a better question for Jim and maybe even David -- just what is the process for being able to issue those types of bonds? What are the restrictions on Page 24 December 3,2001 county government in terms of a GEOGH bond versus a revenue bond? And I think basically some indication-- because there's about $2.9 million in outstanding GEOGH bonds shown on Bill's slide -- maybe just to let the board know what kind of projects we financed through GEOGH bonds in the past. MR. MITCHELL: Unfortunately, for this county, Tom, we'd be very limited in GEOGH bonds. Basically, with a GEOGH bond, it's a general obligation of the county. You're basically covenanting the full faith and credit of the county. Basically, your tax revenue is -- the first place that they will go will be to satisfy those debt service payments related to general obligation debt. A general obligation debt can only be issued via referendum. It has to be voted on by the public. There again, as you're well aware of in this county, we don't take too many of those things to them. The last GEOGH deal that we did, which is the one that's still on books, it's a Marco Island park out there. It was a limited general obligation debt. And, as Bill said, it is going to be paid off in the very near future. Special revenue bonds, I'm with Bill. That's pretty much the basket of debt that we currently have, even though a big chunk of it is in our enterprise fund. It's still what we call special revenue enterprise debt. We do have some special assessments out there, and special assessments are somewhat different, that you have a specific debt for a specific area that has a specific benefit. And that's the big difference there, is you have to be able to attach the benefit to the people that are paying it, and that's what's used to derive the payment related to that assessment. MR. SMYKOWSKI: Those were used in Naples Park drainage improvements. There was a special assessments study done to determine the benefit to each property in terms of drainage improvement, and then the assessment against each property was then Page 25 December 3,2001 based on the relative benefited portion to the home. And that's a specific example. CHAIRMAN CARTER: The special assessment doesn't go to referendum. But if you're going to take something else out there that touches the ad valorem, they both go to referendum? MR. SMYKOWSKI: Right. Ad valorem is referendum. A sales tax, gas tax does not require a referendum, but obviously there are potential implications on your operating budget that you have to consider. CHAIRMAN CARTER: And special assessments are not referendum; correct? MR. SMYKOWSKI: That is also correct. MR. OLLIFF: So one of your upcoming projects in terms of financing has always been looked as a probable special assessment district is your Lely basin six project, for example. That's a very major storm water drainage improvement project on the south end of the county. As you know, we've been struggling trying to get permits. We have submitted as of last Monday, our last, hopefully, permit application for that project. We expect to get permits for that, but that is a very large project and is probably going to require the creation of a special assessments district and then some ensuing bonds that will be based on that special assessment district as repayment. CHAIRMAN CARTER: Has there ever been a situation where a special assessment has been considered county-wide because it affects something that everybody needs? MR. REAGAN: You can make your district, your special assessment district, county-wide. That would receive the benefit. You have to do the findings and determination and methodology for the benefit. CHAIRMAN CARTER: You'd have to go through a process, Page 26 December 3,2001 no question. I'm just asking a global question here because I'm trying to look at everything that's in front of it. MR. REAGAN: Right. CHAIRMAN CARTER: What are the feasibilities of using anything? MR. REAGAN: Right. CHAIRMAN CARTER: Thank you. MR. OLLIFF: Any other questions for Mr. Reagan? MR. REAGAN: You know, within that book that we handed out, I think we showed the outstanding debt in kind of a long spread sheet format. Also, we gave you another book that shows that we periodically once a year do a debt capacity analysis for you. You should have one that looks like what we were just talking about and one that talks about debt capacity. Did anybody get this one (indicating)? I think we have some extra ones here. Why don't you go ahead and -- and those are snapshots of that particular time, like, I think the last one we did was in February, of what your capacity to borrow is. So you look at that, and it becomes a little bit complicated in certain points. But you're certainly welcome to call me or talk to Mike or Jim, and they can kind of siphon through. But it kind of tells you what you have available to bond sales tax, what you have available to bond gas tax, and things of that nature. So you can kind of-- while it's not exact, because interest rates are changing and your projects are changing, it gives you some idea. I think the last one we did, we did this one just for Mike in the finance committee. We showed ours -- after this bond issue and paying debt service on this bond service on the sales tax, what did my analysis show approximately? We could raise about $144,000 in project funds. That's just today. That's showing no increases in your sales tax. That's just a static level. It's a snapshot. COMMISSIONER COLETTA: And how long would this type Page 27 December 3,2001 of fund work? MR. MITCHELL: About 20 years. COMMISSIONER COLETTA: So, in other words, if we were to use this to build our roads for the next 5 years and we're buying it for 20 years out and then we'll have to use whatever we're using that money for at this time, to replace that, would have to come from ad valorem? MR. REAGAN: Ad valorem or somewhere else. COMMISSIONER COLETTA: That's correct. MR. REAGAN: Right. Well, I mean, you're right on point, Commissioner. If you need $20 million to borrow $150 million, that $20 million is coming from something. And that's why, you know, this whole group went through a long exercise in the sales tax referendum. COMMISSIONER COLETTA: That's a paid-for decision we're going to have to make. CHAIRMAN CARTER: You said there's only $144,000 to work for -- work within this one particular category. MR. REAGAN: Million. MR. SMYKOWSKI: You meant million, right, not thousand? MR. REAGAN: Did I say thousand? Excuse me. There's $144 million approximately of remaining capacity in the existing sales tax. CHAIRMAN CARTER: Well, your first one scared the hell out of me. MR. SMYKOWSKI: And approximately $150 million in gas tax capacity. So collectively, between those two sources, you have approximately $200 -- $290, $295 million. Obviously, that varies as market conditions change. COMMISSIONER COLETTA: Well, question on that. Is that based on today's dollars coming in, or is this prorated out over a period? Page 28 December 3, 2001 MR. REAGAN: Today's dollars. COMMISSIONER COLETTA: So, in other words, sales tax goes up because prices go up, and the people buy more because there will be more people? There will be extra dollars to be able to work with, in addition to what we got today, and they will not be -- not have to go for this particular thing. They're free and clear. In other words, we're pledging dollars -- a certain amount of dollars, not the whole revenue stream? MR. REAGAN: That's correct. I mean, you will pledge the whole revenue stream, but you only take what you need. That's all they're asking for. So if you're saying you're going to give them $2,000 a year and you collect $5,000, you get the balance. COMMISSIONER COLETTA: On historical data that you have in front of you, can you give us some sort of projection how we can expect this to increase in other words, five years out, ten years out? And what will we have in extra funds that we don't have today that we'll still be able to work with, our future commissioners will be able to work with? MR. REAGAN: Mike will take it. MR. SMYKOWSKI: Commissioner, sales tax has typically grown anywhere from 6 to 9, 10 percent per year. Up until last year I think it was in the 4 to 5 percent range. And then this year, with the recommended reductions that the State Department of Revenue -- they're calling for a relatively flat sales tax collection. So if you bonded away your full sales tax capacity in current market conditions, you'd have little to no growth revenues available for other things. You would be obligating all of your sales tax for debt service. COMMISSIONER COLETTA: I understand. But we're talking about future; we're not talking today. And the future is based upon a number of years preceding us, 10, 20 years to go forward. What we are seeing now is a little blip in the screen. The only thing we've got Page 29 December 3,2001 to go with is our past to be able to project it forward. MR. REAGAN: We do our analysis, just so you know, just generally as a 3 percent increase every year when we're taking it out. And that's very modest. COMMISSIONER COLETTA: So we're not totally painting ourselves in a comer with this? MR. REAGAN: No. No. It's during the next three to four years. And the other thing, you're not going to borrow it all right now. I mean, I don't know -- I haven't talked to the facility's manager or met with your administrator directly. I don't know exactly how much you need exactly when you need it. It's almost impossible. I think Tom and I have had discussions about this to try to spend $150 million in six to 12 months so you're not going to be borrowing it all today. COMMISSIONER COLETTA: I see what you mean. It's going to be projected over-- MR. SMYKOWSKI: When you borrow in series in conjunction with project need, the 50 -- probably 40, $50 million. COMMISSIONER COLETTA: And that leads to one more question. Now, we're at historical lulls for, like, ten years now on the interest rate. Is there some way that we could get a commitment to be able to borrow X number of dollars over a one-year period? I see you shaking your head no, so I won't go any farther. MR. REAGAN: You mean a commitment that you plan to -- COMMISSIONER COLETTA: That the money would be available at current interest rate, whether we use it all or not. MR. REAGAN: No. But there are some other techniques that we can introduce that will help lighten the burden a little bit on that. We can talk about that as we get closer. COMMISSIONER COYLE: How does our current plan to substantially increase impact fees affect what we just discussed? Page 30 December 3,2001 MR. REAGAN: I don't know. I really don't know what you're planning on increasing and how it's going to help you. COMMISSIONER COYLE: So this hasn't taken into consideration any anticipated increase? MR. REAGAN: I think that one you're looking at is probably six, seven months old. MR. SMYKOWSKI: The other thing about impact fees, let me just do -- impact fees alone are a poor security. You don't just take impact fees and go out and build a road with it. I doubt we could get it in secured, to be honest with you, because they're very elastistic. We don't know which way they're going and when there's one slow- down of the economy that one tends to crumble very rapidly. COMMISSIONER COYLE: But service fees are different? MR. REAGAN: Yeah, service fees are revenue fees. COMMISSIONER COYLE: We're planning on increasing both of them, as far as you know? MR. REAGAN: Usually what people do is, you just add your impact fees as a secondary pledge. COMMISSIONER COLETTA: Mr. Coyle brings up a good point. As we get closer and closer to build-out, and we will in the urban area, there will be a lesser stream of impact fees. People coming into trading houses will not be paying those fees. That's why the transfer-- MR. OLLIFF: Transfer tax. MR. REAGAN: Real estate transfer tax. COMMISSIONER COLETTA: That comes from the State level. And I think you addressed this several times already -- MR. COYLE: Yes. COMMISSIONER COLETTA: -- saying that we've been looking at it for quite a few years within the county. And when you go before the state delegations or you go to Tallahassee, make sure Page 31 December 3,2001 you keep that issue in front of them. COMMISSIONER COYLE: I'm surprised that that isn't a state requirement. We can't do that locally. CHAIRMAN CARTER: There was one that we raised what? Six, seven -- I don't know -- earlier on this year we raised that, Commissioner Coyle. And unlike you, I was really surprised that we couldn't put that in the mix, but it is now one that we're asking the state to consider in the legislative process. Whether they'll get to it next session -- but I'm hoping -- I have more hope for 2003 legislative session than I do for the next one. COMMISSIONER COLETTA: So let's not give up. CHAIRMAN CARTER: Never give up, but the reality of getting it is the other side of it. COMMISSIONER COYLE: So I understand the issue, we're asking the State to approve a property transfer tax for the entire state or provide it as an option by county? CHAIRMAN CARTER: I think we're asking it as a home-rule situation by county. COMMISSIONER COYLE: Thank you. CHAIRMAN CARTER: I believe I'm correct in that. MR. OLLIFF: I believe you are. The only other point that I think is important while Bill is here is just to understand coverage requirements a little bit. And I think when we were talking about different type of revenue sources that are the repayment for whatever bond you're going to issue, depending on the volatility of that, Bill touched on, you may have a requirement for a secondary pledge of revenue if it's very volatile and depending on the revenue stream. You're also going to have what they call coverage requirements. That means you're going to be required to budget and set aside an amount of money that is larger than your actual debt service for each year. Page 32 December 3, 2001 So, for instance, I believe our sales tax bond issue this current time has got a coverage requirement of 1.37 MR. REAGAN: 1.25. MR. OLLIFF: 1.25. So that means we have to budget and set aside 25 percent more than what the actual debt service is for each year to make up for the fluctuating possibilities of that revenue source. Now, that's good and it's bad. I think it's good for the bondholder that it provides a certain amount of security that they're going to get their payment. But on the other side of the coin, at some point you need to recognize that we are budgeting more, especially in what has been a traditionally growing revenue source. Then we are probably going to need to repay debt service in terms of having some additional sales tax revenues available. You should in the out years have some from that alone, let alone, from sales tax growth. MR. REAGAN: Let me add something to what Tom was saying, is that, example, your coverage level for the sales tax with this current debt service is, let's say, 2.5 times. That means you have two and a half times coverage level. We keep our revenue number static, means they do not change. But if run them out with slight increases, as we talked about in the year 15, you'll have six to seven times coverage. The other thing you should -- not to make this too technical, when you issue additional bonds, that coverage level comes into play. What you are required to do is that your documents will say -- and these are typical in all bond documents -- that you shall have one -- say, 125, 130 times coverage, whatever that number is -- for 18 of the preceding months which include the new debt service. So it's an additional bonds test. It becomes even higher than what you see. It's just a calculation that you have to go through, but we wouldn't want you to see just that number and then you get to pledge it all. It's some number less that. Page 33 December 3,2001 MR. OLLIFF: Any other questions for Mr. Reagan before we send him out to get on a plane? (N o response.) MR. OLLIFF: Bill, thank you very much. MR. REAGAN: I'd rather be here than on the plane. MR. SMYKOWSKI: For the record, Mike Smykowski, budget director. The remaining two components of our workshop today are to discuss budget fundamentals, and then Mr. Mitchell will talk about the clerk and finance department roles and issues that they addressed. Let me talk initially, some of the core things. The purpose of a budget. Obviously, a budget is a summary of planned revenues and expenses for a given period of time with emphasis on the plan that as we're preparing the budget at any given point in time, we're well in advance of the county's fiscal year. In preparing the FY '02 budget which was adopted for implementation this October, we send out worksheets, and staff actually began preparing that in the February, March time frame. So you're talking about approximately six months of lead time. You know your estimating revenues 18 months in advance, as well as expenditures. So there is some, certainly some give and take, and I think the board will have a greater appreciation, those having gone through the last budget cycle. Obviously the budget is to balance many different needs, taxpayers, county's commission initiatives, staff and county department initiatives, as well as needs for facilities required by the constitutional officers. Who are the players and what are their roles? I'll talk quickly, and this will be more for the benefit actually of the viewing public. The county organizational structure and the roles of the board, the county manager, the constitutional officers, and the distinctions between the budget office and finance department, that is under the clerk of court's purview. Page 34 December 3, 2001 Board of County Commissioners obviously is the legislative body of the county government with the power to levy taxes and approve the annual county budget and regulate land use in the community. County manager is the chief executive officer, one of three contractual employees working for the county, with the others being the county attorney and airport authority director. And he's responsible for administering all board policies for the county. You do have a number of constitutional officers; the property appraiser, tax collector, sheriff, supervisor of elections, and clerk of courts: Interestingly, the property appraiser and tax collector budgets are approved by the State of Florida with an appeal process or appeal right given to the counties. That's part of the whole check and balance system, so there can't be undo influence in the budget process to influence valuation of property, etc. But ultimately, again, the property appraiser and tax collector's budgets are approved by the State of Florida through the department of revenue. The sheriff also we haven't gone that route, but the sheriff actually has an appeal process to Tallahassee if he feels he can't fulfill his constitutional obligations to deliver public safety in the county based on the budget provided for by the Board of County Commissioners, and that obviously creates a whole series of problems, because after the budget and tax rates are established, the whole appeal process goes to Tallahassee in the governor's cabinet. And there's some adjudication kind of after the budget's already been established and the tax rates have been established. And, you know, obviously, and typically, the sheriff is seeking additional funds above and beyond what has been provided by the Board of County Commissioners in that budget process. So that's an interesting road that thankfully we haven't embarked upon in Collier County. Distinction between the office of management and budget and finance department roles: OMB assists in developing the annual Page 35 December 3, 2001 county spending plan. Finance verifies the revenues and expenses to be valid and executes payment or receipt. And Mr. Mitchell will elaborate on that in more detail in terms of the process by which bills are paid and the whole progression from the point and expenditures made up until the time a bill is actually paid. And then, on the back end, the audit to verify that, in fact, everything was done in accordance with law. An important element is the accounting system number sequence. It's derived from what is known as the UAS Manual, Uniform Accounting System. And it provides a uniform system of financial reporting for local governments, and it promotes consistency across jurisdictions. It's a little hard to read. There is in front of everyone at your place -- there's a Xerox copy of this. And it shows an inverted pyramid that identifies the hierarchical structure of the county. Initially up front there's a three-digit fund number. The general fund being the one that's given the most attention is a one. The number sequence does have meaning. The special revenue funds: If a fund begins with- the digit is a one or seven, signifies a special revenue fund. In this case you're talking about things like MSTUs where people have taxed themselves for a specific purpose. The debt service funds all begin with a two; capital funds, three; enterprise funds, four; internal service funds, five; and trust funds all begin with a six. MR. OLLIFF: Define for the board, real quickly, just some examples of internal service funds and trust funds so that they -- MR. SMYKOWSKI: Sure. A trust fund example would be like the library trust fund where people bequeath money, donate money to the library in their wills and the county acts in a trustee capacity to ensure that those wishes are carried out. And that money is restricted and used solely -- if someone left money to the library in their will, obviously you can't take that money and spend it on parks. So it is in Page 36 December 3,2001 a specific fund separate and distinct from the library budget and the general fund to ensure that, in fact, that money is ultimately spent on a good or service benefiting the Collier County library system. And internal service fund, an example there would be your fleet management department where you're providing certain fleet management services for all county vehicles. That's the clearest example there. The next component in the cost string is what we call the cost center. It's a six-digit number. It actually provides -- identifies by the first two digits, the division. The next two digits identify the department, and then the last two digits identify the officer section. So in the first case, the example here is 56380. The first two digits, 15, signify that it's public services division. And these are used for internal accounting and budgeting purposes. The department, the second two digits, 63, indicates parks and recs. So all parks and recreation cost centers will start with 1563. The last two digits would indicate typically the location of the park. And what we've done there is to identify the costs, as well as the revenue. So you can see programmatically on recreation are you making money or losing money? Is one park doing better than another? How can we best tailor the needs of the public in those various facilities? MR. OLLIFF: And don't be worried. These two guys are the only ones who will recognize numbers at that level well enough to tell you which department or cost centers they are. You're not expected to, or nor would you ever be expected to. MR. SMYKOWSKI: At one point we had that number stream in the fiscal impact section of your executive summaries. And looking back at that process, obviously, the primary customer, so to speak, of that fund and cost center number is typically the budget office or someone in finance who's processing payments. So what Page 37 December 3,2001 we've done is tried to use plain English and use words rather than that it's in the, parks and recreation budget, to make it plain English for the lay reader. And then on the transmittal slip we're looking, in terms of our review of the executive summaries, to ensure that money is available where staff says it is to fund a contract, whatever purpose, whatever transaction is being proposed. The board's used to seeing the term as appropriation unit, and that is personal services, operating capital. That's how we summarize. Obviously, personal services are salaries and benefits. Operating are anything from supplies to utilities. Capital out-lay, obviously, is something like a useful life over a year and defined as being greater than $750. And that's kind of the core distinction. Again, the object of the numbers do have the sequence. The five is -- any object code that begins with a five is personal services; six and seven, work capital out-lay. We also use, especially in the capital project area, project numbers. Obviously, in a road fund, you may have 20 or 30 different road projects under budget at one time. Obviously, just to have one lump-sum number and to be able to monitor that and keep track of how much money is available does not work very well if you did not use a project number system. What we do is, tag on a five-digit project number at the very end, and that signifies the specific project to which that budget is associated. So you may have, again, 20 different segments, a number of Livingston Road segments. It would be -- from Radio Road to Golden Gate Parkway is a segment. And Davis to Radio Road is another segment. And we would actually budget each of those with its own unique project number to enable us to monitor costs and also determine how much money is available in a given project. Again, relating to the funds structure, obviously, the general fund, again, gets the most attention. It's a fund for government Page 38 December 3, 2001 services provided to all county residents, and it does include the City of Naples, Everglades City, and the City of Marco Island. Obviously, the primary funding source is ad valorem taxes. The special revenue funds are used to account for specific revenue sources that are legally or administratively restricted for specific purpose. Example would include special taxing districts, the various beautification districts. People come to the board and say, "As an entity in our area, we want to tax ourselves to provide median beautification." Other examples, special revenue funds; there are Grant funds; the county development fund, which is funded by building permits and permit fees on Horseshoe Drive. Anything associated with the cost of regulation of the building industry is included in that fund. COMMISSIONER FIALA: Can I ask a question, Mike? MR. SMYKOWSKI: Yes. COMMISSIONER FIALA: With CRAs, the money that goes back into that particular community after they've met their baseline, what title is that under or would that be under? MR. SMYKOWSKI: Those would be special revenue funds. I believe they're Funds 187 and 188. There's a special revenue fund, one for Immokalee and one for the Bayshore/Avalon area specific. So any revenues accruing to that, those are tax increment finance where they're peeling off a piece of the general and unincorporated area general fund monies that are being placed back into those respective CRAs to fund future improvements. And by virtue of the fact that it is in its own budget as a separate fund, until that money is spent, it will obviously continue to roll over and be available for use, and it is restricted solely to benefit those areas. COMMISSIONER FIALA: Um-hum. Thank you. MR. SMYKOWSKI: And there's a number of funding sources here. You have both the ad valorem taxes. You have some fees and fines, surcharges, permit fees. Page 39 December 3,2001 Debt service funds: This kind of dovetails nicely with Bill's presentation. Obviously, I used to account for payments of principal and interest on any outstanding debt issued by the county typically, again, funded by specific revenues pledged on each bond or loan. Again, two principal types are general obligation bonds, which are secured by ad valorem taxes. Again, we only have a few years of outstanding obligation left. About 18 years ago, the board issued general obligation bonds to fund the construction of the initial five community parks in the community, and that is the only current outstanding general obligation debt that the county has. The others are various forms of revenue bonds with gas and sales taxes. And the principal issuer in the county in terms of debt is in water and sewer to fund, obviously, plant expansions. Capital project funds are used to account for the revenues and expenses to construct or acquire major capital projects in the county. Obviously, examples, new roads, new buildings, and actually major building renovations as well. Funded primary by impact fees, gas taxes and a piece are also funded by ad valorem taxes in that a lot of your reconstruction projects are not impact fee eligible because they're not creating new capacity in the system. So you have to fall back on either user fees in the case of water and sewer; or in terms of general government facilities, you will be funding those through the general fund. Obviously, a simple example is libraries. You have a component of your library impact fee going to fund new books as the library system expands. But obviously, as you use books, they do not have an indefinite shelf life. And as they become worn and outdated, they have to be replaced. There's a certain component that still has to be replaced on an annual basis to keep the inventory current in the system, and that is not impact fee eligible. So the general fund picks up a small piece of that. Page 40 December 3, 2001 Enterprise funds are operated like a private business. Examples include the county water and sewer district, the Goodland water district and your solid waste funds. These are primarily user fee funded. Internal Service Funds, again, account for operations providing service to other county departments. The biggest example is, again, as I mentioned earlier, the fleet management. And you also have self-insurance funds for risk management, and there are three. That is property and casualty, group health and life, and worker's compensation. And they are funded by billings for services. In the case of fleet, based on cost in secured. In the case of risk management, it's either by number of employees or by risk category in terms of property and casualty. In trust and agency funds, the board is acting in a trustee capacity. In these funds there are a number of them. There's probably 10 or 12 funds. There is a limited policy-making role for the board, but they are very much restricted in use. Some of the examples, again, I mentioned the library trust fund. There's a number of law enforcement trust funds and a drug abuse trust fund and typically funded by donations designated for specific purposes. Obviously, for the benefit of the public, the budget calendar, there are -- is a distinction. The county fiscal year obviously starts in October versus the calendar year begilming in January -- will focus on key dates in the budget process. And it's important to note that many of the calendar deadlines that are required and that dictate really our whole budget preparations schedule are dictated by Florida statute in the truth in millage, what became known as the truth in millage or trim process. Calendar year, obviously, it starts -- the fiscal year starts on October 1 st, ends on September 30th. Budget process typically begins in September -- in February -- excuse me -- and is finalized in Page 41 December 3,2001 September. In terms of calendar milestones; November, December you have the citizens' survey. And that kind of leads us into a strategic planning in terms of service, review of citizen needs, how they feel about government services and the like, upcoming issues. And that leads you into your strategic planning process. February and March, you typically adopt a budget policy which is kind of the basic framework for what you're going to be budgeting, the rules that govern the process for the upcoming year. We typically hold budget workshops in June so that you have a feel or a sense for the ad valorem tax implications of that budget before the trim notices are sent out. And I'll talk about that in a moment. On July 1 you get the tax roll certification from the property appraiser which allows you to finalize your tax rates. Obviously, the tax rates are a function of the dollars needed -- it's actually simple math -- divided by the taxable value. We get a preliminary estimate on June 1 of the taxable value for planning purposes so that when we conduct the budget workshops, we have a ballpark idea of what the millage rate implications are. Typically on July 1, we will get a final version that is certified to the State Department of Revenue and is used for ultimately calculating the tax rates that are adopted. And we release the tentative budget July 15th. That's a statutory requirement. Typically in late July we set the proposed millage rate. We have until August 4th on an annual basis to get the proposed millage rates to the property appraiser and tax collector for purposes of establishing or preparing and filing the trim notices which go to each individual property owner in Collier County so that they understand the implications to their individual property of both the proposed millage rates and the impact resulting from any changes up or down in assessed valuation of that property obviously, in Collier County, Page 42 December 3, 2001 for the most part. That's typically been an increase in taxable value over time. There has been concern noted in the past from some folks attending the budget hearings in September, and that's the last stage in the process in terms of adoption as prescribed in Florida Statute; two hearings in September, a preliminary and a final. And, you know, obviously, September is not the most populated period of time from a calendar month in Florida. Obviously, your seasonal residents are here typically in the March, April period. For better or for worse, though, the process is dictated by those Florida statutes, and we have no ability to differ from those. All of the taxing entities, not only Florida counties, but independent fire districts, the South Florida Water Management District, the school boards are all conducting their hearings in that September time frame as well. And that is the way the statute is established. MR. OLLIFF: Mike? MR. SMYKOWSKI: Yes. MR. OLLIFF: This would be probably a good time to take a break. But before we took that break, if the board members have any questions on the budget portion up to this point ... COMMISSIONER HENNING: Yeah. And I think this is for everybody watching. Our millage rate is -- MR. SMYKOWSKI: The general fund is 3.8772. COMMISSIONER HENNING: And we're allowed to go up to? MR. SMYKOWSKI: Ten. COMMISSIONER HENNING: And that has to meet voters' approval? MR. SMYKOWSKI: No. We have that latitude by the -- prescribed in Florida statute, 10 mills for our county government Page 43 December 3, 2001 purposes. And the board has the latitude, obviously, to increase the millages based on, obviously, budgetary needs and their views as to prioritization of projects or expenditure needs. COMMISSIONER HENNING: And on a trim notice -- and people might refer to it as the tax bill -- we set all the millage rates for the school and fire districts and -- MR. SMYKOWSKI: Technically we don't. They are all listed on one notice, all the taxing jurisdictions. It comes out from the property appraiser. But the ones that fall under the domain of the Board of County Commissioners are to be the general fund and a number of MSTUs, but the school board, the South Florida Water Management District, the city millages are all governed by separate elective governmental bodies, just like you are, that are making individual decisions on their respective budgets and tax rates, just like the board is. CHAIRMAN CARTER: I think that's probably the most difficult communications that we have is to get the taxpayer to understand that ours is one portion that we are accountable for, and the other entities are accountable for what they do. And that is a major, major hurdle of communications for us to get across, and I don't know the answer to it other than we've got to keep repeating and repeating and repeating that this is the process. Also is, you know, the criticism that you mentioned about why do we do this in September? It is not only, as I understand, the State of Florida. But I don't know how many other states -- maybe it's nationally -- they all go through the same budgetary process. Counties nation-wide do this. We just happen to live in an area, because of a lot of seasonal ownership and visitors, that we fall to this criticism. But it is, as you said, state statute. And I think it just behooves everyone to pay attention to that trim notice when you get it in July because if you have a question, that's the time to begin to raise Page 44 December 3, 2001 the questions back to the Board of County Commissioners. MR. SMYKOWSKI: That's correct. Some of the slides I have in the balance of my presentation also focus on the relative share of the tax bill, school board versus county versus city versus other independent districts. CHAIRMAN CARTER: And you may touch on this on the rest of your presentation, but we still, out of 67 counties, have the lowest ad valorem tax rate. And, also I think the question that comes up because of assessed valuation, there is a clustering of counties that we looked at that are similar to our assessed valuations that show that Collier is within a basket of saying that -- you know, comparable counties, that we really are a fiscally conservative county in terms of what we have to do to provide services. MR. SMYKOWSKI: That is true. In speaking with Mr. Arnold, who will be the lobbyist for the county, that was one of the first questions, what is the county's current millage rate because, frankly, while the board has been conservative, and it is low, that actually works against you in Tallahassee when you are up there, you know, looking for funding. The first question from them is, are you levying 10 mills like some of the other counties? So it's kind of a hit-or-miss situation. COMMISSIONER COYLE: There's an additional consideration, and that is that our property owners here have not gone without property tax increases. They have been hit with some fairly substantial property tax increases merely because our property is becoming more and more valuable. And inflation here is far greater than inflation in a lot of other counties that have higher millage tax rates. So I think we must not lose sight of the fact that our people are paying a lot of taxes merely because their property is valuable, not necessarily because of the millage rate. MR. SMYKOWSKI: And in the last couple of years, because Page 45 December 3, 2001 the "Save Our Homes Initiative," you've also had a major redistributable effect because of the fact that homeowners with the homestead exemption are capped at 3 percent or CPI on the increase in their value, shifting the burden to nonhomestead properties, as well as commercial properties. And that's typically who you heard from in terms of-- I know the letters I responded to this year were a lot of out-of-state owners whose values had skyrocketed 30, 40, .50 percent or better. COMMISSIONER COYLE: And an increase who were homesteaded elsewhere. MR. SMYKOWSKI: Correct. COMMISSIONER COYLE: Or businesses. COMMISSIONER COLETTA: Who are multiproperty owners and own more than one property. CHAIRMAN CARTER: Well, the other side of it is, we still don't -- I don't know the exact number. What is it? Seventy-eight percent of our taxes, ad valorem taxes, are paid by individual property owners. We do not have the industrial business technological park kind of basis of which there's any major absorption by both businesses. And until we can get businesses here like medical research facilities or high-tech parks and things where you shift some of that absorption in your tax rate, we will continually be confronted with the brunt falling on individual property owners. So I think that's all got to go into the mix. We're running over in the break time. Let's take 10 or 15 minutes here and let magic fingers get a rest. (Thereupon, a brief recess was taken.) CHAIRMAN CARTER: Okay. Welcome back to our listening audience. We are in the midpoint of the workshop of budget and finance that is helping all of the county commissioners look at any and all possibilities in which we're not only dealing with the current Page 46 December 3,2001 situations, but the furore. And if you're just joining us, please, at your earliest opportunity replay it on our government channel and watch it all and watch the first part because you will get great insight in what our financing conditions are. Mr. Smykowski. MR. SMYKOWSKI: Yes, sir. Thank you. Welcome back. Now, the next item I'd like to talk about is budget-monitoring tools that are available. First and foremost in that is the financial management system which provides real-time transaction updates. At the desktop they can see currently how much money has been expended year to date against the budget, what encumbrances are outstanding? It gives that specific detail in terms of vendors. It also shows revenue transactions as they occur as well. For instance, if you look at impact fees in the morning and look in the afternoon, the number will be different because it is, in fact, real time. So it is the best source of information in terms of being most up to date and accurate. There's also monthly revenue and expenditure reports that are available -- the county manager on a quarterly basis brings that out -- the vital signs report to the board and for the benefit of the public. And a new initiative is the capital projects tracking system. Obviously, as we're in the midst of a number of aggressive construction campaigns, roads, utilities, etc., the sheer volume of projects themselves and at what page they are and what stage of budget, what stage to completion, remaining schedule, just a sheer volume of information to try to stay on top of. We feel that's going to be a good tool, both for staff, as well as the board, to manage that process a little bit. Budget versus cash distinction is very important. Obviously, the budget is the summary of planned revenues and expenses for a given period. And according to Florida law, obviously budget revenues Page 47 December 3, 2001 must equal budget expenditures. Cash is obviously money available to pay for the planned expenditures found in the budget. You can't have an expenditure without a budgetary appropriation. If you don't have the cash, you can't have an expenditure. And what you really need -- the ideal combination is obviously budget and the available cash. And we'll walk through that. The next few slides show a real-life example of a planned budget and what happens in the worst case if the actual cash does not materialize. Here's a specific example from this year's beach renourishment fund. Obviously, revenues equals expenditures. The left-hand side of the ledger here is the revenue side, total revenues of $17.7 million. However, it's important to note that the first item, tourist tax revenue, is budgeted with new revenue coming in anticipated this year at $6.4 million. Now, on the expense side, obviously, again, we are in equilibrium. There's $17.7 million in total projects and reserves with projects making up $10.1 million to be aggressive on beach restoration efforts. COMMISSIONER FIALA: Might I interrupt you for just a second? MR. SMYKOWSKI: Sure. COMMISSIONER FIALA: With the tourist tax, is that figure that you are estimating? This 6.4, was that arrived after the September 1 lth tragedy? MR. SMYKOWSKI: No, that was before. COMMISSIONER FIALA: Okay. MR. SMYKOWSKI: That was before. Now, the next slide is a what-if, kind of, worst-case example. You note that on the right-hand side, the projects are still budgeted at $17.7 million. You're barreling along, but on the left-hand side of the ledger, suddenly what if tourist Page 48 December 3,2001 tax only brings in $1.4 million instead of the previous $6.4 million? Obviously, you see total revenues from a -- would only be $12.7 million versus your anticipated $17.7 million in total expenditures. What they do in those situations -- you do have some built-in budgetary safety valves. Contingency reserves: You're budgeting a minimum of 5 percent per operating fund, and those are available for unanticipated expenses and/or emergencies. In addition, state law requires that you only appropriate 95 cents on the dollar. That's to provide a built-in safeguard against overly aggressive revenue estimates and/or revenue shortfalls. Obviously, that helps. Some of the built-in protection that you will see the benefit of this year is in tourist tax revenues and sales and gas taxes following the September 1 lth terroristic attacks and the resulting impacts on tourism in this community. Obviously, the first 5 percent shortfall, so to speak, is observed in this cushion thafs built in, this built-in safety valve that state law requires. Here it is. It's 95 cents on the dollar. Example, if you have $1,000 in revenue, your 5 percent revenue reserve is $50. Your net appropriation that you could budget for expenditures would only be $950. So, again, there is that built-in safeguard. Overall, the size and scope of the budget: There are 130 different funds. I talked about the various fund types earlier, special revenue, enterprise, trust funds, etc. There are 130 different funds currently in use in Monroe County. CHAIRMAN CARTER: Mike, excuse me, before you leave your tourist area. MR. SMYKOWSKI: Yes, sir. CHAIRMAN CARTER: You presented that at the last board meeting showing worst-case scenarios and how we would reduce and delay to accommodate the worse-case scenarios. So our listening Page 49 December 3, 2001 audience does not get the impression that we haven't already done that, we have done that. And we have the projections, and we have already curtailed projects. And we've already deferred so that we are not in trouble and only doing what is significantly important. MR. SMYKOWSKI: That is correct. And I backed up to that slide again just to reiterate this. Obviously, in the event that you had a $5 million shortfall in this tax -- in this beach renourishment fund, you're looking at total revenues of $12.7 million. On the expenditure side, you've still got 17.7 to bring the budget back into equilibrium in terms of, the initial budget was in equilibrium, but now you have to deal with what are the actuals likely to be. If you're anticipating only $12.7 in total revenue, you obviously have to decrease budgeted projects by $5 million to bring that back into equilibrium at $12.7 million. MR. OLLIFF: Mike was only using this as an example to show you in particular a fund that is contingent upon a fairly volatile revenue source. MR. SMYKOWSKI: Right. CHAIRMAN CARTER: But I didn't want the confusion out there, Tom, because people are watching this thing. And they'll say, "Oh, what did they do?" Well, we've already done it. We accommodated for that $5 million in this example. So if everybody just goes-- MR. SMYKOWSKI: That is correct. CHAIRMAN CARTER: -- back and looks at it, they know that it's already been done. The County Commissioners are responsible and have taken action already. MR. SMYKOWSKI: In this worst-case.scenario, in the event that that were to come to fruition, you have deferred the Vanderbilt of parking garage, which is a substantial amount to bring that budget back into an equilibrium stand. Page 50 December 3, 2001 CHAIRMAN CARTER: And we didn't hurt current beach renourishment projects. So the saying gets back on the beach, we do the things that have to be taken care of. So I would like people to rest easy that we have made the adjustments in areas that really wouldn't hurt the beach itself. MR. SMYKOWSKI: That is correct. Let me jump back ahead here. Okay. Where dollars go, the 2002 budget: There's a whole host of things here. They're defined by function activity number, which sounds like a jargonistic term, but each cost center -- we talked about the cost center number -- within the uniform accounting standards, there is a function activity associated with each cost center budget so, in other words, physical environment. Intuitively, that doesn't tell you what that is, but those are things like utilities, solid waste, and storm water management, management of the physical environment. Obviously, transportation is -- makes up 14.7 percent. Public safety would include things such as, obviously, the sheriff, the various fire, EMS and medical examiner functions. Human services and economic environment are things like housing and urban improvement, veteran services, and your contract with the Economic Development Council. General government includes things like the county manager agency, kind of the core functions of government, the Board of County Commissioner's Office, the tax collector, the airport authority, etc. This gives you a breakdown just by type of expenditure, what the annual appropriations are in place for. Obviously, the flip side to that, the corollary, is available revenues. It's a total of all funds. Of note is that ad valorem actually makes up, in the total county budget, only makes up 13.6 percent, $150 million of the total county budget. And that's because, again, you have those 130 various and distinct funds, a large component of Page 51 December 3, 2001 which are your enterprise funds, such as utilities, solid waste. One thing I'll talk about, enterprise and solid waste are covered under service charges; gas and sales taxes, obviously a key inter- governmental revenue that we have; permits, things like obviously our building permits. Impact fees represent almost $40 million, and there's a budget of dollars of revenue. And you go back ten years, and it was probably -- I don't know -- ifI had to guess, 12 to $15 million. So in terms of volume and in terms of the number of new impact fees that are currently in place, that has had a tremendous impact overall in magnitude in terms of what percentage of the total budget that is. The other thing I'd like to talk about, and we'll get into in the next couple slides, is carry-forward. That's an often- misunderstood issue and a subject of great discussion as we talk about the annual budget. COMMISSIONER FIALA: What was internals? MR. SMYKOWSKI: Internals are things like transfers. Internals are things like transfers. For instance, the sheriff has a separate stand-alone operating fund. He is funded via 100 percent from a transfer from the county general fund. So you have the sheriffs budget as a core component of your general fund, but also as a stand-alone fund so the transfer-- it is funded by a transfer from the general fund. That is, quote, a double-budgeted item, in effect, and those interfund transfers from one place to another are -- primarily the constitutional officers are funded, as well as some of your capital project funds as well. When you transfer money from the general fund to a capital project fund for projects, they are not impact fee eligible for those renovation-type projects that we talked about. In terms of total county taxes levied, on the board's side, the general fund, obviously, being the principal general government activity of the county represents almost 85 percent of the total county taxes levied. Page 52 December 3, 2001 MSTUs cover approximately 14 percent. And those demonstrate how the board has used a mechanism to finance -- local government to fine-tune it, in terms of people who want additional services paying for that level of service above and beyond what is provided at that core level to all taxpayers uniformly across the board. The dependent special districts is the pollution control fund, which was a separately enacted ordinance following a voted referendum. In terms of the uses of the general fund tax dollars, this is done on a proportionate basis relative to everyone's percentage share of total appropriations in the general fund. The constitutional officers comprise almost 55 percent of the total general fund budget. Now, that would be between sheriff, supervisor of elections, the piece of the clerk's budget that's funded and the fees that are actually required, the tax collector fees. It's not representative of his budget per se. Those are the fees on the ad valorem that's actually levied in the general fund. Those comprise 55 percent. The county manager's 28.6 percent. Those are a core. The board and county attorney have a small percentage, approximately 3 percent, as does courts. Transfers to other operating funds, 6 percent, and reserves, 4.6 percent. We had alluded to these slides before our break talking about a particular unincorporated area tax bill and What that is comprised of. It's approximately 15 mills across all taxing jurisdictions with the school board taking the lion's share at approximately 50 percent of a total tax bill. The county's share through its general fund is 27.4 percent. MSTUs or municipal service taxing units are levied by the county, but at the behest of taxpayers who have requested the board to levy special taxes for limited-purpose items such as median beautification and the like. Fire control represents 10 1/2 percent, and mosquito control 1 percent. And the South Florida Water Management and Big Cypress Page 53 December 3, 2001 Basin Board take another 3 percent. So, overall, the County, again, 27 percent, plus you could incorporate the MSTUs. But those are, again, citizen-initiated taxes. Of the MSTU taxes levied, the bulk of those are in the unincorporated area general fund. Collier County is a little bit of an anomaly because of its large unincorporated area population. Because there is not a city government to provide those core government services in that outlying area, the county steps in and becomes the principal service provider. In contrast to that to something like Pinellas County where you're going to have one cookie-cutter city after another and the county government itself does not have to -- is not put in the position of being a core service provider in that unincorporated area, they just provide those core general government services. In this case Collier County's is a bit of an anomaly where the bulk of the population is, in fact, in an unincorporated area with the county being, again, the principal service provider. MSTU advantages provide a means of funding additional services, again, above that base level. It's customized local government service and allocates the cost of the principal beneficiaries of that service. In other words, if Lely wants to do beautification, those people and only those people are paying for that small beautification segment, as they are the principal beneficiaries in that area. That really doesn't have a benefit to someone who lives in North Naples. MR. OLLIFF: I'm going to jump in here real quick just to get the board to at least think in the broad term a little bit about what county government's role is a little bit. We had this discussion early on in the budget process. But I will tell you that I think there's a fundamental question to be answered here in that historically, county governments were put in place to provide what I would typically call Page 54 December 3,2001 a rural level of service. It was to provide services, governmental-type services for the unincorporated areas of communities. As communities became incorporated, the cities in their term provided what was more generally accepted as municipal level of service. They provided the higher levels of service that communities wanted and was a large reason why they incorporated. They wanted a higher level of service in a number of areas. Florida has grown so quickly, and Collier County is certainly no exception, so that county governments are now being looked at to provide what has traditionally been municipal-type services. And I think if you look at what the demands are for our services in the unincorporated area, they are the types of services that would have been performed a decade or 20 years ago by municipalities. We are providing a fairly significant park system, for example, the community. We're providing a very significant library department county-wide for this community. We provide code enforcement for this county where, in most cases, that was probably historically looked at as a municipal-type service. As the county grows, I think one of the issues that we are going to face and is going to require some very difficult decisions on the board is the movement of the population eastward in this community where, in honesty, the taxable values are not as high, the densities are fairly low, the distances to provide services are greater, so the cost to provide service out there is going to be significantly higher, while the tax base is not as high and the demand is continuing to change. I will tell you, a decade ago people were moving east to get away from the urban area because they wanted to be away from urban services, but more and more and more what you're seeing is people moving out east because it is the affordable place to buy property and to build a home. And the people that are moving out there now are not moving to get away, but simply moving there Page 55 December 3, 2001 because it's affordable. And now we're starting to see a demand for those urban-type services, grow and grow and grow. And you're going to continue to see pressure on this board to start providing services like EMS stations, libraries, parks, all of those things out in what has been known as the rural estates area on a growing, growing, growing basis. And I think the cost to providing those services is going to be significantly higher than it ever has been in the urban area, simply because the magnitude of size and the lower densities. And it's just sort of a trend I think you need to be aware of, as we start moving into future developments and budgets. MR. SMYKOWSKI: The last item I'd like to discuss today is an often-misunderstood item which is carry-forward. I'd like to focus on what it is, what-- its relative percentages of the total budget itself; where it comes from; and why it's actually necessary, according to the various fund types, in order of magnitude, $20 million, 18 1/2 percent of the total revenue in the FY '02 budget. What is carry- forward? It's the unspent money available at the end of a fiscal year to fund expenditures in the subsequent fiscal year and its use. It's budgeted as a revenue source in the annual county budget. And here's a simple formula. The technical formula, you take the beginning fund balance, plus, in this case, the FY '01 revenues, subtract out what we actually expended in FY '01, and that will give us our beginning fund balance in the subsequent fiscal year. A real- life formula for the lay reader, anyone watching today, would simply be -- an example, if you open up a bank account, your beginning balance is your initial deposit. Throughout the course of a year, obviously, you deposit paychecks. Over the course of a year you spend money on either home loans, car loans, electricity, food, etc. And the question is, how much money is in the bank at the end of the fiscal year? Is it more or less than it was at the beginning of the fiscal year? Page 56 December 3, 2001 By fund type, this shows where the bulk of that money is concentrated. Enterprise funds is the largest component. And I have a slide that will talk about the carry-forward by a specific fund type itself and why that is required. In the general fund, obviously, carry- forward helps us fund operations prior to the receipt of tax revenues. The county fiscal year, again, begins on October 1 st. You're not receiving tax revenue, typically the bulk of the tax revenue, beginning until late November. So the first seven, eight weeks of the county's fiscal year you're financing operations through available carry-forward revenue, and whatever small revenues on a monthly- basis come into the county. And ad valorem represents 67.4 percent of the general fund revenue. So the biggest piece of your revenue isn't -- doesn't even begin to be collected until late November, and you have large expenditures in the beginning of the year. Your constitutional office of budgets, they have monthly draws, October, November, on the 1st of each month typically. So, obviously, you're making major expenditures on the 1st of the month, so you've paid out one-sixth of the constitutional office of budgets on November 1 st before you've gotten dollar one of your ad valorem tax revenue. And that, again, is two-thirds of the revenue source that is available. Carry-forward is also a measure of financial strength. A carry-forward of approximately 10 percent of general fund appropriation is recommended. In talking about financial strength, some of the credit agencies that Bill Reagan talked about earlier also evaluate -- have some specific concerns relative to Florida counties. And that includes reliance on the tourist industry, the threat of hurricanes to Florida coastal areas, and uncertainty regarding the Article 5, port funding. COMMISSIONER HENNING: Tom, before we go too much further, how do we stand in that period of time when we adopted the Page 57 December 3,2001 budget and the time that we're at now that we're receiving the cash for the day-to-day operation of the constitutional officers, so on and so forth? Do we have enough funds to cover that? MR. SMYKOWSKI: Yes. Now, I will tell you it was -- it gets tighter every year. Obviously, as the budgets grow and the dependence on ad valorem grows, we're not any different really than any other Florida County. The general fund -- the predominant source of revenue is property taxes. And the Florida laws relative to constitutional officer draws are also very, very specific now. We work very closely with Mr. Mitchell's office to manage the cash flow. Obviously, from a fiscal standpoint, we try in the early part of the fiscal year to minimize the outflow of money in terms of transfers to other funds while maximizing any revenue, bringing any revenue into the general fund that is humanly possible. The indirect service charge, any operating transfers we have from other funds that are a general fund revenue, we tend to bring those into the county fiscal year into the general fund at the beginning of the fiscal year to maximize that cash position until the ad valorem taxes are received. The sheriffs office also worked with us in terms of their November draw, breaking that down into component pieces to help us manage that cash flow. But now that we've received that first flow of ad valorem, we're through the premiere crunch period that we have on an annual basis. MR. OLLIFF: I think the clerk as well. MR. MITCHELL: Actually, we didn't have to do anything with the clerk's draw this year. One of the things that Mike didn't allude to, but October 1 is a huge draw in the general fund because of the way the statute sets out the transfers. And that is that a quarter of a lot of the constitutional officers' budget comes out at one time. And then the remainder is Page 58 December 3, 2001 split over a levy that goes out. So they're receiving a quarter of their budget for a fiscal year where you have not received one dollar for funding -- where your funding source has not come to fruition yet. COMMISSIONER HENNING: Are you saying that a quarter comes out of the first part of the quarter -- or first part of the budget year? MR. MITCHELL: Absolutely. COMMISSIONER HENNING: Wow. MR. MITCHELL: Absolutely. So you're dealing with a quarter of that budget right up front when you haven't received the first dollar. So Mike and his staff did a great job and also my staff in coordinating this thing, and that is something we have to look at on a daily basis to see exactly where we're at. One of the things you'll see as we move forward is that, you guys, from cash perspective, you're very helpful. But that cash is put into various funds and we have to look at this one from a general fund perspective. And, also, one of the things that Mike and I do is we look at the inevitable. Well, what happens if we don't have enough cash from the general fund to meet our obligations? That's where we're prepared to go to Tom and look at some alternatives there, but it's a tough task when you're funding an operation for a quarter of the year before you've received one dollar to do that. COMMISSIONER FIALA: I have another question with regard to this also. With the constitutional officers, they give us so much money back every year. What funds does that go into, and does that help to finance this? MR. SMYKOWSKI: That does. All the unspent funds from the constitutional officers are, we call it, mm-back revenue. They're required to mm that back within 30 days of the close of the fiscal year. MR. MITCHELL: But there again, you have a timing issue Page 59 December 3, 2001 there because the way that the law reads on that, you are required to fund this constitutional the first meeting of the fiscal year, which you have not received the mm-back at that time. They're not required to give you that mm-back until 30 days after the close of your fiscal cycle. So there again, you're in that timing issue where even though you've got monies coming in, you have to have monies going out. And it's a real tough situation, and my hat's off to Mike again for the way that he handled it this year. COMMISSIONER HENN1NG: And what I heard you say is, as our general funds increase or ad valorem increases, there's more of a demand on it. Therefore, we have -- we must reserve that same amount for the cases of that first fiscal cycle where that quarter comes out. MR. SMYKOWSKI: That's correct. COMMISSIONER HENNING: What is the recommended reserve for the general fund, rule of thumb? MR. SMYKOWSKI: Probably 10 to 15 percent of total appropriations. COMMISSIONER COYLE: Is there an alternative? Can the law be changed? Do the constitutional officers really require 24 -- 25 percent of the total budget? MR. MITCHELL: That's not a question that I can really answer. We're predicated by what's in the statutes. COMMISSIONER COYLE: Okay. MR. MITCHELL: I'm sure that's something that can be addressed. But are there alternatives? The answer to that is yes. And I'll be up front with you. Your county manager and my office, along with the clerk of the circuit court, are exploring some other alternatives that's going to do two things. Number one, it's going to relieve the stress that you have on your general fund at the beginning of the fiscal cycle. And, hopefully, it's going to give you some Page 60 December 3, 2001 additional borrowing capacity as we move into looking at your transportation. And that's something that if Tom wanted to expand on that-- MR. OLLIFF: Go ahead. MR. MITCHELL: Okay. The statutes are very clear on how the sheriff is funded and how the supervisor of elections is funded and where the revenues for the tax collector and the property appraiser come from. Those are primarily fees. The clerk of the circuit court has traditionally been funded from transfer. That is, that we perform functions as ex-officio clerks of the Board of County Commissioners that are strictly those functions related to your offices, primarily our board minutes and record shop; my finance and accounting shop; and your court -- your county court functions, which that is included as a transfer component of your general fund budget. That has been in place for a number of years. And, actually, I think there is a resolution that adopted that type of mechanism for funding the county portion of the clerk's budget. And the clerk's budget is primarily 50 percent funded by transfer and 50 percent funded by fees that are derived from the services that we provide primarily in the court's area. There is a provision in Chapter 2833 of the statutes that dictates that the clerk of the circuit court shall invest your money in accordance with Chapter 218.415. And he will also take the interest off of those monies and record them as revenue to his office. Currently what we do is, we record the revenue off of those investments to the corpus, whoever's investing those monies, be it the general fund, be it the water and sewer, whatever the corpus is at. And the end of the year, he will turn those unused revenues to you. We have never utilized that as a funding mechanism for the clerk's office. But in exploring it, we do see where there is some benefit to it. And the one thing the clerk has stated is that he's not Page 61 December 3,2001 going to make any radical changes. He wants to work with Mr. Olliff, and at some point with you guys, before making any changes in the way our office is funded. The statute is silent about a transfer from your general fund to the clerk. His revenue streams are dictated in Chapter 28. Primarily he is a fee officer. CHAIRMAN CARTER: So we can explore that process and do it -- I don't want to call it on safe ground because I know the other part that you look at are challenges by any entity that we can or can't so that we may have that as a basis. MR. MITCHELL: I think it's already been challenged, sir, and that is that there's several attorney general's opinions out there that are right on point to this. And I think the statute is pretty clear on that mechanism being available for us. Now, it would be a radical change based on what we're accustomed to and something that we are going to talk -- look at and in great detail before we ever make any changes. CHAIRMAN CARTER: Okay. MR. MITCHELL: But the beauty of it is the fact that you do have a large cash influx at the beginning of the year, a huge influx of cash at the beginning of the year. To give you an example -- and that's something we were going to talk about in my presentation -- but from an interest standpoint alone, we generated last year about $17 million. Now, you have to take the -- in fact, some numbers off of that because you are funding the clerk's office to date to the tune of about $5 ½ million. So you're talking somewhere around $12 million potentially that comes available at the 1st of the year, within 30 days of the close of the fiscal year. And that's available for reappropriation of the general fund, basically, however you want to use it. CHAIRMAN CARTER: Let me ask you this: If we go in that direction -- I don't know how soon you can come to us, but we're Page 62 December 3, 2001 making some very critical decisions as a board. And if we have that alternative in our mix, that certainly changes my thinking in how I deal with what's in front of us. And if that's bondable, that also gives us another big opportunity not to get ourselves in trouble. MR. MITCHELL: Right. The revenue stream that we're talking about would not be something I'd recommend, hedge your bonds, but it would free up other revenues that you're currently using that could be used to fill holes that's available for bondable revenue, primarily your gas tax. If you're using gas taxes for maintenance, you can use those monies for bondable revenue and then fill in with these monies right here. And let me just tell you, this is something that Tom's office and Dwight's and myself have been in a lot of communications about. We want to make sure we explore -- also David Weigel's office. We want to explore as much as we can before we -- and I had no intention of discussing this with you today, but since it came up, we want to get it out there as well as we can. CHAIRMAN CARTER: Sure. COMMISSIONER COYLE: Jim, I have another question. Does the statute permit the constitutional officers to voluntarily forego the payment of the entire 25 percent for 30 days or so? MR. MITCHELL: The answer to that question is, there's no prohibition against it. That is a decision that the constitutional officer will make. Now, let me give you an example of what Mike's staff did this year is, they did work with the Sheriff, and he agreed to take his draw component in segments. So he didn't receive all of it at one point. He took it as he needed it. But that's something that you can ask for as a constitutional officer -- keep in mind, there's only three constitutional officers that are dependent on that transfer: The clerk, which we're dealing with that one; the sheriff; and also the supervisor of elections. Page 63 December 3,2001 COMMISSIONER COYLE: Well, you know, they all seem to need some additional office space, so maybe we can bargain on that basis. MR. MITCHELL: I'm going to leave that one alone. MR. OLLIFF: The opportunity that Jim's bringing to you today is exceptionally interesting. I think it's something that we are going to pursue, but I don't think it's anything that you could take advantage of until your fiscal year '03 budget. And I think by the time we get back with you for budget policy development in February/March time frame of this year, hopefully we'll have some details on this thing flushed out enough that both Dwight, Jim, Mike, and I are comfortable in being able to present something to you. But the opportunity is real, and I think the opportunity is not only in gas taxes, but also in sales taxes. As Commissioner Coletta was mentioning earlier, if you're bonding that, if you're bonding those available sources, it is an avenue to provide a revenue source to fill in behind that and perhaps provide some gap filling. The interesting thing that Jim's bringing to you here is that there's not a restriction in terms of the type of fund interest that's being used. So, for instance, revenue from any of your current funding sources is an available funding source to fund what has traditionally been an ad valorem tax-supported operation. So that includes all of your enterprise funds. That includes your impact fee funds. And we do need to go back and look at which of those funds do have bond covenants associated within primarily on the utility side that wouldn't allow us to use that. But other than those restrictions, Jim, Dwight, Mike, nor I have seen anything that would prevent us from being able to do this. COMMISSIONER COYLE: Good. COMMISSIONER HENN1NG: Well, this sounds really exciting. And I know that our Friday afternoon get-together is, we're Page 64 December 3,2001 looking at replacing those gas taxes. Maybe this is part of the puzzle. CHAIRMAN CARTER: Well, I'm with you, Commissioner Henning, because it now gives me a new framework of which to approach the workshop that took place on Friday. Looking at, I know we don't have any guarantees for this future, but by the next budget year, it's certainly going to give us a different perspective on how we deal with all of this, which for this commissioner helps me in what I've got to do short term with some opportunities coming longer term. MR. OLLIFF: And keep in mind, this is not the magic beam. There's not enough here to solve any and all of the problems that are out there, but it's certainly going to be, I think, part of the puzzle and one of the pieces that you can use. Mike, do you want to keep us moving? MR. SMYKOWSKI: Sure. Let me click through the rest here. In terms of carry-forward, again, in special revenue funds, why is there a large carry-forward balance? You've got TDC reserves for beach renourishment disaster/recovery; community development fund reserve to weather the cyclical nature of the construction industry. Pelican Bay established a large reserve to replace landscaping in the event of a natural disaster. CHAIRMAN CARTER: That's the MSTBU? MR. SMYKOWSKI: That is correct. The MSTBU in the debt service funds, carry-forward reserves, are required by bond covenants where you have the highest outstanding annual debt service payment in reserve to ensure that you have the fiscal means to repay that principal and interest. And you also have cash flow reserves. A lot of your-- some of your payments are actually on the 1st of the fiscal year. And, obviously, your revenue may not arrive on day one of the fiscal year, so you have to set up a sinking fund to ensure that you have adequate cash on hand to make that principal payment at the beginning of the Page 65 December 3,2001 fiscal year. And capital project funds, there are a number of impacts based on the timing of the construction cycle. Obviously, project schedules are impacted by permitting agencies, as we well know, as well as acquisition of right-of-way. Project need itself is not eliminated, but it does impact the ultimate project timing and the expenditure of the cash. Many projects themselves span multiple fiscal years where the payout is spread out over a number of years. Even though you get the contract today, you may not ultimately spend down the final component of that contract for a two-year period. You also have a certificate plus and capacity when you build in excess capacity on the impact fee side followed by collections until the next required project, for example, in libraries. You get to the point of nearing deficiency; you build that next headquarters library. Like for a building, you have capacity for a number of years. Then you're collecting impact fees for four or five years until that next eventual library facility itself is required. Enterprise funds: The utility construction projects are much the same as the capital projects. There's utility debt service subject to the same bond component. And in the solid waste fund, obviously, there's a reserve that was established for the ultimate long-term solution to the solid waste disposal in Collier County, which we haven't arrived at quite yet. The internal service Funds: You have a sinking fund for the replacement of the motor pool vehicles. As I indicated previously, you're self-insured for health claims, property and casualty claims, and worker's compensation. So you have to have cash on hand to meet those obligations, both current and future. So you do have -- and those are dictated. We do an annual actuarial study to determine that the reserves you have on hand are, in effect, substantial enough to cover the estimated cost of ultimately paying out all of those Page 66 December 3, 2001 claims. And the trust and agency funds: The utility regulation trust fund regulates privately owned utilities. Funds were established for rate- case public hearings. And ultimately the board could be -- take the position as receiver of an abandoned -- or a utility that's in financial distress. So there's reserve there to cover that eventuality. GAC Land Trust is another example where improvements are dedicated solely to improvements in the Golden Gate Estates area. Obviously, until that committee makes a decision on where that money's going to be spent, that money will continue to roll over. That's part of the reason why you have the large fund balance that you do by varying fund type. And with that, I'll turn it over to Jim COMMISSIONER COYLE: Could I just make a statement and see if I can get concurrence of the other commissioners to do something? The way we are required to budget is, in my opinion, very complex and inefficient, and we're not going to be able to change that at all. But it's very important to me to understand how to best make long-term decisions to have very clear sources and uses of funds. We have pie chart -- the pie charts that we've seen today that give us a snapshot of those things. The problem is that our decisions will affect what happens 5, 10, or 15 years from now, particularly on bonding decisions. It would be far easier for me to consider a bonding issue if I clearly understood where the funds were coming from, how they were currently being used, and how those funds were likely to grow in future years, thereby creating an excess or reserve that might provide us more funding opportunity. And to give you an example, if we took water and sewer rates as a source of income -- and we have a chart-- it shows how water/sewer rates are increasing over time based upon our new Page 67 December 3,2001 impact and service fees. And then below that line are the other lines which indicate how that money is being currently used. And the difference between the lines would be the growing, hopefully growing, access as we move out into the 5-, 10-, ! 5-, 20-year range. That would give us an understanding of how the decisions we make today would impact our ability to seek future funding or bonding in the out years, 10, 15 years from now, and might give us some additional comfort that we're not necessarily mortgaging our entire future. And then we could update that every year, just as though we're going to update the impact fees and the service fees. And I was wondering if the Commissioners would feel it would be appropriate to ask the finance committee to produce some kind of analysis of that by type of revenue. Every type of revenue we get coming in, it would show how it is expected to grow over time, how it is expected to be utilized over time, and how the excess between the source and use of those funds would grow over time. Is that something that's possible? CHAIRMAN CARTER: I think it's all possible. I think some of that is in place, but maybe it's not put together in one uniform package to us where we can access and look at that, plus the AUIR workshop Friday introduced some other elements that we must consider and incorporate into those who have vested interest already and how much that is going to impact in greater urban boundary areas. Some of it falls outside of it, but most of it falls inside the urban boundary line in how we're going to deal with all that. So I think that is, in my judgment, Commissioner Coyle, is what we're all searching for. And I have this feeling that we have bits and pieces, and it may be scattered over numerous documents where if it was all consolidated, we had it in front of us, we could go through and have a better perspective, one; two, my thinking is, you want to know where we Page 68 December 3, 2001 are with this, plus the other opportunities that are going to emerge from that and how it may impact us as we go along, knowing that it is not here yet, but it may influence where we're going to be in the future. COMMISSIONER COYLE: I think that's very important. I would feel a lot more comfortable making long-term decisions if I had that information before me. COMMISSIONER FIALA: Um-hum. COMMISSIONER COYLE: I think it would be useful to help us understand the impact -- the long-term impact. CHAIRMAN CARTER: You know, impact fees on water and sewer, I recognize in that presentation that that comes from the new growth, and that's what that's associated with. But one of the things that I have a big need for as we go through and look at this is this collective impact fee process in terms of what it means to a new home and how we may package that up and get into some sort of making that part of-- if you're buying a new home, it's sort of part of the mortgage where you've got maybe, say, a short-term, five-year -- I'm just throwing that out as an idea -- to pay these off, and if you move from that home, whoever buys it in the future has to pay the remainder if it is -- you know, or if you have enough profit out of it, you've got to pay that off first. There's got to be some mechanisms in order not to hit people so hard up front because I want that first-time buyer of the home to be able to buy in closer, number one, affordable housing. Work-force housing: We want to be able to get people to buy equity-owned properties, and that has to go into our mix in all these decisions we're making. COMMISSIONER COYLE: Well, yes, I agree. And it gets even more complex because of what Mr. Olliff told us just earlier, a little earlier. Page 69 December 3, 2001 If we're basing our projections of the cost of the infrastructure on historical costs, that's going to lead us into a dead-end road. And so I would just like to have some kind of long-term projection, factoring in the increased cost of developing a municipal-type service level for essentially a rural area and to be able to have a better handle on what's going to happen to us in the future based upon the decisions we make today. If we could do that, would the commission agree? CHAIRMAN CARTER: I'm going to bounce the ball to Mr. Olliff to see what we can consolidate to help us all. MR. OLLIFF: One suggestion: We're more than happy to try and put information in any format that helps you make a decision. My only suggestion would be for every single funding source that you originally indicated, that's probably not as important as far as library trust funds, for example. COMMISSIONER COYLE: You're right. MR. OLLIFF: There are probably a dozen at the most, maybe 15 total major funds that you would want to see in that way. And to make sure that I understand, you're showing, basically, our revenue projection line and then under that our existing uses of those funds by category. And I'm assuming you're looking at more operating capital debt service-type categories? COMMISSIONER COYLE: Yes. MR. OLLIFF: And then what is available undedicated revenues, especially based on projected growth rates that the board can see in a graphic-type format. COMMISSIONER COYLE: Yes. CHAIRMAN CARTER: That's the way I understand it. MR. SMYKOWSKI: And from the perspective of bonding, you really narrow that down much further. Are you talking about sales tax, gas tax? MR. OLLIFF: I think he's looking beyond just bonding. I think Page 70 December 3,2001 for other major funds that we have which primarily are going to be -- even general fund, unincorporated general funds; solid waste; water/sewer; gas taxes; even EMS revenues; solid waste revenues, those are the typical funds that you're probably going to want to look at. And for all those major funds, I think that would be easier for us to do. And if that helps you make decisions better for the long term, by all means. COMMISSIONER COYLE: It would help me. CHAIRMAN CARTER: It helps me, and I think it would help us all if we try to educate everybody in the county to help everybody understand this process through Channel 54, the mechanisms when they look and they say, "Oh, I understand what the commissioners are trying to do, understand how they're going to deal with it," when we put it down in layman's terminology at some point so that we all can have a better grasp of it. So if the rest of the board concurs, we would like to see that, Mr. Olliff. Mr. Mitchell. MR. MITCHELL: The only thing I wanted to say is a lot of work is already done, either from a coffer's standpoint or there's some other projections that Mike's office is doing or it's just a matter of running those two together and putting those into a format that's going to be understandable to read. The actual numbers are pretty much already there from our coffer, and his projections are also there. CHAIRMAN CARTER: I think what happens to us, Jim -- and I'm not faulting our staff or anybody else -- we get this in sections. And what we need is the spreadsheet that lays it all down. I'm a visionary kind of person. I comprehend it on that basis. When I have to look at each one of these -- and I have trouble figuring, what if they're over here, and how's that going to affect this? What if I've got it right in front of me, one spreadsheet? Bingo, I can be able to grasp it much better. Page 71 December 3,2001 MR. MITCHELL: Good. COMMISSIONER COLETTA: If you could, too, if you're using Excel with this thing -- you're not. I was going to say, if it was in a format where we possibly could play with it at home ... MR. MITCHELL: We can do that. We can drop it and import it into certain components of it. COMMISSIONER COLETTA: That would be an interesting thing to have on the computer to be able to play the what-if game. If we move this, how would it affect everything going all the way down the line? MR. SMYKOWSKI: With that, I'll turn it over to Mr. Mitchell for his segment of the presentation. MR. MITCHELL: To save some time, I'm just going to hit some of the high points. I did have a large presentation put together for you, but as we're scheduled to knock off at 12:00, let me just hit some of the high points. First of all, Tom, on behalf of the clerk, would like to thank you for inviting us to participate in this. You've heard about budgets; you've heard about debt. But what is the clerk's responsibility? If you look at the statute, the clerk is really the public trustee. You guys are the legislative body. Tom is the administrative body, and the clerk is the public trustee. So once the budgets are adopted, the expenditures are in the process of being made, it basically becomes my office with the finance department through Dwight's office to make sure that your desires happen. Basically, what we do is, my office is split in two functions, functional units. One is the operational unit, and one of it is the accounting unit. The operational unit is where the vendor payments are made, contractual payments are made, payroll is processed. It's where we perform the preaudit function. It's where we ensure compliance with the Florida Payment Act. It's where we do all the Page 72 December 3,2001 1099 reporting, the W-2 reporting, and things of that nature. Now, I've said two things there that are fairly important, one of them being the preaudit function and one of them being the Florida Prompt Payment Act. What do I mean when I say the preaudit function? Well, the clerk by law is the auditor of the county. There's two types of audits that he does. One is the preaudit, and one is the postaudit. My shop takes care of preaudits. And basically what we do is, we apply a test to every expenditure that we are asked to make on your behalf to make sure that it meets certain criteria, and those criteria are that section -- where did I put it? I don't really need anything to look at to tell you what it is. Basically, we look, and at the first thing we do is, we make sure there's a proper budget in place. The next thing we do is we look to make sure that it's properly approved, that's it's been properly approved based on your purchasing policy, and then we apply the cash to make sure that there's sufficient cash in there to make it, to make that payment. The last prong of the test that we do is known as the valid public purpose test. And if there is no -- if we don't see a valid public purpose in the expenditure, we will not make a payment. We'll kick it back to you where you have to actually validate the public purpose. And then we have to ensure compliance with the Florida Prompt Payment Act. What the Florida Prompt Payment Act is, is it's an act by the legislatures that ensures that local governments pay their bills in a timely manner. And basically what it says is that there are two types of payments. There's construction payments and nonconstruction payments. For the nonconstruction payments that --- -- the clock starts ticking upon receipt of a proper invoice by the chief disbursement officer. And the time line that you have to make your payment is 45 days, 45 calendar days. For construction-type payments, the clock starts ticking upon the Page 73 December 3, 2001 approval of the project architect or the project engineer, and the time line is 20 business days. We've adopted a policy within our shop that we apply a standard business practice to that. We pay all bills within 30 days of the invoice date. One of the things that we do is, we take advantage of every discount that we can get, but we ensure payment within 30 days of the invoice. And that does put us into compliance with the Florida Prompt Payment Act. The Florida Prompt Payment Act does provide the penalties if you do not make your payments timely, primarily that you have to pay the statutory interest, which is 11 percent, until the point in time that it is satisfied. And it also requires us to report to you guys on an annual basis any interest that we've had to pay. And your purchasing dictates that we come to you every December to provide you that number. Fortunately, we have not been to see you in a couple of years, and it's our expectation that we will not be here to see you again this year because we pay our bills on time, and we don't have any accrued interest out there on those particular payments. The second area -- and I'm being as brief as I can about this. And if you have questions, please stop me. Or if you have questions afterwards, please feel free to call my office. But the other half of my shop is the general accounting units, and these are the accountants. I have several CPAs over there, several certified government financial officers, but they basically take the transaction after it's happened to make sure that it's properly recorded and that it's properly classified in our Comprehensive Annual Financial Report. Primarily, their responsibilities include the accuracy of the general ledger, the adherence to general accepted accounting policies, the coordination of the annual audit, and also production of the financial statements. But more importantly, there's three things that they do that was touched on briefly today; they manage debt. Once you guys issue debt, the transaction's not over. My office takes care of ensuring that Page 74 December 3,2001 all the debt service payments are made. And you heard Bill talk this morning about arbitrage. There is an arbitrage requirement where we have to go in on an annual basis and measure where we are from an arbitrage standpoint. And, actually, we have to report that every five years. And we actually have to make the payment if we are in a positive arbitrage position to the IRS on the fifth anniversary, every fifth anniversary of the bond. That is something that my office takes care of. MR. OLLIFF: You may want to define arbitrage for them. MR. MITCHELL: Arbitrage is the difference -- when you borrow money, you borrow it at a -- what we call a true interest level. The bond we're looking at right now, we're hoping to get somewhere between a 44 and 45 from what we call a true interest level. That's the interest we're going to pay out on that bond. Now, when that cash comes in, I put it into our investment pool, and I invest it. So I'm making money. So arbitrage is primarily the difference between what you earn on the invested money and what you pay out on the borrowed money. The treasury says that if you make a positive number there, they're entitled to it, but we only measure it every five -- we measure it every year. We record it as a liability if we owe anything. And that changes from year to year because you may have a very great year from an investment standpoint where you have positive arbitrage. And the next year you may be slightly lower, and you eat up some of that positive arbitrage. Every five years we measure that, and we actually make the payment -- as a matter of fact, we'll be coming sometime this month or early January to talk about one of these payments that we do need to make regarding one of our older bond issues. CHAIRMAN CARTER: So the government penalizes you for prudence? Page 75 December 3,2001 COMMISSIONER COYLE: Absolutely. MR. MITCHELL: I wouldn't quite put it that way. Another thing that's changed recently with debt is disclosure. There is continuing disclosure that happens with every issue that we do. There is a certificate the Chairman will be asked to sign, and it's called a Continuing Disclosure Certificate, which basically says, we're going to tell the secondary market the same information over and over again every year, such as if you were doing a water/sewer deal, how many users you had, what your current rates are, how many miles of pipe you have in the ground. Those are the things we'll be coordinating with Mike and also with the specific benefactors of the debt to make sure we disclose that properly. The last thing that I wanted to touch on is your investment policy and exactly where we're at today. It's very important to note that you guys have a good investment policy. It's dictated by Chapter 218.415 of the Florida Statutes. It primarily has 14 components to it. I'm not going to go into great detail with them, but just give you primarily the most important one, and that is what your investment objective is. Your investment objective is the return of principal, not the return of unprincipal. We are a very conservative investor, and everything that we invest in is based on a policy that's adopted by this board. Recently the legislature did make a change in 218.415 where they dictated that anybody that is involved in the investment activity shall receive eight hours of continuing education on an annual basis. We do that. We already meet that particular criteria, but we have not updated our policy to include that. We normally come to you on an annual basis to recommend any changes to your policy so we are prepared to bring that to you also. To give you an idea where we're at from a portfolio standpoint, in your books you'll see that we have the August portfolio in there. Page 76 December 3,2001 I'm going to give you the October numbers, okay? As of October 31 st, we are from a cash perspective -- now, keep in mind, we're looking at it from how it appears on our books. And that's from a cash perspective, not the market perspective. But from a cash perspective, we have $344,380,000 in the portfolio. From a market's perspective, we're at $348,441,000. So we actually have a positive gain in the portfolio of about $4 million. It would be more than that. Unfortunately, we still have -- as of this point in time, we still had two of the derivatives in the portfolio. We have managed to work ourselves out of those CMO's, that lovely derivative projects that got Orange County, California in trouble. We managed to work ourselves out of that without taking any losses. That's something we're very proud of. We still have one of them in the portfolio. From the time I printed-- actually, this was printed October 31st. We've liquidated another one, so we're down to one. More importantly, what is our rate of return? Your policy dictates that we report to you on what we call the rate of return which includes both your recognized and unrecognized gains and losses. A lot of the investments that we have are -- they accrue interest, and they pay out either on a semi-annual or annual basis. But if we resell in between the coupon period, we're still entitled to that, so it would be unrealized gains or losses. In October we had a 4.14 percent yield or rate of return. Your policy dictates that from a performance standpoint, we must meet or exceed your SBA, which is a State fund. And for the same period, the State fund was 2.46 percent. So what's happening right now is, we are a little bit further out on the yield curb than some of our earlier investments. We're locked into some high rates. But the problem that we're having now is the same problem that everybody else is having. And that is, how far out on the yield curb do we want to go? Our expectation is, we're going to see a turnaround in the Page 77 December 3,2001 economy sometime late summer. So we are not going very far out on the yield, but we're staying fairly short, which means that we're giving up some yield. But I would hate to be further out of the yield curb at a low interest rate when the economy tums and be stuck with that. So we're trying to be as prudent as we can in managing your money. You dictate where we put the money. And just for -- real quickly, currently you have $189 million in federal instrumentalities; $1.6 million in U.S. Treasury Securities; and $146 million at the SBA. So you can see, we are bulking a lot of money at SBA. That's a very short term, daily, it's almost like a bank account. I can get the money today, tomorrow, any time we need it. And they're still paying a fairly attractive rate for short-term money, one-day, two-day money like that. Are there any questions you guys have? CHAIRMAN CARTER: The SBA money, short term, what are we doing on it? I mean, what is an attractive daily rate right now? MR. MITCHELL: Say it again. CHAIRMAN CARTER: What is the attractive daily rate right now? MR. MITCHELL: It's under 2 percent right now. The one thing that we compare is, we basically have a choice of where to keep our money overnight. We can either keep it with our bank, or we can keep it in SBA. We have a contractual amount with the bank which is the fed funds rate minus 27 basis points, or we can keep it with the SBA. And you can see that there is a little bit of difference with the SBA. That's a decision we make every day. We have to go in every morning, and we work with Mike's group and a lot of the other departments out there to figure out what our cash position is. How much money do we have available today to invest? How much surplus is there? And we have to look at what the expectation is. Is Page 78 December 3,2001 it short-term, long-term money, things like that to make the decision do we keep it in the bank, do we put it at SBA, or do we go a little bit further out on a shorter part of the yield curb? That's a challenge that we are facing every day. For your information, from a banking standpoint, we currently bank with First National Bank of Naples. We put that out to bid about a year ago, and they came in. We measured it from two perspectives. One was, how much is it going to cost the taxpayers to bank with them, and do they have the qualifications, or do they have the best qualifications to handle our money? And they won. And they're doing a fantastic job in helping us manage your money. We set parameters on how much money we want to keep in the bank. We set a cap of $2 million, and that's all we want to ever keep locally with First National Bank. We want to put the rest of the money out, have it working for you overnight, and we're doing a pretty good job at that. From a cost perspective of the bank, we're on what's known as account analysis. We basically don't pay services charges. What they do is on a monthly basis, they tell us how much it would have cost us if they would have billed us for that. And what we do is put on deposit with them the amount of money necessary to offset that cost for a 30-day period. So basically, it's a zero-interest C.D. That we put out there for 30 days to offset the prior month's expenses. And, keep in mind, to take advantage of the economies, when we bid this transaction out, we didn't just bid the board. We bid the board, the supervisor of elections, and also the clerk of the circuit court. And with that, I'd open it up for any questions that you have. Yes, sir. COMMISSIONER HENNING: Part of the charge of the clerk of court is a checks and balance, whatever the board-- with county government, whatever the board says, "This is what we want," you Page 79 December 3,2001 write the checks. MR. MITCHELL: Right. COMMISSIONER HENNING: And you make sure that the checks are correct, what we say. What is the responsibility of the clerk of court as far as the efficiency of county government? MR. MITCHELL: The clerk of the circuit court serves in many capacities to you. One of them is that of auditor, okay? And if you look at the definition of internal auditor, which I have included in your package, it will basically be something to the effect that it ensures that management's directives are being carried out in an efficient and effective manner. So I think from his role as the auditor, wearing the hat of internal auditor, he does have a responsibility to work with you and to work with Mr. Olliff and the departments to not only evaluate how you are currently doing in comparison to management's directives, but how he can make recommendations to improve those efficiencies and those economies that are out there. COMMISSIONER HENNING: I know that we have a lot of positions out there that are really attacked right now. One example would be transportation. Norm Feder's trying to bring forward a lot of things by the direction of the board, working many hours. We're really getting the bang for the buck there. But, you know, can the clerk take a look at departments and say, "Okay. This person is working a 40-hour; he's getting paid for a 40-hour. He's not working 30 hours and getting paid for 40 hours"? MR. MITCHELL: Absolutely. MR. OLLIFF: Not only can they, they do. And the clerk's audit department gives us an opportunity to be able to work with them to be able to ask them to come in and audit certain functions that we would like to have them audit. But, in addition, the clerk of the Page 80 December 3,2001 courts and his audit staff have the ability to go audit anything that they want to audit within our agencies, and they take full advantage of that as well. We generally have a very good working relationship with the audit departments in that they provide us an opportunity to see a preliminary report and allow us to be able to provide some responses to that so that the final product is not just a criticism of the operating department, but an opportunity for the operating department to provide some public response to that as well. But I will venture to say that the clerk's audit department probably does anywhere between a dozen and 15 full-blown-type audits over the course of a year, most of them in your agencies, most of them in your operating departments, of which we see a lot of improvements that end up in front of you at your board meetings resulting from the audits that are done. And we're, in fact, right now working with the audit departments on their annual work plan for this current year. We've got a number of things that are on our agenda that we want the clerk's audit department to come take a look at because we think we can do them better, smarter, faster, cheaper, whatever it may be. MR. MITCHELL: I'll give an example of that, Tom. We just had a request this week from the airport authority. They invited us to come back out there and to assist them with some operational issues they have there. So it is something that the clerk is excited about working with you guys on. MR. OLLIFF: The only other thing I wanted Jim to touch on was just a -- give them, from your perspective -- just because you've worked with it as long as you have -- the current financial management system that you've got and a little bit of an oversight on the project that we've got going between our agencies. MR. MITCHELL: Sure. Currently you have a -- what we call Page 81 December 3,2001 an FMS. It's really the government financial system. It's been in this government since 1987. It was actually created in 1985, but actually installed here in Collier in 1987. That's our financial management package. That's our software program. It runs all of our financials. It runs Mike's budget. It runs all of my general ledger, all of our accounts payable, all of the purchases and things like that. And this has become what we consider antiquated. What it is, is a financial system. When we start using the word "management," I've got to be careful about that because I look at a system to be a tool, and it does help me prepare my general ledger and help me put out the financial statements. But as far as being a management tool, it's very lacking. It doesn't allow us to pull the information out of it that Tom needs or that you need from a management standpoint so you can make the answers today. Some time back you approved the acquisition of a software product known as SAP. We are in the process right now of implementing that. We hope to be alive with that at the beginning of our new fiscal cycle, our '03 cycle, which will be 10/1 of '02. It's a very exciting time. We're actually moving into a new century as far as financial processing goes. It's going to give us information and allow us to create efficiencies that have never been there before. One of the biggest things that's going to happen with this thing is something where we're going to be able to take advantage of the electronic environment where we'll be able to push invoices through. We'll be able to push different transactions through that we won't ever see a piece of paper. We'll have a sufficient audit trail to be able to satisfy the payment and things like that. One of the things I'm extremely proud of with this particular project is the way the two agencies are communicating and working together. It is a joint effort. The total project cost that we're looking at is about $3.2 million? Page 82 December 3,2001 MR. OLLIFF: Right. MR. MITCHELL: Where the clerk of the circuit court, through his public records modernization trust fund, has put up $1 million of that, and we're actually going to use commercial paper to pay the remainder balance. A couple of other projects, if I could, Tom, that is going to affect this county significantly that we're dealing with right now is GASB 34, which is Governmental Accounting Standards Board changed the way that our financial statements are going to look, and it's going to affect us in the '03 cycle. It totally changes everything that we deal with from a financial standpoint. That's something that's going to affect Mike's office and my office drastically. And the other big thing is Article 5. I know I've had some discussions with Commissioner Carter regarding Article 5, but that's something that we're struggling with on a pretty much daily basis. And we hope it goes away, but we don't know where it's going to end up, but that's pretty much what's on our plate right now. CHAIRMAN CARTER: I think we need to clarify for our audience what Article 5 is. MR. MITCHELL: Article 5 is a constitutional funding mechanism for the court system. We're primarily, the county courts, even though it's considered a State court system, the Board of County Commissioners is running a large component of that -- or a component of that. And back in the -- when was it? '98 when they had the last constitutional revision, there was a referendum to shift the funding of that away from the local level to the State level. That's one of the things we're dealing with. MR. OLLIFF: Any other questions for Mr. Mitchell? I can't let the public opportunity go by to just thank Jim and his department. I will tell you, I think the relationship between your agency and the clerk of the court's agency, both the financial and audit, is probably Page 83 December 3, 2001 better than it has ever been in my 18-year history working here. I think a lot of that is more due to their willingness to come over and help. And I think they are in a position now where they, on a number of projects, are part of our team when we're looking at problem solving. And that's just a nice position to be in. The FMS project is one that's a particular example that I think it's one of those internal things that you are going to see a lot of external benefit from it. I think currently the best example I've got is payroll. And poor Jim and his staff struggle, honest to goodness, on an every-other-week basis trying to get the payroll out. And it is -- it is just a weeping and mashing of teeth kind of process. But today I bet you to get a single paycheck issued, I probably have to, from the time it starts, to the time Jim issues the check, reenter payroll at least four different times through the system from the time it starts out in the field until the time a check gets issued. And that's a ridiculous system. So this FMS project is one of those where we're hoping to completely cut all of those intermediate steps out and just make your government run a little more efficiently. With that, any other questions that you have on the financial side? CHAIRMAN CARTER: No. I just want to re-enforce what you said because when I came to the Board of County Commissioners, the relationship between the clerk of the courts and the county government was like two cats in a gunnysack. In fact, there was a lot of animosity between the constitutionals and the county government. That has changed. This is a change in professional management in the county and the willingness of the Board of County Commissioners to work cooperatively with the other constitutional officers so we're all on the same page. This is where we need to be, and this is where we need to stay. COMMISSIONER HENNING: Bottom line, we work for the people. Page 84 December 3, 2001 CHAIRMAN CARTER: That's right. COMMISSIONER HENNING: If we can make that efficiency, they'll be a lot happier. MR. OLLIFF: ! hope you found this workshop helpful for you. COMMISSIONER FIALA: Oh, yes. It was very good. COMMISSIONER COLETTA: It was very helpful. CHAIRMAN CARTER: It was an excellent meeting. MR. OLLIFF: But obviously, Mike and Jim are here every day and are available to answer any follow-up questions that you have. And if you want any additional information, by all means, let us know. We will try and look at what we've got in the way of information. We'll take from this workshop as a direction-- I will try and start preparing some of that graphic information for the board to look at in advance of the fiscal year '03 budget. Just keep in the back of your mind that the clerk's agency and ours will also be working on that overall picture of clerk funding for you as part of your fiscal year '03 budget policy as well. And that can be a major change in how we approach budgets there. Mike, do you have anything else before we close? MR. SMYKOWSKI: No. Thank you. CHAIRMAN CARTER: Vice Chair, you opened the workshop. Would you please close the workshop? COMMISSIONER COLETTA: By the power vested in me by Dr. Carter, I hereby close this workshop. There being no further business for the good of the County, the workshop was adjourned by order of the Vice Chairman at 12:15 Page 85 December 3, 2001 p.m. ATTEST: DW,'I~H.T.,E.. BROCK, CLERK ':';~hcse;'~inutes approved by the Board on BOARD OF COUNTY COMMISSIONERS BOARD OF ZONING APPEAL/EX OFFICIO GOVERNING BOARD(S) OF SPECIAL DISTRICTS UNDER ITS ,as presented or as corrected TRANSCRIPT PREPARED ON BEHALF OF DONOVAN COURT REPORTING, INC., BY CATHERINE A. FROMMER, NOTARY PUBLIC. Page 86