Bureau of Accounts – Field Advisor Department of Revenue Division of Local Services MUNICIPAL BUDGET DEVELOPMENT SEMINAR HARDWICK September 22, 2016 Terry Williams Bureau of Accounts – Field Advisor www.mass.gov/dls

BUDGET = a plan expressed in monetary terms covering a specific time period A GOVERNMENTAL BUDGET CONSISTS OF THREE ELEMENTS Estimate of Revenue - including sources Statement of Expenses – how much & where to allocate Specific Period of Time – usually a fiscal year (July 1st - June 30th)

The purposes of a “Municipal Budget” in the Commonwealth of Massachusetts: It must more than simply allocate financial resources to competing programs & services. It should help to establish priorities (e.g. operating vs. capital; municipal vs. school) It should articulate goals, objectives, and measurable indicators of service delivery. It must comply with the Proposition 2-1/2 statute (MGL – Ch59 s21C).

The effect of Proposition 2-1/2 on the Municipal Budget Process: Formerly Expenditure Driven – Now Revenue Driven Budget must be in Balance – e.g. Revenue = Expenditures Tax Levy may not exceed the adjusted levy limit (a.k.a. - Maximum Allowable Levy)

What are some of the Tenets to Successful Creation of an Annual Municipal Budget ? Demand for services generally outstrips available resources – so all possible resources must be identified and maximized. Anticipated revenues for an upcoming fiscal year must first be forecast to establish the framework prior to preparation of a municipal budget – the expenditure side. While services provided by Massachusetts communities vary widely, cities and towns have primarily only four major revenue components from which to provide for this budget.

Property Tax Levy - see Prop 2-1/2 Levy Limit Sheet Revenue Sources Available to Massachusetts Municipal Governments for the General Fund Annual Budget Property Tax Levy - see Prop 2-1/2 Levy Limit Sheet State Aid – Cherry Sheets Estimated Local Receipts - Page 3 of Tax Recap Other Available Funds – by Municipal Vote Certified Free Cash Stabilization Funds Overlay Surplus Budget Surpluses

Typical Massachusetts Percentages: Sources of Revenue State Aid 20.66% Tax Levy 57.54% Local Receipts 17.88% All Other 3.91%

The Property Tax Is the largest source of local government revenue - averages over 50%. Wealthier communities typically have higher percentages of their budgets supported by property taxes due to lower levels of state aid. Conversely, poorer communities typically have lower percentages of their budgets supported by property taxes due to greater levels of state aid.

The Property Tax (cont.) Communities may generally levy a property tax up to their Prop 2-1/2 Levy Limit The Levy Limit is a historical figure that increases each year by 2.5% plus new growth (new construction, subdivisions, etc) It may also be increased by Overrides, Debt Exclusions and Capital Outlay Exclusions The difference between the Maximum Allowable Levy Limit and the actual Levy is called Excess Levy Capacity

Levy Limit Form $ 3,439,606 FY 2015 Levy Limit $ 3,569,620 FY 2016 HARDWICK Levy Limit Form $ 3,439,606 FY 2015 Levy Limit $ 3,569,620 FY 2016 Maximum Allowable Levy

State Aid – Cherry Sheet Chapter 70 and Unrestricted General Governmental Aid (UGGA) are the two largest forms of unrestricted state aid For FY 2017 Ch 70 is $4.6 billion and UGGA is $1.022 billion in addition to the remaining accounts of $337 million represent 15% of this year’s total state budget of $39 billion State Aid represents approximately twenty percent of all revenues for municipalities!

Cherry Sheet Revenues

Cherry Sheet Charges

Estimated Local Receipts These are locally generated revenues other than real and personal property taxes Examples include Motor Vehicle Excise, Meals and Room Excises, Penalties, Fees, Licenses & Permits, Fines, Charges for Service, Departmental Revenue and Investment Income These estimates are shown on the Tax Recap Sheet on “Page 3”

Estimated Local Receipts Projections can be based on the previous year’s actual receipts Larger increases above simple inflation are allowed if the reason can be documented Some of these local revenues cover the direct cost of what they support – user fees DLS advises that the amounts contained on “Page 3” be estimated conservatively Conservative estimates may result in increased future certified Free Cash

* HARDWICK PAGE 3 * Estimated Receipts FY16, $ 780,374.54

Free Cash Definition Unrestricted and available funds for appropriation by the legislative body (some times known as “budgetary fund balance”) Certified as of July 1 based on the June 30th balance sheet which reflects results from the prior year Cannot be appropriated until it is certified by the Director of Accounts as per MGL 59:23 Any remaining balance expires on June 30th Should be considered a non-recurring revenue

The Importance of Free Cash An available fund which can be appropriated for any legal municipal purpose Depletion of Free Cash, particularly to balance annual budgets, endangers future spending plans if it is not regenerated Drawdown on reserves may also cause a negative impact on the communities credit rating However retention of ample Free Cash balance provides municipalities with financial flexibility and confidence

Generating Free Cash Free cash certified > free cash appropriated Actual revenues > budgeted revenues Budgeted expenditures > actual expenditures and encumbrances Outstanding property taxes prior years > outstanding property taxes current year

Basic Free Cash Formula + Undesignated FB or Surplus Revenue - Accounts Receivables - Illegal Deficits + Deferred Revenues = FREE CASH

Stabilization Funds – MGL 40:5B A Stabilization “Rainy Day” Fund is a special reserve fund into which monies may be appropriated and reserved for later appropriation Can be utilized for any lawful purpose Stabilization Fund balances carry forward from one fiscal year to another Interest earned on investment of the balance in this fund remains with the fund

Overlay Surplus Overlay (Allowance for Abatements and Exemptions) is an annual amount raised to cover anticipated abatements and exemptions As abatements and exemptions are granted by the Assessors the account is charged and the balance is reduced At the appropriate time the Assessors can determine that there is surplus available and declare Overlay Surplus which is an available fund to be voted by town meeting

Total Financial Flexibility Factor

The Annual Budget Process WHO AND HOW

Budget Participants: Select Board/Town Administrator – Responsible for overall Budget Process Finance/Advisory Committee – Advises and Is the Fiscal Watchdog! Town Accountant – Maintains Financial Records Treasurer – Responsible for Vendor & Payroll Warrants, Debt Management, Pensions, Insurances Tax Collector – Collect Taxes and Other Fees Assessors – Proper Valuation of Real and Personal Property forms the basis of Fair Taxation Department Heads – Important Member of Budget Process as they are on the front lines everyday

Steps in the Budget Process: Budget Calendar – Responsibilities & Due Dates Preliminary Projections Revenue and Non-Operating Expenses Budget Guidelines – Parameters & Framework Budget Instructions c/w Standardized Forms & Procedures Budget Presentation Format – Form & Content of Budget Document Comprehensive Budget Document – Incorporating Operating, Capital & Off-Budget Items Schedule Review – Public Hearings and Comment Finance/Advisory Committee Recommendations – for presentation to Annual Town Meeting

Important Budget components to help identify the needs of the Municipality and clarify their costs Select Board should first issue Budget Guidelines for annual Salary & Expense accounts . Insurance, Retirement, Utilities, Debt, and other Fixed Costs should be obtained or estimated. Department Heads should submit line item budget requests for their department with justifications. Short Term Capital needs should be identified – Is their a Long Term Capital Plan? Review Cherry Sheet Charges, Overlay and other off-budget items such as deficits to be raised.

Finally a Comprehensive Budget Incorporating all Revenue Estimates and Operating and Capital Expenses is Constructed QUESTION ? ? - Is the Budget in balance and under the community’s Prop 2-1/2 Levy Limit ? YES – Assuming estimated Tax Levy/Rate is acceptable for this proposal it may be brought before Town Meeting – the Legislative Body NO – Budget must be balanced prior to the Tax Rate being certified This can be accomplished by : Reducing the Budget Increasing the use of Available Funds Certified Free Cash Stabilization Funds Overlay Surplus OR Passing a Prop 2-1/2 Override !

BUDGET CYCLE JULY 1ST Create a timeline Present balanced budget to town meeting/city council Develop Revenue projections JULY 1ST Issue budget guidelines Towns: B.O.S. & Finance Comm approval Receive requests & develop working budget Review requests & Revenue projections

Any Additional Questions? Thank You !