NEW OFFICIALS FINANCE FORUM Division of Local Services Department of Revenue June 2, 2015

Division of Local Services Supporting a Commonwealth of Communities Sean R. Cronin Senior Deputy Commissioner of Local Services

Mission The Division of Local Services (DLS) provides: Technical Assistance Training Oversight to assist Massachusetts cities and towns in the achievement of sound and efficient fiscal management DLS is responsible for: Ensuring the fairness and equity of local property assessment and taxation The accuracy and quality of local accounting and treasury management Interpreting state laws that govern local finances Distributing local aid Maintaining a comprehensive databank on local finances DLS Offices are located in Boston, Worcester and Springfield There are five bureaus and an IT section

Executive Coordinate trainings and workshops for local officials: Course 101 Assessment Administration New Officials Finance Forum “What’s New in Municipal Finance Law” Regionalization Conference Tax Rate and Property Valuation Certification Workshops On-site Trainings City & Town e-newsletter is published twice monthly and distributed electronically to nearly 9,000 local and state officials. This newsletter includes articles and fiscal analyses on topics of interest to local officials. Public Information Requests

Bureau of Accounts Bureau of Accounts (BOA): Oversight of municipal financial management through: Tax rate certification Certified $24.2b statewide in municipal financing for FY14 Free cash certification The calculation of free cash is based on the balance sheet as of June 30th Free Cash certified in excess of $1.1b 350 Communities Review and approval of Balance Sheet, Schedule A and Audits Each community is assigned a BOA field representative

Bureau of Local Assessment Bureau of Local Assessment (BLA): Responsible for regulation and oversight of real and personal property assessment, valuation and certification Property value certification every three years 2012 Equalized Valuation (EQV) (fair cash value of all taxable property in the Commonwealth as of 1-1-14) - $975.4b Largest value – Boston - $109.5b Smallest value – Monroe - $22.6m New Growth Certification New construction, personal property and other growth in the tax base FY14 – $237.9m certified in new growth Each community is assigned a BLA field advisor

Municipal Data Management/ Technical Assistance Municipal Data Management/Technical Assistance (MDM/TAB): Develops and maintains the Municipal Data Bank www.mass.gov/dls Provides municipal financial and demographic data from the early 1980s to the present fiscal year through the Community Comparison Tool and other online reporting tools Coordinates the process of preparing the annual Cherry Sheet estimates and local aid distribution in excess of $5.5b FY15 Chapter 70: $4.4b FY15 Unrestricted General Government Aid: $945.7m Provides technical assistance to cities and towns Technical Assistance Services

Municipal Finance Law Municipal Finance Law (MFLB): Serves as legal counsel to DLS Provides legal and technical assistance to state and local officials on municipal finance and taxation issues Develops DLS legislative proposals and reviews municipal finance law legislative proposals Issues Bulletins and Information Guideline Releases (IGR’s)

IT Section IT Section (IT): Enhance the flow of information between DLS and cities and towns in the Commonwealth Gateway application: All BLA and BOA forms submitted by cities and towns are online for direct data entry, review, retrieval, signing and submissions by authorized officials at the local level Ongoing Gateway enhancements Maintains the Local Officials Directory

Community Compact Cabinet Community Compact Cabinet (CCC) strives to incentivize best practices at both the state and local level Improves state-municipal relations by having state agencies work better with and for municipalities Works to better coordinate and leverage state resources available to cities and towns

Inclusive Approach – Assistance for all Communities Massachusetts is a Commonwealth of 351 cities and towns - both large and small The Baker/Polito Administration is committed to helping all communities achieve best practices Any community, regardless of population, that enters into a Compact will be eligible for technical assistance

Best Practice Areas Financial Management Housing / Economic Development Education Energy / Environment Technology Transportation Regional Cooperation

Application Process New CCC website (Mass.gov/CCC) A community can choose to enter into the Community Compact at any time Online application program Simple process – choose Best Practice area and then one of the 5 Best Practice options Can choose up to 3 Best Practices Each Compact agreement will run for two years During the two year period of each compact, the Division of Local Services will monitor progress Progress payments made based on project timeline community has with consultant

Contact Sean R. Cronin croninse@dor.state.ma.us 617-626-2381

MUNICIPAL MANAGEMENT

Municipal Mix & Match Identify which office(s) in the left column performs each of the duties listed in the right column Accountant/Auditor Assessors City Council Clerk Collector Finance Committee Mayor/City Manager Selectmen Town Meeting Treasurer ___ Records all votes of the legislative body ___ Authorizes debt ___ Manages the community’s money ___ Approves all transfers from the reserve fund ___ Prepares and submits the annual budget recommendations ___ Administers the motor vehicle excise ___ Reviews vendors bills to ensure that they are lawful expenditures ___ Makes appropriations ___ Retains all municipal contracts ___ Prepares the annual Tax Rate Recapitulation Sheet ___ Chooses an audit firm to conduct the annual town audit ___ Signs debt issues in towns ___ Pays vendors after proper authorization ___ Monitors municipal spending to ensure that departments are within their budgets ___ Notifies DOR of any votes to incur debt ___ Issues municipal tax lien certificates

Municipal Management Selectmen/Mayor/City Manager City Council/Town Meeting Finance Committee Assessors Collector Treasurer Accountant/Auditor Clerk

Selectmen/Mayor/City Manager Oversees Finances Appoint Employees Sign Debt Decide Tax Policy (Town) Call Town Meetings Prepare Budget (City)

City Council/Town Meeting Makes appropriations Adopts Budget Authorizes Debt Enacts Ordinances/Bylaws Decides Tax Policy (City)

Finance Committee Makes Budget Recommendations Approves Reserve Fund Transfers Approves Year End Transfers

Assessors Prepare Property Database Value & Classify Property Submit Tax Rate Recapitulation Commit Taxes Grant Abatements and Exemptions Administer Excises

Collector Bills & Collects Taxes May also be designated “City” or “Town” Collector, which authorizes the tax collector to also collect other non-tax receivables due the city or town

Treasurer Deposits, Invests & Distributes Money Issues Debt Manages Tax Titles and Foreclosures Administers Payroll

Accountant/Auditor Keeps Contracts (Town) Maintains Finance Records Prepares Finance Reports Monitors Spending

Clerk Keeps Contracts (City) Maintains Records Conducts Elections

Municipal Mix & Match Identify which office(s) in the left column performs each of the duties listed in the right column Accountant/Auditor Assessors City Council Clerk Collector Finance Committee Mayor/City Manager Selectmen Town Meeting Treasurer _D_ Records all votes of the legislative body C, I_ Authorizes debt _ J_ Manages the community’s money C, F Approves all transfers from the reserve fund F,G,H Prepares and submits the annual budget recommendations _B_ Administers the motor vehicle excise _A_ Reviews vendors bills to ensure that they are lawful expenditures C, I_ Makes appropriations A, D Retains all municipal contracts A,B,D Prepares the annual Tax Rate Recapitulation Sheet _H_ Chooses an audit firm to conduct the annual town audit D,H,J Signs debt issues in towns _J_ Pays vendors after proper authorization _A_ Monitors municipal spending to ensure that departments are within their budgets _D_ Notifies DOR of any votes to incur debt _E_ Issues municipal tax lien certificates

PROPERTY TAXES

The Property Tax Statutory mechanism to fund local government operations Administered by local government

Distributing the Tax Levy Based on assessed value of taxable property Tax Levy Tax Rate = X 1,000 Assessed Value

Tax Policy Options Single or Split Tax Rate (Classification) Open Space Discount Residential Exemption Small Commercial Exemption

Classes Of Real Property Residential Commercial 4 Classes of Real Property Open Space Industrial

Example: If the Residential class is 80% of the assessed value in a town…. It will carry 80% of the Tax Burden

Commercial, Industrial & Personal Property Residential & Open Space Split Tax Rate If chosen, this option results in a different tax rate for: Commercial, Industrial & Personal Property Residential & Open Space Than for

Shifting the Tax Burden Classification changes the distribution of the tax levy, not the amount.

Open Space Discount If chosen, this option results in a different tax rate for: n Discount up to 25% of the class tax burden Cost Shifted to Residential Class n

Residential Exemption in value. n For eligible residential properties. n Properties must be owner occupied.

Example $40,000 $600 Exempted value for each eligible parcel is n parcel is $40,000 n The exemption amounts to $600 n for each eligible property owner

Commercial Exemption Similar to residential exemption. Based on a percentage of the For eligible properties. n eligible parcel value only. n Up to a 10% exemption.

The Municipal Budget Process I’ve been involved in over 70 different communities and virtually every budget process was different. However, there are some universal elements that we feel are critical to fiscal stability and planning Objectives: Engage your colleagues in discussion Learn something new

Outline Budgeting 101 Typical Budget Process Best Practices Budget 101, cover the basics What is the budget and its purpose Typical Budget Process Calendar Setting goals and objectives Review Best Practices Avoiding deficits Reserve and debt policies

Budget Basics What is the budget? “It is the means by which we decide how and where available funds shall be spent.” Budget Consist of Three Core Elements: Revenue Estimates Statement of Expenditures Covers a Specified Period of Time Three Core Elements: Revenue estimates – tax levy, state aid (cherry sheet) money, local receipts (are locally generated revenue other than real estate and personal property taxes, including motor vehicle excise, investment income, fees, rentals and charges) Statement of expenditures – salary and expense line-items for each department Time period in municipal budgeting in MA runs on a fiscal year running from July 1st to June 30th

The Purpose of a Budget: Defines service priorities and goals Includes long-term financial goals Considers capital maintenance and future needs Is a major policymaking tool Provides expenditure control Communicates Information to the Public Communicates info to the public Defines service priorities and goals Focus on public safety, schools, etc. Long-range financial goals Free cash and stabilization reserve levels, debt levels, etc. Incorporates capital, maintenance, and future needs Comprehensive capital improvement plan detailing long-term needs, understanding age and condition of buildings and equipment Purchase a new fire truck, cruisers, or construct new school, library, town hall Is a major policymaking tool Provides expenditure control For departments – sets limits on what they can spend For accountant – is the basis for measuring actual against limits, monitoring the budget Communicates where are we going to spend out money

Who Develops the Annual Budget? Depends? Mayor’s Office Board of Selectmen Finance or Advisory Committee Town Manager/Administrator/Coordinator Depends on type of government structure City: Mayor, working with departments, and adopted by city council Town: Town Administrator > Board of Selectmen > Finance Committee > Town Meeting (Lineal Process)

Municipal budget process was expenditure driven, now revenue driven Proposition 2 ½ Impact Municipal budget process was expenditure driven, now revenue driven Budget must be balanced: Revenues = Expenditures Tax Levy cannot exceed levy limit without override Great Tax Revolt in 1980 Prior to Prop 2 ½ there was no control on property taxes. Budgets were expenditure driven, communities could raise whatever was necessary as long as town meeting approved. Today Prop 2 ½ places a ceiling on the total amount of taxes that a town can raise, and it also limits the percentage by which a town’s tax revenues can increase from year to year to 2 ½ percent plus new growth the construction of new homes, additions, etc. Any increase over and above the levy limit requires a Prop 2 ½ override

Budget Process Create a Timeline (Budget Calendar) Establish Goals and Objectives Develop Revenue Projections Issue Budget Guidelines and Instructions Receive Departmental Requests and Develop Working Budget Review Requests and Update Revenue Projections Board of Selectmen and Finance Committee Approval and Recommendations Present Balanced Budget to Town Meeting Create a budget calendar one of the more important parts of the process, should be first Establish goals and objectives summit meeting, tri-board meeting Who develops revenue projections? Town administrator with buy-in from board of selectmen, finance committee, and school committee What do guidelines say? Generally outline the community’s financial condition and how that impacts the budget: level service, level funded, targeted increases, zero-based Review process should match expenditure needs with available revenues Meet with department heads Lineal review process from town administrator to BOS to FinCom Whose budget goes town meeting? Depends, could be town administrator, BOS or FinCom

First and most important step in the process: set milestones Budget Calendar First and most important step in the process: set milestones Should include fixed but flexible deadlines, be a lineal process, and have a cutoff point

Sample Budget Calendar Example from the Town of Swampscott

Establish Goals and Objectives Identify: General Goals/Direction, Specific Projects, and Community Needs Lots of different ways to handle, but generally should involve local officials and the public Town holds a summit meeting, tri-board meeting of BOS, FinCom, Capital Planning, School Committee Seeks residential input through surveys, public meetings

Goal: Preserve Open Space, cultural, and recreational Resources Goals are broad statements of purpose, while objectives offer specific strategies to attain preferred results: Examples: Goal: Preserve Open Space, cultural, and recreational Resources Objective: implement open space plan Goal: Maintain Fiscal Stability Objective: identify opportunities to reduce costs through improved efficiency Goal = improve our roads Objective = pave main street Goal = increase public safety Objective = purchase new fire engine

Develop Revenue Projections Forecasting available revenues is an integral part of the budget process Four major revenue sources: Property Taxes State Aid Estimated Local Receipts Other Available Funds (e.g. Certified Free Cash, Stabilization Funds) Limited growth with each source Prop 2 ½ - revenue driven, determines how much you have to spend Be Conservative

Property Taxes = Levy Limit Calculation Tax Rate = Tax Levy / Assessed Value x $1,000

Cherry Sheet identifies municipal receipts and charges State Aid Cherry Sheet identifies municipal receipts and charges State aid – impact depends on how much a city and town receives Gov releases budget in Jan House and Senate might have possible joint resolution for chapter 70 or unrestricted general government assistance, if not budget goes to house then senate House in April Senate in May Have to cut off at some point

Estimated Local Receipts Motor vehicle excise, Local permit and license fees, Investment income, etc. Be conservative Generally little change from year to year DOR watches the 10% rule (if 10% over and above last year’s estimate you need to justify through increased fees, charges, etc.) Develop initial projections in Nov and revisit in Feb or April

Other Available Funds Certified Free Cash: Stabilization Funds: Total: Excess Levy Capacity: Percent of Budget: $2,380,250 $1,971,721 $4,351,971 $402,908 $4,754,879 5% Separate pots of money, can be appropriated as a revenue source Jared will be talking about free cash and stabilization reserves later

Typical Percentage of Revenue Sources

Issue Budget Guidelines/Instructions Guidelines: Designed to set parameters & frame budget (reserve, debt policies) Instructions: Standardized forms and Procedures Depending on the community it can be as simple as a memo or as complex as a budget manual

Receive Requests & Develop Working Budget At this point in the budget process: Selectmen should issue budget message Debt, insurance, retirement, utilities, and other fixed costs should be obtained Department heads should submit line-item budget requests for their department Capital needs should be identified: Is there a long-term plan? Review Cherry Sheet Charges, Overlay and other off-budget items such as deficits to be raised Budget message = level service, level funded, 2% increase or zero based or performance based budget

Review Schedule: Town administrator formulates initial budget recommendation (depending on the government structure) The selectmen, as chief policymakers, hold hearings and approve budget Finance Committee holds hearings and prepares recommendations for town meeting Town Meeting Presentation

Prepare a comprehensive budget incorporating all revenue estimates and operating and capital expenditures: Is the budget balanced? Yes: Proposal can be brought to town meeting No: Must be balanced prior to setting the tax rate Reduce expenditures Increase use of available funds (free cash, stabilization) Pass a Prop 2 ½ general operating override

Budget Presentation to Annual Town Meeting Presentation: less detail = greater flexibility, but less accountability Generally salaries and expenses Whose Budget goes to town meeting? Depends? Can Town Meeting change appropriations? Is the Town Meeting approved budget final?

Best Practices Communication Realistic, full-year appropriations Avoid year-end deficits Town Administrator/Finance Committee Monitor revenues and expenditures Develop year-end action plan Departments Stay within you budget Manage money via legal transfers Keep an expense log Communication: between BOS, FinCom, and School Committee – Joint Triboard Meetings Avoid appropriation deficits – clear/backfill before end of FY Free cash hit Raised on next year’s tax rate

Municipal Data Management & Technical Assistance Bureau Zack Blake, Director Technical Assistance Services blakez@dor.state.ma.us 617-626-2358 Lisa Krzywicki, Director Municipal Databank databank@dor.state.ma.us 617-626-2386

PROPOSITION 2 1/2

Levy Building Blocks Levy Ceiling Levy Limit Levy

Annual Levy Limit To Calculate New Levy Limit Begin with Last Year’s Levy Limit Factor 1 Increase by 2.5% Factor 2 "New Growth"

Annual Levy Limit New Growth 2.5% Levy Ceiling Levy Limit Levy Limit Base

New Growth To Calculate the New Growth Factor Multiply Prior Year's Tax Rate by Allowable Valuation Increases over Prior Year

To Illustrate Calculation of New Growth New Development Parcel A – Last Year Assessed at $50,000 Parcel A – This Year Assessed at $250,000 $200,000 Included in New Growth Calculation

Total Assessed Valuation Annual Levy Ceiling To Calculate the New Levy Ceiling Begin with This Year’s Total Assessed Valuation Multiply by 2.5%

Growth 2.5% To Illustrate Calculation of Annual Levy Limit Levy Ceiling $ 250 million Levy Ceiling Assessed valuation of the community is $10,000,000,000 Assessed Value of 10 billion x 2.5% = $250 million Subtotal and Levy Limit = $ 105 million Growth $ 2.5 million 2.5% $ 2.5 million $100 million Levy Limit Base Last Year’s Levy Limit $ 100 million

Override Override New Growth 2.5% Levy Ceiling New Levy Limit Levy Limit Base

To Illustrate Impact of Override The community can now levy This Year $1 million Override Levy Limit Base = $101 million Next Year The community can now levy $101 million $1 million override Levy Limit = $100 Million

Underride Underride Current Levy Limit New Levy Limit

Maximum Allowable Levy Debt/Capital Exclusion New Growth 2.5% Levy Ceiling New Levy Limit Levy Limit Base

To Illustrate Impact of Debt Exclusion Debt Exclusion approved for 20 year loan with annual debt service payment of $1,000,000 This Year Levy Limit of $100 million Community can Levy $101,000,000

To Illustrate Impact of Debt Exclusion Begin with Year 1 Levy Limit Levy Limit of $100 million Community can levy $101,000,000 Year 2 Begin with Year 1 Levy Limit $100 million PLUS - - $1,000,000 Exclusion

Comparison of Referenda Questions Overrides Exclusions Any Spending Purpose Only Capital Purchases Permanent Temporary Debt (Life of Bond) Capital (1 Year) Amount Limited by Ceiling No Limit on the Number Or Dollar Amount

The Maximum Levy Debt or Capital Exclusion Maximum Allowable Levy Debt or Capital Exclusion Outlay Expenditure Exclusion Override NEW GROWTH 2.5% Levy Ceiling New Levy Limit Levy Limit Base

What is “Gateway”?

You must be listed in the Local Officials Directory to have a Gateway account. Your city/town clerk can put you there. An accurate email here means you will get important notifications (approvals)

‘Who can do what?’ is a local decision

Who can see the data I enter? FOR LATEVILLE By Policy: When you just “Calculate & Save” data, it’s NOT public yet. When you officially “Submit” data, it’s public only if requested (FOIA.) When data is “Approved” by DLS, it’s public and may be available on the DLS website in various forms.

Electronic Signatures Officials need a Directory entry, a login account, and permission to sign a form Under certain circumstances, authorized individuals can sign “on behalf of” others (comment required) Rules of ordinary signatures also apply to electronic versions – don’t sign for others unless authorized

What happens at DLS after you submit – automatic workflow notifications

What can go wrong? Firewall (Traffic Shield) or system error messages Necessary form approval sequence Web applications time out with no activity -Gateway times out after 35 minutes For help, call or email DLS IT Support: (617) 626-2350 DLSITGroup@dor.state.ma.us

What’s next? Gateway Modernization

~3 year project Software revisions tied to streamlined DLS business processes Better user experience Robust new Help system

RESERVES AND FREE CASH

Developing Reserve Policy Reserve Fund Stabilization Funds Free Cash

Free Cash Definition Unrestricted and available funds for appropriation Certified as of July 1 based on the June 30 balance sheet Cannot be appropriated until it is certified Unappropriated balance expires on June 30 CERTIFIED

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

BOA Review Process June 30 balance sheet (all funds) Reconciliation of cash & receivables Deficits that impact free cash Illegal appropriations Unreimbursed overdrawn grants Deficits that have no impact on free cash, but must be raised in the tax rate Legal appropriations Revenue deficits Court judgments Overlay deficits

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

SETTING THE TAX RATE

A sample of this form can be found in Exercise 2 of your manual II. Amount to be raised III. Estimated receipts and other revenues sources IV. Summary of total amount to be raised and total receipts from all sources A sample of this form can be found in Exercise 2 of your manual

Certification of Appropriations and Source of Funding A sample of this form can be found in Exercise 2 of your manual

A sample of this form can be found in Exercise 2 of your manual II. Amount to be raised A sample of this form can be found in Exercise 2 of your manual

III Estimated receipts and other revenue sources 202,512.00 164,300.00 A sample of this form can found in Exercise 2 of your manual

A sample of this form can be found in Exercise 2 of your manual IV. Summary of Total Amount to be Raised and Total Receipts from all Sources A sample of this form can be found in Exercise 2 of your manual

A sample of this form can be found in Exercise 2 of your manual 1. Motor vehicle excise 5. Charges for services -- water 6. Charges for services -- sewer 7. Charges for services -- hospital 8. Charges for services -- trash disposal + or - 10% 12. Departmental revenue -- schools 13. Departmental revenue -- libraries 14. Departmental revenue -- cemeteries 15. Departmental revenue -- recreation A sample of this form can be found in Exercise 2 of your manual

I. Tax Rate Summary Total Amounts Raised less state aid less estimated receipts less available funds Tax Levy < Maximum allowable levy

For Review The Tax Rate Formula is... Tax Levy Tax Rate = X 1,000 Assessed Value