Local Government Budgeting

Contents

Introduction
Funds and Budgeting
Budget Forms
What the Government Needs:  Budget Estimates for the Coming Year
What the Government's Got:  Balances at the Start of the Year
What the Government's Got:  Non-Property Tax Revenues in the Coming Year
What the Government Needs to Get:  the Property Tax Levy
The Budget Calendar
What the State Lets the Government Have:  Department of Local Government Finance Oversight

Introduction
Each year governments form a plan about their spending and how that spending will be paid for. This is budgeting.  Sometimes citizens and even public officials see budgeting as a mechanical chore--so many forms to fill out, so many signatures to acquire by so many particular dates.  At its best, though, budgeting can be an organized debate and decision process about the policies of the local government.  Department officials debate about the local government's priorities.  Councils and citizens review the levels of spending and tax rates.   The state weighs in with tax controls.  

Perhaps if the budget process were better understood, it would more often perform this debate and decision role.

Funds and Budgeting
A fund is a kind of checking or savings account.  Revenue is deposited in a fund, and spending is drawn from a fund.  The general fund is the biggest fund for most governments, meaning it is the account from which the most is spent.  Most employees wages and salaries are paid out of the general fund, as are the other operating expenses for many government functions.  Other funds have more specific purposes.  There are special funds to receive state aid for road maintenance and construction, and special funds to account for economic development income tax revenue.  County welfare revenues and expenditures come from a set of welfare funds.  Debt service is paid from a separate fund.  Cumulative funds are like savings accounts, where revenue is deposited over several years, until there is enough for a big equipment or infrastructure purchase.

Spending and revenues for each fund must be planned, in advance, each year.  Each fund has a budget.  Expenditures for each fund are planned, revenues for each fund are estimated, and the tax rate for each fund is set.  Budgeting for a government as a whole takes place through the budgets developed for each separate fund.

Budget Forms
For each fund, the budget comes together on budget form 4-B, which is sometimes called the "16-line form," despite the fact that it has 17 lines.  (An older version of the form had 16 lines.)  

The form looks complicated, and it is.  What it tries to accomplish, however, is pretty straightforward.  Form 4-B

• Takes the amount the government needs to spend from the fund next year;
• Figures the amount of money that will be available in the fund on January 1;
• Takes the amount of non-property tax revenue likely to be available to the fund next year;
• Figures how much property tax revenue needs to be raised for the fund next year.

Put another way, the form takes what you need, subtracts what you've got, and calculates what you need to get.  

Two other forms allow local governments to calculate a couple of the lines on the 16-line form.  They are budget form 1, which agencies and departments of the government use to estimate their spending needs in the coming year, and budget form 2, which estimates the revenues likely to be received from miscellaneous revenue sources (that's everything that isn't property taxes).

To follow this discussion, you might want to click on the forms, which are available here in the Adobe Acrobat PDF format.  Print them, or have them available to view on your screen.

What the Government Needs:  Budget Estimates for the Coming Year
The staffs of each department, office, board, commission, institution or fund estimate how much money they need to spend in the coming year.  Estimates include things like wages and salaries of employees, employee benefits, office supplies, insurance, utilities, printing costs, machinery and equipment, purchases of land and buildings, and other budget items.  They fill in this information on budget form 1.  

This process may sound mechanical, but it is at the heart of policy decisions about what a local government will do.  If a newly elected mayor or county commissioner has pledged to upgrade playground equipment in the local park system, for example, the parks department will have to include this new expenditure in their budget estimate.  This means estimating the cost of the new equipment, which will involve decisions about its features.  Will it be elaborate or simple?  Will all parks get some new equipment, or will one park get a big new set-up?  In deciding about the parks budget for the next year, political promises take a step toward practical decisions.  

Agency budgets are built in two ways, called "bottom up" and "top down."  Sometimes the budget begins with the agency staff, at the "bottom", who are in position to know what must be spent in the coming year.  The staff assembles the budget, and sends it to the jurisdiction's fiscal officer.  Sometimes the budget begins with the fiscal officer or the executive (like the mayor), at the "top", who tells the agency approximately or exactly what they will be allowed to spend in the coming year.  

Most of the time there will be elements of both top down and bottom up budgeting in the process.  When the bottom up spending plans of all the agencies are added up, the fiscal officer will usually find that the budget is too big.  There's not enough money available to fund the wish-lists of every department.  Someone will have to cut their budget estimates.  This is another place where policy decisions must be made by elected officials:  which departments delivering which services will get added money, and which will not?  This is a decision about what the local government will do.  In a top down budgeting process, the fiscal officer usually will gather some information about department needs before setting the spending limits.

Once the department budget estimates have been filled into budget form 1, they are added up and placed on line 1 of budget form 4-B.  This line is labeled "Total budget estimate for incoming year."  Sometimes a fund will be the responsibility of just one department, other times many different agencies combine to make up spending in a particular fund.  The local road and street fund is likely to be the responsibility of the highway department alone, while the general fund includes the budgets of many departments.

There's another kind of budget need that's included on budget form 4-B.  Line 11 is "Operating balance."  It is sensible for local governments to maintain a balance in their funds, just like households keep balances in their checking accounts.  The timing of spending and revenues doesn't exactly match.  Maybe the manufacturer of the park equipment wants to be paid in March, but the property tax revenue won't arrive until June.  If there is a balance in the fund, the manufacturer can be paid.  So, line 11 allows the government to add an amount to the budget to maintain a balance in the fund.  There is a ceiling on this amount--it can't be higher than the property taxes to be collected for the first six months of the year.

What the Government's Got:  Balances at the Start of the Year
Now that the government knows how much it wants to spend in the coming year, it needs to figure out how to pay for it.  One step in this decision is to estimate how much money will be in the fund when the coming year starts.  About half of the lines on budget form 4-B are devoted to estimating this number.

The form isn't constructed that way, though.  Instead, the form appears to be budgeting for 18 months, the second six months of the current year, and the 12 months of the coming year.  Some local officials prefer to think of the budget in this way.  I find the budget process easier to understand, though, thinking of it as an estimate of expenditures and revenues for the coming year.  The entries for the last six months of this year simply aim at figuring out what the balance in the fund will be by January 1.

How much will be on hand on January 1?  This is figured out, simply, by taking what's on hand now, adding what will be received in revenue, and subtracting what will be spent, between now and the end of the year.  

What's on hand now:  Line 6 of budget form 4-B is labeled "Actual cash balance, June 30 of present year."  Half-way through this budget year, what's in the fund?

What revenue will be received:  Line 7 is "Taxes to be collected, present year."  That means property taxes, and it really refers to the second installment of taxpayers' property tax payments, paid in November, received by local governments in December (that's called the "December settlement").  Line 8-A is "Miscellaneous revenue to be received July 1 of present year to December 31 of incoming year."  That's the revenue expected from all the non-property tax sources, like local income taxes, aid and distributions from the state, interest on investments, and fines and fees.  

What will be spent:  Line 2 is "Necessary expenditures, July 1 to December 31 of present year, to be made from appropriation unexpended."  Half-way through this year, some of the money the budget has appropriated has been spent, and some of it hasn't.  Line 2 is the part of appropriations to be spent in the second half of the year.  

Line 3 is "Additional appropriation necessary to be made July 1 to December 1 of present year."  Budgets are predictions of revenues and needs, and sometimes predictions are wrong.  When there are needs beyond what was anticipated in the budget, the local government can make an "additional appropriation."  That's added spending in the second half of the year, and it must be counted in what will be spent. 

Line 4 is "Outstanding temporary loans."  Loans must be repaid, and the form wants governments to set aside money to pay them.  They're counted as coming spending whether or not they are going to be repaid in the second half of the year.  Line 4a is for loans to be repaid, line 4b is for loans that will still be outstanding at the end of the year.  

Estimated balance, start of the coming year:  Add balances now on hand (line 6), and revenues expected in the second half of the year (lines 7 and 8-A).  Subtract expected spending (lines 2 and 3) and money set aside to repay loans (lines 4a and 4b).  Here it is:

Estimated balance = line 6 + line 7 + line 8a - line 2 - line 3 - line 4a - line 4b.

What the Government's Got:  Non-Property Tax Revenues in the Coming Year
Now we know what the government needs--the budget estimates for the coming year--and part of what the government's got--estimated balances on hand, at the year's start.  The other part of what the government's got is estimated revenue from non-property tax sources.

Revenues include taxes like the local income taxes, motor vehicle excise tax, and financial institutions tax.  Revenue includes fees from licenses and permits, like dog licenses or building permits.  It includes "intergovernmental revenue," which is aid from the Federal and state governments.  State aid includes distributions from state tobacco and alcoholic beverage taxes, road funding aid, and (potentially) other payments in lieu of taxes.  Other revenues are charges for services, like fire protection contracts or dog pound receipts; fines and forfeitures, like ordinance violations; and other revenues such as interest on investments, and rents on rental property.  All of this revenue must be estimated.  In some cases the state tells local governments how much will be received.  Local income tax revenues for the coming year, for example, are certified by the state to local governments by mid-year.  Other revenues must be guessed at, based on current and past year receipts, and expected trends.  

These estimates are recorded on budget form 2, known as the miscellaneous revenue form.  The local government fills in two columns.  Column A contains the revenue estimates for the rest of the current year, and are used in the calculation of the coming year beginning balance (see above).  Column B contains the revenue estimates for the coming year.  The revenues in this column are added up, and entered on budget form 4-B in line 8-B.  This line is actually poorly labeled, as it does not say anything about estimated revenue for January 1 through December 31 of the coming year.  That's what it is, though.

There's one kind of non-property tax revenue that is not included on the miscellaneous revenue form, but goes directly to line 13 of form 4-B.  This line is for "Property Tax Replacement Credit from Local Option Tax."  This is the revenue from the first one-quarter of one percent of the CAGIT income tax (County Adjusted Gross Income Tax).  This revenue is intended for property tax relief, and to emphasize this use, it's put right on the 16-line form.   

What the Government Needs to Get:  the Property Tax Levy
Now we've got three numbers:  budgeted spending for the coming year, the estimated balance in the fund at the start of the coming year, and the estimated non-property tax revenues to be received in the coming year. Almost always, the amount of spending will exceed the sum of the fund balance and estimated non-property tax revenue.  It's time to fill in the difference with property taxes.  

Start by taking the funds required, and subtracting the funds available.  On budget form 4-B, funds required are on line 5, and funds available are on line 9.  Line 10 is "Net amount to be raised for expenses to December 31 of incoming year."  Remember that the form is constructed on an 18-month basis, so line 10 is the amount to be spent over the next 18 months, less the amount to be received over the next 18 months.  Another way to think of it, though, is:

Coming Year Spending minus Start of Year Balances minus Coming Year Miscellaneous Revenues.

The arithmetic works out either way.

That's it.  The result of this equation is line 14, "Net amount to be raised by tax levy," meaning the property tax.  Divide this levy by assessed value, (which is written in a space in the heading of form 4-B), multiply by 100, and you get line 17, "Net tax rate on each one hundred dollars of taxable property."

The Budget Calendar
But budget form 4-B has four columns!  The first is labeled "Amount used to compute published budget," the second is labeled "Appropriating body," the third, "Tax adjustment board," and the fourth "Control board and State Tax Board final action."   The columns have to do with the steps in the budget calendar.  (Note:  as of 2002 the State Tax Board has been renamed the Department of Local Government Finance.  Newer versions of form 4-B will reflect this change.)

By July 1 the State Department of Revenue will certify local income tax revenues to be received during the budget year, for governments in counties which have adopted a local income tax.  Assessed values and revenues are certified by the county auditor by August 1, based on information submitted by the township and county assessors.

Departments propose their budgets during the middle of the calendar year.  By the end of July the "published budget" is set.  This is the initial budget proposal, and it's called the published budget because it must be published in a newspaper for citizens to examine.  During August and early September the proposed budget must appear in a newspaper twice.  That's the first column of form 4-B.

After the budget has been published, in late August or early September, comes the meeting of the "appropriating body." This is the legislature of the local government, such as the county, city or town council.  The council reviews the budgets and tax rates.  They may make some changes, or not, though the total budget can't be more than the advertised amount.  Eventually the council adopts a budget and tax rates by majority vote.  The result is written in the second column of form 4-B.

Later in September, in a few counties, the Tax Adjustment Board meets.  Where it exists, the board is made up of three members from local governments and four members appointed by the county commissioners.  While the board can act to reduce budgets and tax rates, such actions are rare.  The boards appear to be a relic of past property tax control efforts, non-existent in most counties, not very active in counties where they still exist. 

These are the steps in the calendar.  What's going on behind the scenes?  Much negotiation over the budget goes on before the council budget meetings.  This is especially true in county governments, because there are so many independently elected department heads (such as the Sheriff, Auditor, Treasurer, Commissioners).  Department heads may meet with county council members before the official hearings to work out budget cuts and to hear appeals for reinstating cuts.  Activity at the actual council budget meeting varies.  Sometimes budgets were worked out beforehand, and the council meeting provides an official rubber stamp.  But sometimes the council meeting is the place where council members pursue their agendas, advocating more or less spending for favored services, or working on the overall level of spending.  Unfortunately, public participation in budget hearings usually is very limited.

What the State Lets the Government Have:  Department of Local Government Finance Oversight
There's one more step in the budget process.  The local government has determined its property tax levy, "what the government needs to get."  But now the state property tax controls kick in, to determine what the state lets the government have. 

Property tax levies are limited by state controls.  The result of the levy calculations on form 4-B may or may not be within these limits.  If the local government wants a higher levy, it can appeal to the Department of Local Government Finance (formerly the State Board of Tax Commissioners) for relief.  The appeal must be filed by the end of September.  Such appeals are not approved very often.

Whether or not there is an appeal, field examiners of the Department of Local Government Finance (DLGF) conduct hearings between October 1 and December 31, to review the budgets of all local governments.  If the council has passed a budget that exceeds property tax levy limits, and a levy appeal is not filed or is rejected, the DLGF requires that the budget be reduced.  The DLGF must complete hearings and certify its actions on budgets, tax rates and levies by January 15 of the budget year.  This final result is reported in the fourth column of budget form 4-B.

Indiana gives the DLGF a powerful role in overseeing local budgets.  Most states give local governments more discretion.  This oversight exists to enforce the property tax controls, but it creates some curious and not-so-welcome side effects. 

The property tax levy limits are known in advance of the DLGF hearings.  Why then do local governments pass budgets that are above the limits?  There is a technical reason:  though assessed values are supposed to be known by budget time, the final figures are often not available until the following January.  State law allows appropriations and tax rates to be reduced but not increased after they have passed.  If the tax rate is set on the expectation of a high assessed value, and the final assessment figure is low, governments cannot increase their rates even if the new lower levy is below the levy limit.  Local governments hedge against this possibility by passing budgets above the levy limits.  Unfortunately, this means that the budgets published in the newspapers often are inflated, and so can mislead the public about the government's intentions.

It may also be that local governments pass budgets that are too high in order to pass the onus of saying "no" to the Department of Local Government Finance.  Local governments may approve more appropriations than the limits will allow, remain on good terms with department heads and interested citizens, and blame the state for the eventual budget cuts.  This is unfortunate as well, in that citizens may have a hard time identifying who has the real responsibility for the budgets.