Local Government Budgets as Checking Accounts

New November 2006

Contents
Introduction
Funds and Budgeting
Budget Form 4-B
Lines 1-5:  Total Funds Required
Lines 6-9:  Total Funds
Lines 10-17:  Net Amount to be Raised
The Budget Calendar
Property Tax Controls
The Budget as a Checking Account
An Example
How Big Should Balances Be?
How Big Should Appropriations Be?
How is the Assessment System Working?

Introduction
Each year governments form a plan about their spending and how that spending will be paid for. This is budgeting.  Sometimes citizens and public officials see budgeting as a mechanical chore--so many forms to fill out 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.  Officials and department heads debate 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.  One way to understand local government budgeting is to recognize that it is not so different from household budgeting, using a household checking account.  The household starts the year with a balance in its account.  Throughout the year money is deposited and checks are written.  At the end of the year the household has a balance in its account.  The bank insists that the balance be positive.  Households must pay for their spending with the balances available at the start, and with the money deposited during the year.  This paper shows how to turn the numbers on the budget form that all Indiana local governments use into a checking account statement. 

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 employee 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.

Each fund has a budget.  Spending and revenues for each must be planned, in advance, each year.  Expenditures are planned, revenues 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 Form 4-B
In Indiana, 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 during the second half of this year, and all of next year;

• Projects the amount of non-property tax revenue likely to be available to the fund in the second half of this year and all of 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 governments use for estimates of the revenues likely to be received from miscellaneous revenue sources (that's everything that isn't property taxes).

Figure 1 shows the names and numbers of each line on budget form 4-B.  There are 17 numbered lines, but 19 lines all together, because there are two sets of “a” and “b” lines (4a and 4b, 8a and 8b). 

Figure 1.  The 17 Lines of the 16-Line Form

Lines 1-5:  Total Funds Required
The form starts by calculating the “total funds required,” which is the sum of lines 1 through 4b, shown on line 5.  Line 1 shows the budget for the next calendar year, which is the incoming local government fiscal year.  The staffs of each agency, department, office, board or commission 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 (see the appendix for a copy). 

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. 

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 is the "total budget estimate for incoming year." 

Budget form 4-B is often described as an “18-month form.”  That’s because the budget forms are filled out in advance of the incoming year, so there are still several months of the current budget year to worry about.  Form 4-B calculates the government’s balances as of June 30 of the current year, the revenues and spending likely to occur during the last six months of the current year, and the projected revenues and planned spending for the incoming budget year.  That’s 18 months worth of budgeting.

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 that the current 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 localgovernment can make an "additional appropriation."  That's added spending in the second half of the year, and it must be counted as spending.

Line 4 is "Outstanding temporary loans."  Loans must be repaid, and this is where 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. 

Line 5 adds up planned spending for next year, budgeted appropriations and additional appropriations for this year, and loans to be repaid.  The result is “total funds required.”  Put another way, that’s what the government needs.

Lines 6-9:  Total Funds
The form now starts calculating the funds available to pay for these spending needs.  The heading above line 6 says “Funds on hand to be received from sources other than proposed tax levy.”  Line 6 shows what's on hand now:  "actual cash balance, June 30 of present year."  That’s what the government has in its general fund account half-way through this budget year.

Line 7 is "taxes to be collected, present year."  That means property taxes, and it (usually) 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").  The first installment of property taxes are usually paid in May, and received by governments in June (the “June settlement”).  We say “usually”, because the recent difficulties with the 2002-03 reassessment delayed property tax collections in many counties.  In some years, both installments were collected in the second half of the year.  Some counties saw even longer delays.

Line 8 estimates “miscellaneous revenues,” which are the non-property tax revenues likely to be available.  Line 8a shows what’s projected for the last six months of the current year, and line 8b estimates revenues for the incoming budget year. 

Miscellaneous revenue includes taxes like the local income taxes, motor vehicle excise tax, and financial institutions tax.  It 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 (sometimes) 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 (see appendix).  The local government fills in two columns.  Column A contains the revenue estimates for the rest of the current year and 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 lines 8-A and 8-B.  This second line is poorly labeled, since it does not say anything about estimated revenue for January 1 through December 31 of the coming year.  That's what it is, though.

Line 9 adds current cash balances, expected property taxes for the second half of this year, and all other revenues for the next 18 months.  It’s called “total funds.”  Put another way, it’s what the government’s got, to pay for what it needs.  Since total funds are almost always less than total funds required (line 5), more money must be found.  That’s where the property tax levy for the incoming budget year comes in.

Lines 10-17:  Net Amount to be Raised
Lines 10 through 16 calculate the property tax levy.  Line 17 turns the levy into a property tax rate. 

Line 10 makes the obvious calculation, subtracting the funds available (line 9) from the funds required (line 5).  This difference is called “net amount to be raised for expenses to December 31 of incoming year.”  That’s not the whole property tax levy, though.

Line 11 is “operating balance.”  At the end of the incoming year, in 18 months on December 31, the government will want to have a positive balance in its account.  This amount appears on line 11. The form provides some guidance about the size of this balance.  It says “not in excess of expense January 1 to June 30, less miscellaneous revenue for same period.”  It’s reasonable advice, as we’ll see below.

Line 12 adds lines 10 and 11.  It’s the sum of what the government needs to raise to support appropriations in the incoming budget year, plus the balances the government wants to have at the end.  For some counties, this is the property tax levy for the incoming year.  For others, more adjustments must be made.

There's one kind of non-property tax revenue that is not included on the miscellaneous revenue form, but goes directly to line 13.  This line is for "property tax replacement credit from local option tax."  Property tax replacement credits are often abbreviated as PTRC.  This is the revenue from the first one-quarter of one percent of the County Adjusted Gross Income Tax (CAGIT).  This revenue is intended for property tax relief, and to emphasize this use, counties that have this tax put it right on the 16-line form.  (This was probably the 17^th line of the 16-line form, when the CAGIT option was first made available in 1973.)

Line 14 subtracts CAGIT PTRC from the property tax levy.  For many counties, this is the property tax levy actually raised during the incoming budget year.  In a few counties, however, the Department of Local Government Finance will further reduce the levy, if the county collected more than expected during the current year.  This adjustment is made later in the budget process.  (On form 4-B line 15 can be filled in only in the column labeled “control board and DLGF final action.”)  Line 16 subtracts this “levy excess fund” from the amount to be raised from the property tax.

Line 16 is labeled “net amount to be raised.”  It’s the last line that has that name, and it really is the property tax levy for the incoming year.  Put another way, it’s the difference between what the government needs and what it’s got.  It’s what the government needs to get. 

Now the property tax rate can be calculated, on line 17.  Budget form 4-B shows in its heading the government’s “net assessed valuation,” which is the assessed value of the taxable property within the government’s boundaries, less deductions and exemptions (that’s why it’s called “net”).  Line 17 divides the net amount to be raised on line 16 by the net assessed valuation, and multiplies by 100.  That’s the tax rate, measured in dollars per $100 of assessed value.

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 DLGF final action."   The columns have to do with the steps in the budget calendar.

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 supposed to be 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. 

Property Tax Controls
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 for relief to the state’s Department of Local Government Finance (DLGF—it used to be called the “State Tax Board”).  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 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.  That’s the government’s budget for the incoming year.

The Budget as a Checking Account
The entries on budget form 4-B may seem mysterious.  But it’s possible to re-arrange these numbers to look like a checking account.  It starts with balances at the beginning of the incoming budget year, shows revenues to be collected, appropriations to be spent, and remaining balances at the end of the year.  Citizens and government officials may find that understanding the budget is easier once the numbers are in this form.

Figure 2 shows how the numbers are rearranged.  The left side shows the usual 16-line form, described above.  The right side shows the same numbers in checking account form.

The purpose of budget form 4-B is to plan appropriations, revenues and the tax rate for the incoming budget year.  To do this, the government needs to project what it will have on hand at the start of the year.  What balance will be in the government’s checking account on January 1?

Budget form 4-B covers 18 months in order to project the balance in the fund at the start of the incoming budget year. In fact, seven of the form’s 19 lines are devoted to projecting this start-of-year balance.  And yet, oddly, the projected balance is never actually calculated.  It doesn’t show up on budget form 4-B.

Figure 2.  16-Line Form and Checking Account

Let’s remedy that.  The start-of-year or January balance will be the June 30 balance, plus revenues for the next six months, less expenditures for the next six months.  Add lines 6, 7 and 8a.  That’s current balances as of June 30, December property taxes and all other revenues to be collected in the second half of the current year.  Subtract lines 2, 3, 4a and 4b.  That’s expenditures and additional appropriations for the second half of the current year, with money set aside for loan repayment.  The result is the estimated January 1 balance.

Revenues will be collected during the incoming budget year.  The sum of lines 8b, 13 and 14 estimate this revenue.  That’s the sum of non-property tax revenue, the part of CAGIT devoted to property tax relief, and property taxes.  We could split line 14 into lines 15 and 16, the levy excess fund applied, and remaining net amount to be raised.  Since the levy excess decision is made later in the budget process by the Department of Local Government Finance, let’s not.  Total expected revenues are the same either way.

Those balances and revenues exist to pay for appropriations.  Line 1 shows the government’s spending plan for the incoming budget year.  Nothing else needs to be added or subtracted.

Add January 1 balances and expected revenues during the year, subtract planned appropriations during the year, and the result is the expected end-of-year balance, as of December 31.  That’s line 11.

An Example
Does it work?  Do the numbers add up?  Let’s take an example, the Adams County general fund budget for 2006.   We’ll use Adams simply because it’s county number one, first in the alphabet.  We’ll look at the general fund because it is almost always the biggest fund for local governments, and is the fund over which government officials have the most discretion.  Decisions must be made about how the general fund budget will be allocated among many functions.  This is less true for funds dedicated to one purpose (like highway funds) or for those severely constricted by rules (like debt service funds).

Figure 3 shows the Adams County general fund budget, in 16-line and checking account form.  The county had a general fund balance of $4,081,011 on June 30 of 2005 (remember, the 2006 budget was written in 2005).  It expected to receive $2,501,768 in property taxes in December 2005, and $1,744,958 in other revenues during the second half of 2005.  The appropriations that had not yet been spent half-way through the year were $3,905,641, and the county had authorized $56,920 in additional appropriations, beyond what had been budgeted for 2005.  The county didn’t have any outstanding loans.

All this implies that the county expected to have a balance of $4,365,176 at the beginning of 2006.  Seven lines of the 16-line form are devoted to calculating this number, though it doesn’t appear on the form. 

Expected revenues for 2006 are $3,680,742 in non-property tax miscellaneous revenue, and $5,049,974 in property tax revenue.  Adams County doesn’t have the CAGIT income tax.  Total expected revenues for 2006 are $8,730,716.

The net amount to be raised from the tax levy is the end purpose of the calculations on the 16-line form, yet the checking account form takes this amount as given.  For this reason it might be argued that the checking account form is a distortion of the budget process. 

I would argue otherwise.  In a sense, budget form 4-B reflects an old idea in local budgeting.  The government sets its spending level, subtracts all its non-property tax revenues, and raises the remainder from property taxes.  The property tax was the residual revenue source.  This is an old idea, because since the early 1970’s state property tax controls have restricted the amount that local governments can raise from property taxes.  If the calculations on budget form 4-B show a property tax levy above the state controlled levy, the local government must revise its appropriations or end of year balances downward, or find some additional non-property tax revenue.  The property tax levy is a given in the budget process, not something the government can adjust as it pleases.

Adams County budgeted $9,226,505 in general fund appropriations for 2006.  The checking account form leads to another number that doesn’t appear on the 16-line form, the net for the budget year.  Apart from balances, how do expected current year revenues and appropriations compare?  Adams County, in 2006, appropriated almost half-a-million dollars more than their expected revenue.  This is possible because the county started the year with over four million dollars in the bank.  Does this number indicate that Adams is spending itself to ruin?  Probably not, as we’ll see below.

First, though, comes the test of the checking account form.  Do the numbers add up?  The start-of-year balance, plus expected revenues, less expected appropriations, must equal the end-of-year balance, which is line 11 in the 16-line form.  And it does:  the start-of-year balance, $4,365,176, plus expected revenues, $8,730,716, minus expected appropriations, $9,226,505, really does equal the end-of-year balance, $3,869,387, the amount on line 11.

The checking account form puts the budget numbers into a familiar, understandable order.  Now we can ask (and answer) questions about the budget.  One of the questions likely to be asked is, “how big should start-of-year and end-of-year balances be?”  That is, “how much should a government have in the bank?”  Another likely question is “how much should appropriations be?”  Or, “how much should the government spend?”  In addition, the checking account data can be used to ask how the property tax assessment system is working.

How Big Should Balances Be?
Consider the checking account of a household.  Suppose this household’s bills are the same everyday, and that its income exactly equals its spending during the year (so it spends 1/365^th of its income every day).  Now suppose that the household gets paid once a year, on January 1.  What balance should the household keep in its checking account?

The answer is:  it depends.  It depends on what time of year it is.  On the morning of January 1, the checking account balance should equal the whole of the household’s income.  Nothing has been spent yet, but all of the income will be needed for spending during the year.  Half-way through the year, on July 1, the household should have a balance equal to half its income.  In the evening of December 31, the balance should be zero—but that’s okay, the household gets paid again the next day.  On average over the year, the household will have a balance equal to half its spending (or half its income).

Now suppose the household gets paid twice a year, half its income on January 1 and half on July 1.  On January 1 the balance is half its income.  That’s true on July 1 too.  But on April 1, halfway through the first pay period, the balance equals one-quarter of income.  That’s also true on October 1, halfway through the second pay period.  On average over the year, the household will have a balance equal to a quarter of its spending.

Now suppose the household gets paid every day.  Balances can be run down to zero by the end of each day, because the frequency of income exactly matches the frequency of expenditures.  On average over the year, the household will have a balance equal to one-half of 1/365^th of its income—a tiny fraction of its total spending.

So, the needed balance depends on how frequently the household gets paid, and how long it’s been since the last payday (or how long it is before the next).  Balances are lower when households are paid more frequently, and when it’s a long time since the last payday, and a short time before the next.

Now consider local governments.  Their expenses aren’t the same every day, but they’re substantially the same every month.  In particular, employees are paid regularly on a weekly, bi-weekly or monthly basis, and employee pay is the major expense of local government.  Some revenues arrive monthly, too, if not more frequently—some state aid payments, some income taxes, charges and fees, interest earnings.  The frequency of these revenues is not so different from the frequency of expenditures.  If this were true for all revenues, the average balance would be a small fraction of total spending, and the balance could be run to zero at the end of every month. 

But local governments receive property taxes just twice a year, in June and December.  The needed size of the fund balance depends on how long it’s been since the last property tax settlement.  At the end of June or December, just after a settlement, there are almost six months of spending to support before the next property tax settlement.  The fund balance had better be pretty big.   

The local government checking account shows balances three times—the actual balance on June 30 of the current year, the estimated balance on January 1 of the budget year, and the estimated balance on December 31 of the budget year.  Each of these balances is measured just after one of the property tax settlements.  As with households, if property taxes were the government’s only revenue source, balances just after payday (at the end of June or end of December) would need to be one-half of total revenue, or one-half of total spending.

At the end of June or December, then, the balance associated with miscellaneous revenues can be zero, but the balance associated with property taxes must equal nearly half of the total property tax levy.  Adding them up, the total balance at the end of June or December needs to be about half of the total property tax levy:

June or December Balance = ½ (Property Tax Levy).

The dollar figure for balances depends on the level of appropriations.  Local governments that spend more need bigger June and December balances.  The rule for the share of total appropriations that the fund balance must be is:

June or December Balance / Appropriations = ½ (Property Tax Levy / Appropriations).

Take half the property tax levy for the year, divide by total appropriations for the year, and that’s the target fund balance percentage for the end of June or the end of December.  This applies to all governments, whatever their size.

Actually, this is more than just the logical rule for a target balance.  According to budget form 4-B, it’s the ceiling on the end-of-year balance.  Line 11 of the form says “operating balance (not in excess of expense January 1 to June 30, less miscellaneous revenue for same period).”  Appropriations are expenses, and with a couple of small adjustments, expenses minus miscellaneous revenue equals the property tax levy.  So expenses minus miscellaneous revenue for half a year equal one-half the property tax levy.  The budget form’s December 31 balance ceiling equals the rule for the target balance.

How do Adams County’s balances compare to this target/ceiling?  One-half the property tax levy for 2006 is $2,524,987.  That’s 27.4% of 2006 appropriations.  Adams County’s June, January and December balances vary from $3.8 to $4.4 million, 42% to 47% of appropriations.  They are all substantially above the target/ceiling.  In 2006, these were among the largest balance percentages for all Indiana counties.  These amounts are shown in Table 1.

Adams’ large balances are why its negative “net, budget year” figure probably does not spell trouble.  Adams has balances well above the target, and can afford to spend more than it takes in.  In fact, since Adams’ balances are above the line 11 ceiling, the state could require Adams to spend more than it raises to bring its balances down.  That probably won’t happen.  Apparently the ceiling is treated more as good advice than as a requirement.

Large balances lead to questions that government officials or interested citizens might ask.  Is the county violating the maximum balance requirement on line 11 of the 16-line form?  If so, might the Department of Local Government Finance require the December balance to be reduced in next year’s budget?  How will this reduction be accomplished—by spending more or taxing less? 

Why does the county keep such high balances?  Are there risks that revenues will fall short of expectations, or that spending beyond appropriations will be needed?

In 2006 December balances were less than the target/ceiling in 77 out of 91 counties for which data were available.  This makes sense—balances are supposed to be less than the line 11 ceiling.  Still, smaller balances lead to questions, too.  If balances are particularly small, will the county have enough money available to pay expenses before the next property tax settlement? If not, how will these expenses be paid?

Perhaps balances are understated.  Will the county actually spend less than it has appropriated, or receive more revenue than estimated, so that balances end up higher than budgeted?  That would mean, in a sense, that balances are hidden in the appropriations figure.  If spending is less than appropriations, the unspent amount will revert to general fund balances.  That leads to another question:  why hide balances in appropriations or revenues?  Both citizens and government officials can make more informed decisions if balance figures are accurate.

How Big Should Appropriations Be?
No professor can tell a local government how much it should spend.  This depends on local conditions that only local officials and citizens will know.  In particular, it depends on the desire of taxpayers and voters to pay for and use the services that government provides.

There are, however, a few indicators that show when counties tend to appropriate more, and when they tend to appropriate less.  Population matters, of course.  Bigger counties spend more.  But there are big differences in appropriations per person, appropriations divided by county population.

In 2006, for example, the median county appropriated $245 per person for its general fund.  Pulaski County, though, appropriated $506 per person, the largest amount in the state, and Clark County appropriated $128 per person, the smallest amount in the state.  These amounts are shown in Table 2.

Some of these differences are explained by county characteristics that can be measured.  Really small counties spend more per person.  There are eleven counties with populations under 15,000 in Indiana, and all of them appropriated more per person than the state median.  On average these smallest counties had general fund appropriations of $360 per person.  That’s almost 50% more than the state median of $245. 

Small counties may spend more per person because of “dis-economies of size.”  All counties must provide basic services, hire employees, and buy equipment.  There may be some minimum costs that must be borne, no matter how small a county is.  In small counties these costs are spread over a smaller number of people, so per capita appropriations are larger.

Counties with more assessed value per person tend to appropriate more.  The median assessed value per person is $41,138.  The 45 counties with assessed values lower than the median had average general fund appropriations per person of $231, 5% below the median.  The 45 counties with assessed values higher than the median had average appropriations of $275, 12% above the median. 

Assessed value per person is a measure of wealth, or “ability to pay.”  A county that levies extra property taxes to increase its spending will cause smaller increases in property tax rates if its assessed value is larger.  Simply put, counties that can afford more government services buy more government services.

The composition of assessed value matters, too.  Counties with a larger share of homeowner property in their assessed value tend to appropriate less.  The median share of homeowner property—homesteads, which are owner-occupied homes—was 40.1% in 2006.  The 45 counties with shares less than this appropriated $281 per person to their general funds, 15% more than the state median.  The 45 counties with larger homeowner shares appropriated $222 per person, 9% less than the median.

If a county has lots of homeowner property, more of the extra taxes required for higher spending are paid by homeowners.  If a county has less homeowner property, and more business property, less of the extra taxes are paid by homeowners.  Homeowners make up a majority of voters in every Indiana county.  When homeowners pay a large share of the tax bill, they may be less likely to vote for government officials who want to spend more.  When homeowners pay a smaller share of the tax bill, they may be more likely to support more spending.

Finally, the condition of the county’s budget matters.  Counties with higher balances tend to spend more.  The median June 2005 county general fund balance as a share of 2006 appropriations was 15%.  The 45 counties with balance shares less than this appropriated $229 per person to their general funds, 7% less than state median appropriations.  The 45 counties with larger balance shares appropriated $275 per person, 12% more than median appropriations.   

Counties are required to balance their budgets at the end of the fiscal year in December.  Their balances must be zero or positive.  Counties that start with small balances (or even negative balances as of June 30) may have to cut back on their spending to make sure their budgets are balanced.  Counties with larger balances can spend more.  The money in the bank will support them if they spend more than they receive in revenues.  Counties may be required to reduce their balances if they are higher than the line 11 ceiling.  One way to reduce balances is to appropriate more. 

Adams County, our example, appropriated $272 per person to their general fund in 2006.  This is 11% more than the state median appropriation.  Do the county’s characteristics explain this higher appropriation?

Adams isn’t particularly small.  Its population is close to the state median at 33,872.  The county government probably does not suffer from “dis-economies of size.”  Adams is not wealthy.  Its assessed value per person is $38,003, a bit less than the state median.  And, 46% of this assessed value is owned by homeowners.  That’s a figure higher than the state median.  All of these characteristics would indicate a county that appropriates less than the state median.  Adams appropriates more. 

Adams has very high general fund balances as a share of appropriations.  This one indicator may help explain Adams’ relatively high appropriations.  With so much money in the bank, Adams can afford to spend more. 

In 2006 Adams appropriated about half-a-million dollars more than 2006 revenues.  Their big balances supported this budget.  They could continue such a budget for another two or three years, before balances would drop below the target/ceiling.  The county’s characteristics imply that if its balances were smaller, its appropriations would be below the state median.

But the characteristics do not offer a complete explanation of a county’s general fund appropriations per person.  Using a statistical procedure called “regression” (see the appendix), in fact these four characteristics explain only about half of the variation in appropriations.  Adams may have other characteristics, maybe some that can’t be measured, which cause their appropriations to be higher.  It’s likely that every county will have unique circumstances that influence their local government budgets.

How is the Assessment System Working?
Most of the time, half of the year’s property taxes are collected in May and delivered to local governments in June (the June settlement).  The other half of the year’s property taxes are collected in November and delivered to local governments in December (the December settlement). 

Most of the time, general fund property taxes increase each year, by three or four or five percent.  Growth is restricted by the state property tax controls.  This means that the December settlement property taxes (line 7 on form 4-B), which are half of this year’s taxes, should be a little less than half of the total of next years taxes (line 14 on form 4-B), most of the time.  Line 7 should be a little less than 50% of line 14.

In 2005-06, the state median of December 2005 taxes as a percent of 2006 taxes was 49.5%, a little less than 50%, just as expected.  Adams’ percentage was 49.5%, too.  But in 19 counties, the percentage was greater than 80% (see Table 3).

This is a legacy of the problems created by the 2002-2003 property tax reassessment.  That year the state adopted market value assessment rules for the first time, and used an abbreviated reassessment schedule.  Many counties did not finish calculating their assessments in time to send out the May property tax bills.  So, the June settlement was delayed to the second half of the year.  The December settlement would represent the whole year’s tax, and dividing line 7 by line 14 yields a number closer to 100% than 50%.

This didn’t happen in 2001-02 and 2002-03.  In these years no counties had December settlements equal to 80% or more of their next year’s total levy.  It was in 2003, when 2004 budgets were being written, that the reassessment delays were first felt.  New market value assessments were to be completed in 2002, but in many counties they were still not done by the 2003 May tax billing.  The June settlement was delayed to the second half of the year.  In 72 counties the 2003-04 percentages were greater than 80%.  In 2004-05 the number was smaller but still substantial, at 61.  The figure dropped to 19 in 2005-06, and will no doubt be smaller still in 2006-07.

Dividing line 7 by line 14 is an easy test to see whether assessments and tax bills are on schedule.  If the result is a number closer to 100% than 50%, officials and citizens might ask why billing was delayed, and whether the problem will persist.