Friday, May 2, 2008
A primer on municipal finances
[The following definitions of terms are reprinted with permission from the town Warrant book.]
Capital Exclusion: A town may assess taxes in excess of its Levy Limit by voting a Capital Exclusion. Capital exclusions do not become part of the Levy Limit base but increase the property tax for only the year in which they are passed. This can be used only for capital outlay expenditures.
Debt Exclusion: A town may assess taxes in excess of its Levy Limit by voting a debt exclusion. Debt exclusions are temporary property tax increases. The amount of this excluded debt does not become part of the Levy Limit base but is added on for the duration of the debt. Most of Carlisle’s bonded indebtedness is excluded debt outside the levy limit.
Free Cash: A budgetary fund balance built up over time if town receipts exceed expenditures. Once a year the Town’s Free Cash balance is certified by the state (reserving amounts the town has been committed to spend) and this balance can be used to reduce the tax levy. Credit rating agencies and other members of the financial community use this, in conjunction with a Stabilization Fund and other factors, to make judgments regarding a community’s fiscal stability.
Levy Limit: This is the maximum amount a community can raise through taxes without an override. Under Proposition 2 ½, the Levy can be raised only 2 ½ % over the previous year’s Levy plus an amount reflecting new growth in the total tax base in the Town. The Assessors must document this new growth and receive approval from the state Department of Revenue before it can be added. A town may also increase its levy limit by voting an override.
Excess levy capacity: It is not unusual for towns to raise less in taxes than the absolute Proposition 2½ limit. “Excess levy capacity” is the term used to describe the difference between the maximum that could be raised under Proposition 2 ½ (a.k.a. the “levy limit”) and the taxes actually raised in a given year. For example, in setting the guidelines for the FY10 budget, the FinCom planned NOT to appropriate about $126,000 in "excess levy capacity," though some of this amount was later applied to cover certain unexpected items (see FinCom avoids override)
Long Term Debt: Loans and obligations with a maturity of longer than one year; usually accompanied by interest payments. Long Term Debt represents a commitment of taxable resources over the period of debt repayment. In town budgets it represents a line item expense that local governments must budget to support voted debt.
New Growth: The taxing capacity added by new construction and other increases in the property tax base. New growth is calculated by multiplying the value associated with the new construction by the tax rate of the previous fiscal year. Increases as a result of revaluation or appreciation do not factor into new growth.
Override: A Levy Limit Override provides a community with flexibility to levy more than their levy limit and is used to obtain additional funds for annual operating budgets and fixed costs. An override is a permanent increase in the amount of property taxes a community may levy. The override becomes a permanent part of the Levy Limit base in future years.
Regional School Debt: Under Proposition 2-1/2 a regional governmental unit may exclude its assessed share of debt service on district borrowings. This form of debt exclusion is proportionally assessed to each community over the life of the debt. It does not become part of the Levy Limit base.
Reserve Fund: This fund is established by the voters at the Annual Meeting and may be added to at a Special Town Meeting. It may not exceed 5% of the tax levy of the preceding year. Transfers from this fund are within the exclusive control of the Finance Committee and are for “extraordinary or unforeseen expenditures” by various town departments.
Revolving Fund: A Revolving Fund allows the town to receive revenues for a specific service, which can then be used for that specific purpose without appropriation. Revolving Funds must be reauthorized by Town Meeting each year and a limit on the total amount that can be spent from each fund is established annually.
Stabilization Fund: A stabilization fund is analogous to a bank account, Town Meeting can appropriate (make deposits) into for use at a future time. Sometimes seen as a “rainy day” fund, this fund is used to stabilize the financial picture of the community and can be appropriated from by a two-thirds vote at Town Meeting for any legitimate municipal purpose. Credit rating agencies and other members of the financial community use this, in conjunction with Free Cash and other factors, to make judgments regarding a community’s fiscal stability.
© 2008 The