1. Proposition 2½: The Cornerstone of Massachusetts Municipal Finance
This is the most consequential feature of municipal finance in Massachusetts. If you are coming from outside Massachusetts, or if you ascended to the CAO role through a path other than finance, you need to know that Proposition 2 ½ sets a limit on how much a municipality can raise from property taxes without ballot approval (i.e. overrides, debt exclusions, capital exclusions). Specifically, a community’s levy limit may not grow more than 2.5% over the prior year with an additional allowance for revenue generated by property being taxed for the first time (aka – “New Growth”). Understanding the mechanics of Proposition 2 ½ is essential to building a sustainable budget, as is understanding Massachusetts’ unique focus on levy constraints as opposed to rate or assessment limits common in other states.
2. Your Finance Management Team is a Critical Coordinating Platform
The accountant/auditor, treasurer, collector, and assessor each holds a critical piece of the financial puzzle, and a municipal CAO who doesn’t consult them regularly is missing the complete fiscal picture. Some communities also appoint a Finance Director to bring additional organizational focus to matters of fiscal management. Throughout the year, there are various financial benchmarks and milestones that warrant the CAO’s attention, including quarterly review of revenues and expenditures, monthly cash reconciliation, timely submission of required assessment information (e.g., new growth, sales, assessed values) and holding the annual tax classification hearing. Holding regular meetings of the Financial Management Team, in conjunction with other best practices, will maximize a community’s chance of success in confronting fiscal challenges and identifying opportunities. DLS has written extensively on this topic. Further reading is available here: Financial Management Team | Mass.gov.
3. The Budget is a Policy Document
The budget is the opportunity for a Municipal CEO to lay out accomplishments and challenges – both short-term and long-term – to the taxpayers. It’s not just a spreadsheet. Every number in the budget reflects a choice about community priorities. Presenting it that way to the Select Board and the public builds trust and accountability. The Municipal CAO must present the budget in a way that demonstrates how service goals are being met within the framework of existing financial policies. For example, showing that the staffing complement of a fire department accords with the community’s decision to meet NFPA shift standards while simultaneously showing where proposed uses of reserve funds comply with the same community’s policy restricting such sources for capital expenditures only (not operating). Communities have a variety of goals, all of which should be articulated in written policies or guidelines. The budget process should inform the public about how each of these goals are being funded. Whereas goals between and among municipal departments often compete for scarce resources, the budget should make clear where these tensions exist and where compromises (if any) have been made. Responsibility for settling fiscal conflict falls to the CAO when proposing the budget to elected officials. This responsibility fundamentally differs from merely quantifying the monetary value of conflicts, only to hand them over for others to resolve.
4. Collective Bargaining Agreements Have a Lasting Fiscal Impact
A labor contract signed today obligates the municipality to both current and future costs for multiple years. It is critical that a finance team member be charged with the costing out full cost of each proposal, thereby confirming everyone’s understanding of the long-term fiscal requirements.
5. Enterprise Funds Are Businesses Inside Your Government
Water, sewer, and other enterprise funds are usually meant to be self-supporting. Arbitrary subsidies to/from the tax-supported general fund may be a sign of an underlying rate or spending problem. Knowing and accounting for the true cost of services rendered is important to the fiscal health of these funds.
6. The Importance of Free Cash
Free cash is both a component of municipal reserves as well as an important fiscal tool. It is determined through a state-prescribed calculation based on information submitted by the accountant/auditor and certified by DLS. This certification identifies the portion of a city/town’s undesignated fund balance that is eligible for appropriation. Fundamentally, the undesignated fund balance from which Free Cash is derived results from a combination of underspending appropriations and exceeding budgeted revenue targets. In this way, it manifests as a one-time resource. However, when used to fund recurring expenses, it often masks underlying structural deficits, leaving a gap in future budgets. While the legal parameters around use of Free Cash are broad, most communities have policies that restrict what types of expenses are sourced from Free Cash (e.g. capital appropriations). Many communities go further by setting target-levels for Free Cash balances – either a specific percentage/range of the overall municipal budget or other proportional metric. Some communities even go so far as to stipulate methods to generate Free Cash balances such as declaring a limited percentage of certain local receipts for current year budget revenue. Each of these approaches have benefits and tradeoffs for communities to consider. The CAO must have a clear understanding of how Free Cash is being generated and spent in order to meet the stated policy goals of the community while avoiding future fiscal peril.
7. From Town Meeting Appropriations to Mailing Tax Bills: Mastering the Tax Rate Recap Timeline
The path from Annual Town Meeting votes to an approved tax rate is longer than most new managers expect, running through final state aid numbers, a deficit-proof reconciliation of all appropriations and revenues, BLA’s certification of property values, and BOA’s approval of the recap sheet. These activities all take place in the context of deadlines that, if missed, can delay tax bills, negatively impact cash flow, limit a community’s ability to make operational adjustments, and can present financial challenges for the community. Some communities structure their budget documents in a way that mimics the various Tax Rate Recapitulation worksheets. Whatever approach communities take, you need to understand this process from start to finish and ensure that target deadlines are being met. Planning the tasks and critical path around these activities is an arena for which a Financial Management Team is purpose-built (see above).
8. Capital Planning is Budgeting for a Future You Should Already See
The negative results of deferring maintenance on aging infrastructure should not be surprising to anyone. Maintaining a multi-year capital improvement plan designed to anticipate the inevitable decay/failure of building systems, roads, water/sewer mains, and heavy equipment is part of how responsible CAOs demonstrate stewardship for public assets. A capital improvement plan, as the name indicates, is a “plan”, not an inventory of needs. Developing and executing the plan will require consultation and coordination with your finance team as well as your community’s financial advisor and bond counsel where debt/borrowing is required. All funding for this plan should be integrated into your community’s multi-year financial forecast. If your community does not already have a multi-year financial forecast, stop reading. Read this instead: The Importance of Revenue & Expenditure Forecasting. Then, watch this webinar.
9. The Audit is a Valuable Management Tool, Not an Annual Chore
A clean independent audit with no findings is something the CAO and finance team should be working toward all year. For their part, the independent auditor will perform important testing of internal controls, system controls, reconciliation processes, and segregation of duties between and among financial staff. The management letter that accompanies the audit contains some of the most valuable feedback a CAO will ever receive and should be reviewed at a public meeting. Furthermore, conducting an exit interview with the independent auditors is immensely informative, as it helps municipal leaders understand any exposure to issues that may not come up in the typical budget process (e.g. pension liability, fixed assets, other post-employment benefits liability, etc.).
10. DLS is Here to Help You Succeed
Yes, the Division of Local Services reviews, certifies, and oversees various elements of municipal finance in Massachusetts. But we also publish guidance, offer training, publish data, and employ field staff, attorneys, analysts, and others who genuinely want to help you succeed. The DLS Municipal Databank provides a tremendous amount of community-specific and comparative data while the Municipal Finance Law Bureau offers timely legal information to help the CAO make informed financial decisions. The Financial Management Resources Bureau and Municipal Finance Training and Resource Center work individually with cities and towns while providing an endless library of municipal finance best practices, videos/webinars, and other online tools.
To learn more and stay connected to DLS, visit our website and sign-up for DLS alerts.
| Date published: | June 9, 2026 |
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| Last updated: | May 21, 2026 |