Author: Tony Rassias - Bureau of Accounts Deputy Director
This article will review another area of fiscal stress that may be seen numerically and graphically for your community using Category Four of the DLS Municipal Finance Trend Dashboard. It will focus on budgeted and actual local government general fund revenue components, determine whether and how these components were affected during the pandemic from FY2020 to FY2021, provide some relevant FY2022 statistics and help local officials with recommendations and links for managing these components even during uncertain economic times.
The Revenue Components
The local government revenue components that will be discussed in this article are mostly found recorded into the general fund: property tax levy, state aid and local receipts. Reserves that help support general fund appropriations are included as All Other. Enterprise fund revenues are not included in this article.
Local government revenues have been highlighted in previous City & Town articles regarding “Financing Massachusetts Town Government” Part 1, Part 2 and Part 3, involve a combination of components that must be sufficient in each community to balance local budgets annually. The following table shows these components statewide by percent of total.
1.) The Tax Levy (FY2022 - $19.8 billion, 64.5% of total)
The property tax levy is the net amount remaining to fund the community’s budget after all other revenue components have been applied to support that budget. The levy’s annual increase is controlled by Prop 2½ and due to that control, the levy can present a fiscal stress as reported in the previous article in this series, Area of Fiscal Stress: Statutory Property Tax Limits. This component in the statewide total continues to be by far the one most relied upon.
Fiscal Stress from a Greater Reliance on the Tax Levy
As shown in the table above, the percentage reliance on the tax levy increased between FY2020 and FY2021 while the other percentage components either decreased or stayed the same. Details during this time revealed a greater percentage reliance in 274 of 351 communities. Of these 274, 92 experienced a double fiscal stress: (a) a greater reliance on the tax levy and (b) a reduction in authority to tax within Prop 2½’s levy limit or in “override capacity." However, in FY2022 the percentage reliance on the tax levy decreased, the result of a rebound in local receipts and use of other available funds (“All Other”).
Fiscal Stress from Non-Payment of Property Taxes
On March 10, 2020, the Governor declared a state of emergency in response to COVID-19. In the ensuing couple of years, the virus caused a worldwide public health and economic crisis. Not long after the Governor’s emergency declaration, the Legislature enacted property tax payment relief by extending property tax payment deadlines to June 1, 2020 and waiving interest on late payments under certain conditions, provided prior local government approval.
After June 30, unpaid property taxes are “outstanding receivables” until full payment is made. Outstanding receivables are a revenue shortfall and are a negative factor in calculating spendable surplus, or “free cash.” Collecting them is a positive factor in the calculation and abating them has no effect. These receivables place a fiscal stress on a community’s cash flow and add a further stress on other revenue components to compensate for the shortfall they create.
Details revealed for unaudited total outstanding receivables as of June 30, 2019 and 2020 reported to the Bureau of Accounts increased by over $153 million or by 49%. Further details during this time revealed increased receivables in 305 of 349 reporting communities. By the end of FY2021, total outstanding receivables decreased by over $50 million or by 11%.
Recommendations
The greater a community relies on the property tax to balance its municipal budget, the greater the emphasis on (a) maximizing the levy’s potential and (b) collecting property tax outstanding receivables.
DLS offers videos and tips on how the Proposition 2½ levy limit is calculated, how to maximize the tax levy’s potential by properly calculating and reporting new and revised growth and, if sought, how to present an override or exclusion vote to taxpayers. DLS also offers collectors and treasurers written guidance on enforcing collections and video guidance on the tax taking process and the effects of non-payment of property taxes on free cash.
2.) State Aid (FY2022 - $6.2 billion, 20.4% of total)
State aid is received mostly from the “cherry sheet,” named after the cherry-colored paper it was once printed on. It is the Commissioner of Revenue’s notification of estimated state aid and assessments that are used in calculating the annual tax levy later in the fiscal year.
Most budget officials rely on estimates included in the Governor’s budget recommendation to the Legislature when preparing their local budgets, but the cherry sheet is not official until the final state budget is approved. Cherry sheet revenues include formula driven distributions, incurred cost reimbursements and specific expenditure offsets. For FY2022, 12 aid items were funded, with approximately 89% of the total coming from Chapter 70 public school funding aid and Unrestricted General Government Aid (UGGA).
Cherry sheet revenues are distributed net of cherry sheet assessments that totaled $1.2 billion in FY2022 and included the county tax, charter school assessments, state assessments for services such as the MBTA, and certain other charges. Review trends in Cherry Sheet aid and assessments by program.
Other state aid includes Massachusetts School Building Authority (MSBA) Prior Grant and Waitlist Payments that were approved by the Department of Education (now the Department of Elementary and Secondary Education) prior to MSBA’s creation. For FY2022, these payments totaled $34.3 million to 34 cities, towns and regional school districts.
Fiscal Stress from Level Funded or Lower State Aid
Cherry sheet aid is dependent on many factors including economic indicators, the state’s economic health, the Governor’s annual budget recommendation and the Legislature’s approval. Details for FY2022 revealed that cherry sheet aid in 13 communities exceeded their tax levy. This heavy reliance adds budgeting stress as level or increased funding is not guaranteed and a reallocation of revenue components may be necessary.
Today, MSBA payments are mostly from their “ProPay,” or “pay as you build” progress payment system. Per MSBA’s website, Prior Grant and Waitlist Payments will decrease to $18.1 million in FY2023 to about $5 million to only four communities and one regional school district in FY2024. If this state aid source is budgeted based on an amount received in the previous fiscal year, the amount may be incorrect.
During the FY2003 and FY2009 economic recessions, governors authorized cuts to local aid under G.L. c. 29, § 9C during the fiscal year. In response, communities had to reduce operations, freeze spending or search for other revenue components to compensate for any cut and prevent a year-end revenue deficit.
Recommendations
Although much of the cherry sheet aid is provided by distribution formulas over which the local government has no direct control, emphasis must be placed on amounts over which the local government does have control by completing the appropriate form(s) for receipt of cherry sheet aid reimbursements.
Also, review your community’s future MSBA projected Prior Grant and Waitlist Payments before budgeting this revenue source which may have already been paid in full.
3.) Local Estimated Receipts (FY2022 - $2.8 billion, 9.3% of total)
All funds received by a city or town per G.L. 44, § 53 belong to the general fund unless re-directed by law to another fund. Redirected funds are usually dedicated for special purposes but may be appropriated for general operating expenditures if allowed by law, thereby reducing the general fund’s financial burden.
Local estimated receipts include motor vehicle, meals and room excises, fines and forfeits, fees, licenses and permits, other departmental receipts, penalties and interest on taxes and excises and investment income. They are separate from real and personal property tax levy receipts and vary greatly in amount among communities.
FY2020 Local Receipts Estimated and Received
Despite the pandemic’s upheavals, FY2020 statewide actual local receipts totaled $3.3 billion, $314 million or 10.5% greater than FY2020’s $3 billion estimate. This additional amount from FY2020 operations plus unspent appropriations returned to the General Fund became positive factors in the calculation of free cash as of July 1, 2020.
Details during this time revealed that this statewide increase of FY2020 actuals over estimates applied to 301 communities. The two greatest increases in individual categories were in Licenses and Permits ($76.5 million) and Investment Income ($61.9 million). The two greatest decreases were in Fines and Forfeits ($8.8 million) and Medicaid Reimbursement ($7.6 million).
Fiscal Stress from FY2021 Local Estimated Receipts Budgeted
Budget officials normally base the following fiscal year’s revenue estimates on actual amounts received in the current fiscal year adjusted by reasonably expected increases or decreases. Pandemic uncertainties resulted in conservative FY2021 statewide estimates that totaled $2,6 billion, $652 million or 25% less than $3.3 billion received in FY2020. Details during this time revealed the two greatest estimated decreases for individual categories were in Room Excise ($126.1 million) and Motor Vehicle Excise ($98 million).
FY2021 Local Receipts Estimated and Received
As a result of conservative FY2021 estimated receipts. statewide actual local receipts totaled $3.1 billion, $467 million or 17.7% greater than FY2021’s $2.6 billion estimate. This additional amount from FY2021 operations plus unspent appropriations returned to the General Fund became positive factors in the calculation of free cash as of July 1, 2021.
Details during this time revealed that this statewide increase of FY2021 actuals over estimates applied to 334 communities. The two greatest increases in individual categories were in Licenses and Permits (123.2 million) and Motor Vehicle Excise (114.5 million). The two greatest decreases were in Investment Income ($18.2 million) and Fines and Forfeits ($10.1 million).
Recommendations
Local receipts should be budgeted conservatively and not at historically high levels. They are so varied for each community that their estimation requires a strong financial team working together. Such a team may include the CEO, CFO, accountant, assessor, treasurer, collector, clerk and school business manager and serve as a forum to review the community’s fiscal status. It can identify critical junctures and offer strategies to deal with anticipated fiscal events and areas of concern, as well as enhance lines of communication. In addition, local fee structures should be reviewed annually as part of the budget process to ensure that they are set at levels that most accurately cover costs associated with the service for which the fee was assessed.
4.) All Other (FY2022 - $1.8 billion, 5.8% of total)
All Other revenue components are not otherwise categorized and include free cash, general stabilization fund, municipal light surplus, specific reserve funds and budget transfers. Details for FY2022 revealed that free cash represents over $983 million or 55% of All Other components. Free cash is a revenue source that first requires certification by the Bureau of Accounts. It results from the prior fiscal year’s operations and requires appropriation by majority vote of the community’s legislative body for any lawful purpose. Free cash may be appropriated toward a particular expenditure or to reduce the tax levy.
The general stabilization fund, a second major All Other component, may also be appropriated for any lawful purpose and requires:
- a 2/3rd vote of the community’s legislative body to create the Fund
- a majority vote of that body to deposit into the fund, and
- a 2/3rd vote of that body to expend from the fund
Special purpose stabilization funds may be appropriated for a particular purpose, although that purpose may be amended by the community’s legislative body. Details for FY2022 revealed that Stabilization funds represent $218.5 million or 12% of the All Other revenue component.
Fiscal Stress from Diminishing Reserve Levels
A diminishing level of one reserve need not create a panic provided other reserves remain healthy. When reserves are relied upon to any degree, however, they must be replenished back to sufficient levels or fiscal stress could easily result.
Recommendations
The first article in this Fiscal Stress series, Identifying Fiscal Stress: Diminishing Reserves, provided recommendations on how to rebuild and improve a community’s free cash and stabilization fund balances, as well as recommendations on writing formal written guidelines for funding and maintaining reserves to decrease the potential of diminished reserve levels that could impact municipal operations or result in a bond rating downgrade.
Comparing Revenue Components to Inflation
The final table looks at the growth of budgeted revenue components compared to inflation over the past ten fiscal years.
(Constant dollars are calculated beginning FY2013 applying the average yearly increase from CPI for all Urban Consumers - Boston, Cambridge, Newton, MA - NH. FY2022 applies +7%)
Details for the period shown in the above graph reveal that current dollars (actual) grew by 42%, from $21.5 billion to $30.6 billion, while in constant dollars (inflation adjusted) grew by 25%, from $21.5 billion to $27 billion. In effect, for the period shown, the cost of running local government operations in current dollars from available revenue components increased at a greater pace than the rate of inflation in constant dollars.
Fiscal Stress on Taxpayers
Local officials should evaluate the public’s financial capability to pay the additional tax as an increase to their tax bill could place a fiscal stress upon them which could then result in residents being “priced-out” or in their disapproval of an override or exclusion vote.
In Summary
Uncertain economic times can certainly cause fiscal stress in estimating and receiving that proper combination of local government revenue components to balance annual budget appropriations and to maintain operations. The recommendations provided in this series are keys to forestalling, abating or preventing fiscal stress and preserving the community’s fiscal health.
Helpful Resources
City & Town is brought to you by:
Editor: Dan Bertrand
Editorial Board: Marcia Bohinc, Linda Bradley, Sean Cronin, Emily Izzo, Lisa Krzywicki and Tony Rassias
| Date published: | November 3, 2022 |
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