Author: Financial Management Resource Bureau
The overlay account is a key component of municipal finance that is designed to fund abatements and exemptions of committed real and personal property taxes for any fiscal year. Abatements arise due to requests to lower property tax assessments, while exemptions are tax reductions for certain eligible individuals, such as veterans or seniors. The overlay funding amount is determined by the board of assessors and may be raised in the tax rate without appropriation. Understanding how the overlay works can help local governments maintain fiscal responsibility and accountability.
As part of the annual budget process, the assessors should be analyzing the overlay’s fund balance to determine whether it is adequate—this can be calculated by taking into consideration account balance, the average of abatements and exemptions granted in the previous five fiscal years and any liability associated cases pending before the Appellate Tax Board (ATB) cases. If the account balance is not adequate, the assessors can raise additional funds required through the tax rate setting process without appropriation. The entire finance team should be part of this process, as it has direct impact on the ensuing fiscal year’s budget.
During the course of the fiscal year, abatements and exemptions are granted. Once the fiscal year ends, the assessors will know the final amount paid out. Whenever the board determines that there is excess overlay, the surplus can either stay in the reserve or be voted to overlay surplus by the assessors for other use by the municipality with approval of the legislative body. If the board votes to certify a surplus, they must notify the accounting officer in writing of their vote. If the amount released from the overlay as surplus is not appropriated prior to June 30, it will be closed to the undesignated fund balance in the general fund and in most cases will increase free cash.
The amount of excess overlay, if any, may be determined by the assessors on their own motion at any time and must be determined by them within ten days of a written request by the community’s chief executive officer.
To ensure fiscal responsibility, municipalities should adopt strong financial policies that guide the decision-making process when determining the overlay as well as what to do with any overlay surplus. The following best practices can help municipalities stay accountable and responsible when planning for and using the overlay fund.
- Strong budgeting practices - Municipalities should estimate the overlay amount conservatively based on historical data and anticipated changes in the local property tax base, as well as consider if it is an interim or full valuation year.
- Annual review of overlay fund usage - Regular reviews should be conducted to assess the adequacy of the overlay fund and ensure that the amount set aside is sufficient to cover anticipated abatements and exemptions. An annual review of the overlay fund allows municipalities to adjust their projections for the following year, ensuring the amount of funds is neither excessive nor insufficient.
- Clear documentation and reporting - Municipalities must document and report the use of overlay and surplus funds. This includes providing detailed reports about any abatements or exemptions granted and the resulting impact on the overlay account.
- Strategic use of overlay surplus - While Massachusetts law provides flexibility in the use of overlay surplus funds, municipalities should be cautious in their decision-making process. Any declared surplus should be used for one-time expenses. Any decision to use the surplus should be supported by locally accepted financial policies.
When measuring the annual overlay appropriation as a percent of the property tax levy, the average has consistently been between 0.8% and 1% for the past five years. Take advantage of DLS’ data on this subject by visiting the Municipal Financial Self-Assessment dashboard and the Databank report showing the overlay as a percentage of the tax levy.
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Editor: Dan Bertrand
Editorial Board: Tracy Callahan, Sean Cronin, Janie Dretler, Emily Izzo, Christopher Ketchen, Paula King, Jen McAllister, Jessica Sizer and Tony Rassias
| Date published: | March 20, 2025 |
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