Author: Deborah Wagner - Director of Accounts
The certification of free cash is a calculation completed by the Division of Local Services’ (DLS) Bureau of Accounts (BOA). This calculation is done at the end of the fiscal year, June 30, after the submission of a combined balance sheet and various other supporting documentation completed by the city, town, or district to BOA. The free cash certification is valid until the following June 30 to be appropriated for any legal purpose by the legislative body. Even if a balance remains the following June 30, free cash cannot be appropriated until recertified by BOA.
Where does free cash come from? First, it's important to understand the starting point of the free cash calculation, which is the undesignated fund balance account in the general fund. This account is where all general fund revenues and expenditures close-out as of June 30. Free cash is created (or reduced) by any variances to budgeted revenues and expenditures. For example, if actual local estimated receipts, such as motor vehicle excise tax, meals and rooms excise tax, and interest earned, exceed the amounts budgeted, that adds to the free cash that will be certified. In the first paragraph, it was noted that free cash remaining at the end of the subsequent fiscal year cannot be expended until recertified; this amount, too, becomes part of the free cash calculation.
Also, if actual real and personal property tax collections for the fiscal year are less than real and personal property taxes calculated and committed to the collector as a result of the tax rate recap certification process, that will reduce free cash. The budget for the city, town or district is dependent on collecting 100% of the property taxes levied. Any shortfall in the amount collected reduces the free cash amount calculated and certified by BOA. When taxes from prior years’ tax levies are collected in an amount sufficient that the total outstanding real and personal property taxes, liens, and foreclosures are less in the current year under free cash certification than the prior year, that adds to the free cash amount certified.
To illustrate this point, the changes in outstanding receivables from two different communities are shown below.
In Community 1, the first column shows property tax receivables outstanding from prior years as of June 30, 2023. The second column shows the outstanding property tax receivables outstanding from prior years as of June 30, 2024. The decrease in outstanding property tax receivables contributed $423,850 to the amount of free cash certified:
Conversely, the example from Community 2 shows that the increase in outstanding receivables from June 30, 2023 to June 30, 2024 has caused the free cash certified to be $178,505 less than it could have been:
For more information on where the free cash in your community comes from, please view our Free Cash Proof Comparison Report. The line titled “Prior & Current Year Outstanding Receivables Total” shows the change in outstanding property taxes and the impact on the free cash calculation. The DLS website also has an interesting visualization regarding trends in local receipts, which impact the free cash certification.
For information on the tax title foreclosure process, refer to BUL 2024-06 Recent Legislation Chapter 140 of the Acts of 2024 Tax Title Reform.
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Editor: Dan Bertrand
Editorial Board: Tracy Callahan, Sean Cronin, Janie Dretler, Jessica Ferry, Emily Izzo, Christopher Ketchen, Paula King, Jen McAllister and Tony Rassias
| Date published: | May 15, 2025 |
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