Basics of Municipal Accounting

The Town of Caroga Town Board must create a budget and adopt it by resolution by November 20 of each year. The budget specifies the tax rate to be levied on properties in the Town of Caroga. Tax rates are specified in amount to be levied per thousand dollars of Taxable Assessment (or Total Assessment) of each property.

The budget specifies the amount that may be appropriated (or spent) in each line of the budget.

At the beginning of the fiscal year (January 1) taxes are levied at the rate specified in the adopted budget. The Town Board spends monies but not more than the amount specified for a particular line item. If the Town Board has a need to spend more than the budget allows for a particular line item, it must pass a resolution to adjust the budget by moving funds from one line item to another line item.

If there are unspent monies at the end of the fiscal year, they are swept into the “fund balance”.

The Town Board is constrained on the amount of tax it may levy in any budget it adopts. This constraint is the Tax Cap and is set by a formula issued by the State of New York.

Developing a budget

General ledger account numbers are assigned by the State of New York for each major line item. All municipalities must use this account numbering system. The Town of Caroga has three kinds of accounts with these prefixes:

“A” general account
“DA” highway account
“SF” fire district account

School Districts are not necessarily contiguous with town boundaries. They are responsible for their own budgets and tax levies.

If a town finds it useful to specify line items in greater detail, the town can create account numbers with a decimal point and digits to the right of the decimal point.

The town must also estimate revenues from all sources. The sum of all of the revenue lines should match the sum of all of the appropriation lines. If the sum of the revenue lines is less than the sum of the appropriation lines, the tax rate must be increased but the tax rate increase is subject to a state tax cap. If the tax cap must be exceeded, it can only be done by passing a local law authorizing the tax cap to be exceeded. Being a local law, it is subject to permissive referendum.

The budgets must use general ledger accounting codes specified by the Office of the New York State Comptroller in the Accounting and Reporting Manual.

Fund Balance

Fund Balance is the amount of cash on hand after all revenues and expenses are added up since the Town of Caroga came into existance. Fund Balance increases each year that the revenues exceed the expenses and decreases when expenses exceed revenues. Prior to 2001, New York State law required all unrestricted Fund Balance be applied to the next year, so Fund Balance would be zero. After 2001, towns were allowed to keep a small unrestricted Fund Balance on hand for emergencies. In the fall of 2020, the Town of Caroga has a Fund Balance over one million dollars. Multiple persons have analyzed the Town’s revenue and expenses for 2020 and project a year end Fund Balance of over one million dollars. The New York State Comptroller discusses Fund Balance and one example of the appropriate level of Fund Balance is 15% of total annual expenses. That might suggest an appropriate Fund Balance might be around $370,000. With a projected year-end Fund Balance of one million dollars, that suggests the Town should be applying over $600,000 dollars of Fund Balance towards the 2021 budget. If the Town of Caroga did this, it would actually result in a tax decrease.

The New York State Comptroller warns that an excessive Fund Balance could lead to fraud if controls are weak. The New York State Comptroller offers the following Discussion on Fund Balance (pdf).

If there is a large Fund Balance, a portion of it should be used in creating a budget. It might be reasonable to appropriate some of the Fund Balance to Restricted Accounts for capital construction. On the other hand, it is unwise to use a fund balance to pay for salary increases or other recurring operating expenses. That is because the fund balance will be depleted eventually and then a large tax increase will be necessary.