1. Basics of Local Government Finance & Budgeting
2010 In-Service Training
Alan Probst
Local Government Specialist
UW-Extension Local Government Center
(608)

2. Fund Accounting Local government accounting is Fund Accounting
All revenues and expenditures must be assigned to a specific fund
GASB guidelines
All government accounting is “fund accounting” because different expenditures are made from different and distinct revenues sources that cannot be mixed.
ALL revenues and expenditures have to be assigned to a specific fund. You CANNOT have a slush fund that is off the books. That can be an indictable offense.
Although not all governments comply, it is sound practice and well advised to use the Governmental Accounting Standards Board’s recommended guidelines.

3. Funds Revenues General Fund Special Revenue Funds Debt Service Fund
Capital Fund
Proprietary/Enterprise Funds
Fiduciary Funds
Here is a list of the most oft used funds.

4. Revenues All incoming funds from any source are included in revenues
In Wisconsin, revenues primarily come from four sources:
Property taxes
State shared revenues
Fines and fees for services
Sales taxes
All revenues are listed in the Revenue Fund.
This includes ALL revenues, no mater what the source.
Property taxes are commonly on all residential and commercial real estate.
State shared revenues can be for specific purposes, such as streets and roads, or it can be for general purpose government
Fines and fees for services depend upon the local government.
Sales taxes are optional for Wisconsin counties but not currently allowed for municipalities or towns.

5. Expenditures
All funds expended by a local government must appear in one of the fund other than Revenue
The Revenue Fund is only for incoming funds. Any money spent or budgeted to be spent must appear in one of the other funds where expenditures are listed.

6. Restricted funds Some funds are considered “Restricted”
Restricted funds include:
Proprietary Funds
Fiduciary Funds
Enterprise Funds
Special Revenue Funds

7. Restricted Funds
Can only be used for the restricted purpose for which they exist
Cannot be used to cover deficiencies in the General Fund
Can be borrowed from to assist General Fund ONLY by resolution with payback plan

8. Deficit Spending
Wisconsin local government cannot operate in a deficit mode
If insufficient funds exist to cover expenses, local governments must borrow to cover those deficiencies

9. Cash Flows
Cash flows must always be considered when local governments expend funds
Budgeted for does not mean the money is available
Property taxes come in two payments
State shared revenues come in two payments

10. Cash Flows
Major purchases or expenditures must be scheduled to coincide with points when cash is available unless borrowing is planned or a sufficient reserve exists to cover the expenditure

11. Reserve
Maintaining a General Fund reserve or Contingency Fund is essential to cover unplanned expenditures or when an expenditure cannot wait for a revenue payment
A common rule for General Fund reserve or Contingency is six (6) month’s normal operating expenditures

12. Undesignated or “Slush” Funds
In local governments, all incoming revenue must be shown in budget documents and assigned to a fund
All expenditures must be accounted for under the budget
“Slush Funds” are not allowable

13. Debt
Borrowing money for major purchases and projects is as essential for most local governments as it is for the average citizen
Borrowing should be according to a plan (capital improvement, strategic, etc.) and managed

14. Local Government Budgets
Section of Wisconsin Statutes REQUIRES local governments to produce a budget
Some other states allow the passage of an appropriation ordinance in lieu of a budget but this is not allowed in Wisconsin
Local governments are required to produce and manage a budget. This is a statutory requirement that local governments cannot ignore.
Some states allow a appropriation ordinance, which essentially says “ we’ll spend what we need to but we won’t exceed this amount” but doesn’t say what we’ll spend it on. Still allowed in Illinois but frowned upon by the state and auditors.

15. Budgets
The preparation and approval of a budget is probably the single most important duty of local government officials because it determines what services will be provided, to what extent they will be provided, and how they will be funded. This affects every citizen in their community.
The fact is, even if the county board leaves for the Bahamas for six months, as long as they’ve approved a budget, the staff will keep county services running until they get back by using the last policy direction they received. If no budget was approved, once current funding runs out, government stops until more money is appropriated.

16. Official’s Responsibility
Local government officials have a fiduciary responsibility to manage public funds in the most responsible manner their abilities and the local situation allow
Misuse of public funds is the most frequent cause for public official indictments
Properly managing the public’s money is probably the most basic of all the responsibilities of local officials.
Unfortunately, misuse of public funds is also the most frequent cause for the indictments of public officials.
There are very strict laws applicable to how you use and spend public money.

17. Local Government Budgets
Local Government Budgets are normally organized according to Governmental Accounting Standards Board (GASB) recommendations.
While there are as many ways of doing a budget as there are local governments, the standard commonly used is that recommended by the Governmental Accounting Standards Board. When you hear someone talking about GASB, this is who they’re talking about.
GASB sets a recommended format and methodology for how local government budgets are put together.

18. Local Government Budgets
Budgets, like all aspects of the government finance and accounting system, should also comply with Generally Accepted Accounting Principles (GAAP)
In addition to using GASB compliant budgetary methods, local government budgets need to comply with Generally Accepted Accounting Principles.
Compliance with GAAP is fundamental to good money management and essential for efficient tracking of public funds.
Not complying with GAAP will lead auditors to qualify the government’s audits which will make it difficult for them to borrow money.

19. What is the Purpose of a Budget?
An accounting document (record & control expenditures)
A management document (determines who can spend how much)
Decision-making document (basis for sound decision-making by council & staff)
Communications document (informing public of how their money is being spent)

20. Budget Approaches Line-Item Budgets Program Budgets
Performance Budgets
Zero-Based Budgets

21. Line-Item Budgets Most common format
Connects & reports information on inputs used to produce government services
Emphasizes control & oversight
Downplays trust, communication & flexibility

22. Line Item Operating Budget

23. Line-Item GENERAL FUND FY 09/10 100 Administration Dept 100
FY 09/10
Administration
Dept 100
Description
FY04 Budget
FY04 Actual
FY05 Budget
FY05 Project
FY06 Budget
Comments
Wages & Salaries
$1,463,450
$1,461,320
$1,513,880
$152,420
$1,609,210
City Manager
$82,000
$84,525
$95,000
Board directed increase
Office Staff
$46,000
$46,293
$47,000
$47,442
$49,816
Increase per labor contract
Secretary
$12.75 per hour
$26,520
Insurance clerk
$11.20 per hour
$23,296
Total
$108,000
$108,293
$111,525
$111,967
$114,816
Benefits

24. Program Budgets
A Program Budget allocates money to major program areas or activities rather than to specific line items
More centralized than other approaches
Focuses on program goals
Examines all alternatives that may achieve program goals

25. Program Budgets
Program budgets include both revenue and expenses for the major activities of an organization. Helps managers focus on sources of profits and losses of programs that could be expanded or discontinued.
($000’s)
Oncology
Rhinoplasty
Cardiac
Total
Revenues
$40,000
$ 8,150
$50,000
$ 98,150
Expenses
37,000
17,000
46,000
100,000
Profit/(Loss)
$ 3,000
$(8,850)
$ 4,000
$(1,850)
Note that the accounts are reduced in terms of number of line-items. Also, departments are broken out by program.

26. Program Budgets
Program budgets allocate money to major program areas or activities rather than specific line items
A Police Department might be broken down as such:
Administration
Patrol
Investigation
Community support
Instead of by line items

27. Program Budget Challenges
Goals can be difficult to formulate and define
Goals are subject to change; program structure must be changed in response
Sometimes difficult to obtain objective measures of benefits
Can be difficult to determine inter-program efficiency

28. Performance Budgeting
Under a performance budget approach, a program budget format is adopted to the existing organizational structure
A performance budget is essentially a program budget with performance measurement methodology used to make budget decisions.

29. Performance Budgeting
Initiative in budget preparation lies with performance unit
Government activities are divided into major functions
Each activity must yield an identifiable output
Management, administration, and overhead costs are distributed among the various activities of the performance unit

30. Purposes of Performance Budgeting
Better evaluates results of program operations
Provides decision-makers and public with better information on quality of public services
More popular as citizens lose confidence in government

31. Zero-Based Budgeting
Zero-Based Budgeting (ZBB) organizes information into decision packages, i.e. incremental spending levels that reflect varying levels of effort and costs

32. Zero-Based Budgeting
In theory, each department prepares at lest three (3) packages:
A base-level, meeting the program’s minimum requirements
Current-level funding
Enhanced package – to address unmet needs

33. Zero-Based Budgeting
Packages from all departments are then ranked according to perceived need for the package
Unlike PBB, which uses more objective criteria, ZBB relies on subjective judgment of decision-makers in ranking packages

34. Incremental vs. Zero-Based Budgeting
Incremental budgeting starts with current revenues and projects next year by adjusting for inflation, volume, efficiency, technology, etc.

35. Incremental vs. Zero-Based Budgeting
calls for a total re-evaluation of all programs and activities
requires that decision packages be prepared for each separable activity or level of activity
Ranks the packages
Selects packages for adoption or rejection

36. Why the “zero” in ZBB?
In theory, decision-makers conduct an annual evaluation on each program’s purpose and priority, weighing it against all other spending possibilities
As a result, decision-makers may decide not to renew funding for existing program and shift those funds to another, possibly entirely new, program
In reality, this reallocation rarely occurs

37. Local Government Budgets
Generally comprised of several separate sections:
Overview
Summary
Revenues
General Fund
Special Revenue Funds
Debt Service Fund
Capital Fund
Proprietary/Enterprise Funds
Fiduciary Funds
Local government budgets are commonly composed of these sections. Smaller communities won’t have all of these but every level of government, no matter how small, will have a Summary, Revenue, and General Fund section as a minimum.

38. OVERVIEW
Narrative used to give the reader an idea of what the budget hopes to accomplish, what is different from last year’s budget, and any pertinent information not obvious in the budget.
The overview is a narrative that explains to the average citizen as well as those using the budget what this budget is intended to do, what is different from last year, and explain those aspects of the budget not readily understandable from just looking at the funds and numbers.

39. SUMMARY
Wisconsin Statutes REQUIRE the summary to show the percentage difference between the current budget and proposed budget for:
General Property Taxes
Total Revenues
Total Expenditures
The summary is required by statute. The summary shows total differences between the current budget and that which is proposed for the coming year.
The summary is intended to give the public a “snapshot” as to what their government is doing with their money.

40. REVENUES
Where the budget shows your projected income for the coming fiscal year
Includes all anticipated incoming money
Don’t receive them all at beginning of the year, funds come in incrementally
The revenue section of the budget show all, repeat: ALL, incoming funds projected for the coming fiscal year.
An important point here is that many local governments try to separate incoming revenues, frequently funds to law enforcement, and not report them as revenue. This is a mistake. All revenue must be reported in the revenue section of the budget; it is simply allocated to the specific department or purpose it may have been specially intended for but it still has to show up as revenue.
Another important point to remember is that, just because the funds have been reported as projected in the budget, it doesn’t mean the money is there to be spent. Major expenditures must wait until there is sufficient cash flow into the government’s funds to be expended without borrowing.
Property tax revenues commonly come in twice per year; state shared revenues generally come in installments, too. Government funds don’t simply appear because the budget is approved.

41. REVENUES Includes: Property tax revenue State Shared Revenues
Fees for Services
Sales tax revenue (where applicable)
Anticipated grants, loans, etc.
Here are some of the most common sources of revenue for local government.
Property taxes commonly make up about a third of local government revenues.
State shared revenues commonly make up about 60% of local revenues
Fees for services include building permits, recreation fees, fines and other collections
Wisconsin counties have the option of collecting a .5% sales tax but not all do so.
Other states allow municipalities to collect sales taxes but, currently, this is not allowed in Wisconsin
Revenues must also show anticipated borrowed funds.

42. The codes are per GASB recommendations.
REVENUES
FY 07/08
Code 010
Description
FY06 Budget
FY06 Actual
FY07 Budget
FY07 Projected
FY008
Budget
Comments
Property Taxes
$1,463,450
$1,461,320
$1,513,880
$152,420
$1,609,210
New subdivision complete in 2006
State Shared Revenues
General aids
$1,187,204
$1,185,647
$1,199,250
$1,197,521
$2,014,415
Down 3% from FY 04/05
Transportation aids
$162,500
$165,770
$171,400
$169,340
$202,500
Total
$1,349,704
$1,351,417
$1,370,650
$1,366,861
$2,216,915
Sales Taxes
$750,000
$694,230
$751,892
$1,250,000
New big box in 2006
This is an example of what a revenue page in a local government budget might look like.
The codes are per GASB recommendations.
You see here the property taxes, state shared revenues, both transportation aids and general fund, and sales taxes.
GASB compliant budgets will show not only the year the budget is being prepared for but also the present and previous year’s data.

43. Fines/Fees/Misc.
Police Fines
$147,000
$189,655
$160,000
$231,400
$200,000
Building Permits
$245,000
$244,124
$250,000
$251,250
$260,000
New Deer Haven subdivision construction starts
Parking Permits
$55,000
$53,200
$54,150
Inspection Fees
$85,000
$83,400
$87,240
$90,000
TOTAL
$532,000
$570,379
$550,000
$624,040
$605,000
Grants
EDA Grant $0
For industrial Park infrastructure
Meth Abatement
$100,000
From Homeland Security; Drug Task Force
$350,000
Grand Total
$4,095,154
$4,077,346
$4,184,530
$2,895,213
$6,031,125
Here is an example of the fees and other collections on a local budget and how anticipated grants and related income are represented.
Note here that while law enforcement may wish their meth abatement funds to go into a separate account, they are shown in revenues and must be accounted for within the budgetary system.

44. COMPUTING THE PROPOSED TAX LEVY
Total Proposed Operating Expenditures and Reserves
(Minus) Total Proposed Non-Property Tax Revenues =
Proposed 2006 Operating Tax Levy
EXAMPLE: County X proposed expenditures -- $50 Mill.
- Non-Tax Revenues (State /Local) --38 Mill.
Proposed Tax Levy = $12 million
At this point you may be wondering how a property tax levy is computed.
Here is a formula for coming up with how much must be levied.
Another method is to calculate what you can afford and adjust the proposed expenditures accordingly (my preferred method)

45. Funds Proprietary Funds General Fund Fiduciary Funds Special Revenue
Capital Project
Debt Service
Government budgeting is “fund budgeting”
Government budgets commonly include these six “funds”

46. General Fund This is where your day to day operations are budgeted
Payroll Small IT purchases
Benefits Electricity
Office Supplies Vehicle repairs
Fuel
The general fund is where all of your “day to day” expenditures are located.
This is the fund that essentially keeps government operating.

47. GENERAL FUND FY 05708 100 Administration Dept 100
FY 05708
Administration
Dept 100
Description
FY04 Budget
FY04 Actual
FY05 Budget
FY05 Projected
FY06 Budget
Comments
Wages & Salaries
$1,463,450
$1,461,320
$1,513,880
$1,512,420
$1,609,210
County Administrator
$62,000
$64,525
$65,000
Board directed increase
Office Staff
$46,000
$46,293
$47,000
$47,442
$49,816
Increase per labor contract
Secretary
$12.75 per hour
$26,520
Insurance clerk
$11.20 per hour
$23,296
Total
$108,000
$108,293
$111,525
$111,967
$114,816
Here is an example of how a budget would commonly look for a county with a county administrator.

48. Note that the benefits should be broken out for cost, too.
Medical Insurance
$26,500
$28,941
$30,000
$30,190
$32,880
Family
2x$1,100 per month
$26,400
Single
1x$540 per month
$6,480
Total
FICA
$7,750
6.75% of total wages
Retirement
$4,019
3.5% of total wages
TOTAL
$95,760
$44,649
Note that the benefits should be broken out for cost, too.

49. TOTAL PERSONNEL COSTS
$134,500
$137,234
$207,285
$142,157
$159,465
Description
FY04 Budget
FY04 Actual
FY05 Budget
FY05 Projected
FY06 Budget
Comments
Office Supplies
$2,000
$2,198
$2,318
Copier Maint. Contract
$3,800
$4,000
$4,200
107-1
Fuel Oil (Courthouse)
$21,000
$21,420
$22,000
$23,120
Thermostat will be reduced to 66 degrees
TOTAL
$26,800
$27,418
$28,000
$29,438
$28,200
Grand Total
$161,300
$164,652
$235,285
$171,595
$187,665
Also in the general fund are such expenses as office supplies, heating fuel, and copier contracts. All day to day expenses.

50. “Insulated Departments”
Special Revenue Funds
“Insulated Departments”
Library Systems -- Special Tax & Charges
Public Health Dept. -- Special Tax & State grants
Highway Commission -- State Road Aids
Special revenue funds are those funds whose money comes from a special tax or funding source and can only be expended for that particular department or function.
Here are three of the most common Special Revenue Funds.
The departments these funds apply to are sometimes referred to as “insulated departments” because their special revenue status “insulates” them from competitive for funds with other departments

51. Capital Budget/Fund
The Capital Budget is where major purchases and projects are planned and budgeted for.
A common guideline is that any program or purchase of a non-expendable piece of equipment valued at over $10,000 should be listed as a capital budget item
The Capital budget or fund is where the big expenditures are commonly planned for and made.
It is usually for non-expendable items or construction valued at $10,000 or more. Some smaller communities my use $5,000 as their limit for capital expenditures but the most common benchmark is $10,000

52. Debt Service
The Debt Service portion of a government budget includes the payments of principal, interest, and fees on loans, bonds, and any other government debt.
Proper accountability of debt service is essential for future borrowing.
Local governments have to borrow money like the rest of us and have to plan for and budget to pay it back.
Annual payments of principle and interest are listed in debt service for each obligation. Worthy of note and all too often forgotten when producing local budgets are the annual fee that goes with loans and bonds.

53. DEBT SERVICE FY 07/08 Code 500 Grand Total
FY 07/08
Code 500
Description
FY05 Budget
FY05 Actual
FY06 Budget
FY06 Projected
FY07 Budget
Comments
General Revenue Bond
$203,750
$203,748
$201,800
$201,801
$200,050
For County Courthouse addition
Principal
$180,000
Interest
$23,450
$23,448
$21,500
$21,501
$19,750
Fees
$300
Alternative Revenue Bond
$95,250
$95,247
$94,650
$94,562
$93,000
Sewer Plant I & I Progect
Principal
$87,500
Note: Paid off in 2006
Interest
$7,400
$7,397
$6,800
$6,712
$5,000
Fees
$350
$500
Higher fee for bond closure
Grand Total
Note how principal, interest, and fees are broken out separately for each bond.

54. Proprietary Funds Enterprise Funds Internal Service Funds
Proprietary funds include enterprise funds and internal service funds

55. Enterprise Funds
The portion of a budget supporting an enterprise, such as a water & sewer utility, a government owned electric utility, or other specialized, restricted use funds such pension funds
Enterprise funds cover just that; an enterprise. This fund covers what is effectively a subordinate business to the local government, such as a water & sewer or electric utility. Pension funds, commonly for firefighters and police officers, are also enterprise funds.

56. Internal Service Funds
Motor Pool Equipment
Health Insurance
These are some examples of internal service funds.
They essentially operate as clearing or holding accounts.
For instance, all employees in all departments probably receive health insurance and the department must budget for it. The funds are collected from the departments into a health insurance internal service fund from which the premiums are paid for the entire staff.

57. Fiduciary Funds Public Pension Trusts Investment Trusts
Private Purpose Trusts
Agency Funds
Fiduciary funds are usually some kind of investment covered by the budgetary process.

58. Managing the Budget Monthly budget reports
Monthly expenditures should relate directly to what proportion of the year has passed
Major purchases made when planned and cash flow allows
Monitor cash flow closely
Mid-Year review
Here are some keys to successful management of a local government budget.

59. Managing the Budget Manage debt, plan for borrowing Investment plan
Following the Capital Plan essential
Managing debt is essential. You can’t just budget to make the payments; you have to have a plan for when and why to borrow; an investment plan to build funds for projects; and you have to have a capital plan to avoid unnecessary or unwise spending and borrowing.