Building a Sustainable Budget: Essential Guide for Municipal Finance Officials
Division of Local Services outlines key strategies for effective financial management, from Proposition 2 1/2 to capital planning
Municipal finance officials need to master several essential building blocks to create sustainable budgets and maintain fiscal health, according to experts from the Massachusetts Division of Local Services (DLS).
Property taxes, which form the largest revenue source for most communities, are governed by Proposition 2 1/2, which sets two key limitations on municipalities.
"The levy cannot exceed 2.5% of the total assessed valuation of the community," explains Sean Cronin, senior deputy commissioner at DLS. "Your levy cannot grow by more than 2.5% each year, except for new growth."
New growth, which comes from development and property improvements rather than market conditions, provides critical budget stability under Proposition 2 1/2. Examples include new construction, property additions, and previously exempt properties returning to tax rolls.
Communities have three main additional revenue sources beyond property taxes: state aid, local receipts, and other available funds.
State aid includes Chapter 70 education funding (approximately $6 billion statewide) and unrestricted general government aid ($1.2 billion statewide). Local receipts encompass motor vehicle excise tax, meals tax, and other locally generated revenues.
Personnel costs dominate municipal budgets, accounting for 70% to 80% of expenditures. Major cost centers typically include schools, police, fire, and public works departments.
Zack Blake, Chief of the Financial Management Resource Bureau at DLS, emphasizes three essential components for sustainable budgeting:
"Financial policies codify priorities and provide structure. Long-range forecasts report the fiscal future and project available funding. Based on these, communities can develop their capital investment strategy," Blake says.
The budget development process should be transparent and deliberative, involving multiple stakeholders including select boards, finance committees, department heads, and residents.
"The budget is arguably the most important policy document that the community develops," Blake notes. "Rather than simply matching revenues and expenditures, it represents the intersection of all aspects of municipal finance."
Communities should establish written procedures through bylaws, charters, or policies that outline:
- A detailed budget calendar with milestones
- Regular review of financial policies
- Clear budget guidelines for departments
- Public hearing schedules
- Methods for monitoring expenditures
Maintaining adequate reserves proves crucial for fiscal stability. Communities typically maintain both a general stabilization fund ("rainy day" fund) and special-purpose stabilization funds for specific needs like equipment purchases.
Capital planning requires particular attention to prevent infrastructure deterioration and emergency spending.
"The last thing you want to do is just react when the water main fails or when the roof comes in," Blake explains. "You need to put together a capital plan."
DLS recommends communities maintain consistent debt levels relative to revenue. This approach helps ensure ongoing infrastructure investment without overburdening taxpayers.
"If you can afford that debt today, you should be able to afford it going forward," Blake says regarding maintaining steady capital investment levels.
The division provides extensive resources to help communities implement these practices, including:
- Sample budget calendars
- Capital project request forms
- Financial policy templates
- Training materials
- Regular newsletters
Officials can access these materials through the DLS website at mass.gov/DLS under municipal government training and resources.
Blake emphasizes that budget management continues throughout the year through regular monitoring and reporting.
"You want to keep your stakeholders regularly informed," he says. "If you've used 80% of the budget and you're only a third of the way through the year, an explanation of why that's either normal or not normal is important."
The DLS experts stress that successful municipal finance requires ongoing attention to multiple interconnected elements - from revenue forecasting to capital planning to policy development.
By following these fundamental practices and utilizing available resources, communities can work toward building sustainable budgets that serve their residents' needs while maintaining fiscal responsibility.
*editor’s note: Trying something different during the lull of meetings from school vacation week. With several towns considering overrides, wanted to write up the DLS Municipal Finance 101 training.