Idea #39 -- Establish Budget Guidelines

Idea #39 – Establish Budget Guidelines

Report Status: Fully Reviewed

Researched by: Anne Helgen

Original Idea as Submitted

Adopt budget guidelines to inform budget process each year

Other ideas included in this report

None

Idea intent

Bring discipline and transparency to Town and School budgets

Weighted Final Score: 67 (Financial Impact: 4, Operational Impact: 6, Time Scale: 3, Ease of Implementation: 3)

Background Information

The following are excerpts from “Achieving a Structurally Balanced Budget”, Government Finance Officers Association (GFOA), Best Practices Bulletin, adopted February 2012:

“Most state and local governments are subject to a requirement to pass a balanced budget. However, a budget that may fit the statutory definition of a "balanced budget" may not, in fact, be financially sustainable. For example, a budget that is balanced by such standards could include the use of non-recurring resources, such as asset sales or reserves, to fund ongoing expenditures, and thus the future. A government needs to make sure that it is aware of the distinction between satisfying the statutory definition and achieving a true structurally balanced budget.

For a variety of reasons, true structural balance may not be possible for a government at a given time. In such a case, using reserves to balance the budget may be considered but only in the context of a plan to return to structural balance, replenish fund balance, and ultimately remediate the negative impacts of any other short-term balancing actions that may be taken. Further, the plan should be clear about the time period over which returning to structural balance, replenishing reserves, and remediating the negative impacts of balancing actions are to occur.”¹

Every fall, the Town Administrator (TA) provides a forecast of estimated revenues for the upcoming budget year which is presented to the Select Board, School Committee, and Warrant Committee. Based on those initial forecasts and ongoing conversations between the TA and the Superintendent, two budget processes begin.

The Town Administrator prepares the budget documents for approval by the Select Board. This budget includes all Town departments, including the enterprise funds and also includes fixed costs such as debt service, pension obligations, and shared costs such as health insurance, school and town retirement and OPEB costs, school and town facilities and utilities expenditures, vocational school costs, and other items. The School Committee is, by law, responsible for the preparation and approval of the School Department budget. This budget includes school department salaries and benefits, special education (SPED) and other mandated costs, school health insurance, non-salary costs and transportation costs. Public budget discussions are held independently for each budget in late fall through January. A combined budget is presented at a joint meeting of the Select Board, School Committee, Capital Budget Committee and Warrant Committee in mid-February. This budget, subject to minor alterations, is the budget voted on for appropriation at Annual Town Meeting. By law, the Select board has the sole responsibility for forwarding the budget to annual town meeting.

Both the Town and School budgets typically focus on year-to-year changes in expenditures. The school department applies percentage increases to salaries and wages, non-salary expenditures, SPED and contractual expenditures and adds need-based additional expenditures. The Town budgets department by department, inputs pension obligations received from the Retirement Board, develops the percentage increase for health and workers’ compensation to be added to each budget and determines the amount available for discretionary capital to be spent on school and town facilities. The Town Administrator is also responsible for determining non-property tax funding sources to support the budget.

In spite of a robust budget process in Belmont that includes multiple public meetings on projected revenue and expenditures, the determination of allocating Belmont’s scarce resources between town, schools and capital needs is often unclear to residents. The public is shown deluged with information—budget requests, spreadsheets, and percentage and dollar increases- sometimes in pieces, for two separately constructed budgets, all of which tally to one “balanced” budget by the time annual town meeting occurs. In addition, revenue dollars estimated in the fall often change once the Massachusetts legislature adopts the state budget, usually in the late winter or spring. This can create last minute tension between stakeholders, administrators and the relevant boards regarding allocation of incremental funds. This is not unique to Belmont.²

Many communities have developed a budget guideline framework to formalize the allocation of scarce resources and bring more transparency to the budget, including peer communities such as Arlington, Brookline, Burlington, Canton, Lexington, Newton, Wayland, and Wellesley.³ The process for arriving at budget guidelines varies by community, both in terms of who determines the guidelines (Select Board, Finance Committee or Joint Committee) and what methodology is used. A “best practices” joint approach, used by Lexington in particular, is outlined below.⁴

Budget Guidelines

Formalized budget guidelines are a tool used by municipalities to allocate marginal surpluses and deficits and bring discipline and visibility to the annual budget building process. A methodology is established to produce a framework for annual budget decisions and to codify how the marginal dollars will be spent between town, schools and capital and other priorities. The methodology is applied each year to formulate operating budgets for the coming fiscal period. The process begins early in the fall and sets expectations for budget changes early in the process among all stakeholders, including the public. The formalized guidelines also help provide year-to-year stability for Town finances and support facilitation of long-range planning.

The annual joint process brings together representatives from the Select Board, School Committee, Finance or Warrant Committee, Town Administrator’s office, Superintendents’ office, Capital Budget Committee, and others involved in the budget development to agree on the revenue forecast and funding, understand fixed and shared costs, and agree on a town/school split for the operating budgets. This process begins early in the fall and promotes engagement of the public from the earliest stages in the budget process through progression to appropriation at annual town meeting.

The base for analysis starts with the prior year’s revenue and expenditures. Base year actual revenues are compared to forecasted revenues and the difference is the amount that the Town has to spend for town and school services.

Changes in fixed costs and shared costs are deducted from the year-to-year change in revenues to determine the net operating budget. Fixed costs include debt service, pension obligations, and state charges. Shared costs include such line items as health insurance, facilities/utilities, cash capital and other agreed-upon expenditures, such as appropriation to reserve accounts. The increase in net operating budget is then split between the school and town based on actual spending in the prior year and carried forward into the budget year. [Exhibit I shows a simplified outline of a formula.]

The formula for establishing guidelines varies from town to town based on town finances and town priorities.⁵ Adjustments to both revenues and expenditures can be tailored to address specific accounts, priorities or needs. Lexington includes allocations to a capital stabilization fund in shared expenditures.⁶ Canton deducts changes in Chapter 70 aid, ambulance receipts, and other specified receipts from revenues.⁷ These amounts are added back to the relevant school and town operating budgets accordingly after the split. Expenditures such as SPED tuitions, vocational school tuitions and OPEB allocations are sometimes included in shared costs or treated separately. The formula also includes a process for adjustments to be made based on needs such as enrollment increases, recycling/waste cost contract costs, etc. Major changes between early fall and adoption of the budget—such as that experienced in FY20 and FY21—are evaluated within the framework established.

The annual process for setting guidelines begins in early fall, after the Select Board sets goals and priorities for the coming budget year. In early to mid-September, a financial “summit” is held for stakeholders to review prior year results, financial indicators and identify budget drivers for the coming year. Once revenues are estimated, the agreed upon formula for setting operating budgets is applied and discussed in additional public meetings, and the budget amounts are finalized by late November or early December. The town and schools then determine how the amount allocated will be spent.

In simple terms, this methodology produces a framework for decisions and a guideline for annual budgeting. It is an annual exercise that should reflect town and school priorities as they change and accommodate increased needs when they arise. As such, the allocations and increases may vary year to year, and in some years, exceed the guidelines.

Many of the considerations included in the budget guideline methodology may initially appear similar to Belmont’s current budget process, however, the budget process differs significantly in the following ways:

Priority based allocations

The changes in shared costs, which are deducted from changes in revenues, can include allocations to meet priorities, such as appropriations to general or specified stabilization funds, reserves, capital projects, or other priority expenditures. These ensure that priorities are funded before operating funds are allocated. Brookline’s Finance Advisory Committee, opining on the Town/School Partnership formula, writes “this Incorporates into the current incremental budget process a way to intermittently and more effectively reprioritize town operating and capital objectives”.⁸
Can prioritize fiscal goals identified in the Town’s recently adopted financial policies.

Mutually agreed framework for decision-making

Provides a formula for the town/school split and reduces last minute conflicts over allocations of funds.
Additions to revenues sources and expenditures, changes to aid or cost structures, etc. can be evaluated through the framework.
Town expenditures that are made on behalf of the schools are made visible to the public. This is particularly important for residents to understand when budget cuts are under discussion.

Clarifies spending

The process uses prior year’s actual spending to inform the current budget period, a significant change from current budgeting practices. Automatic percentage increases in expenditure categories from budget to budget can often obfuscate the purpose for such increases, especially as changes in services or actual costs occur over time. As noted by the Finance Committee in the Weston’s FY22 Budget, “typically, department heads are told to budget for “level service,” which too often means level staffing plus additional requests. This naturally results in budget increases beyond negotiated salary and benefits, resulting in increases well beyond inflation, which are not sustainable over time”.⁹ GFOA research suggests that “school district budget processes are typically “incremental,” where last year’s budget becomes the basis for the next year’s budget, with incremental changes made around the margin. However, past patterns of spending may no longer be affordable or even relevant given changing needs of the community and student body. Hence, the budget process should encourage review of past spending decisions and critically change, where necessary”.¹⁰
Provides enhanced visibility on spending increases, such as facilities, staff additions, support for increased demand in services, etc. At the same time, the framework is flexible and can be adjusted for vacancies or to allocate funds for unanticipated intra-year needs.

Visibility on use of non-recurring funds

The use of free cash and other non-recurring funds is determined and agreed upon early in process. This allows the public to understand the use of these funds from year to year and engage in public discussion of such use before budgets are developed.

Engages the public earlier in the annual process

Enhances residents’ understanding of how the budget is built and funded.

Reduces the “surprise” factor for future override discussions.

Provides stability for town finances and facilitates long range planning by establishing a formula that can be incorporated into forecasts.

Shifting the first question asked in the budget process from “How much to you need?” to “How much to we have?” might be viewed as subtle but time after time, we’ve seen this change the approach to developing the budget. Starting off with a clear understanding of how much revenue is available to spend for the upcoming budget year sets realistic expectations from the get-go as to whether there is more money available, the same amount as last year or, as all of us often experienced, less money than we had before. Since revenues, not expenditures, are the real drivers of the budget, focusing on understanding where the money is coming from is extremely critical to the budget process. Ensuring that everyone understands the base from which next year’s budget is to be built is extremely important before kicking off budget development. Sometimes it can be unclear whether the starting point is the current year’s budget, last year’s budget, last year’s actuals or current year expenditure estimates. A shared understanding of the base from which you are building the budget is vital to the process.¹¹

Recommendations

Fiscal discipline and budgetary transparency are two critical elements required to address Town’s structural deficit. Whether it is with this model or an alternative model, the Select Board needs to adopt a more top-down process for determining the amount of funds available to spend and how those funds are allocated. Although the School Committee has lawful authority over the school budget, the Select Board is responsible for the financial health of the Town, for setting the priorities and for developing policies to achieve overall goals and objectives, and for submitting the total budget to Town Meeting for approval.

The SCIG recommends that the Select Board take a proactive role to adopt a priority-based, revenue driven model for budgeting for FY24, and that the Select Board, Town Administrator, School Committee, Warrant Committee and Capital Budget committee work together to adopt budget guidelines to inform the process within the next six months. This may seem like an impossible task given the size of non-recurring revenues used to support recurring operating expenditures in the FY22 and projected FY23 budget. In many ways, however, it is exactly the right time to bring a new framework to building annual budgets, renewing trust in the budgeting process and improving stability in town finances:

Belmont is at a unique point in time to begin this process. Over the past two years, the Town experienced significant changes in Town revenues as well as school and town cost structures. As new recurring revenues are realized from marijuana receipts, development, and other sources, the framework allows the town to be more thoughtful about deploying these new sources of funds. At the same time, there is an opportunity to align town and school expenditures with projected revenue increases. Over the next several years, the overall rate of growth in the School Department budget should be lower than experienced prior to FY19, when budget increases were primarily spent on support for unrelenting year-to-year enrollment increases. Due to lower pandemic enrollment, the School Department has achieved lower class sizes earlier than was projected pre-pandemic, an important reset for ongoing school needs.
The current level of non-recurring funds used in the FY21, FY22 and FY23 budgets is not sustainable. Budget guidelines will not solve this problem in the next two or three years, but the framework can be used to bring rigor and discipline to goal of reducing the amount of free cash and other funds used from year to year.
Setting budget expectations can be critical to seeking future overrides. The guidelines provide a foundation for fiscal discipline, and the process engages the community well before any override request. Establishing an agreed upon framework for budget increases will help reduce the public distrust of administrators and governance that currently is present in town. Of note, both Arlington and Norwood, both of which had successful 2019 overrides, included budget guideline expectations in an override pledge made to the community that laid out how resources from the tax increase would be used.¹²
The SCIG is not under the illusion that changing the budget allocation process will be a simple task. Establishing budget guidelines agreeable to all parties--the Town, the Schools, the Warrant Committee, the Capital Budget committee and residents-- will require time and effort to establish a fair and equitable methodology acceptable to all stakeholders. The effort will require a lot of discussion and detailed modeling to determine the appropriate formula that can meet the needs of the Town and School Department and that can accommodate variable expenditures and other unanticipated needs or changes. Belmont’s formula will likely look different from many other towns using similar frameworks. Nonetheless, the challenges inherent in change of this nature have been faced in many other communities with great success. The experience of Lexington, in particular, could be helpful to understanding and codifying the process.

Secondly, the Select Board and School Committee should initiate an update of Town and School budget documents to align with current best practices recommended by the GFOA and other associations. Although the current budget documents contain hundreds of pages, relevant information can be buried in the detail and not readily available to the reader. The goal is to produce budget information is a way that is useful and understandable to stakeholders¹³. Based on a review of peer community budgets, the Education Subcommittee of the Warrant Committee submitted suggestions to the School Committee Finance Subcommittee in 2020 to align budget drivers with simplified budget information and help “tell the story” in an more effective manner.

Next Steps

Select Board to initiate process for budget development and allocation process as a priority in Spring of 2022.
Select Board, School Committee, Warrant Committee, and Capital Budget Committee to meet jointly in early summer to and set a timeline for developing an agreed upon formula that can be used for the FY24 budget process. Jointly identify individuals to be accountable for meeting the timeline.
Town Administrator and Superintendent (or appointees) to develop formula, test prior years and model various scenarios in coordination with the FTF II model. If possible, utilize financial structure grant to assist in this process.
Should the timetable for joint agreement slide, the Select Board and Town Administrator should use formulaic approach to inform the budgeting process for FY24
Warrant Committee to schedule a joint Financial Summit with Select Board, School Committee, and Capital Budget Committee for September 2022 to review updated financial indicators and engage public earlier in budget development.
Use a formalized budget guideline methodology to inform FY24 town and school budgets and beyond.
Select Board and School Committee develop a timetable to overhaul budget documents with the goal of creating a more relevant and understandable presentation to residents.