A Primer on Takoma Park’s Budget

During my time on the City Council I quickly learned two things about the city’s budget. It is the City Council’s second most important responsibility (after hiring the city manager) and it seemed unfathomably difficult to understand. (This coming from a commercial bank lender.)

If you’re perplexed by the budget document, don’t feel bad. Even councilmembers have a hard time. One reason is that many of us tend to assume the city budget is like our household budget or a business’s profit & loss statement. It’s not.

Residents need to be able to understand the city’s budget if they wish to be effective advocates and hope to influence the City Council and City Manager’s budget priorities. If residents are better versed on the budget, the job of the Mayor and Councilmembers’ job will be far easier. 

Residents have often asked questions like:

  •             How can the city have expenses that exceed revenues?
  •             Why doesn’t the city create a 5-year budget?
  •             What happens to the money saved on projects that don’t get built?
  •             What is the general fund? 
  •             Why can’t money be shared among funds?
  •             What’s the point of large reserves, if we never use them?
  •             What’s the difference between a fund and a reserve?

First, I refer readers to Deputy City Manager Jason Damweber’s superb article in the January 2019 City Newsletter explaining how the executive staff and councilmembers perform this duty. Mr. Damweber’s piece walks us through the 5-month process, including how the public’s preferences are taken into account. Read it here: https://takomaparkmd.gov/newsletter/dollars-and-sense-approaching-fiscal-year-2020/

This blog is different. It’s about how to read the budget – that is, how to make sense of it. Believe me, there is a rationale to the structure of the budget and the flow of the budget’s funds in practice.  

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Fund Accounting            Government agencies, many non-profits and places of worship use what’s called Fund Accounting. Unlike with businesses, there is no such thing as the familiar “bottom line.” Governments do not try to make a profit; instead they provide accountability, constancy and transparency.

Fund Accounting allows the municipality to properly manage funds that come from many different sources each of which requires that the money be used in a specific way. 

An easy example is the Speed Camera Fund that receives over a million dollars each year from fines collected from speeders. By state law this money must be used for “public safety,” and can’t be used for anything else. Other funds include the Stormwater Management Fund, the Special Revenue Fund and the General Fund. More about these later. 

Another way to view Fund Accounting: think of each fund as an independent entity with its own budget. Bundle all these funds together and, voilà, you have a municipal budget.

“Bundle all these funds together and, voilà, you have a municipal budget.”

Revenue Inflows            Takoma Park receives income or revenue from a multiplicity of sources. Some of these are restricted and some aren’t. Most familiar to us are revenues from property taxes. The next largest chunk is a mixed bag of money transfers from the County, the State, and the Feds. This includes income tax and Highway User Revenues, as well as tax duplication money, recreation and police assistance from the County. There are also various fees, fines, service charges, as well as grants from agencies and organizations. Let’s not forget bond sale proceeds. 

Expense Outflows            In contrast most of the City’s expenses and outlays are predictable. Many occur like clockwork, just like household expenses. Nevertheless, in any fiscal year there are always unknowns: staff vacancies, programs and projects that get delayed or take longer than expected, weather events, equipment breakdowns, accidents, legal issues, actions by other governments (e.g., a government shutdown), construction overruns, cost increases for supplies, replacement parts, insurance premiums and so on.

“You can think of the General Fund as a big bathtub with revenues flowing in and expenses draining out simultaneously every day.”

The General Fund            To simplify things a bit, the General Fund is the City’s primary budgeting vehicle for overall operations. It covers all the departments and almost all of their basic functions; all the wages and benefits of everyone who works for the City. You can think of the General Fund as a big bathtub with revenues flowing in and expenses draining out simultaneously every day. The City Manager prepares and presents to the City Council a proposed annual budget that assures that “water” in the tub won’t drain out or get too high and overflow. 

Translated, this involves the big challenge of estimating future revenues that will come to the City in the fiscal year ahead. This includes sustaining the city’s operations while anticipating increased costs (wages increases, health insurance costs, repairs and replacements, new technology and inflation, etc.); accommodating new projects and programs council members and residents want; accommodating new mandates imposed by higher level governments; seeking new cost-saving efficiencies and reallocating staff resources. 

This may come as a surprise, but in truth the City has little control over its revenues, except for regulating property tax rates. The City’s revenues often are either dictated by other levels of government, affected by the economy or influenced by just pure political considerations. 

Reserves            This is where Reserves come in. Reserves are nothing more than a fund’s balance at the end of the budget cycle. The balance represents the unappropriated accumulation of the difference between actual revenues and expenditures, or the water left in the tub when all the year’s revenues and expenditures have been accounted for. If in a fiscal year actual revenues are larger than expenditures, then the reserve balance will become higher, and vice versa. 

Here’s an example. In the proposed FY2017 budget the General Fund was projected to have total revenues of approximately $24,518,000 and projected total expenditures of $27,564,000, resulting in a projected deficiency of $3,046,000.

“Wow,” you say, “that’s not even close to a balanced budget.”  And, by the way, Maryland law mandates a balance budget.

Actually, the deficiency is made up by pulling in money from the Reserves also known as the “Fund Balance;” namely unspent, accumulated cash in the General Fund.  In this example, the proposed “Fund Balance” would drop from $11,320,000 to $8,273,000.  The City Manager probably explained to the Council that the Fund Balance was unnecessarily high, perhaps because a major project was delayed or there were position vacancies for part of a year, and thus we could use some of that money in lieu of raising the tax rate.

Think of the City’s Fund Balance as you would your family’s savings account. Most of the time you live out of your checking account. But if income is too low or there are unexpected expenses, you take money out of your savings account. The opposite happens when times are fat.

How High the Reserves            The State requires municipalities to maintain reserves at a certain level. There are also “best practices” among municipalities. Common sense takes over from there.  A big factor for any city is that it must pay routine bills and obligations every week, like salaries and utilities.  But revenues come in irregularly, such as income tax property tax receipts and intergovernmental transfers.  

“The Fund Balance is also there for really bad times when there is a fiscal or economic crisis as happened in FY’10 to ‘14, or some sort of calamity occurs.”

Therefore, the Reserves supply the cash when expenses exceed revenues. The Reserves can fluctuate a good bit throughout the year.  Effectively the City has its own bank line of credit with itself.

The Fund Balance is also there for really bad times when there is a fiscal or economic crisis as happened in FY’10 to ‘14, or some sort of calamity occurs. The Great Recession caused revenue growth to almost stall. General Fund balances were drawn down for three years in a row from 2010 to 2012. In 2010 Takoma Park was forced to eliminate eight positions to make ends meet. 

On the upside, a decent-sized General Fund Balance makes it easier for the City to borrow money from a bank or via a bond issuance. Takoma Park doesn’t have a bond rating because we are too small, but our creditworthiness helps us when Maryland issues bonds on our behalf, as was the case when we borrowed money for the planned Library renovations and major street projects. 

Other Funds                        We mentioned the Speed Camera Fund. There are some other funds, like the Stormwater Management Fund and the Special Revenue Fund.  The City is responsible for managing its stormwater system that includes the above ground drains and collection areas as well as the entire underground pipe system.  Annual fees from each property owner finance this fund.

The Special Revenue Fund gets revenue from cable companies through franchise agreements, the federal CDBG program, the WSSC and Safe Routes to School. Each of these sources stipulates restrictions on how the monies can be spent. Yet another fund is the Facilities Construction Fund, which helps the City to monitor monies received and earmarked for the construction of the city’s facilities. For example, monies gained from the sale of bonds for constructing the Library expansion must be segregated and only used for that project. Money for the renovation of the police department might come directly out of the General Fund.

“Congress refuses to appropriate the money Trump wants to build a wall and so he’s trying . . . to grab money out of other agencies’ budgets. He cannot legally to do that because Congress approved money for specific purposes”

Affordable Housing Reserve            Sometimes the Council creates “special” reserve accounts, which are entirely different than the fund balance in the General Fund or any other fund.  A big difference between “funds” and “special reserve accounts” is that the former contains money from outside agencies and grantors; whereas special reserve accounts are simply set-asides of city monies that are already in the General Fund. 

In 2016 the City Council adopted a plan to create an “affordable housing reserve.” It is not a fund in itself. But rather a commitment, adopted by council resolution, to dedicate a set-aside to be used exclusively for facilitating affordable housing. In 2018 the Council resolved to dedicate all rents earned from the 99-year ground lease with the Neighborhood Development Company to this reserve. Unlike most budget authorizations this reserve is designed to be added to and carried over from year to year while expenditures are made at Council’s discretion. 

Facilities Maintenance and the Equipment Replacement Reserves          These are two other similarly constructed reserves, which the Council finances annually. These two reserves maintain balances from year to year and are intended to assure there’s adequate money set aside to pay for maintaining and repairing city buildings and replacing equipment when needed. 

Capital Budgeting            We conclude by describing the unique Capital Budget. It is part of the overall General Fund, but addresses the need for financing multi-year public facility projects. This could include sidewalk construction, street repaving, facility renovations as well as the purchase of long-term assets such as trucks, police vehicles and other heavy machinery and equipment. 

The capital budget covers 5 years, with the first year being the upcoming fiscal year. Why 5 years? Because the City knows the life expectancy of existing facilities and equipment including what will need to be replaced and when.  Also, because 5 years is standard throughout the U.S. (In fact, the Equipment Reserve plans as far as 8 years ahead.)  In the case of building construction (like our Library) the planning and design phase may take a few years and the construction will take a year or more. 

Common sense says the City has to commit years in advance to provide for the needed monies to build projects and to replace worn out equipment. It can’t be done on an annual basis like routine operating expenses because the hit on the budget would be too big. If money for a project comes from special sources like grants, then these monies may go into the Facilities Construction Fund where they can be carefully accounted for.  An example is the Flower Avenue Green Street project, which has six or seven grant sources that must be used for this project.[ The DPW and the Dept of Finance have to account to each funding source that their money was spent and how it was spent. 

Does this ring a bell?            Compare this to President Trump’s attempt to find money to build a wall on the Southern Border. Congress refuses to appropriate the money Trump wants and so the President is trying, willy-nilly, to grab money out of other agencies’ budgets. He cannot legally to do that because Congress approved money for specific agencies and purposes. 

In Maryland, the General Assembly approved casino revenues to go for school construction. It really hasn’t, and so some Assembly members want to constrain the governor to use casino receipts for schools and not be shifted to something else. Do we see a Casino Receipts Fund in Maryland’s future?


“Democracy means government by discussion, but it is only effective if you can stop people talking.” –  Clement Atlee, British Prime Minister

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