Solving City Budget Mysteries

Concerns this year about the Coronavirus pandemic’s impact on the City of Takoma Park’s operations and residents’ welfare have caused residents to pay greater attention to the budget and budgeting process. Sadly, all this attention has revealed how little most residents understand the budget. Some people have huge misconceptions. Others distrust what they hear from the City. There’s a lot of confusion. And it is not anyone’s fault.

When it comes to the City’s budget, a huge knowledge gap persists between the City Council on the one hand and everyone else who lives in the city.

This is a serious problem that needs to be fixed and no one is doing anything about it. This lack of understanding makes it really difficult for taxpayers to intelligently comment on the budget. Public criticism often misses the target. Well-meaning residents want to make productive contributions to the budget discussions, but if they’re ill informed they get frustrated and feel like their concerns are falling on deaf ears. Councilmembers don’t benefit from the sound opinions they need to get from residents. 

From my own Council experience, I know this to be true. It just isn’t possible to take the time to thoroughly explains things to constituents. No one comes out a winner in this situation. At Council work sessions residents hear a lot of accounting jargon and Councilmembers’ disjointed questions and answers. Listening to Council work sessions that go on into the wee hours of the morning can’t teach us anything. Who can deal with that? No matter how clear the budget document is written, at 200+ pages it intimidates even the most plugged-in citizen.

A 3-Step Solution

My intention is to fix this in a 3-step process.

Step One, I explain the budget in plain English below: why the budget is structured the way it is, how it works; and the external realities that shape our budget. This is cursory overview. I truly wish I had had this information when I joined the Council in 2009. There was no one to teach me. 

Step Two, In order to elevate the dialogue, I recommend that the City set up a series of trainings for residents who want to learn about the budget. Today, there is no way to do that. (There never has been.) Four 2-hour sessions ought to give people a good start. 

Step 3. From those attendees, the City Manager should select five persons to serve on a new Citizens Fiscal Advisory Board. Members, while continuing to learn, will function as interlocutors between the community at large and the City’s Manager and Council. Their job will be to assist the City Manager year-round when needed and to grease the communication skids. 

As interlocutors, Fiscal Advisory Board members’ role will be helping residents to understand the budget process. Psychologically for many it is easier to grasp information in a casual setting from a fellow resident who’s not part of the decision-making apparatus, or part of a public debate.

In the other direction, Advisory Board members will provide early guidance to the City Manager and Councilmembers on things residents are concerned or confused about, and to offer help with solutions. This will be a new avenue to obtain community input. And ultimately it will elevate the dialog around the budget and other fiscal matters.

An existing entity similar in function is the Police Chief’s Advisory Board. I’ve advocated for a fiscal advisory board for years. Other cities do this. There is no reason we can’t. It will fill a huge knowledge gap and make Councilmembers’ jobs easier.

By the way, the City’s budget document is indeed praiseworthy. When I first clambered aboard the City Council in 2009 the first budget I saw was twice as thick and nowhere near as well organized. So things are relative.

Let’s be real. Municipal budgeting is extremely complicated. Believe me, it is hard even for the Mayor and City Councilmembers to decipher all of its components and make sense of it all. You can tell this by some of the clarification questions they ask the City Manager and the Finance Director.

So let’s get down to business.

8 Realities

We have to start with the big picture first. 

1) Divorce your perceptions of a municipal budget from your home finances and your business financial statements. The similarities are scant. But the contrasts can be very helpful to your understanding.

2) In Maryland, municipalities (except Baltimore) are at the bottom end of a food chain.

3) Small municipalities have very little control over their revenues.

4) There is no such thing as a “bottom line,” a profit or a loss. 

5) A business and an organization can fail or voluntarily cease, but a government never has that option. 

6) In local government expenses get paid daily, but revenues come in irregularly.

7) A budget is an educated best-guess plan for the next 12 months. The City rarely spends all the money it budgets for, but it must budget for all expenses as though it will. 

8) The idea of running a government like a business is a false hope.

A side note on terminology — The terms municipality, city and town are synonymous. Different places call themselves different things, like the Village of Chevy Chase, but in Maryland there are no legal distinctions. Either a place is duly incorporated as a municipality or it is not. 

What is Fund Accounting?

Governments use an accounting system call Fund Accounting. Except for the arithmetic, it has almost nothing in common with commercial accounting. Basically it’s a system for tracking income (revenues) the use of which is limited either by the entities that provide the money or by law. The system emphasizes accountability to the taxpayer rather than profitability. 

While a business’s revenue come from one basic source, the sale of products and services, local government’s revenue comes from a multiple sources. They include various taxes, fees, grants, governmental transfers, licenses and permits, penalties, fines, rents and loans. 

Due to these limits, a city must set up various separate accounts called “Funds” to keep it all sorted.

The Speed Camera Fund is an example. Maryland created the program in 2009 to control speeding on state highways only. All the money comes from speed violations. Most of the proceeds benefit the City, but State law requires it to be used solely for “public safety.” This money can’t be mixed with other money.

The City has four major funds: the General Fund, Stormwater Management Fund, Speed Camera Fund and Special Revenue Fund. The latter one is comprised of a number of distinctly funded projects (sub-funds), which the City must keep separate track of. In the draft FY 2020 budget there are 9 of these projects and some, like the Flower Avenue Green Street, have multiple grantors, creating an accounting nightmare. 

The City must account to each grantor that its funds were spent as intended. At the conclusion of a fiscal year, the City reports the ending Fund Balance, which is the net difference between income and expense with each Fund.

Budget Structure 

The budget binder is structured around departments and within departments by functions, which is how the chain of command works. If you want to know about a program, you have to know what department it is in. 

Interestingly, things like Funds, Reserves, Debt and the Capital Budget cut across department boundaries. 

Capital Improvement Program

The C.I.P. section in the budget is a large matrix that looks 5 years forward at how the City expects to spend money on tangible hardware and structural items like streets, buildings, equipment and stormwater. Primary focus is the upcoming fiscal year, which is included in the overall budget. All municipalities use a similar format to plan for the long term. It’s a good way to look at the City’s expenditures down the road. 

Reserves

The City Council creates individual Reserves. They accomplish several things. Most importsant is to assure the City doesn’t run out of money unexpectedly in case of an unforeseen major financial hit. The City uses the reserve to smooth out financial disruptions and avoid a sudden hike in tax levies. The Equipment Replacement Reserve (“ERR”) is an example. Another reason is to accumulate money for a certain desireable gosls, such as the Housing Reserve.

The City Council decides how to fund a Reserve and how and when to use the monies. Think of a Reserve like a family savings account. In one savings account you put money away for your kid’s college education so the money will be there for the dreaded day you have to write a tuition check. Another savings (i.e., reserve) could be a vacation fund for future trips.

The City has six Reserves. These include the: 

• General Fund Reserve  
• Equipment Maintenance Reserve
• Facilties Maintenance Reserve
• Emergency Reserve
• Housing Reserve
• Restricted Bond Reserve

The City Council controls each of these accounts, except for the Restricted Bond Reserve.

The Reserves are designated as “Unassigned” and “Assigned.” The funds in unassigned reserves, like the General Reserve can be used flexibly without constraint. Control derives from the Council’s discipline in sustaining it. The General Reserve is dipped into when cash runs thin to pay obligations. Payables are regular, but revenues arrive irregularly. So the General Reserve acts like a business line of credit whose balance goes up and down throughout the year. 

Assigned Reserves, like the ERR, have set mandates for how the money can be used. The City charts the longevity of each equipment item. Each year the City Council adds money to the ERR to assure that replacement equipment can be purchased per schedule. The Housing Reserve is a bit open-ended pending the Council’s decision on how to best make use of it.

Bonds and Debt

The Restricted Bond Reserve is a different animal. Money going into it comes from the City’s sale of bonds to finance really expensive projects that have a very long life span — like the Community Center (2005), the Public Works Yard (2010) and for the new library (2018). All of this data can be found in the “Debt Service” section of the budget binder. The City monitors its total debt burden so it stays within manageable proportions. 

The sale of a bond and the use of the proceeds are regulated by the State and federal government in order to protect the bond buyers (investors). The money must be used for its original purpose. Thus the City Council’s control is quite limited.

Revenues – The Cheese Stands Alone

As in any business, estimating future revenues is the hardest part of city budgeting. Doing so is ultimately an educated guessing game. Each year the new budget is built on the experience and outcome of the previous one.

The big problem is that the City has very little control over most of its revenues. Ninety-two percent of its inflows come from three sources: property tax (54%), income tax (13%) and intergovernmental revenues (25%). The City has a real “say” only over the property tax. 

In the song, the Farmer in the Dell, as children we learned that, in the end, the cheese stands alone. The “mouse takes the cheese,” but the cheese doesn’t take anything. Takoma Park is at the end of the line; it doesn’t get any choices.  

In Maryland a city has very limited chances to alter its revenue sources. It cannot create a new tax to raise money. (A county can.) We’re at the mercy of the Governor, the State legislature and the County. (This is where our District-20 Annaoplis delegation is so important.)

Maryland cities rely principally on the property tax for the largest share of their revenue. The State performs the property assessments every three years, and the city determines the tax rate annually. Unfortunately for us, the County and the State also tax real estate, which drives up our tax bills considerably. So even though Takoma Park may hold or lower its rate, the County effectively forces it up. 

It is unlikely property tax receipts will be affected by the pandemic because, first, property values would have to decline (unlikely) and the next assessment won’t happen until 2022. Property tax revenue is not where our City is vulnerable.

Takoma Park automatically receives a flat 17% of the income tax paid by Takoma Park residents to Montgomery County in the preceding year. This amount can vary considerably from year to year as residents’ income varies because of the effects of prosperity, recessions and economic turbulence like the Coronavirus. Income tax revenue receipts come in about 8 times a year due to different tax filings, according to the City Manager. Because this tax revenue is based on calendar year 2019 earnings, FY 2021 income tax revenues won’t be much affected by the pandemic.

Intergovernmental transfers represent more than 15 categories of programs and agreements by which funds come from the County and the State to the City. These infusions tend to be fairly stable year to year. Included our several “in lieu of” (a.k.a. “tax duplication”) grants from the County reimbursing the City for services we provide in lieu of the County. These transfer protocols are set by legislative acts, mutual agreements and political understandings. But the higher government can at any time reduce or terminate at its discretion. This has happened.

Expenses and Deficits?

Some people get terribly confused because the City seems to operate at a deficit some years. In FY 2019 the City had total revenues of $25.7 million and expenses of $27.0 million producing an operating loss of $1.3 million. How can this be? Aren’t local governments required to adopt balanced budgets? Yes they are. 

The City balances its budget by using money from its General Reserve when there is an operating deficit. In such cases the General Reserve shrinks. On the other hand, should major projects get delayed, or jobs become vacant, the city wins a grant or the State legislature increases programming support, then there could be a surplus.

Keep in mind that an adopted budget is just a plan; effectively it’s a best guess of what is likely to happen with revenues and expenses in the coming year. As the fiscal year progresses, adjustments get made; money needs to be shifted among accounts, and this requires the Council’s approval.

Otherwise, in a normal year expenditures are not complicated and are relatively predictable. Since this is not a normal year, the City Council is reducing expenses in favor of conserving cash and waiting to see how things play out pandemic-wise.

No More Mystery

The City’s Budget is complicated. That’s the nature of the beast. Even the brightest of people have difficulty dealing with it because it is unfamiliar. But it doesn’t need to be mysterious and off-putting. We as a city want and need informed participation. But to get that, we have to give folks a fair chance to be able to participate intelligently. The steps I’ve outline here will achieve that.