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Chapter 6

Financial Management

Sound decision-making by the Select Board requires an understanding of the main components of the town’s financial management. The town’s finances may limit or frame the ability of a Select Board to achieve its objectives. To be an active participant in financial policy-making, and to be effective in maintaining a sound financial position for the town, each Select Board member should have a basic understanding of the following areas:

  • Organization of local financial functions and responsibilities
  • Budgeting
  • Sources of revenue
  • Assessment administration
  • Proposition 2½
  • User fees
  • School finance
  • Capital budgeting and capital planning
  • Debt
  • Accounting and financial reporting
  • Cash management

Coordinating the activities of the various elected and appointed boards and officers involved in municipal finance is often a significant challenge for Select Board members.

The Division of Local Services offers excellent municipal finance guidance for town officials in its Municipal Finance Training and Resource Center, including its Resources for New Officials.

Finance Roles and Responsibilities

As the chief executive officer for the town, the Select Board should play a major role in formulating financial policy. Generally, the Select Board will participate in the town’s financial planning and budget process, provide leadership in the development of the capital improvement plan, and monitor the town’s financial performance. Select Board members should consult their town charter to understand the allocation of roles and responsibilities for finance and budgeting matters.

Professional staff, typically appointed by the Select Board, oversee the town’s day-to-day operations and finances. These appointees may include a town manager or administrator, a finance director, a town accountant, and a town treasurer.

Regarding specific finance activities, the Select Board should:

  • Participate in the budget process by developing budget guidelines, reviewing budgets, and evaluating proposals for expenditure of funds
  • Participate in broad policy development on issues that will have a major impact on town finances (e.g., a new school, authorization of debt, use of the stabilization fund)
  • Ensure the development of a capital improvement program
  • Monitor financial performance

The Select Board also has statutory authority for certain financial matters, including:

  • Signing bonds or notes when the town issues debt
  • Signing warrants for the payment of bills
  • Classifying property by use, for taxation purposes
  • Setting water and sewer rates and other fees, unless this authority is assigned by bylaw to another board or official
  • Placing a Proposition 2½ override or debt exclusion question on the ballot

Certain substantive areas of municipal finance are often the responsibility of other town boards or officials, but Select Board members should acquaint themselves with these areas in order to carry out their own responsibilities in making and coordinating financial policy and preserving a strong financial position for the town.

Finance Committee (or Advisory or Warrant Committee)

The finance committee — or, in some towns, the advisory or warrant committee — is a town’s official fiscal watchdog. Its primary, statutory responsibility is to advise and make recommendations to Town Meeting on the budget and other areas of finance. One of the finance committee’s most important functions involves making transfers from the town’s reserve fund (a contingency fund normally created as part of annual budget appropriations) to other line items in the budget for extraordinary or unforeseen occurrences.

While the finance committee plays a vital role, it is within the executive authority of the Select Board, and/or professional staff, to prepare the town’s budget. The board has ultimate responsibility to the residents for this service. The finance committee’s responsibility is to review the budget submitted to them and to make recommendations regarding the budget to the town’s legislative body: the Town Meeting.

Day-to-Day Financial Management

There are several key appointed positions that manage town finances on a day-to-day basis. The Division of Local Services offers online training and resources regarding the following positions:

Department Heads

As budgets have evolved from lists of projected expenditures to statements of programs, services and expected outcomes, department heads have become more central to the budget process. In most communities, department heads develop budget requests that describe the service impacts of proposed spending levels. Town Meeting expects department heads to justify their requests by linking departmental spending to program benefits.

Town Meeting

Town Meeting is the legislative body and appropriating authority of a town. As such, it approves the annual budget, thereby authorizing specific expenditures. Town Meeting must also approve the issuance of debt and the use of free cash. During the course of the fiscal year, special Town Meetings may be convened to refine the budget or to transfer funds. (See Chapter 4 for more on Town Meetings.)

Organization of Finance Functions

In recent years, communities across Massachusetts have moved from a fragmented structure of independently elected officials toward coordinated departments of municipal finance. Many have also chosen to appoint financial officers who traditionally had been elected and to combine the positions of treasurer and collector. Communities have several options to accomplish these changes.

Section 11 of Chapter 43C, a local-acceptance statute available to municipalities with populations below 150,000, was enacted in 1987 to authorize the creation of several consolidated municipal departments, including the department of municipal finance. Communities may bring the question of adopting a consolidated department to the voters via a petition of 10% of the municipality’s voters, or by a vote of the Select Board to place the questions before the voters.

The department of municipal finance would be instituted via adoption of a bylaw containing the following features:

  • The position of director of municipal finance would be established, to be appointed by the chief executive officer (Select Board or town manager/administrator).
  • The director of municipal finance may serve as auditor, accountant, comptroller, treasurer, collector, or treasurer-collector, but may not serve “as both accountant, auditor or comptroller and treasurer, collector or treasurer-collector.”
  • The director of municipal finance would be appointed for a term of three to five years.
  • The bylaw would describe the functions of the consolidated department, which may include the functions and responsibilities of all municipal finance offices (accountant, treasurer, etc.), purchasing, and information services. Towns would determine the extent of responsibilities of the department in the bylaw.
  • The director of municipal finance would appoint employees of a consolidated department, subject to approval of the appointing authority, unless the charter provides otherwise.
  • Such a bylaw may be adopted, revoked or rescinded only at an annual Town Meeting.

Another option to consolidate a department of municipal finance is the administrative organization provision of a home rule charter. Some of these provisions are detailed and establish a department structure within the charter, while others extend to the Town Meeting, via bylaw, a general authority to reorganize. Several charters include a specific provision for the creation of a division or department of finance.

Yet another route is submitting a special act, or home rule petition, to the Legislature to create a consolidated finance department or a department of budget and finance. Some of these acts include the functions of treasurer, collector and accountant, while others also include purchasing, information services, insurance administration, and coordination of the budget preparation process. While several include the assessing function, some retain the board of assessors as an independent board. Almost all of these acts call for the appointment of a finance director by the Select Board, referencing education, training and experience as criteria for selection.

Many special acts have been enacted in recent years changing the positions of treasurer and collector from elected to appointed status; in many instances, the positions are also combined. The vast majority of these acts allow incumbents to complete the terms for which they were elected before the appointment and consolidation of positions is effective. Several such acts also required local voter acceptance before the act’s provisions took effect.

The Budget Process

The process of developing and adopting a town budget typically starts in late summer or early fall and runs until the spring annual Town Meeting.

According to the Division of Local Services, major milestones in the budget process often include the following components:

  • A joint meeting of the Select Board, finance committee, and school committee to review revenue projections and reach consensus on overall expenditure levels, use of reserves, and allocation of resources generally
  • Distribution of budget guidelines to department managers so they can begin to prepare their appropriation requests
  • Deadlines for submission of departmental appropriation requests and for preparation of a working budget document
  • Completion of meetings with department managers to review requests
  • Adjustments to revenue projections
  • Formulation of the initial budget recommendation by the town manager/administrator, finance director, or finance committee (depending on government structure)
  • Budget approval by the Select Board
  • Budget review by the finance committee with a deadline to ensure the printing and distribution of the Town Meeting warrant in sufficient time for review by Town Meeting members and residents

These steps culminate in the presentation of an annual budget recommendation to Town Meeting.

“Throughout the process, decision makers should recognize and adhere to formal financial policies, such as those guiding the use of free cash and stabilization reserve funds and establishing debt levels,” the DLS states.

Division of Local Services guidance for town officials about the budget process includes:

Budget Formats

The Commonwealth does not prescribe a mandatory budget format for towns, therefore no two town budget documents are alike. The Department of Revenue’s Division of Local Services has determined, however, that towns may rely for guidance upon Section 32 of Chapter 44, which sets forth the budget format for cities. The DLS’s “Overview of the Municipal Budget Process and Key Concepts” also offers some general guidance.

Line-Item Budgets

A line-item budget presentation for each department will likely focus all attention on expenditures, not the results of expenditures. Monitoring expenses and appropriations at the line-item level will require vigilance to limit spending to each specific appropriation. Since every budget is a set of initial estimates, and because circumstances change during the year, reserve fund transfers and supplemental appropriations may be necessary to respond to mid-course corrections.

Categorical Budgets

A budget that groups department line items into categories, such as personnel services and other expenses, offers greater flexibility, but imposes somewhat rigid controls. Such specific Town Meeting appropriations within each department prevent the department head, town manager/administrator, or Select Board members from managing for results. The manager has no discretion to determine the most effective and efficient ways to achieve desired results and deliver services within the total amount of departmental resources.

Single-Appropriation Budgets

A budget format that presents a single appropriation amount for each department, or program, simplifies the process of monitoring and making adjustments during the year. Management can focus on delivering services, rather than on accounting details. In some instances, however, this format may grant more flexibility and authority than the Town Meeting wishes to convey.

Group or Departmental Appropriation Budgets

A budget presented and voted as appropriations for groups of departments, for broad programs, or even for the entire town government gives broad spending discretion to the Select Board and/or management team. Town Meeting must have confidence in the ability and commitment of these administrators to provide the level and quality of services promised by the budget. Group budgets should only be contemplated where the accounting system is capable of providing reports to monitor expenditure detail.

Maximum control is achieved by appropriating funds for “objects of expenditure,” or line items. Spending cannot exceed the amount appropriated for the specific item. Managers gain flexibility when appropriations encompass multiple line items or even multiple departments and programs. Such a system permits over-spending line items and even departmental budgets, as long as total expenditures do not exceed the amount appropriated.

The discussion of the tension between appropriation control and managerial flexibility applies only to non-educational budget elements.

Non-Departmental Budgets

Most towns separate budgetary items that are not the responsibility of any one department. These expenses include items such as employee benefits, including Medicare, retirement contributions and health insurance premiums, debt service, liability insurance, and requests such as reserve fund appropriations.

In general, the level of detail supporting these requests should reflect the magnitude of the request and its relationship to elements of the operating budget. As the cost of employee benefits has grown relative to wages, some towns allocate such costs to the appropriate operating departments or programs. If the budget request fails to relate benefit costs to department or program costs, an analysis is necessary to demonstrate the full cost of the department or program.

Off-Budget Items

There is a need to consider some items as part of the budget even though Town Meeting does not appropriate funds for such obligations. For example, a balanced budget must include Cherry Sheet assessments, court judgments, overlay reserves (for future property tax abatements), and deficits required to be raised in the next year’s tax rate.

Revolving Funds

A revolving fund receives its income from selling goods and services to users or participants in a program and expends funds to cover the costs of such goods or services. The intent is for such activities to break even financially, and the revolving fund is a mechanism that allows for fluctuations in levels of activity.

Revolving funds exist under specific statutory authority1 and operate without approval or appropriation by Town Meeting. Revolving funds are commonly used for park and recreation programs, school athletic programs, community adult education and continuing education programs, and school lunch programs. A revolving fund must be authorized annually by Town Meeting.

Adopting the Budget

To meet the minimum legal requirements for approving a budget, Town Meeting must vote appropriations for salaries and wages and for expenses of each town department. In addition, Town Meeting must vote each year to approve the salaries for elected officials.

In some instances, town bylaws may prescribe specific aggregations of line items for appropriation purposes. More typically, there is no such stipulation. Regardless of the details of each appropriation, Town Meeting must approve any transfers of funds between separate appropriations for all departments, except the town’s school appropriation.2 If Town Meeting appropriates a sum for a reserve fund, then the finance committee may transfer funds from this reserve to specific departments within statutory limitations.

School Budgets

Education is typically a town’s largest service, but state law limits Town Meeting’s latitude in setting the school budget, which is presented to Town Meeting as a single amount. Town Meeting has no authority to divide elements of the school department’s budget, make line-item amendments, or direct expenditures to specific purposes within the budget. Town Meeting can only vote on a bottom-line budget for the schools and cannot compel the school committee to spend this allocation for specific purposes. To pass a regional school budget, Town Meeting must appropriate the assessment proposed by the regional school district. An appropriation for any amount less than what the regional school proposes constitutes a rejection of the regional school budget.

Select Board members should strive to have open communication between the town and the school department to ensure that the town can comply with school spending requirements while staying within the revenue constraints of the state’s Proposition 2½ law. (See School Finance section below.)

Sources of Revenue

Forecasting anticipated revenues for the coming year establishes the framework for preparing a town budget. Towns primarily raise revenue from four sources: property taxes, state aid, local receipts, and other available funds.

Property Taxes

Taxing the value of real estate (land and structures) and personal property (equipment owned by commercial entities) accounts for the largest share of all local revenue, though the exact percentage of revenue from these sources varies widely among municipalities. The amount of property tax revenue a town can raise is governed by a state law known as Proposition 2½3, which limits the amount of property taxes that may be raised in any year to 2.5% of a community’s full assessed valuation and limits the total increase in the property tax levy to 2.5% (plus a factor for growth in the tax base resulting from new construction and improvements to existing properties). The law also allows for raising additional taxes through overrides and debt exclusions. (See more on Proposition 2½ below.)

Property taxes for each fiscal year are due quarterly (in towns that have adopted the local-option statute) or semiannually, on November 1 (subject to deferral if tax bills are sent out late) and May 1. In quarterly towns, preliminary tax payments are due on August 1 and November 1, with payment of the actual tax bill (after credit is given for the preliminary payments) in installments on February 1 and May 1 (if actual tax bills are mailed by December 31). Interest accrues on delinquent taxes at the rate of 14% per annum.

State Aid

Each year, the Department of Revenue issues a two-page document to every city, town and regional school district known as the Cherry Sheet. This document lists the various categories and amounts of state aid to be provided, as well as any offsets and charges from the state, county and special district assessments. Thus, the Cherry Sheet reflects state aid for the coming year, minus deductions for intergovernmental charges. The Cherry Sheets are updated regularly as the various state budget proposals are released and passed. (Note: Reimbursements from the Massachusetts School Building Authority are not shown on the Cherry Sheet, but can be found on the MSBA website.)

Cherry Sheet payments are generally made on a quarterly, semiannual or annual basis, depending on the aid category. Cherry Sheet charges are usually deducted from the quarterly payments.

Cities and towns can’t be absolutely certain of the levels of state aid they will receive until the state budget for the fiscal year, which begins on July 1, is enacted by the Legislature and signed by the governor. In order for the local budget process to proceed in an orderly fashion, reasonable revenue estimates must be made six to eight months earlier. Lacking firm estimates of state aid for the coming year, towns may use their current year’s Cherry Sheet as a starting point for estimating these revenues. In some years, the Legislature provides early information about the likely distribution of education aid (known as Chapter 70) and other state aid accounts (the largest of which is Unrestricted General Government Aid). There are a number of state aid accounts that can change significantly from year to year.

Local Receipts

Each town determines the extent to which programs and services will be supported by fees and charges. Towns may also levy and collect taxes and fees within the provisions of state statutes. Local receipts collected by the community include, but are not limited to, the following:

  • Motor vehicle excise
  • Water and sewer charges
  • Penalties and interest charges for services
  • Departmental revenue
  • License and permit fees
  • Fines and forfeits
  • Investment income
  • Hotel/motel tax (where adopted)
  • Meals tax (where adopted)

After local taxes, user fees and license and permit fees account for most local receipts. While a user fee cannot be a way of instituting a “hidden tax,” state law allows towns to establish user fees to recover all of the direct and indirect costs of providing certain services. Local receipts often account for as much as 20% of a town’s revenues. For purposes of setting the tax rate, estimated local receipts cannot exceed actual receipts for the prior fiscal year without Department of Revenue approval.

User Fees and Enterprise Funds

Property tax revenues derive from a tax rate and property values, with little or no link to the cost of specific government services. In contrast, user fees and charges support the provision of a specific municipal service, with the users paying for the service based on the cost of providing it. The Division of Local Services’ “User Fees” guide provides an overview.

An enterprise fund accounts for the income, expenses, assets and liabilities of financing specific services to the public, where the governing body intends to recover the costs of providing the services through user charges. Governmental units operate and finance these service activities in a manner similar to a private business or enterprise. Rates and user charges are established, either as part of the budget process or as a separate, formal rate-setting procedure to cover direct and indirect costs, including depreciation of assets, expenses, replacement or improvement of assets, and efforts to retain earnings for future capital investments. An Informational Guideline from the Division of Local Services provides more details.

Other Available Funds

Free cash,” also referred to as an unappropriated fund balance, is a factor in every budget cycle. The Department of Revenue certifies amounts of free cash resulting from closing the financial books as of June 30, the end of the fiscal year. Generally, the calculation incorporates the following:

  • Surplus revenue (revenue collections in excess of estimated revenues)
  • Budget turn-backs (unexpended appropriations)
  • Prior year’s free cash (the fund balance from last June 30 that had not been appropriated for the current year’s budget)
  • Outstanding property taxes from prior years that were collected

A town’s free cash, or “budgetary fund balance,” is funds that are unrestricted and available for appropriation. Town Meeting may appropriate from free cash during a given fiscal year, but depleting free cash may cause a community to face tighter financial times in the future. Because it is a one-time revenue source, it is best to avoid using free cash for the operating budget, and preferable to use it for one-time expenditures, such as equipment or capital projects.

Some communities maintain a more formal “rainy day” fund, called a stabilization fund (analogous to a bank account). Town Meeting can appropriate, or “make deposits,” into this fund for use at some future time. Although a stabilization fund is used mostly as a reserve to fund capital improvements, it can be used for any legitimate municipal purpose. A two-thirds majority at Town Meeting is necessary to appropriate to or from this fund.

Many financial advisors and rating agencies recommend that a town maintain a free cash and stabilization fund balance equal to at least 5% of total revenue. This level can serve as a reserve for use in financial emergencies. It is also used by the bond rating agencies in evaluating a community’s financial condition.

Miscellaneous revenue and other funds include federal and state grants, gifts, funds from the sale of assets, insurance proceeds in excess of $20,000, transfers from other town accounts (such as a parking meter fund), and other reserve accounts permitted by state law.

Assessment Administration

The board of assessors is responsible for overseeing real and personal property valuations, upon which the property tax, and property tax revenue, are based. Any delay or error in the valuation of property or the issuance of tax bills can result in the need to issue tax anticipation notes.

The Department of Revenue must certify that a town’s property valuations are at full value every three years. To comply with this mandatory certification requirement, towns must revalue their property so that it accurately reflects the market. Property assessment and revaluation don’t affect the town’s total tax levy, but often redistribute the tax burden. To make sure this is done fairly, the assessors must carefully evaluate the local real estate market. Property revaluation typically redistributes the tax levy among different types of residential property, different neighborhoods, and different classes of property (such as residential, industrial and commercial).

Assessors are responsible for carrying out a program of equalization on a continual basis in order to maintain assessments at full and fair cash value. Property may be reassessed during non-certification years to reflect full and fair cash value, provided that the resulting values are consistent within each property class, as well as among all classes of property. Interim year adjustments should be made when statistics demonstrate that assessments are not uniform throughout the community. The results of any equalization program should enable assessors to maintain fair and equitable assessments.

Classification of Property

Each year, the assessors must classify all real property within the town into one of four real property classes (residential, open space, commercial and industrial), using guidelines established by the Department of Revenue. The Select Board then adopts a residential factor, which determines the percentage of the tax levy to be borne by each class of real property and by personal property (movable goods and materials not affixed to real estate), according to a statutory allocation formula calculated by the Commissioner of Revenue (under Ch. 58, Sec. 1A). The formula establishes the limits within which a town may shift the tax burden from residential and open space property to commercial, industrial and personal property, to allow multiple tax rates.

Under a single tax rate system, if residential property totaled 81% of a community’s taxable property, and open space accounted for 4%, then 81% of the community’s tax levy would need to be raised by residential property taxes, 4% would be raised by open space taxes, and the remaining 15% would be raised by taxes levied on commercial, industrial and personal properties. State law, however, allows a town to increase the levy share of the commercial, industrial and personal property classes by as much as 50% in order to reduce the tax burden on residential and open space property, so long as the residential and open space classes raise at least 65% of what their share would be if the town had a single tax rate.

State law provides relief for those communities when the maximum shift results in a residential share that is larger than it was in the prior year. Those communities may increase the commercial/industrial share of the levy by as much as 75%, if the residential class would not be reduced to less than 50% of its single tax rate share by doing so. This residential share, however, cannot be less than the residential share in any year since the community was first certified at full and fair cash value.

The Select Board may also adopt an open space discount and may grant residential or small commercial exemptions as part of the classification process.4 Decisions on these exemptions must be preceded by a public hearing.

The Select Board may apply a discount of up to 25% to open space. The open space discount reduces taxes on property classified as open space and shifts those taxes onto residential property. The purpose of this discount is to encourage preservation of undeveloped land.

The Select Board may also grant a residential exemption of a dollar amount that cannot exceed 20% of the average assessed value of all residential class properties. The exemption reduces, by the adopted percentage, the taxable valuation of each residential parcel that is a taxpayer’s principal residence. Granting the exemption raises the residential tax rate and shifts a portion of the residential tax burden from moderately valued homes to apartments, summer homes and higher-valued homes. A residential exemption is one way that resort areas (such as Cape Cod and the Berkshires) can provide some tax relief for permanent residents.

Another option under classification is the small commercial exemption,5 for commercial parcels occupied by businesses with average annual employment of not more than 10 people during the previous calendar year and a value of less than $1 million. The Select Board may choose an exemption that reduces the taxable valuation of each eligible parcel by up to 10%. Qualifying small businesses are certified to the assessors annually by the Executive Office of Labor and Workforce Development. The exempted taxes are shifted to other commercial and industrial taxpayers through an increase in their tax rates.

Finally, a community may add water and sewer project debt service costs to its levy limit or levy ceiling for the life of the debt, as long as it reduces water and sewer rates by the same amount. The water and sewer debt exclusion is adopted by a majority vote of the Select Board and may include all or part of existing and subsequently authorized water and sewer debt, or just the residential share of that debt.

Setting the Property Tax Rate

A town’s tax rate is the amount of its annual property tax levy stated in terms of a unit of its tax base. To set a tax rate, a municipality must submit a “Tax Rate Recapitulation Sheet,” also called “the recap,” to the Division of Local Services’ Bureau of Accounts. The recap displays the town's entire budget plan for the fiscal year and summarizes all anticipated expenditures.

For more, visit the Division of Local Services’ Tax Rate Setting website.

Proposition 2½

Proposition 2½ does not limit appropriations, only property taxes, and no other statute requires that the local appropriating authority adopt an annual expenditure within a specified revenue figure. Since the levy limit, local receipts, state aid, and other revenues that support the budget are not fixed at the time the annual budget is adopted, compliance with Proposition 2½ cannot be determined until the tax rate is set several months into the new fiscal year. At that time, the budget must be balanced within the levy limit.

Overrides and Debt Exclusions

For prudent reasons, communities attempt to adopt expenditure budgets in the spring, within reasonable estimates of property tax and other revenues likely to be available for the year. Nevertheless, budgets with a higher level of appropriations than supported by estimated revenues could be in place at the beginning of the fiscal year. Appropriations are valid spending authority in such cases until they are rescinded by the local appropriating body. Departments may continue to spend at appropriated levels, even when spending cuts will probably be needed to bring the budget into balance. Alternatively, additional revenue may be sought by placing an override or debt exclusion before the voters. Approval of the referendum would bring the budget into balance and allow a tax rate to be set. Defeat of such a referendum, however, does not cause the rescission of the budget as a whole, or any particular appropriations made for the purposes described in the question. Difficulties can occur in resolving any differences in the spending decisions made by the appropriating body and taxing decisions made by the voters. This can create uncertainty in the delivery of municipal services and delays in setting the tax rate.

For more, visit the Division of Local Services’ Proposition 2½ and Tax Rate Process website, or see its publication “Levy Limits: A Primer on Proposition 2½.”

Contingent Appropriations

Towns can use another budgeting option that eliminates the need for Town Meeting to take further action on the annual budget or special purpose appropriations after a referendum. When voting specific appropriations, Town Meeting can decide that those appropriations will take effect only if additional property tax revenues to support them are approved by the voters (i.e., the appropriations are contingent upon later approval of a Proposition 2½ referendum question). Voter action on the referendum, which must take place within 45 days, then determines whether those appropriations are effective grants of spending authority for the year.

The use of contingent appropriations is governed by state law.6 Town counsel should be consulted for the proper wording of contingent appropriations and the timing of the election for voter approval of a referendum question to fund a contingent appropriation.

A contingent appropriation vote simply conditions the effectiveness of the appropriation on the approval of a referendum question within a certain time period. It does not place a question on the ballot. The power to place Proposition 2½ questions on the ballot rests solely with the Select Board in towns. The board may choose not to place a question on the ballot for any or all contingent appropriations voted by Town Meeting. The board can also decide to place a question on the ballot for an amount less than the contingent appropriation. In that case, approval of the question would make the appropriation effective only to the extent that the appropriation is funded.

A separate referendum question is not required for each contingent appropriation. The Select Board may include several appropriations within one question. Alternatively, the board can use so-called “menu” or “pyramid” approaches, if the appropriations are for operating, or other noncapital, purposes. The only limitation is that the purpose of each contingent appropriation that a referendum question is intended to fund must be described in the question in the same manner as the appropriation vote.

School Finance

The financing of K-12 public education is governed by a complex system of laws, regulations and funding programs that have a major impact on local revenues and the overall municipal budget. Not only is the school budget typically the largest item in the local general appropriations budget, it is also one of the most challenging to understand, analyze and explain to Town Meeting and to local voters.

The state and federal governments set rules for services, such as special education and vocational education, that must be provided and funded locally, and the state sets minimum levels for basic local educational spending. In addition to mandated spending, there is also significant discretionary spending on schools determined by local officials and voters that reflects local needs and priorities.

There are many different types of education programs with varying rules. Finance and procedural rules for school departments that are part of town government are different in many ways from the rules governing regional school districts. There are educational collaboratives that provide specialized services, and there are private residential and day schools for special education students. There are also rules governing programs that provide parents with educational options for their children, including charter schools, “school choice” and vocational education.

The end result is a complex finance landscape, with consequences for municipal and school budgets that can challenge even the most seasoned municipal official.

Chapter 70 and Local Contribution Requirements

The landmark Education Reform Act of 1993 established a school funding structure designed to ensure that all students have access to an adequate education as required by the Massachusetts Constitution.

The reform act, codified in part as Chapter 70 of the General Laws, established the “foundation budget,” which represents the minimum amount needed to provide an adequate education for all students. A separate “foundation budget” is calculated for each school district and updated annually to reflect inflation and changes in enrollment. Chapter 70 sets a minimum local revenue contribution for each city and town toward the foundation level of spending based on local wealth characteristics, with any remaining amount needed to reach the foundation spending level provided by Chapter 70 school aid — the largest source of state aid in municipal operating budgets.

Chapter 70 school aid and local contribution amounts for a fiscal year are typically calculated by the Department of Elementary and Secondary Education in early January to be included in the governor’s budget recommendation, which is filed in late January. The amounts reflect the operation of the law and sometimes changes that may be proposed as part of the governor’s budget recommendation. These amounts may be used to help prepare municipal and school budgets, although changes are often made during the legislative budget process in the spring that change local contribution and aid amounts. In some years, the Legislature provides a measure of certainty to the local budget process by adopting a Local Aid Resolution that commits the House and Senate to minimum school and local contribution amounts.

Chapter 70 school aid amounts are included on preliminary and final Cherry Sheets prepared by the Division of Local Services. The division releases preliminary Cherry Sheets beginning with the governor’s budget recommendation and updates them throughout the budget process until the final state budget is signed by the governor.

School Choice

The school choice program allows children to attend school in districts other than the district serving the city or town in which they reside.7 All districts with available “seats” must accept out-of-district students for the school year unless the local school committee adopts a resolution for that year withdrawing from the program.

Under the school choice law, a tuition amount for each student is deducted from the Chapter 70 school aid allocated to the sending district (where the child resides) and paid to the receiving district (where the child attends school). The tuition amount for a fiscal year is equal to 75% of the per student expenditure in the prior year, but not more than $5,000, except for special education students, for whom a special increment augments that tuition. The Department of Elementary and Secondary Education requires school choice tuition revenue received by a district to be deposited into a school choice revolving account, where the funds are then available for expenditure by the school committee without further appropriation.

Estimated tuition payments to receiving districts and estimates of assessments on sending districts are included on the town’s Cherry Sheet. The amounts may change over the course of the year as enrollments change and are finalized and special education amounts are finalized.

Charter Schools

State law8 authorizes the Board of Elementary and Secondary Education to grant charters to schools that are separate from standard municipal and regional schools. The board may grant a charter to a board of trustees for a school independent of the local school committee, called a Commonwealth charter school, or it may grant a charter for a school that is part of the local school district, called a Horace Mann charter school. There are three different types of Horace Mann schools.

Under the charter school statute, a tuition amount for each Commonwealth charter school student is deducted from the Chapter 70 school aid allocated to the sending district (where the child resides) and paid to the charter school that the child attends. Each Commonwealth charter school receives tuition payments from the sending school district based on a state-calculated tuition rate. The tuition includes separate foundation budget (operational) and facilities (capital) amounts. The foundation budget amount is calculated based on the foundation factors used for the distribution of Chapter 70 school aid, with certain exclusions. Each tuition rate is increased based on how much the local district spends above the foundation level of spending. Each tuition rate is further increased by a state-set per pupil capital spending amount. The state treasurer makes monthly payments to Commonwealth charter schools, funded by reducing each sending district’s Chapter 70 school aid allocation by a commensurate amount.

All students who reside in the local school district in which a charter school is located must be provided transportation by the district in the same manner that transportation is provided to district students in the same grade or as is required by the student’s individualized education program under the special education law.

Horace Mann charter schools are funded through the local school district under the terms of the school’s memorandum of understanding. The budget for a Horace Mann charter school, as acted on by the local school committee, may be spent by the charter school board of trustees as it sees fit without any further approval.

Estimates of charter school sending district assessments are included on the Cherry Sheet prepared by the Division of Local Services. The amounts may change over the course of the year, as enrollments are updated and finalized and as other parts of the charter school tuition calculation change. The charter school assessment is not subject to appropriation at the state or local level. It is the largest Cherry Sheet assessment item.

Under charter school law, municipalities and regional school districts are entitled to temporary reimbursement of a portion of the deducted Chapter 70 school aid used to pay tuition to charter schools. This amount, which is subject to state appropriation, is also included as a receipt on the Cherry Sheet. This line item can also change over the course of the year.

The regulations governing the charter school system can be found on the DESE website.

Out-of-District Vocational Education

Under Chapter 74, a local student may attend a vocational technical school district other than the municipal or regional district that serves the city or town where the student resides. If a city or town does not offer a particular vocational technical education program that a student desires, either in the local high school or in the regional vocational school, the student may attend, under a non-resident option, any vocational technical high school or other high school in the state that offers the program. The student’s municipality of residence must pay the vocational school a tuition fee set by the Department of Elementary and Secondary Education. If the student’s municipality of residence is a member of a local regional vocational school district, the tuition fee shall be paid by the district.

Under Section 8A of Chapter 74, the sending district must provide and pay for the transportation of the student. The district is entitled to state reimbursement to the full extent of the amount expended, subject to state appropriation.

Cherry Sheets do not include an assessment for tuition and transportation costs or a receipt item for any transportation reimbursements that may be appropriated in the state budget. These are separate revenue and expense items for the municipality or regional school district budget.

Students may also attend another vocational technical high school through the school choice program at a high school that accepts school choice students. Students attending another vocational technical high school under the school choice program can elect any vocational technical program offered by that school.

The regulations governing out-of-district vocational education can be found on the DESE website.

Special Education Circuit Breaker

State law9 provides for state reimbursement of a portion of the educational expenses for high-cost special education students, a provision commonly known as the Circuit Breaker Program.

The general rule is that for each student the state’s share is equal to 75% of educational expenses that exceed four times the state average per pupil foundation budget amount. For students without a parent or guardian living in the Commonwealth, and for any non-resident student placed in a school by certain state agencies, the state’s share is equal to 100% of instructional costs in excess of four times the state average per pupil foundation budget. Reimbursements are subject to state appropriation and are prorated in the event of underfunding. Transportation costs are not reimbursable under the Circuit Breaker Program.

There are special rules for administering circuit breaker finances. School districts must exclude the estimated reimbursement expected under this program when preparing a budget recommendation for the upcoming fiscal year.

Cherry Sheets do not include an assessment for tuition and transportation costs or a receipt item for any transportation reimbursements that may be appropriated in the state budget. These are separate revenue and expense items for the municipality or regional school district budget.

Reimbursements paid under this program are deposited in a Special Education Reimbursement Fund and may be spent by the school committee without further appropriation for any special-education-related purpose in the year received or in the following fiscal year. Districts are also permitted to pre-pay tuition crossing fiscal years.

In addition to the regular circuit breaker reimbursements, the “extraordinary relief” program provides assistance to districts experiencing a significant increase in their special education costs. Under this program, districts may file an additional claim form in February for the current year’s estimated expenses. If the expenses have increased by 25% or more over the prior fiscal year, then the district will be eligible for an additional extraordinary relief payment to help fund the increase.

Circuit breaker claims are audited by the Department of Elementary and Secondary Education, and adjustments are made to future payments in the event of disallowed costs.

Capital Planning and Budgeting

Planning for and financing the replacement of a town’s infrastructure is an enormous task that requires active involvement by the Select Board. Evaluating assets and their expected useful lives, projecting replacement costs, examining financing options, determining bonding levels, estimating user fees and tax levies and evaluating the impact on property owners are all important steps in the process. The “Capital Improvement Planning Guide” from the Division of Local Services will help Select Board members understand this process.

Municipal Debt

Although debt issuance is the responsibility of the treasurer, Select Board members should understand the process because of its long-term impact on town finances. This understanding will help board members evaluate the variety of debt financing options and policies available to the town. By working closely with the treasurer during the debt planning and issuance process, the board can develop plans and policies that are consistent with the town’s budgetary constraints and financial policies. The “Understanding Municipal Debt” guide from the Division of Local Services will help Select Board members understand the municipal borrowing process.

Other Post-Employment Benefits (OPEB)

Employees of towns are often eligible for certain benefits after their employment has ended. A pension is the most common type of post-employment benefit. The term “other post-employment benefits” (OPEB) covers all retiree benefits other than pensions. For eligible town employees, this would include both health and life insurance benefits. In some cases, OPEB may also include an eligible spouse or a surviving spouse. Eligibility for retiree benefits are defined in Chapters 32 and 32B.

Towns may establish an OPEB Trust, which is designed to hold the funds needed to cover the future benefits due its retirees. (The Division of Local Services has published an FAQ document on OPEB Trust Funds.)

Plan assets are:

  • Segregated from other town funds and restricted in their use
  • Dedicated to providing plan benefits to retirees and beneficiaries
  • Legally protected from creditors

In addition, town contributions to the trust are irrevocable.

An actuarial valuation of a town’s OPEB liability must be performed every two years.

Financial Accounting and Reporting

An accounting system documents financial transactions and is the basis for meaningful financial reports. Financial reports summarize town revenues and expenditures and allow Select Board members to evaluate financial performance.

Accountants and auditors in the Commonwealth currently use either one of two accounting systems or both systems at the same time.

The statutory system is the older of the two recommended accounting systems. It uses a single fund (i.e., one general ledger) to record all transactions that occur during the course of the year. While the statutory system is allowed, it is no longer recommended.

The Commonwealth’s Uniform Municipal Accounting System is a multi-fund accounting system, based on the national Generally Accepted Accounting Practices for governmental units. Because GAAP principles are accepted and used nationally, it is possible to understand the figures and compare them to those from any other municipality. This accounting system recognizes the variety of activities performed by a municipality in several funds.

Town accountants are increasingly sensitive to national governmental accounting models. While UMAS continues as a guide, the state also looks to outside agencies, such as the Governmental Accounting Standards Board to establish the principles of accounting and reporting to be followed in Massachusetts. Over the last 20 years, GASB has issued several “statements” requiring outside auditors to include such financial findings as fixed-asset reporting, management financial summary statements, and other post-employment benefits analysis. Select Board members should be aware of these findings in their audits and understand what they mean for their communities.

Financial Reporting

The basic elements of the accounting system — general ledger, general journal, and detailed subsidiary ledgers for revenues and expenditures — must be maintained and kept up-to-date, since they are the foundation of monitoring appropriations and revenues and preparing financial reports. This is the responsibility of the town accountant or comptroller.

Some important financial reports that Select Board members should monitor include a year-end balance sheet, monthly budget reports, and audited financial statements. The balance sheet shows a town’s financial position at the end of the fiscal year, summarizing assets, liabilities and fund equity, and it is used by the Department of Revenue to calculate a town’s free cash. Many communities have systems that produce monthly reports that show expenditures by department and purpose in relation to budgeted amounts. This type of report can be used by the Select Board or finance committee to monitor spending, in order to ensure that the budget is not exceeded.

Schedule A is a statement of revenues, expenditures, fund balances and other financing sources and uses. It is prepared at the end of the year for the most recently completed fiscal year, sent to the Department of Revenue, and entered into the Municipal Data Bank. Information from the Data Bank can be used to compare spending patterns, revenue structures, and financial position across communities. Information from Schedule A is used by the Legislature, the U.S. Census Bureau, and local government officials interested in analyzing the scope of services provided and using the data to help make policy decisions.

Municipal Audits

An audit is an independent examination of a municipality’s financial transactions and accounts to determine whether a town’s financial statements are “fairly presented.” The audit process involves a review of fiscal procedures and controls, the establishment of audit scopes, the conduct of tests, and independent confirmation and calculation of assets and liabilities.

Independent annual audits in Massachusetts have been commonplace since the mid-1970s. Audits are mandated by the federal government for those communities receiving in excess of a specific amount of federal aid. In addition, the bond market expects audited financial statements to support debt sales, and bond-rating agencies rely on audited financial statements when assigning a bond rating to a community. The “Annual External Audits” guide from the Division of Local Services provides more detail.

Cash Management

Cash operations involve the procedures by which money is collected, deposited into a bank, and disbursed to pay salaries and other operating expenses of town government. These activities are the statutory responsibility of the town treasurer. The “Cash Flow Forecast And Short-Term Borrowing” guide from the Division of Local Services provides more detail.


Finance Roles and Responsibilities

Day-to-Day Financial Management

Consolidated Department of Municipal Finance

The Budget Process

State Aid

User Fees and Enterprise Funds

Other Available Funds

  • Free cash, Division of Local Services, January 2020

Setting the Property Tax Rate

Proposition 2½

School Choice

Charter Schools

Out-Of-District Vocational Education

Special Education Circuit Breaker

Capital Planning and Budgeting

Municipal Debt

Other Post-Employment Benefits (OPEB)

Financial Accounting and Reporting

Municipal Audits

Cash Management

MMA's Handbook for Massachusetts Select Boards: Chapter 6: Last Updated: January 19, 2024
MMA's Handbook for Massachusetts Select Boards: Last Updated: March 25, 2024