AN INTRODUCTION TO LOCAL GOVERNMENT BUDGETS: A Guide for Planners

Transcription

1 AN INTRODUCTION TO LOCAL GOVERNMENT BUDGETS: A Guide for Planners Lincoln Institute of Land Policy Workshop on Curriculum for Graduate Planning Programs: The Nuts and Bolts of Development Finance Prepared by: Jack R. Huddleston, Ph.D. Professor of Urban and Regional Planning University of Wisconsin-Madison 925 Bascom Mall-Old Music Hall Madison, Wisconsin USA jrhuddle@wisc.edu July 2005

2 AN INTRODUCTION TO LOCAL GOVERNMENT BUDGETS: A Guide for Planners 1 I. Introduction and Overview Planners are not ordinarily involved in the budget process of local governments, other than preparing a budget for planning operations. The task of preparing and adopting a local government s budget often falls under the responsibilities of finance departments, executive offices and local legislative bodies, such as city councils, school boards, and so forth. It is the local government s budget that determines what public priorities will be addressed each year and how public funds will be generated and who will pay. Most often, the local government budget reflects the overall health of the local economy and is the place where public scrutiny is focused. Headlines announcing local tax rates for the upcoming year or deteriorating conditions of local public infrastructure or services (as examples) often receive special attention in local newspapers. Although planners are not directly involved in developing and adopting local government budgets, actions that they take and planning decisions that are made often can play a significant role in the overall economic health of a local government. For example, decisions to zone land for residential rather than commercial purposes can alter the property tax revenues generated for a city and the mix of public infrastructure and services that must be provided. Of equal importance, the overall condition of a local government s budget may constraint actions that planners propose for the development or redevelopment of a city, or conservation of important natural resources. For example, large amounts of outstanding debt may hinder the amount of new public infrastructure that can be provided in support of new development that is proposed or alter the way new infrastructure is financed. 2 The purpose of this paper is to present planners with a guide to the local government budget. Although local government budgets vary across the U.S. and within individual regions, this paper will discuss the general composition of local government budgets in terms of common expenditures and revenues, the process by which local government budgets are commonly 1 This paper has been commissioned by the Lincoln Institute of Land Policy. All errors or omissions are solely the responsibility of the author. 2 See Jack Huddleston, The Intersection between Planning and the Municipal Budget (2005a) for a discussion of how planning and the local budget are connected. 1

3 developed and approved, and the outcomes of the local government budget process. The purpose of the paper is not to be a primer on budgeting, but rather a primer on the fiscal side of planning. In particular, this paper strives to lay a foundation of what is involved in the local government budget so that planners can anticipate the fiscal impacts of actions that they take or propose, or, can find creative ways to finance important local development, redevelopment or conservation efforts. As a primer, this paper will not delve too deeply into any single area, but will lay sufficient groundwork to suggest more detailed papers that will follow as part of the broader Lincoln Institute fiscal planning effort. II. Overview of Local Government Budgets As discussed by David Amborski (2005), local governments are as diverse across the U.S. as the people represented by these governments. In any given area, a plethora of local governments normally exist, including general purpose governments that are intended to provide a wide range of public goods and services, and special purpose governments that provide a specific public good or service. There are governments representing cities and governments representing rural areas. There are some governments, for instance counties, that represent both cities and rural areas. In some states, municipal governments provide public education, while in others education is provided through a special purpose government separate from municipal government. Not surprisingly then, local government budgets display diversity as well. Having acknowledged this diversity, however, it can be said that the general purpose of the local government budget is the raising and spending of public money (Petersen and Strachota 1991: p.1). In many general purpose local governments, the budget is composed of three separate, but connected parts: (1) annual operating budget; (2) capital budget; and (3) the enterprise or utilities budget. The annual operating budget lays out the anticipated spending that will be done by all municipal agencies during the upcoming year. Here, for example, spending for public safety, planning and development, social services, and so forth are identified. The annual operating budget also lays out the revenues that are expected to by received by the local government during the upcoming year. Here, for example, intergovernmental revenues such as state or federal aids are identified, as are special charges for services such as use of public facilities (e.g. golf courses) 2

4 or public approvals (e.g. impact fees). Most importantly, the annual operating budget identifies the amount of property tax revenue that will be (hopefully) collected during the upcoming year. The capital budget reflects anticipated expenditures on needed infrastructure projects that will have a useful life that extends into the future. The capital budget is the result of a major planning exercise that can be extensive and shows the amount of spending that will occur on capital items during the upcoming year and the revenues that will be used to finance these expenditures. 3 General purpose local governments often break out public services that have identifiable beneficiaries into separate enterprises or utilities. For example, municipal water is supplied to 4 specific homes or businesses and public charges for water use can be tied to specific customers. Local government enterprises often are self-financing, that is, annual revenues cover annual costs, but also can commonly receive an operating subsidy from the general local government budget. Revenues of local government enterprises, thus, can be composed of both user charges and general purpose revenues (such as property taxes). At an accounting level, local government budgets are typically described by their expenditures and by their revenues. On the expenditure side, local government budgets can be described either by function (e.g. public safety) or by type of input (e.g. labor costs). Revenues of local government budgets are commonly categorized into three parts: (1) own source, that is, revenues generated by individuals or companies within their boundaries; (2) external, that is, funds coming from other governments or individuals or companies outside their boundaries; or (3) debt. The following section presents national data on various local governments expenditures and revenues for the most recent decade using the above conventions. This information, while not exciting, provides the basic foundation from which to build planners understanding of local government finance. 3 See Vicki Elmer, Capital Improvement Budgeting and Finance (2005) for a discussion of the broad capital budget and planning process. 4 Water supply is an example of a public good that may be provided as a part of the bundle of services provided by a general purpose government (and paid for through general revenues) or as a specific service provided by a special purpose government (and paid for through user charges). 3

5 III. Recent Trends in Local Government Budgets The U.S. Census Bureau has identified over 87,000 local governments in the U.S. that fall in one of five general categories. Table 1 reports the number of local governments and provides a brief description of the type of government in each category. TABLE 1. Number and Description of U.S. Local Governments by Major Category Category Number Description Counties 3,043 Provide general government services. Exist in all states except Connecticut and Rhode Island and the of Columbia. Include boroughs in Alaska and parishes in Louisiana. Municipalities 19,372 Provide general government services to defined population concentrations. Include cities, boroughs (except Alaska), villages and towns (except New England states, Minnesota, New York and Wisconsin). Townships 16,629 Provide general government services to areas without population concentrations. Include towns in New England states, Minnesota, New York and Wisconsin and townships in eleven other states. Special s 34,683 Provide a single or limited number of designated services and have sufficient administrative and fiscal autonomy to qualify as independent governments. School s 13,726 Provide public elementary, secondary and/or higher education and have sufficient administrative and fiscal autonomy to qualify as independent governments. Excludes school districts that are administered as part of county, municipal, township or state government. SOURCE: U.S. Census Bureau, Census of Governments ( class_ch3.html), (2005). Table 2 shows the revenues collected by the various types of local governments across the 5 U.S. for fiscal year budgets ending in the year 2002, the most recent data available. All 87,000 local governments collected over $1.1 trillion in Schools collected the most revenues in 5 All data reported in this section is available from the U.S. Census Bureau, Census of Governments. Specific website addresses are shown at the bottom of each table. 4

6 2002, followed closely by municipal and county governments. Townships and special districts which collectively accounted for 59% of total local government units, accounted for only 14% of total revenues raised by all local governments. Total revenue from all sources for each type of government is composed of: (1) general revenue that is generated from each type of government s taxes, charges or other miscellaneous revenues, (2) transfers of funds from other governments, and (3) revenues that are generated by enterprises or utilities associated with each type of government. While Table 2 provides the basic information on local government revenues for the most recent year, it is generally easier to understand the relative importance of each type of revenue when Table 2 is translated into percentages. Table 3 does this, by presenting each revenue as a percentage of total revenues from all sources for each type of local government. In municipalities, townships and counties the general revenues generated directly by the local government (own source) provide the majority of all revenues available to the government, ranging from 59% of all revenues for municipalities to 73% for townships. Schools and special districts receive less than half of their total revenues from own source general revenues, ranging from 43% for schools to just below 50% for special districts. Intergovernmental general revenues provide about one-fourth of all revenues for general purpose local governments. This type of revenue is considerably more important to schools and special districts. Schools for example, get nearly 60% of their total revenues from intergovernmental transfers and special districts over one-third of their total revenues. It is of some interest that of all intergovernmental transfers to local governments, the largest share comes from state government; transfer of funds from the federal government is relatively small (4%), with the exception of federal payments to special districts. Segregated (non-general) funds generated by enterprises and utilities play a significant role for special districts and municipalities, but only a minor role for other local governments. In terms of general, own source revenues generated by the various local governments, property taxes are the single largest source of revenues for all local governments, except special districts. Thirty four percent of all school revenues are produced by the property tax and over 50% of all township revenues are produced via the property tax. Municipalities and counties also rely heavily upon the property tax, raising about 20% of their total revenues this way. The sales tax, either general or specific to selected commodities, is a significant source of revenue for 5

7 TABLE 2. Local Government Revenues by Type of Government: $ 1,000s Municipal Township Special County School Total All Local Governments Total revenue: all sources 337,432,406 35,430, ,727, ,661, ,002,038 1,107,253,234 General revenue: own sources 200,431,056 25,892,248 61,751, ,035, ,248, ,359,026 Taxes 119,994,938 20,556,919 14,680,632 89,747, ,750, ,730,209 Property 58,301,633 18,833,577 10,254,320 62,060, ,969, ,419,295 Sales & gross receipts 35,508, ,385 3,652,021 19,733,304 2,652,544 61,679,232 General sales tax 21,544, ,627,559 15,698,632 2,450,909 43,321,430 Selective sales tax 13,964, ,186 24,462 4,034, ,635 18,357,802 Motor fuel 311, ,399 1,076,213 Alcohol 230, , ,948 Tobacco 122, , ,847 Public utilities 8,604,566 49,544 1,150, ,635 10,005,774 Other 4,694,715 82,628 24,462 1,932,215 6,734,020 Individual income tax 12,131, ,594 3,306,467 1,157,308 17,161,561 Corporate income tax 3,028,725 3,028,725 Vehicle license tax 508,365 31, ,461 1,333,522 Other taxes 10,516, , ,291 3,854, ,651 17,107,874

8 TABLE 2. Local Government Revenues by Type of Government: (continued) $ 1,000s Municipal Township Special County School Total All Local Governments Charges & misc. general revenue 80,436,118 5,335,329 47,070,842 68,288,193 26,498, ,628,817 Charges 52,089,059 3,216,866 36,972,845 46,970,032 14,132, ,381,745 Education 563, ,529 1,113 2,359,133 14,132,943 17,234,505 Institutions of higher education 230,394 1,113 1,278,533 5,366,691 6,876,731 School lunch sales (gross) 229, , ,611 4,978,555 5,936,660 Hospitals 6,210,433 62,142 16,990,208 18,238,771 41,501,554 Highways 1,225,173 11,437 1,308, ,606 3,106,144 Air transportation (airports) 5,617,759 20,880 3,758,792 2,141,570 11,539,001 Parking facilities 1,197,738 27,272 66, ,430 1,402,151 Sea & inland port facilities 829,346 3, , ,111 1,949,262 Natural resources 850, ,365 Parks & recreation 3,395, ,334 1,158, ,720 5,820,048 Housing & com. development 1,504,576 17,682 2,079, ,940 3,766,485 Sewerage 17,811,931 1,364,565 4,652,488 3,226,638 27,055,622 Solid waste management 5,638, ,255 1,011,848 3,681,274 10,820,368 Other charges 8,094, ,534 4,177,776 15,290,839 28,336,240

9 TABLE 2. Local Government Revenues by Type of Government: (continued) $ 1,000s Municipality Township Special County School Total All Local Governments Misc. general revenue 28,347,059 2,118,463 10,097,997 21,318,161 12,365,392 74,247,072 Interest earnings 12,480, ,407 6,760,196 10,928,199 4,261,540 35,210,758 Special assessments 1,893, ,636 1,016,397 1,540,660 4,660,663 Sale of property 699,734 55, , ,901 1,348,405 Other general revenue 13,272,939 1,072,908 1,946,146 8,631,401 8,103,852 33,027,246 Intergovernmental general revenue 85,114,204 7,886,401 31,428,154 98,647, ,544, ,620,884 From federal government 15,201, ,084 16,163,305 7,539,429 3,631,796 42,952,953 From state government 62,405,346 6,645,510 8,588,730 86,759, ,145, ,543,986 From local government 7,507, ,807 6,676,119 4,349,209 4,767,291 24,123,945 Enterprise & other non-general revenue 55,180,221 1,597,065 30,554,052 3,832,904 91,164,242 Water supply utility 20,626, ,214 8,581,022 2,867,203 33,047,385 Electric power utility 26,827, ,339 16,705, ,541 44,301,674 Gas supply utility 4,607,663 7,958 1,105,086 29,295 5,750,002 Transit 2,726, ,162, ,049 7,287,920 Other (liquor store revenue) 391, , ,261 Insurance trust revenue (3,293,075) 54,627 (6,539) (855,182) 209,251 (3,890,918) SOURCE: U.S. Census Bureau; October 13, 2004 (Rev. October 14, 2004).

10 TABLE 3. Percentage Composition of Local Government Revenues by Type of Government: Percentage (%) Municipal Township Special County School Total All Local Governments Total revenue: all sources General revenue: own sources Taxes Property Sales & gross receipts General sales tax Selective sales tax Motor fuel Alcohol Tobacco Public utilities Other Individual income tax Corporate income tax Vehicle license tax Other taxes

11 TABLE 3. Percentage Composition of Local Government Revenues by Type of Government: (continued) Percentage (%) Municipal Township Special County School Total All Local Governments Charges & misc. general revenue Charges Education Institutions of higher education School lunch sales (gross) Hospitals Highways Air transportation (airports) Parking facilities Sea & inland port facilities Natural resources Parks & recreation Housing & com. development Sewerage Solid waste management Other charges

12 TABLE 3. Percentage Composition of Local Government Revenues by Type of Government: (continued) Percentage (%) Municipality Township Special County School Total All Local Governments Misc. general revenue Interest earnings Special assessments Sale of property Other general revenue Intergovernmental general revenue From federal government From state government From local government Enterprise & other non-general revenue Water supply utility Electric power utility Gas supply utility Transit Other (liquor store revenue) SOURCE: U.S. Census Bureau; October 13, 2004 (Rev. October 14, 2004).

13 municipalities and counties, raising from 8-10% of total revenues in both types of government. The individual income tax raises a relatively small amount of revenues for municipalities, but not other types of local government, and the corporate income tax produces virtually no local government revenue across any of the local governments. 6 Charges for public services such as parking, schools, and so forth constitute about 21% of all revenues generated by local governments, with special districts relying more heavily than other local governments on this source of revenue (30%). It is important to note that the category housing and community development that contains impact fees generated by local governments, represents a very small proportion of all revenues for all local governments. Tables 2 and 3 are snapshots of revenues received by the various types of local governments in the most recent fiscal year for which data is available, Table 4 compares the revenues for all local governments in fiscal year to the total for all local governments shown in Table 2. All amounts shown in Table 4 are in current dollars, that is, they have not been adjusted for the impacts of inflation. Over the ten year period, , total revenues for all local governments grew 69% above their 1991 levels. Important local revenue sources growing less rapidly than total revenues included property taxes, 56%, and revenues from enterprises, 61%. Revenues associated with housing and community development, including impact fees, increased by only 35% over the 10 year period. Important local revenue sources growing faster than total revenues included intergovernmental transfers from state (80%) and federal (114%) governments, and general and selective sales taxes, 86% and 78% respectively. It is of some interest that although special assessments are a relatively minor individual source of revenues to local governments, they grew by 91% over the period. Turning to the spending side of local government budgets, the need to have balanced local budgets means that spending for the various types of local governments closely matches the amount of revenues collected by these governments. Table 5 reports the amount of local government spending by functional area for the various types of local government in the fiscal year. As would be expected, schools are responsible for the majority of educationrelated spending and municipalities, townships and counties the majority of other spending. As 6 While certain revenue sources may not be significant sources of revenue on average across all local governments, they may be significant in specific local circumstances. 12

14 TABLE 4. Growth in Local Government Revenues: All Local Governments: $1,000s % Change Total revenue: all sources 655,215,792 1,107,253, General revenue: own sources 361,086, ,359, Taxes 228,679, ,730, Property 172,973, ,419, Sales & gross receipts 33,595,859 61,679, General sales tax 23,267,024 43,321, Selective sales tax 10,328,835 18,357, Motor fuel 705,215 1,076, Alcohol 291, , Tobacco 193, , Public utilities 5,710,224 10,005, Other 3,428,409 6,734, Individual income tax 10,642,945 17,161, Corporate income tax 2,029,016 3,028, Vehicle license tax 843,570 1,333, Other taxes 8,594,774 17,107, Charges & misc. general revenue 132,407, ,628, Charges 85,363, ,381, Education 10,128,374 17,234, Hospitals 25,301,105 41,501, Highways 1,758,912 3,106, Air transportation (airports) 5,303,591 11,539, Parking facilities 982,742 1,402, Sea & inland port facilities 1,949,262 Natural resources 417, , Parks & recreation 3,133,807 8,820, Housing & com. development 2,788,749 3,766, Sewerage 15,550,043 27,055, Solid waste management 6,307,115 10,820, Other charges 13,691,964 28,336, Misc. general revenue 47,043,465 74,247, Interest earnings 28,954,526 35,210, Special assessments 2,441,139 4,660, Sale of property 562,187 1,348, Other general revenue 15,085,613 33,027, Intergovernmental general revenue 217,996, ,620, From federal government 20,106,789 42,952, From state government 197,889, ,543, From local government 24,123,945 Enterprise & other non-general revenue 56,672,597 91,164, Water supply utility 19,340,419 33,047, Electric power utility 29,165,235 44,301, Gas supply utility 3,050,759 5,750, Transit 4,540,151 7,287, Other (liquor store revenue) 576, , NOTE: All dollar amounts shown are in current year dollars (i.e. not adjusted for inflation). SOURCE: U.S. Census Bureau; October 13, 2004 (Rev. October 14, 2004); and March 30, 2001 (Rev. July 10, 2001). 13

15 TABLE 5. Local Government Expenditures by Type of Government: $ 1,000s Municipal Township Special County School Total All Local Governments Total expenditure 366,964,130 36,223, ,072, ,604, ,155,100 1,155,020,011 Direct expenditure by function 296,150,580 32,551,904 71,220, ,040, ,478,491 1,009,441,630 Education services 38,621,489 9,788,106 2,283,864 38,242, ,439, ,374,718 Elementary & secondary 34,591,660 9,326, ,595 32,401, ,481, ,007,992 Capital outlay 3,736,887 1,124, ,701 3,788,705 43,848,017 52,660,805 Higher education 700,115 4,062 3,866,785 20,957,705 25,528,667 Capital outlay 1, ,724 1,957,058 2,282,743 Libraries 3,329, ,402 2,073,207 1,973,736 7,838,059 Social services & income maintenance 25,470, ,400 20,416,639 72,765, ,281,344 Public welfare 9,713, , ,796 29,546,613 39,694,663 Cash assistance payments 1,451,736 49,000 7,467,631 8,968,367 Other public welfare 8,262, , ,796 22,078,982 30,726,296 Hospitals 9,898,801 68,395 17,752,351 22,562,778 50,282,325 Capital outlay 790, ,373,898 1,002,607 3,166,980 Health 5,848, ,576 2,444,492 20,656,210 29,295,174 Other 9,182 9,182

16 TABLE 5. Local Government Expenditures by Type of Government: (continued) $ 1,000s Municipality Township Special County School Total All Local Governments Transportation 31,508,962 4,101,333 8,302,412 19,345,862 63,258,569 Highways 22,068,621 4,051,706 1,840,026 16,259,001 44,219,354 Capital outlay 10,011, , ,789 5,233,091 16,898,143 Airports 6,972,890 22,402 5,266,232 2,777,327 15,038,851 Parking facilities 986,592 17,361 48,680 70,215 1,122,848 Sea & inland port facilities 1,183,386 9,535 1,147, ,777 2,556,172 Transit subsidies 297, , ,344 Public safety 59,366,613 4,869,227 3,047,672 35,749, ,033,289 Police protection 36,282,990 2,877,348 15,923,958 55,084,296 Fire protection 17,627,391 1,704,472 3,047,672 3,598,457 25,977,992 Corrections 2,959,706 2,473 15,253,320 18,215,499 Capital outlay 210, ,205,835 1,416,105 Protective inspection & regulation 2,496, , ,042 3,755,502

17 TABLE 5. Local Government Expenditures by Type of Government: (continued) $ 1,000s Municipal Township Special County School Total All Local Governments Environment & housing 56,464,951 4,254,445 25,208,831 18,953, ,882,167 Natural resources 353,033 55,912 2,451,745 2,551,200 5,411,890 Capital outlay 161,197 14, , ,537 1,480,927 Parks & recreation 15,523,572 1,100,213 3,136,932 5,382,439 25,143,156 Capital outlay 4,454, , ,388 1,962,741 7,610,574 Housing & com. development 12,486, ,465 12,313,009 2,698,418 27,827,442 Sewerage 18,526,918 1,453,738 6,156,923 4,051,103 30,188,682 Capital outlay 6,908, ,317 2,236,621 1,616,042 11,168,846 Solid waste management 9,574,878 1,315,117 1,150,222 4,270,780 16,310,997 Capital outlay 709,225 58, , ,506 1,334,330 Government administration 21,362,221 3,003,904 28,511,381 52,877,506 Financial administration 6,605,230 1,024,846 6,081,255 13,711,331 Judicial and legal 3,676, ,698 12,874,720 16,820,018 General public buildings 3,795, ,964 3,780,180 8,264,415 Other government administration 7,285,120 1,021,396 5,775,226 14,081,742 Interest on general debt 15,784, ,621 6,814,962 11,287,141 9,035,289 43,876,356 Other general expenditures 31,527,246 4,628,846 4,550,639 18,765,036 59,471,767

18 TABLE 5. Local Government Expenditures by Type of Government: (continued) $ 1,000s Municipality Township Special County School Total All Local Governments Insurance trust expenditure 16,044, , ,594 4,419,045 1,004,202 22,385,914 Unemployment compensation 149,476 Employee retirement 15,894, , ,594 4,419,045 1,004,202 22,236,438 Enterprise expenditures 62,488,346 1,789,517 49,196,965 5,914, ,388,838 Capital outlay 11,142, ,860 11,872,064 1,708,847 25,083,200 Water supply 24,019,166 1,185,733 11,123,621 3,812,319 40,140,839 Electric power 25,955, ,264 17,565, ,137 44,263,358 Gas supply 4,595,968 8,338 1,071,732 35,168 5,711,206 Transit 7,917,922 11,182 19,435,945 1,908,386 29,273,435 Intergovernmental expenditure 8,325,204 1,881,657 1,655,252 12,650,821 1,676,609 26,189,543 SOURCE: U.S. Census Bureau; October 13, 2004 (Rev. October 14, 2004).

19 with local government revenues, the composition of local budgets can best be understood by examining the percentage distribution of total spending across the various functional categories. This is reported in Table 6. As shown in Table 6, the largest share of total general spending (16%) is associated with public safety in the case of municipalities, followed closely by expenditures on environment and housing (15%). Municipalities also make 17% of their total expenditures operating their various enterprises and utilities. Townships spend approximately one-fourth (26%) of their total spending on elementary and secondary education, and about one-half this amount on transportation, public safety, and environment and housing. County governments allocate about one-fourth of their total spending to social services and income maintenance. Education, transportation, public safety, and environment and housing each represent about 10% of total county spending. Table 7 compares spending by function for all local governments in fiscal years and Again, all dollar amounts shown in Table 7 are in current year dollars, meaning that the effect of inflation has not been removed. Total expenditures for all local governments increased by 76% over the ten year period. Local government expenditures for cash assistance to households and individuals actually decreased over the ten year period. Expenditures for transit subsidies and public welfare increased over the ten year period, but at rates considerably below total spending (33% and 36% respectively). Local government expenditures for transportation, housing and community development, and public safety increased at about the same rate as overall expenditures. The local government functions experiencing some of the greatest growth over the period included elementary and secondary education (81%), natural resources (84%), and parks and recreation (89%). Table 8 looks at local government budgets from a different perspective. Here the purpose of the local government expenditure is identified, rather than the agency (or function) making the expenditure. As shown in Table 8, about 40% of all direct local government expenditures in was for salaries and wages. Another 15% of all direct expenditures was used for capital projects (such as infrastructure improvements). A relatively small share of total direct 7 Direct expenditures do not include intergovernmental expenditures, but do include enterprises and utilities. 18

20 TABLE 6. Percentage Composition of Local Government Expenditures by Type of Government: Percentage (%) Municipal Township Special County School Total All Local Governments Total expenditure Direct expenditure by function Education services Elementary & secondary Capital outlay Higher education Capital outlay Libraries Social services & income maintenance Public welfare Cash assistance payments Other public welfare Hospitals Capital outlay Health Other

21 TABLE 6. Percentage Composition of Local Government Expenditures by Type of Government: (continued) Percentage (%) Municipality Township Special County School Total All Local Governments Transportation Highways Capital outlay Airports Parking facilities Sea & inland port facilities Transit subsidies Public safety Police protection Fire protection Corrections Capital outlay Protective inspection & regulation

22 TABLE 6. Percentage Composition of Local Government Expenditures by Type of Government: (continued) Percentage (%) Municipal Township Special County School Total All Local Governments Environment & housing Natural resources Capital outlay Parks & recreation Capital outlay Housing & com. development Sewerage Capital outlay Solid waste management Capital outlay Government administration Financial administration Judicial and legal General public buildings Other government administration Interest on general debt Other general expenditures

23 TABLE 6. Percentage Composition of Local Government Expenditures by Type of Government: (continued) Percentage (%) Municipality Township Special County School Total All Local Governments Insurance trust expenditure Unemployment compensation Employee retirement Enterprise expenditures Capital outlay Water supply Electric power Gas supply Transit Intergovernmental expenditure SOURCE: U.S. Census Bureau; October 13, 2004 (Rev. October 14, 2004).

24 TABLE 7. Growth in Local Government Revenues: All Local Governments: $1,000s % Change Total expenditures 657,319,515 1,155,020, Direct expenditure by function 574,762,071 1,009,441, Education services 238,274, ,374, Elementary & secondary 225,051, ,007, Higher education 13,223,224 25,528, Libraries 4,424,888 7,838, Social services & income maintenance 76,188, ,281, Public welfare 29,245,128 39,694, Cash assistance payments 12,465,019 8,968, Other public welfare 16,780,109 30,726, Hospitals 33,135,983 50,282, Health 13,793,136 29,295, Other 14,405 9, Transportation 36,695,964 63,258, Highways 26,873,714 44,219, Airports 7,312,444 15,038, Parking facilities 874,455 1,122, Sea and inland port facilities 1,394,531 2,556, Transit subsidies 240, , Public safety 57,925, ,033, Police protection 30,568,494 55,084, Fire protection 14,751,172 25,977, Corrections 10,417,441 18,215, Protective inspection & regulation 2,188,885 3,755, Environment & housing 63,277, ,882, Natural resources 2,936,275 5,411, Parks & recreation 13,313,679 25,143, Housing & com. development 15,853,612 27,827, Sewerage 20,100,540 30,188, Solid waste management 11,073,252 16,310, Government administration 31,280,880 52,877, Financial administration 8,682,291 13,711, Judicial & legal 10,137,920 16,820, General public buildings 4,687,037 8,264, Other government administration 7,773,632 14,081, Interest on general debt 30,742,827 43,876, Other general expenditures 29,519,343 59,471, Insurance trust expenditure 10,856,129 22,385, Unemployment compensation 126, , Employee retirement 10,729,455 22,236, Enterprise expenditures 75,187, ,388, Water supply 24,624,754 40,140, Electric power 29,986,683 44,263, Gas supply 3,074,512 5,711, Transit 17,501,950 29,273, Intergovernmental expenditure 7,369,545 26,189, NOTE: All dollar amounts shown in current year dollars (i.e. not adjusted for inflation). SOURCE: U.S. Census Bureau; October 13, 2004; and March 30,

25 TABLE 8. Direct Expenditures by Purpose and Type of Government: $1,000s $ 1,000s Municipality Township Special County School Total All Local Governments Current operations 259,472,370 27,836,919 82,510, ,000, ,633, ,453,756 Salaries & wages 112,881,570 12,759,781 27,479,857 90,087, ,624, ,832,842 Capital outlay 61,505,823 5,080,948 25,670,923 29,231,867 45,805, ,294,636 Construction 48,262,375 3,277,735 19,560,747 21,257,835 34,235, ,594,303 Other capital outlay 13,243,448 1,803,213 6,110,176 7,974,032 11,569,464 40,700,333 Assistance & subsidies 1,451,736 49,000 7,467,631 8,968,367 Interest on all debt 20,164,946 1,051,532 11,640,989 11,835,039 9,035,289 53,727,795 Insurance benefits and repayments 16,044, , ,594 4,419,045 1,004,202 22,385,914 Total direct expenditures 358,638,926 34,341, ,417, ,954, ,478,491 1,128,830,468 NOTE: Total direct expenditures does not include intergovernmental expenditures.

26 TABLE 8. Direct Expenditures by Purpose and Type of Government: (continued) Percentage Distribution Percentage (%) Municipality Township Special County School Total All Local Governments Current operations Salaries & wages Capital outlay Construction Other capital outlay Assistance & subsidies Interest on all debt Insurance benefits & repayments Total direct expenditures SOURCE: U.S. Census Bureau; October 13, 2004 (Rev. October 14, 2004).

27 expenditures was used for assistance and subsidies, and about 5% of direct spending in was for interest on debt (both general purpose and enterprise-related). Local governments use debt to meet both long- and short-term financial needs. Shortterm debt is usually repaid within one year, while long-term debt is repaid over much longer periods of time (such as five to 30 years). Long term debt can be classified by the security of the debt issued and by the purpose for which the funds are borrowed. Full faith and credit debt is the 8 most secure of all municipal debt and generally costs the least for a government to borrow. Non-guaranteed debt is most often not fully guaranteed by the local government issuing the debt and increases the financial risk to purchasers of local debt, thus, increasing the cost of borrowing for local governments. Long term debt can be issued for various purposes, including: (1) public debt for private purposes, such as industrial revenue bonds; (2) infrastructure development, such as schools and sewerage treatment facilities; and (3) enterprise or public facility improvements, such as parking garages or electric utilities, that will repay the debt using revenues generated by operation or utilization of the improvements. Table 9 reports the use of debt by the various types of local governments in The vast majority (98%) of the debt outstanding (yet to be repaid) was long term debt and of this, slightly more than half (54%) was in debt that was not guaranteed by the issuing local government. About 60% of outstanding long-term debt was issued to fund private activities, education or utility improvements, each in roughly equal amounts. The remaining 43% of outstanding long-term debt was issued for other purposes, such as port development, sports facilities, etc. IV. Process of Creating the Local Government Budget The data reported in Section III reflects the outcomes of a budget process that was undertaken by the 87,000 local governments in the U.S. in fiscal year That is for example, in fiscal year ,372 municipalities, each using its own budget process, collectively decided to spend $59.3 billion on public safety and to raise about $58.3 billion through the local property tax. The planner is not likely to be the one that oversees preparation 8 Full faith and credit debt, some times referred to as general obligation debt, often pays interest on the debt that is exempt from federal and occasionally state income taxation. The relative security and tax exemption both serve to lower the cost of borrowed funds to local governments. 26

28 TABLE 9. Local Government Debt: $1,000s $ 1,000s Municipality Township Special County School Total All Local Governments Debt Outstanding by Term & Security Short-term 6,645,811 3,601,091 2,862,806 4,708,923 6,779,086 24,597,717 Long-term 392,021,119 19,740, ,022, ,145, ,375,965 1,019,306,373 Full faith & credit 150,770,840 16,139,195 35,783,786 70,429, ,094, ,216,854 Non-guaranteed 241,250,279 3,601, ,239, ,716,710 5,281, ,089,519 Long-term Debt by Purpose Public debt for private benefit 50,614,830 1,103,720 34,005,519 72,784, ,508,707 Education 15,914,053 4,239,878 6,703,423 13,972, ,375, ,205,419 Utilities 87,875,604 1,739,212 92,828,956 9,944, ,387,811 Other 237,616,632 12,657,944 81,484, ,444, ,204,436 Long-term Debt Issued 64,016,636 3,621,261 27,679,724 25,329,050 37,947, ,594,193 Long-term Debt Retired 37,563,888 2,185,111 21,017,669 19,155,917 17,253,048 97,175,633 SOURCE: U.S. Census Bureau; October 13, 2004 (Rev. October 14, 2004).

29 of the budget each year, but the planner is likely to take actions during the year that will affect budgets that are developed, perhaps for years into the future. This section briefly describes the typical local government budget process, highlighting when possible how actions taken by planners may affect budget process outcomes. A. Major Steps in the Local Government Budget Process While the details of the budget process vary among the various local governments, five steps can generally describe the process that is used in most local governments. 1. Establish Budget Parameters and Instructions. The person or agency in charge of overseeing the entire local budget process (for example mayor or school board) normally identifies the context for the upcoming budget and establishes parameters of how the budget will be initially constructed. Local priorities can be identified in this step (for example, revitalization of the downtown river front) and broad or specific parameters set for each agency or function (e.g. limit agency spending increases to 3% over previous year, or, total spending may not increase by more than the rate of inflation). These parameters are normally communicated to each agency or function via a set of budget instructions. 2. Agency Requests. Within the context of the budget instructions that have been issued, each agency or function normally assembles its budget requests for the upcoming year. Agencies must anticipate the resources that will be needed to meet ongoing needs and new resources that will be needed to provide public infrastructure and services for new population or economic activity. As suggested in Table 8, on average most agency budget requests will deal primarily with wages and salaries and needs for capital improvements. Agency budget requests normally focus heavily on the spending side of the local budget, commonly identifying annual operating expenditure needs and long-term capital improvement needs. Enterprise budgets commonly identify both anticipated expenditures and revenues, and any government subsidy that might be necessary. Agency or function requests are normally forwarded to the individual or agency that oversees the budget process for incorporation into the final proposed budget. 3. Executive Budget Proposal. Ultimately the office in charge of the overall budget process assembles agency requests and decides what will and what will not be included in the proposed budget for the upcoming year. As discussed later, these decisions are based 28

30 on a combination of factors, but ultimately must be supportable by the taxpayers and voters. The executive budget proposal is normally submitted to a legislative body (such as city council) for further consideration, modification and approval. In the case of local enterprises or utilities, budget are often developed and approved within the administrative and oversight functions of the agency and then reviewed and approved again by a higher legislative body (such as city council or county board). 4. Legislative Consideration and Approval. In most cases local government budgets must be approved by elected legislative bodies such as city councils, school boards, etc. Before approval, it is common for individual members or committees of the legislative body to consider and alter the proposed budget as they deem necessary. The final budget that is approved by the local government legislative body is, thus, most often a combination of many different elected officials views of how public money should be raised and spent for the upcoming year. 5. Property Tax Levy Determination. For local governments utilizing the property tax to fund at least part of their activities, the final step in the local government budgeting 9 process is determination of the local property tax levy. The property tax is often considered to be a residual tax, that is, property tax collections are determined by the amount of revenue needed to balance the local budget after all other revenues have been taken into account. While this notion of the property tax is generally true, it is also commonly true that total property tax collections or the property tax rate are determined first, and then local spending is adjusted as needed to produce a balanced budget. Which ever approach to property taxes is taken, it is universally true that the annual bane of many elected local officials is announcement of the property tax rate for the upcoming year. Property tax rates matter, both to elected officials and taxpayers and voters! B. Time Frame for Local Budgets While not too crucial to planners, a general understanding of the time frame by which local budgets are adopted can prove beneficial when dealing with local government agencies. The time frame reflects the five steps discussed above. 9 See Jack Huddleston, The Property Tax and Planning (2005b) for a more detailed discussion of how the property tax is determined and collected by local governments. 29

31 Local government budgets are most often cover the upcoming year of activities, and run a mix between annual or calendar year budgets (i.e. January 1-December 31) and fiscal year budgets (e.g. July 1-June 30). The time frame involved with municipalities in Wisconsin can serve as an illustration of how the various steps in the budget process are carried out in a typical year. Municipalities in Wisconsin work on a calendar year basis. 1. July Budget instructions go out from mayor or municipal administrator to all agencies or functions. 2. August Agencies or functions prepare budget request for submission to mayor or village administrator. 3. September Mayor or municipal administrator prepares executive budget proposal and submits to city council or municipal board. 4. October- City council or municipal board considers the proposed executive budget, November holds public meetings as necessary, and revises and approves final budget. The property tax levy is determined as part of this step. 5. December Notice of the property taxes to be collected are sent to the Tax 10 Administration for distribution of local property tax bills. The property tax rate is determined at this time. Tax bills are mailed to property owners in December of each year. Property owners can pay one-half of this bill no later than January 31 of the following year and the second half no later than July 31. Thus, local governments receive their property tax revenues in staggered periods over the following year. V. Local Budgets: Outside the Numbers While local budgets can be reduced to a set of mechanistic steps (such as Section IV), local budgets are, in fact, influenced by numerous internal and external influences that shape what can and cannot be done by local governments. Some of these influences are legal or institutional and are discussed more fully in David Amborski s paper, Institutional and Legal 10 A Tax Administration is a local governmental body that collects property taxes for all local governments in an area that utilize the property tax. In Wisconsin, cities, villages and towns are the Tax Administration s for other local governments (such as the county and school districts). See Huddleston, The Property Tax and Planning (2005b) for a more detailed discussion of the role of Tax Administration s in the overall process. 30

32 Contexts for Local Government Budgets (2005). Other influences flow from actions or requirements placed on local governments by federal and state governments. Several of these major influences are discussed below. 1. Delegated Powers and Responsibilities. Local governments derive their power to raise revenues and to provide certain infrastructure and services through federal and state government statutory authority. Cities in certain states, for example, are given the authority and responsibility to provide elementary and secondary public education, while cities in other states are not allowed by statute to do this. Local governments can raise revenues only by means approved by state statutes. Cities, for example, may be allowed to raise revenues using the property tax, but are prevented from raising revenues using the sales tax or income tax. Importantly, local governments are not generally able to take on new spending responsibilities or to use new revenue sources unless specifically allowed by state statute. 2. Rigidity of Delegated Powers and Responsibilities. Related to the first point, powers and responsibilities that have been delegated to local governments are often almost frozen in time. That is, delegated powers and responsibilities are often slow to respond to changing local conditions. For example, the property tax was considered by many local government experts to be a relatively efficient means of generating revenues when most property that was being taxed was tangible (such as houses, factories, machines, inventories, etc.). As the economy has changed over time, more property has become intangible (such as patents, e-commerce, etc.) and has proven difficult to value and to 11 tax. The evolution of formerly local problems into regional problems has caused rigidity on the spending side of local budgets as well. For example, as commuting patterns within a metropolitan region change over time, the ability of any single local government to meet the transportation needs of non-resident, non-local taxpaying commuters is stressed. 3. Budget Limitations. Local government budgets in many states are constrained by either the spending that can occur or the amount of revenue that can be raised. In several states, for example, school districts have state statutory limits on the amount of spending that 11 See for example, Robert Tannenwald, Are State and Local Revenue Systems becoming Obsolete?, National Tax Journal, Vol. LV, No. 3, September 2002, pp