Defining Municipal Finance

There are many commonly used phrases when it comes to municipal finance, but that doesn’t mean they are commonly known by community members! 

Here’s your cheat sheet to help you understand the words and phrases used when discussing the budget. 

You can find a complete glossary here.

Appropriation: An authorization granted by a town meeting, city council or other legislative body to expend money and incur obligations for specific public purposes. An appropriation is usually limited in amount and as to the time period within which it may be expended.

Available Funds: Balances in the various fund types that represent nonrecurring revenue sources. As a matter of sound practice, they are frequently appropriated for unforeseen expenses, capital expenditures, or other one-time costs.

Capital Budget: Outline of a municipality's financial strategy for long-term, large-scale investments, such as infrastructure projects and major equipment purchases. While capital budgets focus on long-term investments, they can have an impact on the operating budget through increased maintenance costs, staffing needs, or potential new revenue streams. 

Capital Exclusion:  A temporary increase in the levy limit (tax ceiling) approved by voters to finance the cost of a specific capital project, rather than borrowing.

Cherry Sheet:  The official notification from the Massachusetts Department of Revenue (DOR) detailing estimated state aid and assessments for the next fiscal year. The actual receipts and charges may vary from the estimates.

Classification: The categorization of property valuations by type, which allows for potentially different tax rates for different property types like residential, commercial, and industrial. 

Debt Exclusion:  A vote to exclude from the levy limit the costs of debt service for capital projects. This exclusion remains in effect for the life of the debt only. 

Debt Service: The annual payments of principal and interest (based on an amortization schedule) on a municipality's long-term debt used to finance capital projects. 

Enterprise Fund: A separate fund with its own assets, liabilities, revenues and expenses in which a municipal service is operated as a standalone business unit. Costs of the service are primarily funded by user fees, but may be supplemented by general revenues.

Excess & Deficiency (“E&D”): Also called the "surplus revenue" account, this is the amount by which cash, accounts receivable, and other assets exceed a regional school district’s liabilities and reserves as certified by the Director of Accounts. E&D is not available for appropriation until certified by the Director of Accounts.

Excess Levy Capacity: The difference between the levy limit and the amount of real and personal property taxes actually levied in a given year.

Fiscal Year (“FY”): A 12-month period used for budgeting and financial reporting purposes, typically starting on July 1 and ending on June 30 of the following year. 

Free Cash: A municipality's unrestricted fund balance, certified by the state each July 1, that is available for appropriation and can be used for various purposes like funding supplemental appropriations or the next year's budget. 

General Fund:  The primary operating fund used to account for all financial resources not specifically designated for other funds, supporting essential services like public safety, infrastructure, and general government operations. 

Level-Service Budget: A plan that allocates funds to maintain the same level of services as the previous year, including contractual and mandated obligations, without adding new programs or services.

Levy Ceiling*: The levy ceiling (an amount equal to 2.5% of the community's total assessed value) is a limit to the size of a city or town's maximum allowable levy. 

Levy Limit*: A restriction on the amount of property taxes a community can levy.

*Although a community can pass an override or a temporary debt exclusion to exceed its levy limit, only the debt exclusion can exceed the levy ceiling.

New Growth: The additional tax revenue generated by new construction, renovations and other increases in the property tax base during a calendar year.

Operating Budget: A plan outlining the expected revenues and expenses for the day-to-day operations and services provided to citizens, distinct from long-term capital projects.

Override: A voter-approved, permanent property tax increase.

Reserve Fund: Money set aside by a town or city to cover extraordinary or unforeseen expenditures.

Revolving Fund: A fund that allows a community to raise revenues from a specific service and use those revenues without appropriation to support the service.

Stabilization Fund: A special reserve account where a city or town sets aside money for future needs, such as unforeseen expenses or capital projects, acting as a "rainy day" fund.

Tax Levy: The amount of money that must be raised through local taxation to fund the town budget.

Tax Rate: The amount of property tax stated in terms of a unit of the municipal tax base; for example, $14.80 per $1,000 of assessed valuation of taxable real and personal property.

Underride: A vote by a community to permanently decrease the tax levy limit. It is the exact opposite of an override.

Undesignated Fund Balance: Money in the various government funds as of June 30 that are neither encumbered nor reserved and are therefore available for expenditure once certified as part of free cash.

Warrant: An authorization for an action. Examples: A town meeting warrant establishes the matters that may be acted on by that town meeting. A treasury warrant authorizes the treasurer to pay specific bills. The assessors’ warrant authorizes the tax collector to collect taxes in the amounts and from the persons listed.