The Basics of City Budgeting

Basics of the Budget ProcessCity Fiscal Year runs October 1 through September 30.

Each year the city prepares and adopts a budget for the upcoming Fiscal Year.

In conjunction with the budget process the city sets its property tax levy to fund tax-supported services like streets, police, fire protection, parks, libraries, etc.

Cities also typically review their utility rates and other fees as part of the budgeting process.

The Council’s Role in the Budgeting Process• Setting the city’s property tax levy, utility rates and other fees to

support the budget.• What new services should the city provide and how should these

services be funded?

• What levels of service should the city provide?• How can the budget support the city’s future growth and

development?• What policy priorities should be fulfilled in the budget process?

April 30, 2021: Notice to County Clerk of Budget Hearing

Deadline for the city to notify the county clerk of the date, time and location of the city’s budget hearing for the upcoming fiscal year.

Failure to do so will prevent the city from increasing the property tax portion of its budget.

Developing the Budget• Every Spring, the city begins the budgeting process, providing a calendar of

deadlines and meetings, as well as forms for city departments to make their budget requests.

• Department budget requests are checked for mathematical accuracy and compiled into a draft budget.

• City staff make projections for revenue sharing, highway distribution account, state liquor fund revenues, fine revenues, and other city revenues.

• Elected officials review the draft budget and make suggestions to bring it into balance and implement their policy priorities, often at budget workshop council meetings.

Publishing the Budget & Notice of Budget HearingOnce the budget has been balanced and refined to the satisfaction of the elected officials, then:

1. the council provides its tentative approval,

2. the budget is reflected in the council meeting minutes, and

3. the budget and notice of public hearing are published twice in the official city newspaper at least 7 days apart.

The budget establishes a ceiling on the total level of spending and the city’s property tax levy that cannot be exceeded, for that reason it’s wise to set both on the high side.

Elements of the Budget• Actual revenues & expenses for prior FY.

• Budgeted revenues & expenses for current FY.

• Projected revenues & expenses for upcoming FY.

• Spending is classified by department, fund or service.

• The city’s property tax levy in dollars for the upcoming fiscal year.

• Revenues are classified by source.

Sept. 8, 2021: Last Day for Budget Hearing• At the hearing citizens can testify concerning the proposed

budget.

• Effective July 1, 2016, cities that wish to levy for forgone property taxes must adopt a resolution of their intent to do so, provide notice, and hold a public hearing (more on this later).

• Effective July 1, 2020, cities that wish to accrue all or part of their forgone levying authority for use in a future year must pass an annual resolution to do so, provide notice and hold a public hearing (also more on this later).

Sept. 9, 2021: Deadline to Certify Property Tax Levy

The city’s property tax levy is certified to the county commissioners by filing the L-2 form, along with a certified copy of the city budget.

Sept. 30, 2021: Deadline to Adopt & Publish Appropriations Ordinance• The appropriations ordinance sets the legal spending

authority for city funds or departments.

• It must be passed by the council and published within 30 days after passage as a legal notice in the official newspaper by Sept. 30, 2021.

• A copy of the ordinance must be sent to the Idaho Secretary of State’s office.

Amending the Appropriations Ordinance◦ The appropriations ordinance may be amended during the fiscal

year to reflect additional revenue from grants, fees, or other nonproperty tax revenues.

◦ The process for amending is the same as for original adoption: two published legal notices, public hearing, council passing the ordinance, and publishing the ordinance as a legal notice.

◦ The council must approve the appropriations ordinance amendment before the money is spent.

Evaluating Competing Budgetary PrioritiesIs it Mandated?

Will Productivity Increase?

Will this Reduce Liability Exposure?

What are the Priorities of the Elected Officials?

Workload Increases Resulting in Overtime.

Difficulty of Accurately Pinning Down Expenses.

Difficulty of Accurately Predicting Revenues.

Can a Program Offset its Costs?

Don’t Use One-Time Money for Ongoing Expenses.

Don’t Spend it All—Build Up Reserves.

Budgeting Training & Resources

• AIC Budget Manual

• AIC Annual Conference June 16-18, 2021 in Boise:• Budgeting Basics with Leon Duce

• ICCTFOA Institute in September

• AIC Online Training Videos

Understanding Property Taxes

Property Taxes: The Basics• Property tax revenues are a city’s most significant general fund

revenue source.

• Property taxes have funded local government since territorial days.

• Local governments have operated under budget freezes and property tax caps since the passage of the 1% Initiative in 1978.

• Your city’s current budget capacity largely reflects the population and budget capacity of your city from the late 1970s.

The 3% Cap• Increases in total property tax budgets are limited to 3% over the

highest dollar levy of the past 3 years.

• Growth factors like new construction and annexation fall outside the 3% Cap.

• Tax increases forgone in previous years can be recovered and are outside the 3% Cap.

• The 3% Cap does not apply to bonds or override levies.

• The 3% Cap works alongside levy limits for specific funds.

Property Tax Override Alternatives

• Cities with a total levy under .004 may increase levy to .004 with 60% voter approval.

• Temporary overrides may be approved for up to 2 years in duration upon a simple majority vote.

• Permanent overrides may be approved by a 2/3 majority vote.

• It is critical to garner public support prior to placing an override levy measure on the ballot.

Understanding Property Tax LeviesCities may levy taxes for general fund purposes of up to .009 on the taxable market value within the city.

Cities may also make special levies for specific purposes, including:

Airport .0004 or .0006 (city only)

Cemetery .0004

Library .001

Capital Imp. Fund .0004

Streets No Limit

Recreation .0006

Growth Factors for New Construction & Annexation• The 3% Cap has growth factors for new construction and

annexation allowing cities to levy to help offset the costs associated with growth.

• The maximum levying authority is determined by multiplying the prior year’s levy rate by the taxable assessed market value of the new construction or annexed area.

New Construction RollPrepared by the county assessor no later than the 1st Monday in June and includes taxable assessed market value increases from:◦ Construction of new structures◦ Additions or alterations of existing nonresidential structures

◦ Installation of new or used manufactured housing◦ Changes in land use classification

Make sure to review the new construction roll annually, comparing it to building permits issued for the previous year. Let assessor know of any discrepancies.

Understanding Forgone Levies• When a city fails to budget the maximum amount allowed by the 3% Cap,

the forgone revenues accumulate and can be included in future budgets.

• The purpose is to ensure that local officials aren’t forced to take the maximum tax increase every year to protect their levying authority in future years.

• This has resulted in over $100 million in tax relief for property taxpayers over the past 20 years.

• Forgone revenues are exempt from the 3% Cap.

Process to Accrue Forgone • HB 354, passed by 2020 Idaho Legislature, requires each city to pass a

resolution every year to accrue forgone property tax levying authority for use in a future year.

• If the city fails to pass the resolution, that year’s forgone amount would be forfeited permanently, but the city would still retain previous forgone levying authority already accrued.

• City must publish notice of its intent to accrue the forgone in the official newspaper twice, at least 7 days apart and there must be a public hearing.

• The process for passing the forgone accrual resolution is the same as, and can be done together with, the city’s budget notice and hearing.

Process to Accrue Forgone, continued • Once passed by the council, the resolution must be filed with the

county with the L-2 property tax levy form. • The forgone reserved can only be for the year that the city is

filing the L-2 levy form, and you can’t accrue multiple years of forgone in one resolution.

• The resolution must specify the exact dollar amount of forgone being reserved.

Process for Levying Forgone The city must do the following before budgeting or levying forgone:

1. Adopt a resolution stating:

◦ The intent to budget forgone property tax revenues,

◦ The amount of forgone revenues to be budgeted, and

◦ The purposes for which the forgone revenues are being budgeted.

2. The city must notice the meeting and hold a public hearing pursuant to the Idaho Open Meeting Law.

3. The notice and hearing may be done in conjunction with your annual budget hearing.

4. Notice must be published twice, at least 7 days apart as a legal notice.

Budgeting Non-Property Tax Revenues

Fees

Fees must be reasonably related

to, and cannot exceed, the cost of

providing the service.

FeesUtility Fees

Recreation Fees

Parks Fees

Cemetery Fees

Community Development Fees

Development Impact Fees

Administrative Fees

Records & Copy Fees

Building Permit Fees

Fees

New fees or fees increasing more than 5% require

legal notice (published twice) and public hearing.

Sales Tax Revenue SharingLocal governments receive $200 million annually from the state revenue sharing program.

Allocates 11.5% of sales tax revenue to cities, counties and non-school special districts.

This is general fund revenue unless the city chooses to dedicate it for a specific purpose.

Revenue Sharing Distribution Formula under HB 408 from 2020HB 408 reformed the revenue sharing distribution with the goal of having it be allocated on a population basis.

Next few years will be spent bringing the distribution in line on a per capita basis.

◦ Cities that have high per capita distributions would see, at most 1% annual revenue increases if the economy is growing.

◦ Cities that have low per capita distributions would see most of the increased revenue in the future if the economy is growing and would be somewhat protected when revenue drops.

Basics of HB 408• Takes effect July 1, 2020. • Establishes new quarterly base amounts for FY 2020 for each city

based on their quarterly revenue sharing distribution.

• Also establishes an annual per capita revenue sharing amount for each city based on the previous Fiscal Year’s receipts.

• If there is no change in the amount of revenue sharing from the same quarter of the previous Fiscal Year, then cities will receive the same distribution amount.

Basics of HB 408When revenue for the current quarter is greater than the amount for the same quarter of the previous Fiscal Year:• In the event the distributions made to cities during the same

quarter of the previous Fiscal Year are below the base amount for FY 2020: • All cities receive a proportional increase up to the base amount and up to

a 1% increase over the base amount.

• Any remaining moneys are allocated to cities with below-average per capita distributions in proportion to that city’s population share of the population of all cities with a below-average per capita distribution.

Basics of HB 408When revenue for the current quarter is greater than the amount for the same quarter of the previous Fiscal Year:• In the event the distributions made to cities during the same

quarter of the previous Fiscal Year are at or above the base amount for FY2020: • Cities will receive the same amount from the same quarter of the previous

Fiscal Year, plus a proportional increase up to 1%. • Any remaining moneys are allocated to cities with below-average per

capita distributions in proportion to that city’s population share of the population of all cities with a below-average per capita distribution.

Basics of HB 408If revenue declines below the amount for the same quarter of the previous Fiscal Year: • Each city would receive a proportional reduction

down to the quarterly base amount for FY2020, and

• If further reductions are needed, they would be based on the proportion that the city’s population bears to the population of all cities within the state.

Revenue SharingTotal Revenues to Cities FY99 – 22 (proj.)

Revenue Sharing Projections vs. ActualAIC Projection Actual

FY 2011 +2.5% +2.3%FY 2012 +3% +5.7%FY 2013 +3.5% +8.2%FY 2014 +5% +4.9%FY 2015 +5% +6.4%FY 2016 +5% +7.1%FY 2017 +5% +6% FY 2018 +4.5% +8.7%FY 2019 +4.6% +6.6%FY 2020 +4% +6.1%FY 2021 -+9.1% (Updated Projection)FY 2022 +7.0%

NOTE: Revenue sharing projections are based on state fiscal year, which runs July 1 to June 30.

Highway Distribution Account

Distributes revenue from state fuel tax, vehicle registration, fines &

fees.

Local highway jurisdictions receive 38% of the revenue, of which

cities receive 30%, which is distributed based on population.

Revenue must be used for development, construction or

maintenance of highways & bridges.

House Bill 312 (2015)Increased revenue for state and local transportation needs by $95 million annually.

Annual vehicle registration fee increase of $21 for passenger vehicles, $10 for motorcycles and $25 for trucks.

New annual registration fees for electric vehicles ($140) and hybrid vehicles ($75).

7 cent per gallon fuel tax increase took effect July 1, 2015.

Cities received an additional $13 million annually for street and bridge maintenance, an increase of 30.5%.

Highway Distribution Account Revenues to Cities FY 99 – 22 (proj.)

Highway Distribution Account ProjectionsAIC Projection Actual Old Formula Actual New Formula

FY 2011 +1.1% +1.9%FY 2012 0% -.5%FY 2013 +1% +1.3%FY 2014 +1% +.3%FY 2015 +1% +4.9%FY 2016 +30% +5.1% New Formula EstablishedFY 2017 +1% +1.5% +20.8%FY 2018 +1% +3.4% +3.2%FY 2019 +.8% +5.0% +3.9% FY 2020 -1.47% -1.46% -1.52%FY 2021 +2.8% (Old) +2.7% (New)FY 2022 +2.9% (Old) +2.3% (New)

NOTE: Projections are based on state fiscal year, which runs July 1 through June 30.

State Liquor Account

Distributes profits of state liquor stores to the state, cities and

counties.

Profits are split equally between the state and cities/counties.

The local share is allocated 51.2% to cities, 36.8% to counties

and 12% to magistrate court funding.

State Liquor AccountThe cities’ portion is allocated:

◦ 90% to cities with liquor store(s) on point-of-sale basis

◦ 10% to cities without liquor stores on population basis

Each city is entitled to receive the amount distributed during FY 1981 (hold harmless).

This is general fund revenue unless the city chooses to dedicate it for a specific purpose.

State Liquor Account Revenues to Cities FY99 – 21

Impact to State Liquor Fund of HB 643• Passed to provide sustainable long-term funding for magistrate courts and

get cities out of having to provide court facilities, staffing and equipment.

• Workgroup including Mayors, County Commissioners and court administrators decided to dedicate a portion of State Liquor Account revenues.

• Beginning in FY 2019, 2.2% of cities’ liquor revenue will be dedicated to court funding each fiscal year for the next five fiscal years, for a total of 11% in FY 2023.

• This comes off the top of the cities’ distribution and will impact cities differently depending on their recent liquor revenue growth trends.

Impact to State Liquor Fund of HB 643• If your city experienced rapid growth in State Liquor Account

revenue prior to FY 2019 then it would be prudent to plan for no increase or a very small increase for the next five fiscal years.

• If your city’s State Liquor Account revenues were flat prior to FY 2019, it would be prudent to budget for a small decrease.

• If your city was losing revenue prior to FY 2019, then it would be prudent to plan for a somewhat larger decline over the next five fiscal years.

Other City Revenue Sources

Fine Revenue: Cities receive 90% of fine revenue (exclusive

of court costs) when city ordinances are violated or when

citations are made by city officers (Idaho Code 19-4705).

Licenses & Permits.

Other City Revenue SourcesFranchise Fees: Fees charged to power, natural gas and water utilities, and cable television providers, for use of public rights-of-way.

Resort City Local Option Taxes:Resort cities under 10,000 population may enact alcohol by the drink, hotel/motel occupancy, and/or general sales taxes with 60% voter approval.

Thank You!