BUDGETING BASICSFollow These Tips to Create an HONEST, REALISTIC Spending PlanCreating a township budget can be a daunting prospect be-cause it shows taxpayers exactly where their money is going. Experienced township administrators share their tips for draft-ing a document that not only explains where your revenue comes from and where it goes but may also help to gain and retain your residents’ faith in their local officials.

BY BRENDA WILT / ASSISTANT EDITOR

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It’s that time of year again … bud-get season. Most township ad-ministrators agree that the budget is the most important document municipalities produce each year and that it is way more than just a

bunch of numbers. “When done properly, a budget en-compasses the community’s short- and long-term goals,” says Tommy Ryan, manager of Worcester Township in Montgomery County. “It expresses the township’s philosophies and vision of itself.” For example, if a township has a philosophy of sustainability and preser-vation, its budget may include a dedi-cated fund for purchasing conservation easements or revenue from a tax levied strictly for land preservation. A budget will reveal a township’s priorities, whether getting all the roads paved, paying down debt, or creating a new township park. The point is, it’s not something that should be thrown together at the last minute to meet the December 31 deadline. In fact, experienced township ad-ministrators say that budgeting is a year-round process. To be an effective tool, a budget must be realistic, dynamic, forward-thinking, and most important, easy to understand by residents who have no background in finance or local government. Given its importance, it is perhaps surprising that the Township Code contains less than 700 words about budgeting. That’s why the Township News has turned to a few experts from the trenches to provide some basics and explain the processes for crafting an effective budget.

It’s a marathon, not a sprint The most important rule of thumb for budgeting is understanding that it is a 12-month marathon, rather than a two-month sprint. The Municipal Sec-retaries Handbook, available from the state Department of Community and Economic Development, says that dis-tributing budget activity throughout the year does the following: • helps reduce confusion and poten-tial errors of last-minute decisions, • encourages using the final weeks before budget adoption to review num-

10 Steps to a Better Budget Budgeting can be a minefield of potential missteps, and that’s why township officials need to know the law, understand the process, and make sure that they do sweat the small stuff. In its Fiscal Management Handbook, the Governor’s Center for Local Govern-ment Services outlines numerous pitfalls for townships to avoid when developing their annual budget. The Township News has adapted these and turned them into 10 tips for effective budgeting:

1 Don’t budget for non-existent revenue — Budget only for the revenue you know you can count on. Consider how local economic conditions or regional

disasters could affect employment and therefore, property, income, and wage taxes.

2 Use realistic revenue estimates — Don’t assume that revenues for the com-ing year will be similar to the current year. Did a new housing development

come into the township this year that may have given the township a welcome but one-time cash infusion that can’t be counted on in the new budget?

3 Follow through on budget cuts — Plan your budget cuts carefully. If you don’t take what’s on paper and turn it into reality — due to citizens’ demands,

municipal needs, or any other factor — you will be spending non-existent revenue.

4 Don’t rely on a “once-a-year” budget — Look at the budget as a “living document” that you review regularly and amend as needed throughout the

year. Supervisors must control the expenditures in every individual account every month and not just meet the overall bottom line.

5 Eliminate fuzzy financial reports — Make sure monthly financial reports give an accurate picture of the township’s fiscal health. For example, a report

might show a balance of $10,000 but fail to show $19,000 in outstanding bills. To avoid this scenario, pay bills promptly and show any remaining unpaid balances on the financial report.

6 Face up to a tax increase when needed — The tax rate that a township starts the year with is the tax rate it must end the year with — there can be

no mid-year increase when a budget shortfall becomes apparent. If a need truly exists, consider an incremental increase now, rather than one big jump a few years down the road. And make sure residents know just how few of their tax dol-lars go to pay for township administration and services.

7 Budget for the repayment of bank loans — Remember to budget for the an-nual payment of principal and interest on any loans. Not doing so could result

in an unexpected expenditure later in the year, and carrying the payment forward to the next fiscal year is unlawful.

8 Include all costs in the budget — Be sure to include all true costs, especially for personnel. Determine overtime, for example, based on experience. In-

clude changes in insurance or pension costs and calculate the operational costs for any newly acquired equipment, buildings, and land.

9 Involve all departments when drafting the budget — Make sure to gather input from public works, parks and recreation, and other departments so you

can budget for upcoming expenditures, such as equipment purchases or repairs, park improvements, and so on.

10 Stick to a standard accounting system — Use a standard double-entry accounting system to account for assets, liabilities, revenues, and expen-

ditures. Failure to do so will distort a township’s true financial picture. For example, the purchase and sale of investments, refunds, and amounts due are sometimes recorded as revenues and expenditures when they should be re-corded under assets and liabilities. Double-entry bookkeeping will help the town-ship accurately classify each transaction.

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bers and evaluate priorities, and • facilitates valid estimates based on data, rather than guesswork. An essential element of a year-round budget process is the budget file. As soon as a budget is passed, the township should start the budget file for the next one. “I opened the file for the 2019 budget December 21, 2017, the day after the board adopted the 2018 budget,” Ryan says. “We work on our budget every week of the year. Anytime something changes, we make note of it.” These notes, along with remind-ers about contract expirations, staffing changes, insurance premium increases, and anything else that will impact the budget go into the budget file, Ryan says. “There are things happening around us at all times that affect our budget

— the passage of new federal and state mandates, the ups and downs of the housing market, utility rate increases, etc.,” Ryan says. “Open your budget file in January, stay aware of the world around you, and add this information to the file.” Greg Primm, manager of Allegheny Township in Westmoreland County, is also a proponent of opening a budget

file in January and using it to compile all budget-related information over the next six or seven months. “I put notes and reminders in it about upcoming expenses or items that need to be included in the next year’s budget,” he says. “Then, when I begin the actual budgeting process in August, I have all of that information at my fin-gertips.” ➤

The budgeting process is a mara-thon, not a sprint. As soon as one budget is passed, it’s time to begin working on the following one. Ex-perienced township administrators start a file in January for the next year’s budget.

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WHAT IS A BALANCED BUDGET? It might not be what you think PSATS staff fields thousands of calls and emails a year from its members, especially during budget season. The most frequent questions, according to Policy and Research Manager Holly Fishel, involve confusion about the term “balanced budget.” “Many people think that a township’s ex-penses must zero out its revenues so that every single penny is spent during the year,” Fishel explains. “This is not true. A balanced budget simply means that your revenues are at least equal to your expenses. “Some of the confusion comes from the mistaken idea that townships aren’t supposed to have surpluses or carryover balances, which isn’t true either,” she continues. “One of a township’s primary functions is maintaining and improving infrastructure, such as roads and bridges. Carrying a balance and building up a reserve to tackle these projects are not only a good idea but also essential to proper budgeting. “Based on these misconceptions, many townships want to start their budget with a zero balance from the previous year and completely ignore their carry-over balance, also known as ‘cash on hand’ or ‘balance as of December 31,’ ” Fishel says. “This is not proper budgeting. The carryover balance from the pre-vious year should be worked into the current budget. For example, it can be put toward a reserve for road and bridge or other infrastructure projects. One way or another, any carryover should be noted and accounted for.”

Keep it real During the summer, township bud-get preparers should begin compiling information from multiple sources, including monthly financial reports, multi-year budget and expenditure his-tories, program recommendations from department heads, and simple experi-ence. Primm meets with department heads in August to talk about their needs and wants for the following year. “I try to give them what they ask for,” he says. “Some things can’t wait, though, and one department may have to wait for something it wants so an-other department can get something it needs.” In Worcester Township, Tommy Ryan asks department heads to provide information by June 30 on any large capital expenditures for the upcoming year and the year after. This eliminates surprises and allows him to plan ahead for major expenses. Preparing a draft budget is about more than just plugging in some num-bers, though.

“A lot of people put the budget on auto-pilot,” Ryan says, “but you need to think about the numbers behind the numbers.” For example, some folks look at a projected receipt or expenditure for the current year or even an actual receipt

or expenditure from a previous year and add a flat increase of, say 3 percent, to come up with the budgeted amount for next year. This so-called incremental budgeting can be problematic, Ryan says, because many numbers have nu-ances that are not readily apparent. ➤

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“The real estate transfer tax, for ex-ample, has three distinct components: taxes that are paid on the sale of exist-ing homes and commercial properties, new construction, and the larger land transfers, such as land sold to a devel-oper,” he says. “Revenues from resales can be fairly consistent, but sales from new construction vary from year to year. And do we want to budget for the sale of larger parcels, which may not happen?” DCED’s Fiscal Management Hand-book encourages municipalities to only budget for revenue that they can count on receiving. Local economic condi-tions and natural or manmade disasters can affect certain tax receipts so it’s best not to rely on them to balance the budget. (See page 21 for more tips from the Fiscal Management Handbook.) Jason Wager, manager of Union Township in Berks County, says it can be challenging to explain to others why certain numbers can’t be adjusted. “Certain expenses are what they are, and the revenue can be relatively flat unless there is a lot of development,” he says. “You have to be realistic. You can’t manufacture revenue to make the bud-get do what you want it to do.” Townships must also take cash flow into consideration and understand when money comes in and payments go out. “Many receipts and expenditures do not occur on a consistent basis,” Ryan says. “Tax revenue increases are in the spring, snow removal expenses are usu-ally November to March, and fire and pension relief arrives in the fall. We need to understand cash flow to ensure that we are able to pay bills when they come due and minimize the need for tax anticipation notes.” No one understands this better than Allegheny Township’s Greg Primm. When he joined the township in 2008, he inherited a $1.9 million budget deficit, a pension fund $350,000 in the hole, and a yearly tax anticipation loan

Technical assistance • PSATS — Association staff members are available to answer members’ questions weekdays between 8:30 a.m. and 4:30 p.m. at (717) 763-0930. Con-tact Holly Fishel at ext. 138 or hfishel@psats.org or Melissa Morgan at ext. 178 or mmorgan@psats.org. PSATS’ Wage and Benefits Survey is also helpful when preparing a municipal budget. PSATS members will be able to access the 2018 survey results this fall. More details will be forthcoming. You can also ask for help from your fellow township officials and staff through Discussion, PSATS’ online community forum. To access it, go to connect.psats.org, sign in with your email and password, and choose the “Discussion” tab at the top. • The Governor’s Center for Local Government Services — Township officials can get additional budget assistance by contacting Marita Kelley, a local govern-ment policy manager who specializes in municipal financial management, at (717) 720-7301 or markelley@pa.gov.

Training • PSATS is a leader in local government training so be sure to visit connect.psats.org and click on the “Education” tab to find out what’s on tap to help you better understand the municipal budgeting process. See page 56 for information about the upcoming course “Developing Your Township Budget,” scheduled at six locations around the state this month. • The PSATS Municipal Government Academy (PMGA) is a certification pro-gram that can help you hone your budgeting and administrative skills. Go to pmga.psats.org to learn more.

Publications Township officials have a lot to know when it comes to the ins and outs of bud-geting — a year-round process that requires constant attention. The Governor’s Center for Local Government Services offers the following guidebooks on budget-ing, fiscal management, and the related responsibilities of township officials and staff: • Chart of Accounts • Debt Management Handbook • Financial Monitoring Workbook • Fiscal Management Handbook • Manual for Municipal Secretaries • Municipal Pension Handbook • Municipalities Financial Recovery Act • Taxation Manual • Township Supervisor’s Handbook To view these publications online or down-load PDFs, go to dced.pa.gov, hover over the “Local Government” tab at the top of the page, click on “Publications and Docu-ments,” and then click on the “Library” button on the right to pull up a list of avail-able publications. Select a title to view or download. Printed copies are also avail-able for a nominal fee by clicking the button for the electronic or fax ordering form on the “Publications and Documents” page.

Resources are a call or click away The budget process doesn’t have to be overwhelming. PSATS and the Governor’s Center for Local Government Services are here to help. Here’s where to find technical assistance, training, and publications:

NEED BUDGET HELP?BUDGETINGBASICS

to cover expenses. That was a direct result of creating unrealistic budgets and not honoring the township’s obliga-tions, Primm says. Primm instituted a program of fis-cal discipline and accountability that righted the sinking ship. After a decade of hard work by the manager and many others, the township will be debt-free by the end of this year. Worcester Township’s Ryan finds that working from a monthly budget more than a yearly one enables him to spot problems early and address them before they become unmanageable. He has created a spreadsheet of all receipts and expenditures that breaks out the details of every line item in the budget (see the example on page 28). The docu-ment contains more than 2,000 lines of data. “The first year you build this kind of model takes a lot of time,” he says, “but for the second year, third year, and beyond, it’s a breeze. It’s just making adjustments and tweaking numbers. Anyone can look at it, know where we are financially, and put together a bud-get.” It also provides all the numbers to back up the board of supervisors’ decisions, Ryan says. If a resident asks why money was spent or not spent on something, the board can point to the numbers to explain why. “It shows that we took the time and care needed to prepare an honest and realistic budget,” Ryan says.

‘A living, breathing document’ Townships need to realize that bud-gets are not once and done documents, these experienced administrators say. “The worst thing a township can do is create a budget and put it on a shelf,” Primm says. “It’s a living, breathing document that helps guide the town-ship’s operation and maintenance.” Ryan agrees. “Very few line items in the budget are static,” he says. “Almost every one requires adjustment.” The budget is also a team effort, he says. The department heads monitor receipts and expenditures every month and then meet with Ryan every three weeks to go over the budget and any other issues. “We look at where we are in rela-

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tion to budget projections and to see if we need to make any adjustments,” he says. “You have to look at the budget throughout the year to keep track of how you are doing.” This is also where an understanding of cash flow comes into play. “If you don’t have the money you budgeted as relief aid for the fire com-pany come July 1, to an outsider it may look like your budget is off,” he says. “However, if that money doesn’t come in through taxes until fall, you are right where you are supposed to be.” That’s why Ryan prepares monthly budgets and performs regular reviews with staff to stay on top of the town-ship’s finances. This dynamic aspect of a budget makes it a particularly challenging part of the township administrator’s job. “It’s one of the toughest things we do,” Union Township’s Jason Wager says. “It is a very fiscally responsible job that managers and secretary-treasurers are doing,” Primm says. “They are deal-ing with the township’s primary asset: money. You can’t get just anyone off the street to do this job.”

Always look ahead To really fulfill its role as an expres-sion of a township’s goals, philosophy,

and vision, a budget needs to look for-ward farther than just the coming year. Having a five- or 10-year plan enables township officials to make budgetary decisions that will help the community get to where it wants to be years down the road. A multi-year plan takes into account such future expenditures as road main-tenance, equipment repair and replace-ment, computer upgrades, infrastructure improvements, and so on. It also helps the township plan for expenses related to its goals and philosophies. For ex-ample, new staff may need to be hired if the township has a goal of embracing environmental sustainability.

A forward-thinking budget will most likely include reserve funds for capital and other expenditures, Ryan says. “We tell folks we’re going to operate unlike Washington and Harrisburg and develop a sustainable operation for years to come,” he says. “Just like taxpayers, we will save up for large purchases. We’re not going to burden the next gen-eration of residents. It’s the responsible, honest, and sustainable way to budget.” Union Township’s Jason Wager, who has a five-year plan for the township, agrees. “You’re not doing your residents justice if you don’t have a multi-year plan,” he says. “Have a capital replace-

Tommy Ryan, manager of Worcester Township in Montgom-ery County, created a spreadsheet that breaks down all the details of every line item in the budget, such as this example for maintenance and repairs to the township building.

Details of a budget line item

Townships should make sure that when they present the budget to the public, it can be understood by those who have no background in finance or local government.

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ment fund — not just for vehicles but also computers, tools, and other large expenses. Get away from year-to-year budgeting that doesn’t look ahead. You want to be proactive in your approach while being fiscally sound.” A multi-year plan is what got Al-legheny Township moving toward fiscal recovery, Primm says. One of his first

moves was to develop a five-year plan to pay down the debt, fund the pension plan — which the previous board did not do — and eliminate the need for the annual tax anticipation loan. The township also levied a 1-mill tax exclusively for debt reduction and paid more than the principal against the debt. By the end of the first five years, the township had reduced the deficit by nearly 74 percent and no longer needed to borrow money to pay bills. Now that the township is on even ground, Primm still looks years down the road when preparing the budget. “You always have to be looking ahead if you don’t want your commu-nity to stand still,” he says.

Be credible The final piece of the budgeting puz-zle is to make sure you present it to the public in an easy-to-understand format, our experts say. Rows of data probably aren’t going to cut it. Ryan says Worcester Township’s budget document has more words than numbers. “The human brain responds better to words and images than numbers,” he says. “Because the budget is the most important thing that we do, it should be understood by our residents.” The budget is presented as a nar-rative, rather than a bunch of spread-sheets, and does not contain technical jargon. It includes figures but is more focused on explaining exactly where revenue comes from and how it is spent. When Greg Primm presents his township’s draft budget at a public hearing each November, he uses a com-prehensive PowerPoint to explain it to the board of supervisors and the public. Primm explains how the budget will affect homeowners, makes recommen-dations to the board, and answers ques-tions from residents. The following day, the draft budget is available for public inspection. “In this day and age, government lacks credibility on so many levels,” he says. “We must be credible in how we spend taxpayer dollars and show that we are actually doing what we say we are doing. What better way to help resi-dents have confidence in their elected officials than to show them exactly where their money is going?” Wager agrees that accessibility and clarity are imperative. “Give people access to your budget,” he says. “Make it available on the web-site. People don’t trust us the way they used to, but sunshine kills all germs. Be transparent and do everything in the light of day.” “We have a legal responsibility to prepare an honest budget but also a moral responsibility because we are managing other people’s money,” Ryan says. “We have an obligation to care for that money, and that means under-standing how to budget and making sure our residents can understand it, too.” F

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Q Must the budget reflect all our town-ship’s revenues and expenditures?

A Yes.

Q Our township will have funds left over at the end of this fiscal year. How should these be reflected in next year’s budget?

A Funds left over at the end of the year should be shown as a carryover bal-ance and appear as the first line item in your township’s new budget.

Q Must budget work sessions be open to the public?

A Yes. The Sunshine Law requires bud-get work sessions to be advertised as a public meeting because the board will be discussing and deliberating how tax dollars will be spent.

Q Must a public comment period be held at budget work sessions?

A Yes. However, comment can be lim-ited to the township budget.

Q Must minutes be kept for budget work sessions?

A Yes. Minutes must be kept for all advertised public meetings. However, the minutes for a budget work ses-sion can be very brief.

Q Must the township file copies of its adopted budget with any state agen-cies?

A No.

Q Does the state Department of Com-munity and Economic Development (DCED) provide an annual budget form that townships must use?

A No. Act 35 of 2000 eliminated the requirement that DCED provide an annual budget form to townships.

BUDGET BREAKDOWN PSATS answers your budget questionsQ When must the township formally

adopt a budget?A The Township Code requires that

the township budget be adopted no later than December 31.

Q What are the advertising require-ments for the township budget?

A According to Section 3202 of the Township Code, after preparing and adopting the proposed budget, the board of supervisors must publish a notice stating that the proposed budget is available for public inspec-tion. This notice must appear once in a local newspaper at least 20 days before the final budget is adopted.

Q We advertised our budget and are ready to adopt it, but we found a mistake that would reduce our total expenditures by 5 percent. Do we need to advertise the budget again?

A No. The Township Code does not require the budget to be readvertised if revenues or expenditures are decreased.

Q After we advertised our budget, we decided to make a change that will increase the total estimated expenses. Must we readvertise the budget?

A Section 3202 of the Township Code requires that the budget be readvertised if any revision would in-crease estimated revenues or expenses by more than 10 per-cent overall or more than 25 per-cent in any major category.

Q How much time does the township have to readvertise the budget?

A Section 3202 of the Township Code requires the township to publish a notice once in a local newspaper at least 20 days before the final budget is adopted.

Q Our township appropriates funds to a volunteer fire company. Is the fire company required to submit a report to the board of supervisors describ-ing the use of these funds?

A Yes. Section 1553(c) of the Town-ship Code requires fire companies to submit an annual report to the board of supervisors detailing the use of the appropriated funds before the township may consider budgeting additional funding to the organiza-tion.

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