The LWVN municipal finance committee has prepared the information below about Newton’s budget and about overrides in general as they begin their effort to help educate voters about the overrides recently proposed by the mayor.
In order to explain how the override process works, it is first necessary to explain the City’s own budget. The municipal budget for a City of 86,000 is has to take into account paying for common, recurring items and also for infrastructure and buildings. Each department feeds its own requirements into the budget and each receives funding depending upon the priorities of the City.
An explanation of terms and process follows:
- What is the difference between capital expenses and operating expenses?
- What types of revenue does Newton have?
- What is zero-based budgeting?
- How does an override work?
Difference between capital expenses and operating expenses
Capital expenditures are expenditures to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In addition, a capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset.
An operating expense is an ongoing cost for running a business. Operating expenses consist of salaries paid to employees, legal fees, accountant fees, bank charges, office supplies, electricity bills, business licenses, as well as facility expenses such as utilities.
Types of revenue in Newton
Newton receives revenue from these sources:
- Real Estate Taxes
- Motor Vehicle Excise Taxes, hotel room occupancy taxes, inspectional services permits, investment income
- Unrestricted State and Federal Aid
- Transfers from other funds
- Reserves / Extra / free cash
Zero-based budgeting is an approach to planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only variances versus past years, based on the assumption that the “baseline” is automatically approved.
By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes. During the review process, no reference is made to the previous level of expenditure. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting from the zero-base. This process is independent of whether the total budget or specific line items are increasing or decreasing.
The City implemented a zero‐based budgeting strategy beginning with the development of the
FY2012 Budget to ensure that every department function was reviewed comprehensively, that all expenditures were analyzed, and that planning and decision making was enhanced in order to maximize administrative and operational efficiencies.
The zero‐based budgeting process required all departments to justify and prioritize all activities before the City allocated any resources. Zero‐based budgeting resulted in a more efficient allocation of resources, drove managers to find cost effective ways to improve operations, detected inflated forecasts, increased communication and coordination, identified and eliminated waste or duplication, and identified opportunities for efficiencies.
The City will continue to utilize this process of budget preparation in order to continue to maximize efficiencies.
How does an override work?
Massachusetts voters approved Proposition 2½ – a measure intended to reduce arbitrary increases in property taxation – in 1980. Stated simply, Proposition 2½ places limits on the amount of property tax revenue that a municipality can collect, and on how much this may be increased from year to year.
The 2½ comes into play in the following ways. A community cannot raise in revenue more than 2.5% of the total full and fair tax value of all taxable real and personal property in the municipality. This is called the levy ceiling.
Additionally, the total amount of taxes can increase year on year – the levy limit – is based on the previous year’s ceiling with a few allowances – new properties added, increases allowed, and, of course, overrides. Regardless of other changes however, the levy limit itself increases 2.5% automatically each year.
There are two forms of overrides –
- A Debt Exclusion, or capital outlay expenditure exclusion, gives the municipality temporary additional taxing capacity to finance a specific capital project
- A Override (occasionally referred to as an Operating Override) permanently increases the municipality’s levy limit
The process is designed to ensure that the full community has a voice in determining whether the expenses, projects and investments are aligned with the community’s goals in a way which justifies the increased taxation.
A two-thirds majority of the municipal legislature (the Board of Aldermen in our case) is required in order to present a debt exclusion or capital exclusion question to the voters. Debt exclusion and capital exclusions must state the amounts and purposes for the expenditures.
In contrast, a simple majority vote of a municipality’s legislature allows an “operating” override question to be placed on the ballot. These override questions must be presented in dollar terms and must specify the purpose of the override.
All overrides require a majority vote of approval by the electorate.