> ready > set > succeed

newPA.com

Fiscal ManagementHandbook

FiscalManagement

Handbook

Ninth EditionJuly 2003

Comments or inquiries on the subject matter of this publication should be addressed to:

Governor’s Center for Local Government ServicesDepartment of Community and Economic DevelopmentCommonwealth Keystone Building400 North Street, 4th FloorHarrisburg, Pennsylvania 17120-0225(717) 787-81581-888-223-6837E-mail: ra-dcedclgs@state.pa.us

This and other publications are available for viewing or downloading free-of-charge from he Department ofCommunity and Economic Development web site. Printed copies may be ordered and purchased through a privatevendor as indicated on the web site.

Access www.inventpa.com

Select Communities in PA

Select Local Government Services

Select Publications

Photo Credits

Large Photo: Perry County Courthouse, courtesy of the Perry County Commissioners and the CountyCommissioners Association of Pennsylvania.

Small Road Project Photo: Courtesy of the Pennsylvania State Association of Township Supervisors.

No liability is assumed with respect to the use of information contained in this publication. Laws may be amendedor court rulings made that could affect a particular procedure, issue or interpretation. The Department of Commu-nity and Economic Development assumes no responsibility for errors and omissions nor anyliability for damages resulting from the use of information contained herein. Please contact your local solicitor forlegal advise.

Preparation of this publication was financed from appropriations of the General Assembly of theCommonwealth of Pennsylvania.

Copyright © 2003, Pennsylvania Department of Community and Economic Development, all rights reserved.

Table of Contents

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Roles and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

How to stay Out of Financial Trouble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Budget Balancing Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Pennsylvania Accounting Forms and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

III. Revenue Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Elements of a Good Revenue System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Tax Levies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Municipal Tax Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Fees and User Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Intergovernmental Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

IV. Budget. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Types of Budgets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Legal Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Budget Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Budget Goals and Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Budget Requests by Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Revenue Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Budget Review and Adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Amending Your Budget. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Capital Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Capital Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

V. Accounting, Bookkeeping and Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Required Accounting Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Types of Accounting Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Fund Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Double Entry Accounting Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Cash or Accrual Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Summary of Principals of Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

The Meaning of Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

VI. Accounting Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

The Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Double Entry or Not Double Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Accounting Procedures and Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Setting Up the Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Adding a New Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

The Chart of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

The Account Number System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Prefix Numbers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

The Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

The Suffix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Using the Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Receipts Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Expenditures Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

General Journal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

The Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Making Entries or “Posting” from the Receipts Journal to the Ledger . . . . . . . . . . . . . . . 41

Making Entries or “Posting” from the Expenditure Journal to the Ledger . . . . . . . . . . . . 43

The General Ledger — Double Entry Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Receipts/Revenue and Expenditure Ledgers — The Traditional Approach . . . . . . . . . . . 44

All Ledgers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Purchase Journal or Voucher Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Payroll Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Payroll Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

The Payroll Fund and Payroll Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Shortcuts, Mechanical Aids and Automated Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

VII. Fiscal Management Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Cash Flow Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Petty Cash Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Purchasing Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Municipal Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Risk and Insurance Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

VIII. Municipal Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Debt Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Major Provisions of the Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Lease Rental Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Borrowing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Application for Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Temporary Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Municipal Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

IX. Fiscal Monitoring System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Using the System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

List of Illustrations

Figure No. Page

1. Tax Collection Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2. Working Budget - General Fund Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

3. Working Budget - General Fund Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

4. The Audit Trail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

5. Flow of Accounting Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

6. Steps in Payroll Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

7. Employe Earnings Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

8. A Typical Payroll Journal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

9. Municipal Payroll Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

10. Petty Cash Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

11. Municipal Purchasing Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

12. Purchase Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

13. Request for Quotation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

14. Record of Outstanding Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

15. Determining Net Nonelectrical Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

List of Tables

Table No. Page

1. Typical Municipal Officials' Fiscal Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Department of Community and Economic Development Reports . . . . . . . . . . . . . . . . . . . . . . . . 9

3. PENNDOT Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4. Typical Budget Calendar for a Medium- Sized Municipality . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

5. Example of General Fund Cash Receipts Projection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

6. Example of General Fund Expenditures Projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

7. Example of Cash Position Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

1

I. Introduction

The Fiscal Management Handbook provides guidanceand information to elected and appointed municipalofficials within Pennsylvania to enable them to bettermanage their community’s fiscal affairs. There are avariety of textbooks and manuals available from stateagencies and from professional associations carefullytreating the details of technical tasks involved in fiscalmanagement. Most of these publications are directedtoward persons who have had the benefit of someformal training in accounting, bookkeeping, budgetingand related topics. Most elected officials do not have,nor do they generally have time to acquire, in-depthtraining in fiscal techniques. This handbook bridgesthe gap between the professional language and tasksof finance, and the day-to-day fiscal problems dealtwith in a typical Pennsylvania municipality.

This publication will be of most interest to officials ofsmall to medium-sized municipalities of less than5,000 people. These municipalities generally do nothave trained bookkeepers, accountants, payroll admin-istrators or similar professionals. It is usually up to theelected officials themselves, along with their secretaryand the auditors, tax collector and solicitor to carry outmost fiscal management tasks. Newly-electedofficials or those who are acquiring new fiscal respon-sibilities within their municipality will benefit fromthis handbook. It includes many definitions of fiscalterms and points out in plain language various provi-sions of the municipal codes and other laws related tofinance.

Municipal fiscal management is becoming a continu-ally more difficult task for elected officials. The diffi-culties stem in part from the general complexity ofgovernment now involving a wide range of revenuesources including various grants from the state andfederal governments. Some grant programs requirespecial accounting for the grant funds and strictly limitthe uses of the funds. However, the major fiscalproblems revolve around the cost/revenue squeeze.Costs for labor and materials are rising almost withoutexception. Unless the employment, income and realestate tax base within your community rises at least asfast as costs and demands for increased services,higher taxes must be developed or the efficiency ofyour municipal services must be increased.

This publication is directed mainly toward the majorelements of the fiscal management cycle. The input tothe cycle, made up largely of taxes, fees and grantfunds, is transformed into services you are providingto the taxpayers of your municipality. The services areprovided within the framework of the budget, and aresubject to the inspection and verification of the audit.

Chapter II describes the fiscal management roles ofvarious elected and appointed officials in the typicalmunicipality, and the interrelationships among theirtasks. The chapter explains the difference between thejobs you are responsible for carrying out yourself andthose where you have supervisory responsibility to seethe job is done properly by others. Summaries of thoseportions of municipal codes and laws influencing yourduties, responsibilities and liabilities are provided.

Chapter III presents the various revenue sourcesprovided in the codes and tax laws and comments onthe use of various sources under differing conditions.Characteristics of revenue sources in terms of theirfairness, yield and administrative complexity arepointed out to aid in the selection of appropriate taxes,fees or service charges.

The budget process is a requirement of law and manymunicipalities prepare a budget mainly to satisfy thelaw. In Chapter IV the legal requirements of themunicipal budget are discussed; however, of moreimportance are the guidelines you can use to makebudget preparation a useful planning process. Theguidelines include illustrations of revenue forecastingtechniques and the development of standard unit coststo be used to project the costs of particular services orprojects. Charts outline suggested budget schedulesand the responsibilities of the people preparing thebudget. An orderly sequence of events is more likelyto produce a useful and realistic budget to serve as abasis for the upcoming year’s activities.

Chapter V provides a description of municipalaccounting, bookkeeping and auditing requirements sothe reasons for particular instructions and proceduresare easily understood. Various types of funds andalternative accounting methods are described to betterprepare you to tailor an accounting system best suitedto fulfill your community’s needs.

2

Basic accounting requirements are reviewed inChapter VI. It also addresses the very difficult subjectof payroll administration, with emphasis on simplifiedmethods you can use to account for fringe benefits,social security payments, tax withholdings, and tokeep complete and accurate records of payrollpayments.

Chapter VII brings together several topics cuttingacross the earlier ones. The first of these deals withcash flow management techniques to minimize theneed for borrowing short term money, This chaptercontains recommendations on petty cash control,purchase authorizations, purchase orders and controlof revenue and expenditures through the use of suchadministrative measures as vouchers, receipts andother records. Strategies for investment of municipalfunds and legal restrictions are also covered.

Debt management is the subject for Chapter VIII, withdiscussion of how to calculate debt limits, proceduresfor borrowing and financing through municipalauthorities.

Chapter IX provides local officials with a financialmonitoring system to allow them to track the financialperformance of their municipality. This will alert themto the need to take steps to correct problem areas.

As with all publications of this type, the contents arefor guidance only and do not constitute a legal refer-ence. Where points of law are in question, the appro-priate municipal code, tax laws or other legal sourcesmust be consulted. Your solicitor should be called into answer questions that have unresolved legal impli-cations.

3

II. Roles and Responsibilities

Municipal financial management — what does theterm really mean in practical terms to you as anelected official? Essentially, fiscal or financialmanagement is the process of obtaining funds tosupport the necessary services provided by yourmunicipality and using those funds in an effective andefficient manner. Sound fiscal management requires:

� A well-planned budget.

� A bookkeeping and accounting system.

� Procedures and rules for receiving and spendingmoney.

� An annual audit.

Your municipality, in complying with current legalrequirements of the municipal code, already has tosome extent placed in effect the four major elementsof fiscal management listed above. Your present fiscalmanagement system may be operating efficiently andsmoothly or you may have occasional doubts about theprocedures being used and the accuracy of youraccounting records and budget-making process.

As an elected official of your municipality, you haveassumed a number of responsibilities. Some of theseresponsibilities require you, along with your fellowsupervisors, commissioners, or council members, totake specific actions — to do things yourself. In othercases, you are responsible for the actions of others —appointed officials or employes of your municipality.In other words, even though employes may makeerrors, you may be held responsible in some cases. Itis necessary to understand your more importantresponsibilities in financial affairs in order to avoidfuture difficulties.

Table 1 summarizes some of the major fiscal actionsthe governing body must take as official acts duringproperly constituted meetings. The table also pointsout some of the major tasks appointed officials oremployes of your municipality must carry out — andwhich you must assure are completed properly.

How to stay out of Financial Trouble!

What happens if these roles are not carried outproperly, if the financial operations of the municipalityare not adequately monitored? Where there is anample tax base, nothing may happen for a while. Butwhen circumstances change and resources become less

available, failure to adequately manage municipalfinances results in crisis. This combination ofdeclining resources and inadequate management hasposed severe challenges for a number of Pennsylvaniamunicipalities over the past decade.

Municipal financial crisis was brought to nationalconsciousness when severe financial difficulties wereexperienced by large urban centers in the 1980s.Cities such as New York, Cleveland and Detroitteetered on the brink of bankruptcy. Although lesswell known, smaller municipalities in Pennsylvaniaalso began to experience severe financial difficulties.The Municipalities Financial Recovery Act waspassed in 1987 to provide state assistance to help suchplaces avert bankruptcy. Since that time, 17 munici-palities have been declared distressed under the Act.Five of them, Ambridge, Shenandoah, Wilkinsburg,East Pittsburgh and North Braddock have since beengraduated from the program with restored financialsolvency. The distressed communities are concen-trated in the Monongahela Valley of southwesternPennsylvania where the closing down of much of thesteel industry has resulted in widespread economicand social distress.

TABLE 1

TYPICAL MUNICIPAL OFFICIALS’ FISCAL ROLES

You must do You must see that

these tasks yourself these jobs are done properly

set taxes accounting system

set fee schedules payroll and deductions

review existing fee schedules legal notices

select budget items payment on approved invoices

adopt budget issuance of receipts

approve expenditures petty cash fund

make investments collection of taxes

approve borrowing financial report

designate fund depositories file budget and financial report

with DCED and county court

secure bonds filing of liens

repayment of loans on

prescribed schedules

4

A declaration of distress under the MunicipalitiesFinancial Recovery Act is a radical step and one to beaverted by local officials if at all possible. TheDepartment of Community and Economic Develop-ment (DCED) provides intensive technical assistanceto municipalities to help them before they becomedistressed. The Act requires each municipality tosubmit an annual Survey of Financial Condition to theDepartment. Although these are submitted beforeMarch 15 of the following year, it is often some timebefore the Department is able to review the Surveysand determine if positive responses to any of thequestions indicate potential financial problems.

DCED also uses data compiled from the Annual Auditand Financial Report as some of the variables for theEarly Warning System mandated by the MunicipalitiesFinancial Recovery Act. Again, these are filed byMarch 15 of the following year, then must be editedand compiled by the Department, so it may be almosttwo years after the data represented in the Report isavailable for use to track a municipality’s financialcondition. The usefulness of the data is alsodependent on the quality of the local financialreporting system. These limitations on state reviewmean that local officials cannot rely solely on DCEDto identify developing financial difficulties. It isimperative that municipal officials understand some ofthe symptoms of fiscal problems themselves and learnhow to recognize and treat them on the local level.

You can fall into a number of common pitfalls infulfilling your fiscal roles and responsibilities, andthese pitfalls can lead to serious future financialtrouble for your municipality. Most of the pitfalls ormistakes don’t look serious at the time — but theirlong term effects can be painful. Most pitfalls occuraround two major financial management tasks —

� Preparation and execution of the budget.

� Control of expenditures and borrowing.

The following several pages outline a number of thepitfalls causing serious trouble for Pennsylvaniamunicipalities. The list is not all inclusive — peoplecan always find new ways to make mistakes.However, it does cover a number of common troublespots. The pitfalls are presented so you and youremployes can detect if any of these mistakes are beingmade in your municipality. If some of the pitfalls lookfamiliar, your municipality should attempt to correctthem, perhaps with the assistance of a financialadvisor or a consultant.

Pitfall #1

Budgeting nonexistent revenue. Although it seemsobvious only real revenue sources should be consid-ered when estimating next year’s revenue for yourbudget, there have been cases when municipalitieshave budgeted revenues which simply will not exist.For example, some municipalities have neglected toconsider the effects local employment problems suchas layoffs, or regional disasters such as floods willhave on property, personal income and wage taxes.One municipality normally counted heavily on trafficand overweight fines but neglected to consider theopening of a major interstate highway nearby wouldeliminate this source of revenue.

Pitfall #2

Overinflating your revenue estimates. This pitfall issimilar to #1. It is possible to lull yourself into a senseof security by ballooning tax and fee revenueestimates to match your needed expenditures withoutincreasing taxes. A common way revenue estimatesbecome overinflated is calculating revenues for thecoming year will increase by the same amount theyincreased in the current year. This “lazy’’ method ofestimating revenue can result in a false sense ofsecurity. Completion of a new subdivision or otherhousing project may have inflated the current year’srevenue, but next year it may remain relativelyconstant. If you budget to spend nonexistent revenue,your municipality will either have to reduce costs orend up operating at a deficit.

Pitfall #3

Failing to follow through on budget cuts. When thefinal budget is drawn and adopted, many municipali-ties will find it necessary to make some cuts from theprevious year to balance revenues and expenditures.Perhaps the cuts were a reduction in expenditures foroffice supplies, or a reduction in the recreationprogram, or a reduction in the size of the police force.Pitfall #3 occurs when you do not follow through andmake the budgeted cuts at the proper time in the newyear. Failure to follow through with the cuts will againmean you are spending nonexistent revenue! Proposedbudget cuts must be studied carefully to determinewhether later citizen demands or the true needs of themunicipality will force you to spend funds for itemsyou had planned to delete.

5

Pitfall #4

The “once-a-year” budget. Many municipalitiesconsider the budgeting process a necessary evil whichmust be undertaken once a year. As soon as the budgethas passed public scrutiny, it is placed in the file andonly brought out by request. The total expenditurebudgeted for the year is used as the limit, but expendi-tures in individual accounts are not controlled. Theelected officials presume they can always transferfunds from one account to another to match actualexpenditures. The budget is the published record ofanticipated expenditures. Many accountants maintainapproval of the budget is a formal allocation of fundsto those accounts, and any expenditure of funds inexcess of the limits in each account can be legallyaccomplished only by formal action of the electedofficials to amend or modify the budget.

Both to assure legality of operation, and as goodmanagement procedure, each municipality shouldcontrol its expenditures by individual budget accountsthroughout the year

Pitfall #5

Fuzzy financial reports. In many municipalities, thesecretary or clerk will prepare a monthly financialreport showing the status of revenues, expendituresand the resulting bank balances. Since most munici-palities account for revenues when the money isreceived and account for expenditures when the billsare actually paid, a financial report can be deceptive.For example, a report might show a balance of$10,000, and this would be reassuring since it corre-sponds to the budgeted balance at that time. The reportwould not show the municipality is holding $19,000 inoutstanding bills. So, rather than a solid balance of$10,000, in reality the municipality is faced with a$9,000 deficit! Two lessons are to be drawn from thissituation. First, all bills should be paid promptly soyou can accurately determine the cash position of yourmunicipality. Secondly, if unpaid bills do exist at theend of the month, the financial report should includethese bills and their effect on the balance, and theaccounting system should include a purchase journalor voucher register to maintain a continuing record ofthese accrued expenses.

Pitfall #6

Tax anticipation loans. Through good managementof your cash position and scheduling expenditures, theneed for tax anticipation loans can be minimized aswill be explained more fully in Chapter VII.

However, tax anticipation loans are sometimes neces-sary. For example, if carry-over funds from theprevious year are not adequate, a short term loanmight be needed to meet the municipal payroll untilcurrent year taxes are collected. Tax anticipation loanscannot be carried over from one fiscal year to the nextand must be repaid during the year the loan was initi-ated. This problem ties into Pitfalls #1 and #2. If youobtain a tax anticipation loan for nonexistent revenue,it will be impossible to pay the loan back during thecurrent fiscal year.

Pitfall #7

Failure to face up to a tax increase. Tax rates set atthe beginning of a year cannot be changed during thatyear. Municipal officials who falsely talk themselvesinto believing a tax increase is unnecessary will findthemselves with a totally unrealistic budget and arelikely to run short of funds before the end of the year.If the need exists, it is generally better for the munici-pality and taxpayers if small realistic increases aremade on a regular basis rather than holding the line ontaxes for several years, and then enacting a substantialincrease in one given year. There is less public objec-tion to the incremental approach.

Pitfall #8

Failure to budget for repayment of bank loans. TheLocal Government Unit Debt Act permits municipali-ties to obtain temporary bank loans for capital expen-ditures. Some municipalities have had majordifficulties with bank loans. Municipalities sometimesfail to include as a budget expenditure the annualpayment of principal and interest. Failure to budgetthis repayment will result in an unexpected expendi-ture later in the year, or may require the unlawfulcarrying forward of the payment to the next fiscalyear. Article IX, Section 10 of the Constitution andSection 8104 of the Local Government Unit Debt Actrequire local governments incurring debt to adopt aconvenant to make payments out of its sinking fund orany other revenues or funds in annual amounts suffi-cient for payment of principal and interest charges.The municipality is no longer required to levy a tax.

Pitfall #9

Neglecting to review insurance coverage. Munici-palities having insurance for employes, buildings orvehicles should obtain a full explanation of allcoverages from their insurance agent at least once ayear. Often when an employe resigns or a building is

6

sold, the insurance coverage continues in effect andthe municipality pays the premium. This obviouswaste of money can be avoided by regular review ofyour policies. The annual review should also be usedto assure adequate coverage is being maintained.

Pitfall # 10

Omitting costs in the budget. When estimating costsfor the coming year, particularly for personnel,carefully include all true costs. A common problem isfailure to budget for overtime. Simply using theannual wage and fringe benefit amount for eachemploye is likely to result in too low an estimate. Youshould scan through your past experience to determinehow much overtime to expect. For example, howmuch overtime did you pay last year to handle snowremoval? A similar problem occurs if you do not takeinto account changes in fringe benefits for employes.Increased insurance coverage, pension benefits or amore liberal vacation policy can have considerableimpact on your costs in the coming years. Other costssometimes overlooked are increased maintenance andoperational expenses when new municipal buildings,new roads, park facilities or similar projects areacquired by the municipality. For example, expensesfor heat, paint, repairs and janitorial service for amunicipal building can be significant. When you havecompleted a new capital project, be sure you considerall annual operational costs it will require. Changessuch as these should be identified and adjustments inyour cost estimates should be made accordingly. Eachyear prior to enactment of the budget, a written quota-tion of the next year’s actual insurance premiumsshould be obtained from the agent or agents.

Pitfall #11

Delayed funding of pension funds. Various statelegislation has provided for the establishment ofpension funds for municipal employes to which boththe employe and the municipality contribute. Fullfunding of the municipal share is now required bystate law. Failure to make the payment by December31 incurs interest penalties for the municipality.Interest due compounds for any payment made afterthe end of the year.

Pitfall #12

An inefficient tax package. Many municipalitieshesitate to approach their legal millage limit on realestate taxes, and when additional funds are neededthey impose a variety of “nuisance” taxes. These taxesare often more difficult (and expensive) to collect than

a real estate tax and present a confusing tax picture inthe municipality. The selection of specific taxes andthe rates to be used should be based on such factors asfairness and yield. However, the expense and diffi-culty of collection should also be an important consid-eration.

Pitfall #13

Long-term borrowing for short-lived facilities.

There have been instances when municipalities haveentered into long-term bond issues, and the proceedsof the bond issue were spent for items that will beworn out or replaced long before the bond issue isretired. The term of the borrowing should not exceedthe reasonable expected life of the item beingpurchased.

Ignoring this principle ties up future municipal fundsfor which no benefit is being received at the time. Agood financial advisor should be consulted on all bondissues, and the proceeds should be spent for long-livedimprovements.

Pitfall #14

Overreliance on volunteer groups. Often occasionsarise where a civic group in your municipality offersto provide volunteer services for such activities asrecreation, solid waste recycling or school crossingguards. This support is beneficial and should beencouraged. However, you should recognize volunteergroups can fall apart or at any time decide to stopproviding the service, and government will always bethere. You should be careful your municipalitydoesn’t become unnecessarily or undesirablycommitted to continue the services if the volunteergroup disbands. You might find yourself incurringadditional unplanned expenses for a service whichcannot be justified as a municipal activity.

Pitfall # 15

Liquid fuels allocations. The timely filing of therequired annual reports with the Pennsylvania Depart-ment of Transportation to comply with the law andtheir regulations will result in the receipt of the properallocation on schedule. Otherwise, money will not bemade available until the forms are filed, resulting inthe loss of accrued interest on this money. When newstreets are added to the street system, a mileage updateshould be done within the year. Contact the Bureau ofMunicipal Services for the necessary filing proce-dures. If you are a fast-growing municipality, considerthe feasibility of an interim census.

7

Pitfall #16

Investments. Many municipalities fail to gain addedrevenue through wise investments of all funds. Allmonies not necessary for current operations should beinvested. However, before funds are invested, the ratesof interest from several financial sources should becompared. Investigate pooled municipal investmentfunds.

Pitfall #17

Employe withholdings. Municipalities should insurethey are withholding the proper federal, state and localpayroll taxes, including social security employe andemployer shares and unemployment compensationtaxes. Contact the nearest offices of the InternalRevenue Service and the Pennsylvania Department ofRevenue as well as the local tax collectors for earnedincome and occupational privilege taxes. Failure toadequately account for withholdings and make timelysubmission of withholdings can artificially inflate amunicipality’s financial balance. One of the commonproblem areas discovered in distressed municipalitiesis accumulation of past due withholdings where themunicipality has succumbed to the temptation todivert these funds to other uses, even to the point ofincurring penalties for late payment.

Pitfall #18

Not requiring accurate disclosure of financial

transactions on the accounting records. Neglectingto require a standard double entry accounting systemthat accounts for assets, liabilities, revenues andexpenditures distorts the true financial position of amunicipality. Often the purchase and sale of invest-ments, refunds and amounts due other funds areimproperly recorded as revenues and expenditureswhen they should be recorded under assets and liabili-ties. Double entry bookkeeping should be required toaccurately classify each transaction.

The pitfalls outlined above represent only a few of themost common and potentially serious ways a munici-pality can get itself into fiscal difficulties. Goodbudgeting, accounting and fiscal control practicesaccompanied by common sense and willingness toface up to the true situation can avoid most if not all ofthe pitfalls. Budgets should be carefully drawn upand then used to control and monitor your expendi-tures and revenues. Accounting systems must be usedto obtain good financial reports to illustrate yourmunicipality’s true financial status at any time.

Budget Balancing Remedies

If one of the pitfalls has led you towards financialtrouble, some quick fixes are available. The followinglist of remedies for putting, or keeping, municipalfinances on an even keel has been adapted from alisting produced by the Government Finance OfficerAssociation, 180 N. Michigan Avenue, Suite 800,Chicago, IL 60601. The remedies are not presented inany particular order, nor does it exhaust all the possi-bilities for improving cash flow. No single remedy isparticularly recommended. Each municipality mustdetermine which are going to be most useful for theirown particular situation.

� Cut the hours of public facilities, such as librar-ies, recreation centers or swimming pools.

� Close facilities with the lowest incidence of useor where needed repair is so extensive it is nolonger cost effective.

� Reduce frequency of services or scale back ex-isting programs, such as cutting garbage collec-tion from twice to once a week and requiringfront curb pickup.

� Determine the full costs of delivery of servicesbefore implementing any change to upgrade ex-isting or institute new services, ensuring thatuser charges pay the complete cost of delivery ofthe service, including overhead.

� Pursue possibilities of cost savings by joiningwith neighboring municipalities in a regionalprogram.

� Pare down fund reserves or carry-over surplus.When this is being done, the elected officialsshould be clearly aware of the trend of final cashbalances over the past several years. Continueddecline in reserve level is a clear indication thatrevenues are not meeting expenditures.

� Postpone hiring for selected positions or institutea hiring freeze for all new vacancies for a speci-fied period.

� Refinance debt to obtain lower annual debt ser-vice payments. This is particularly beneficial ifinterest rates have dropped since the debt was in-curred. Any extension of the amortization pe-riod should be closely scrutinized.

� Examine where part-time and temporary staff areused to decide if the positions are truly needed.

� Use volunteers wherever possible to reduce sal-ary and benefit costs. But, also be conscious ofPitfall #14, above.

8

� Replace full-time staff with less costly part-timepersonnel. Be careful to consider training costsand the need for qualified personnel.

� Spread capital equipment costs over a period ofseveral years through lease-purchase agree-ments.

� Limit or reduce overtime and callback pay.

� Increase user fees and charges for licenses andpermits so that costs of programs are covered.

� Create new service charges for user-specific ser-vices currently funded by other means. A fre-quent candidate in Pennsylvania towns has beengarbage collection which is still paid for fromthe General Fund in some places.

� Update asset and equipment inventory list to en-sure new purchases are for essential items.

� Institute safety programs for employes to reduceinjury claims and absenteeism resulting from in-juries.

� Extend the useful life of equipment through pre-ventive maintenance programs.

� Examine organizational structure and job de-scriptions for possible position consolidation ortransfer to areas of greater need.

� Postpone the implementation of new programsor services or provide them on a lower servicelevel.

� Encourage cost-savings ideas from employesthrough a cash award or public recognition pro-grams.

� Institute early retirement incentives to generatesalary and benefit savings by keeping positionsvacant or filling them at lower salary levels.

� Delay or cancel capital projects.

� Require employes to pay part of health insurancecosts or increase their share.

� Freeze spending in controllable areas of the bud-get, such as office supplies, travel and subscrip-tions.

� Sell assets no longer needed or in use.

� Transfer services or program to enterprise funds,if appropriate, where they can be funded throughuser charges to free up general fund tax revenue.

� Lease or rent property not currently needed formunicipal operations.

� Maximize collections through timely billingsand aggressive pursuit of delinquent tax and util-ity payments.

� Participate in a regional joint purchasing agree-ment or buy items through the state piggybackpurchasing program.

� Use employe attrition to incur savings over timeby not filling vacant positions.

� Implement across-the-board cuts.

Pennsylvania Accounting Forms and Reports

The Commonwealth of Pennsylvania provides supportand establishes requirements on the accounting,bookkeeping and auditing done by Pennsylvaniamunicipalities. The Commonwealth, through thePennsylvania Department of Community andEconomic Development, provides a Budget Form foruse by the municipalities, a Chart of Accounts, and aFinancial Report Form for use in auditing. PENNDOTalso distributes a Treasurer Account Book to allsecond class townships and boroughs. Finally,PENNDOT also provides a separate set of forms to themunicipalities for use solely with the Highway AidFund.

A checklist of the specific reports required byPENNDOT and DCED is provided on the next fewpages. The following checklists are provided as a firststep toward streamlining the procedures for themunicipal secretary/treasurer. Suggestions andadditions are welcome. They may be sent to thefollowing addresses:

Pennsylvania Department of TransportationBureau of Municipal ServicesCommonwealth Keystone Building400 North St. 6th Fl.Harrisburg, Pennsylvania 17120-0064

Department of Communityand Economic DevelopmentCenter for Local Government ServicesCommonwealth Keystone Building400 North Street, 4th FloorHarrisburg, Pennsylvania 17120-0225

9

TABLE 2

DEPARTMENT OF COMMUNITY AND ECONOMIC DEVELOPMENT REPORTS

When Due Report Identification Who FiIes

January 15 Tax Information DCED-CLGS-22 Secretary or Clerk

March 1 Annual Financial Report (Cities) DCED-CLGS-30 Director of Accounts & Finance

March 15 Survey of Financial Condition DCED-CLGS-69 Presiding Officer of Governing Body

April 1 Annual Financial Report DCED-CLGS-30 Auditors

(Boroughs. & Townships.)

15 days after Ordinance or Resolution — Act 511 Tax — Secretary or Clerk

effective date

90 days after close Annual Report of Municipal Authority DCED-CLGS-04 Certified Public Accountant

of fiscal year, if fiscal

year ends Dec 31, report

due July 1, of following year

TABLE 3

PENNDOT REPORTS

When Due General Forms Send to: Special Instructions

January 15 DCED-CLGS-19-5 — Organization 4 copies to PENNDOT

of Elected and Appointed Officials Pennsylvania Department of Transportation

Bureau of Municipal Services

Commonwealth Keystone Building

400 North Street, 6th FloorHarrisburg, PA 17120-0064

January 31 MS- 965-S — Record of Checks 4 copies to PENNDOT District Office

— State Fund Acct.

January 31 MS- 965 — Actual Use Report of State Funds 4 copies to PENNDOT District Office

October 1 MS- 990 — Road Mileage & Type 2 copies to PENNDOT District Office These forms will be prepared by PENNDOT.

Municipality must

possess an approved MS- 339 — Application for County Aid 4 copies to County Commissioners These forms will be prepared by PENNDOT.

copy prior to

expenditure for constr. MS- 329 — Application for Act 655 These forms will be prepared by PENNDOT.

or reconstruction Construction or Reconstruction

Complete prior to MS- 999 — Completion Report PENNDOT District Office These forms will be prepared by PENNDOT.

inspection by local 3 copies if State Aid —

authority & PENNDOT Rep 4 copies if County —

5 copies if both

10

CONTRACT PURCHASE FORMS WORK PERFORMED BY CONTRACT

When Due General Forms Send to: Special Instructions

Must be executed prior MS- 944 — Contract 1 copy retained by Municipality Attach Bond (Form 9445)

to performance of work carrying out project

Same as above Copy of Advertisement 1 copy retained by Municipality Tabulation of all bids received & copies

carrying out project of plans & specs. should be retained by sec.

Same as above Copy of Bid Tabulation 1 copy retained by Municipality

carrying out project

Same as above Proof of Advertisement 1 copy retained by Municipality

carrying out project

CONTRACT PURCHASE FORMS PURCHASE OF MATERIALS OR EQUIPMENT IN EXCESS OF $10,000

(To be retained by local secretary-treasurer.)

Must be approved MS- 963 Attach bond to each copy.

prior to performance Material up to $5,000, 50% bond;

of any work over $5,000, 100% bond.

11

III. Revenue Sources

For Pennsylvania’s smaller municipalities (third classcities, boroughs and townships), there are three mainstreams of revenue to generate the needed funds tooperate municipal government and provide services tocitizens. In 1996, local taxes provided 45 percent ofthe revenues for these governments. Non-Real Estatetaxes provided 34 percent of revenues at the locallevel. Taxes are “enforced contributions” for munic-ipal services which cannot be rationally allocated toindividual users. These include services like policeand fire protection, parks and general administration.Such services benefit the entire community and arepaid for by all local taxpayers in a tax systemsomewhat scaled to the ability to pay.

Intergovernmental revenues from the state and federalgovernments accounted for 10 percent of the revenuesof third class cities, boroughs and townships in 1996.More than half of these funds are state liquid fuelsmonies.

The remaining 45 percent of revenues were generatedby the internal operations of municipal government.They are paid by the users of municipal services. Thebulk of this revenue is generated by municipal utili-ties: water, sewer, electric, garbage collection andparking. Also in this category are municipal fees,permits, departmental charges, fines and income frominterest and facility rentals.

Elements of a Good Revenue System

Since taxes are essentially a form of enforced contri-bution, your revenue program must be both fair andequitable. Fair treatment of your revenue sourcesessentially means taxes and fees should not discrimi-nate against any particular group or category ofcitizens. For example, if a tax were permitted on themembership dues of a religious organization, thismight represent a form of discrimination. Act 511 of1965, the Local Tax Enabling Act, specificallyprohibits such a tax. Generally, the taxes local govern-ments in Pennsylvania are empowered to impose donot discriminate and are, therefore, essentially fair.

An equitable tax or charge applies equally to allpersons subject to the tax or charge. Real estate taxesare sometimes inequitable because the assessed valua-tion (and therefore, taxes) for a house built ten yearsago is often lower than the assessed valuation for an

equivalent house built today. Although the tax ratemay be equal, the base on which the tax rate is appliedis not uniform. Unequal enforcement of tax collectionalso represents a way your revenue program may beinequitable. Following through with all measuresallowed by law to collect unpaid taxes is essential to atax program which treats all citizens of your munici-pality equally.

Your tax program should be set up to automaticallybenefit from growth. As your municipality grows,higher levels of municipal services are usually needed.A desirable tax structure results in the new growthpaying its own way by bringing in increased revenue.Most taxes Pennsylvania local governments arepermitted to levy automatically increase revenues asthe value of real estate, incomes and populationincrease.

Tax Levies

Pennsylvania municipalities may enact a tax on realproperty within their boundaries. This is a generalpurpose tax and may be used for any of the purposesspelled out in the municipal codes. Further real estatetaxing power is provided in the municipal codes forspecific purposes and the proceeds maintained inseparate funds. (Fund accounting is described inChapter V). In addition, Act 511 of 1965, the LocalTax Enabling Act, specifies other taxes municipalities(as well as school districts) may enact and themaximum rates of taxation. Complete discussion oftax sources is found in the Taxation Manual publishedby the Department of Community and EconomicDevelopment.

A Special Road Fund for boroughs and a RevolvingFund for townships of the second class may beinitially established by levying up to five mills. Costsof street, sidewalk and other permanent capitalimprovements paid for from these funds can be replen-ished by the use of special assessments against theowners of the properties benefitting from the improve-ments. When the funds are replenished by assess-ments, there is a continuing supply of money availableto conduct new capital improvement projects.

12

Municipal Tax Collection

In Pennsylvania, the local elected tax collector worksindependently of the municipal governing body. Taxcollector duties, responsibilities and relationships withyou as a municipal official are spelled out in the appli-cable municipal code and the Local Tax CollectionLaw.

Figure 1 contains a typical tax cycle and illustratessome of the major duties and interrelationshipsbetween local and county officials and the taxcollector. The assessment roll is prepared by thecounty after it has been updated by assessments onnew taxable properties by the county assessor and onoccupations by the municipal assessor. From theassessment roll, the municipality is responsible for thepreparation of the tax duplicate, which contains theamount of tax due for each property and person on thebasis of their real estate and occupational assessments.In some cases, the county, when preparing the assess-ment rolls, may calculate the taxes due.

Figure 1Tax Collection Cycle

The tax duplicate is delivered to the tax collector bythe municipality within 30 days after adoption of thebudget or within 30 days after the assessment roll isreceived from the county. Usually this will result inthe tax duplicate being delivered to the collectorduring the month of January.

Within 30 days after receiving the tax duplicate, thetax collector must prepare and issue the tax notices toeach person listed on the duplicate.

As the tax payments are received by the tax collector,each payment is noted on the tax duplicate and fundsare paid over to the municipality on or before the tenthday of each month or more often. The tax collectorpays the entire amount received and does not deductany funds for commission or expense. The tax collec-tor’s commission or salary can be paid at the time themonthly deposit of taxes is made. However, exceptfor third class cities, the law does not specifically statewhen or on what schedule the tax collector is toreceive compensation.

There are several words, terms and phrases relating totax collection frequently misunderstood by municipalofficials. One of these is exoneration. An exonerationdoes not excuse a taxpayer from paying the taxesowed. An exoneration only removes the liability of thetax collector to collect certain delinquent taxes. Withfew exceptions, exonerations cannot be granted forreal estate taxes. Usually the tax collector is onlyexonerated from per capita and occupational taxes,and then only after all reasonable efforts are made tocollect the taxes, including the attachment of delin-quent taxpayers’ wages.

When an exoneration is granted, the taxpayer is stillliable to the municipality for the unpaid taxes. Themunicipality must proceed with all legal means tocollect the taxes as if no exoneration has been granted.The municipal clerk or secretary must maintainrecords of all persons exonerated, as well as the dateof exoneration and the amount of tax due. Of course,the tax collector receives no commission on exoner-ated taxes.

An exemption is a state of immunity or freedom froma tax or other public charge. Taxes are not leviedagainst exempt persons or property. The assessmentlaws and the Local Tax Enabling Act authorize munic-ipalities to exempt persons whose income from allsources is less than $5,000 from personal taxes. Thisaction must be taken by an amendment to theordinance levying the tax. Persons who then qualifyfor the exemption will be relieved from all liability forthese taxes. Because taxing districts frequentlyrequest tax collectors to process exemption claims forper capita and occupation taxes, these exemptionshave become confused with exoneration.

The tax collector must make an annual settlement ofaccounts by December 31 of each tax year. The taxingdistrict designates before whom settlement is made,for taxes levied and collected. The tax collectordischarges accountability for a given tax levy by beingallowed a credit for all taxes collected and paid over.

$

Deliveredto municipalities

Tax duplicateprepared by

municipalities

Delivered tolocal taxcollector

Tax collectorprepares tax

notices

Notices deliveredto taxpayers

Taxes receivedby tax collector

Tax receiptsdelivered tomunicipality

Local assessorupdates tax rolls(occupations andpercapita only)

Deliveredto county

County preparesassessment rollsand updates real

estate assessments

13

Credit is allowed for unpaid taxes on real propertyprovided those taxes have been returned to the TaxClaim Bureau; credit is allowed for unpaid per capitaand occupation taxes accounted for exoneration. As afinal step in discharging annual tax collection duties,the tax collector must, in a sworn statement, affirm atrue and just return of all taxes collected has beenmade.

The Real Estate Tax Sale Law mandates the return ofall delinquent taxes to the Tax Claim Bureau, underthe control of the county commissioners in eachcounty. The following taxing districts are not includedor subject to the provisions of this law: Philadelphiacounty; city and schools; Allegheny County; Scranton,city and schools.

The Bureau is designated the agent of any taxingdistrict in the prosecution and collection of claims andin the management and disposition of property held bythe Bureau as trustee.

Under the law, each tax collector is required to make areturn to the Tax Claim Bureau on or before the lastday of April of each year, listing all properties onwhich any taxes levied in the calendar year immedi-ately preceding remain unpaid, plus penalties andinterest incurred up to the return date. The Bureau isthen required to give notice to each delinquenttaxpayer not later than July 31 that taxes have beenreturned and a claim entered.

Act 511 taxes may or may not be collected by theelected tax collector. The Local Tax Enabling Actgives municipalities complete freedom in makingadministrative arrangements for collection of Act 511taxes. Act 511 per capita and occupation taxes aremost often collected by the local tax collector sincethese are billed and collected once a year, usually withthe real estate and code per capita and occupationtaxes. Earned income taxes are usually collected byspecialized bureaus or private collection agencies.Mercantile, business privilege and amusement taxesare often collected by municipal licensing agents.

Fees and User Charges

To cut down on the burden of direct taxation, mostmunicipalities levy one or more fees or user chargeson the persons benefitting directly from a municipalservice. Most common are water rents and sewageuser fees based on the volume of water consumed byresidential, commercial and industrial customers. Inplaces where there is municipal garbage collection, agarbage collection fee is usually charged on eachserviced property. In some places, solid waste

disposal or recycling fees are added to garbage collec-tion fees. A number of boroughs sell electric power atretail within their boundaries, generating significantrevenues. User fees are commonly applied in therecreation area for such things as swimming pools,tennis courts, golf courses, park pavilions and specialactivities.

In other cases, although municipal services are not“sold” directly, the use of license or permit fees allowsmunicipalities to recapture the cost of providing speci-fied services to individual customers. Zoning permits,junkyard licenses, building permits, transient retailerlicenses, and parking lot or meter fees are commonexamples. The fee limitations are, in some cases,specified in the municipal codes. Where the maximumfee is not specified, you may not set the fee so highthat it becomes a money-making operation for yourmunicipality. The fee or permit schedule should be setto cover all of your justifiable administrativeexpenses. For example, the expenses connected withissuing a permit include filing and storage, cost offorms or other materials, and the time required bymunicipal personnel making inspections, reviewing orevaluating the application. Generally, where nototherwise constrained by municipal code specifica-tions, you should set fees high enough so that all ofyour costs associated with a license or permit arerecovered from the fee itself. If fees are less than theactual cost, the taxpayers of the municipality aremaking up the difference and, in effect, subsidizingthose persons obtaining permits and licenses.

Intergovernmental Revenues

Intergovernmental revenues are funds transferred fromthe state and federal government to municipal govern-ments. These form a significant percentage of munic-ipal revenues in some cases. There are two types ofintergovernmental revenues. Entitlement funds go outto all eligible local governments with minimalreporting requirements. Discretionary grants are estab-lished by state or federal legislation and require appli-cation to the administering agency for each grant.

State liquid fuels funds are distributed to all munici-palities under a formula based on population and themiles of municipal streets and roads. Use of liquidfuels funds is restricted to highway and bridge mainte-nance and construction and related equipment andservice. Municipalities are required to file copies oftheir annual audits and other certification forms withthe Department of Transportation to qualify for thesefunds.

14

Under the Public Utility Realty Tax Act, the statelevies a tax on public utilities and distributes fundsderived from it to local tax bodies in lieu of local realestate taxes on public utility property under a formulabased on total tax receipts, tax rates and the value ofpublic utility realty within its boundaries. Taxingbodies must file an annual report with the Departmentof Revenue to qualify for the distribution.

The Commonwealth of Pennsylvania has deregulatedthe elective power generation utility industry to insti-tute competitive pricing and service providers tobenefit consumers including municipalities. The costof the transmission and distribution of electricity byutility companies in Pennsylvania to consumerscontinue to be regulated by the Public Utility Commis-sion.

Public Utility property owned by electric power gener-ation companies is exempt from the tax the Common-wealth levies on their real estate. This results in lessmoney being paid to the state and in turn, to the taxingbodies. Power generation utilities are, however, nowrequired to pay a local real estate tax to the taxingbodies within their boundaries. Municipalities overtime will receive less and less of the annual distribu-tion of the Public Utility Realty Tax Act funds eventu-ally phasing out.

Receipts from the two percent state tax on insurancepremiums paid to foreign (out-of-state) fire insurancecompanies are allocated to municipalities under aformula based 50 percent on population and 50percent on market value of real estate. Where themunicipality is served entirely by volunteerfirefighters the allocation is distributed to the munici-pality to be paid over to the volunteer firemen’s reliefassociation or associations representing the firecompanies serving the municipality. Where the munic-ipality has both paid and volunteer firefighters, themunicipal governing body must annually certify theproportion of service provided by each. The allocationis then divided on the same basis. The portion attribut-able to volunteers is distributed directly to the munici-pality for payment to the relief association. Theportion attributable to paid firefighters is transferred to

the General Municipal Pension System State Aidprogram. Receipts from the two percent state tax onforeign (out-of-state) casualty insurance companiesplus a portion of the foreign fire insurance premiumtax receipts fund the General Municipal PensionSystem State Aid program. The program providesannual allocations to municipalities for pension costs.The allocation is based on the number of full-timemunicipal employes covered by a pension plan.Municipalities must make annual certifications of thenumber of full-time police officers, firefighters andnonuniformed employes participating in pensionplans. Distribution of funds is based on the number ofemploye units with police officers and firefighterscounting as two units each and nonuniformedemployes as one unit. A transition period through1995 assures municipalities a minimum amount basedon past receipts or the annual municipal costs of itspension plans, whichever is less. The funds receivedunder the program may be allocated to any pensionplan maintained by the municipality.

The Commonwealth makes in lieu of tax payments tomunicipalities for state-owned land used for forest,water, conservation, flood control and game purposes.The federal government makes in lieu of tax paymentson certain types of federal lands.

Besides these intergovernmental funds which comemore or less automatically to local governments, thereare literally hundreds of grant programs operated byboth state and federal governments. The Catalog of

Federal Domestic Assistance provides a comprehen-sive listing of federal grant programs currently active.It may be purchased from the Superintendent ofDocuments, U.S. Government Printing Office,Washington, D.C. 20402. Contact them for price infor-mation before ordering.

The regional offices of the Department of Communityand Economic Development can assist municipalofficials in identifying sources of state and federalassistance for financing projects. County planningcommissions can often offer technical expertise toassist in the preparation of applications.

15

IV. Budget

Budgeting is a basic tool for managing municipalfinances, but it can be more than that. Preparation andadoption of the annual budget should be the occasionfor careful planning for municipal activities for thecoming year and making reasoned and balanceddecisions on how municipal resources will be spent.Some elected officials consider enactment of theannual budget as a formality, or even as a nuisance,but this process has some significant purposes.

� The budgeting process should allow the electedgoverning body to express its goals for commu-nity services for the coming year in a single doc-ument that is readily understandable by the citi-zens.

� The budget allocates revenues among variousmunicipal service needs. Careful decisions onwhat is most important have to be made in deter-mining where the limited amount of moneyavailable will be spent.

� The budget provides citizens information onhow their tax dollars will be spent and the pro-cess allows citizen input in the making of thesedecisions.

� The budget document authorizes expendituresfor the budgeted items by making appropria-tions. Expenditures during the year can only bemade if sufficiently appropriated funds are avail-able.

� The budget provides a framework for monitoringthe performance of revenues and the accumula-tion of expenditures during the year. If revenuesdo not match estimates, or if expenditures aresignificantly higher than planned, quick actionmust be taken during the year to adjust the bud-get and bring expenses in line with income.

Types of Budgets

Pennsylvania has no mandated uniform budgetprocess, or even budget type. The state annual budgetform has been eliminated.

There are several basic types of budgets. A “line-item”budget simply categorizes the planned expendituresfor things, with little regard for how the things, suchas labor, supplies and materials, or contractualservices will be used. Although a line-item budget is

easy to prepare, it doesn’t provide much planninginformation. For example, since all labor costs arelumped, it is difficult to differentiate between labor forpolice and labor for road maintenance.

At the other extreme of difficulty is a “performance”budget. In a performance budget, all work units areexpressed in dollars; for example, the dollars per tonof refuse collected, the dollars per hour of policepatrol, or the dollars per square yard of road resur-facing. The performance budget gives very directplanning information relating dollars spent to servicesreceived; however, the amounts, accuracy and volumeof data needed to make a performance budget workare beyond the practical limits of most small Pennsyl-vania municipalities.

In addition, there is a “program” budget that allocatesmoney to the functions or activities of a municipalitysuch as public safety, highways and streets, recreationand parks and similar categories. Then, in the munici-pality’s working budget within each of thesefunctions, expenditures can be broken down intospecific object items; for example, salaries and wages,contractual services, supplies and materials. Theprogram budget allows you to judge the reasonable-ness of the amounts being spent for each function ascompared with the other functions, and to determinewhether the expenditures for each reflect the needs asseen by the municipal officials and the citizens of themunicipality.

As an example, if a municipality is contributing$15,000 a year toward a regional library system andspending $27,000 for parks and recreation, does thisrepresent a reasonable balance between thesefunctions? The answer, of course, depends on theparticular municipality and the needs as determined bythe elected officials. Caution must be used in makingthese kinds of comparisons assuming the benefits fromall functions are equivalent for each dollar spent onthe functions. You are really comparing inputs ofdollars to the function, rather than the output ofmunicipal service because the output is often difficultto define. A true program budget is developed on thebasis of expected output from each municipalfunction. To develop meaningful output measures istoo complex for small municipalities and is not likelyto be worth the effort.

16

Legal Responsibilities

Each municipal code requires adoption of an annualbudget. There is very little detail in any of the codeson how the budget is to be developed. There is morelegal detail on the adoption of the budget.

Although the codes contain somewhat differentrequirements for townships, boroughs and cities, thefollowing are common elements.

1. Projections of revenue estimates and proposedexpenditures must be made either by the secre-tary, department heads or committees of the gov-erning body.

2. The minimum financial obligation of the munici-pality for the following year must be determinedby the chief administrative officer of each mu-nicipal pension plan and submitted to the gov-erning body by September 30.

3. A public meeting of the governing body is heldat which the budget for all funds of the munici-pality is discussed and the proposed budget isprepared.

4. After the proposed budget is prepared, it must beadvertised. The advertisement should include astatement of where the budget is available forpublic inspection for a period of at least 20 days,except for boroughs, which is at least 10 days.

5. The governing body must officially adopt a bal-anced budget before December 31, of the yearpreceding the budget year.

Budget Calendar

If the budget process is to be a valuable tool formunicipal management, an organized sequence ofevents should be laid out to permit the participation ofall parties at the appropriate time.

The preparation and use of a budget calendar will aidin scheduling participation of the various elected andappointed municipal officials in the budgeting process.The calendar is intended to lead to an orderly processclimaxing in enactment of a budget, and to avoid lastminute panic efforts to adopt the budget before thedeadline.

The budget calendar can be adopted as an ordinanceor included as part of the municipality’s administrativecode. At a minimum, the calendar should indicate thetime periods in which the following tasks will beperformed, as well as identify the officer responsiblefor the task.

� Budget forms, instructions and guidelines dis-tributed to the departments.

� Revenue estimates prepared.

� Budget requests submitted by departments andcompiled by the appropriate officer.

� Preliminary budget to be reviewed and approvedfor public inspection.

� Final adoption of the budget and tax ordinanceby the governing body. (Resolution in the caseof second class townships)

Table 4 is an example of a typical budget calendar fora medium-sized township in Pennsylvania. Specificactivities and events are identified and the deadlinedates for their completion are indicated. For eachactivity, the municipal official or employe responsiblefor obtaining the information and assuring that thedeadline is met is noted. Depending on when thecounty supplies the assessment rolls for your munici-pality, you may have to adjust several of the dates. Inthe example, the revenue projections that are indicatedfor October 1st may have to be rescheduled if yourassessment rolls, supplements or updates are not avail-able from the county assessor at that time.

The budget calendar that you design for your munici-pality may omit some of the steps shown in theexample, or you may wish to go into more detail.Excessive detail is likely to lead to confusion. Themain point is that the calendar is a plan for developingthe budget, and it should point out what must be done,when it must be done and who is responsible.

17

TABLE 4

TYPICAL BUDGET CALENDAR FOR AMEDIUM-SIZED MUNICIPALITY

Due Date Budget Activity Responsible Person

Sept. 1 Obtain annual budget forms Secretary

Sept. 15 Post current year expenditures Secretary

and revenues or estimates

to the budget form

Sept. 30 Municipal pension Chief administrative

obligation submitted officer of pension plan

to governing body

Oct. 1 Project revenue estimates Secretary consulting

for the next budget year other officers

Oct. 30 Submit activity expenditure Department heads

estimate to secretary

Nov. 15 Enter expenditure requests Secretary

and revenue estimates in

annual budget form

Nov. 20 Conduct full review of budget Governing body

Nov. 20-30 Tentative adoption Governing body

Nov. 30 Submit advertisement to Governing body

newspaper

Dec. 3-23 Make budget available for Secretary

public inspection

Dec. 27 Adopt budget and Governing body

ordinance setting

real estate tax rate

Jan. 1 Create budget accounts and Secretary

enter amount in ledger

Budget Goals and Guidelines

As the elected officials of the municipality, thegoverning body is responsible for setting policy. Acritical policy tool is the annual establishment of goalsfor municipal services for the coming budget year.This is most appropriately done when the capitalprogram and the municipality’s financial status arereviewed in August or September. The goals set bythe governing body should guide decision making forboth the capital budget and the operating budget. Thegoals have to be restated as budget guidelines for themunicipal departments. The goals may addresslong-term objectives such as hard surfacing all munic-ipal roads or working towards 24-hour policecoverage, or they may respond to more immediateneeds such as replacing broken machinery or missingroad signs.

The goal setting process should include the followingelements:

� Review the current year’s fiscal condition andprospects for the budget year to develop a roughestimate of the financial constraints. It is awaste of time to consider new services or facili-ties if there is no prospect of paying for them.

� Examine what services are really needed. Whatalternative ways are available for providingthem?

� Determine if any programs are no longer neededor can be cut back.

� Are there services that are not being met and canbe met within the municipality’s ability to pay?

� What community needs require a response interms of municipal activity, and how importantare these in relation to other needs?

Following the establishment of goals for the comingyear, the governing body should develop overallguidelines for budget requests from the departments.In smaller municipalities without well-establisheddepartment structures, this is the next logical step inthe governing body’s own preparation of the budget.Guidelines provide a common approach to thefollowing issues:

� What is the expected effect of inflation on oper-ating costs for the coming year?

� What are estimated cost adjustments for pro-jected salary increases either as a result of col-lective bargaining or those granted to nonunionemployes?

� What increases can be projected for employebenefits such as health insurance coverage?

� What areas of municipal service are to bestrengthened, de-emphasized, reduced or elimi-nated?

� What general approach will be taken to the needfor a tax increase or decrease, or changes in ser-vice fees?

Budget Requests by Departments

The next step in the process is to have the municipalsecretary distribute budget forms and instructions toeach department. This should be done with sufficientlead time to give the departments full opportunity toprepare thorough budget requests. The budget instruc-tions should at least include the following items:

18

� The goal statement developed by the governingbody for the coming budget year.

� The budget preparation calendar.

� The budget guidelines covering financial factorsthat apply to all departments, particularlyemploye costs.

� Copies of whatever budget forms are used, alongwith the necessary instructions for completingthem. Figures 2 and 3 show a sample worksheetfor calculating expenditures for part of the Gen-eral Fund. Separate worksheets on employe costsare often used.

The first step in developing a department’s budgetrequest is writing a simple budget narrative. Thebudget narrative presents the goals of each departmentand its specific objectives as they relate to the overallgoals of the municipality as established by thegoverning body. Budget narratives commonly includethe following elements:

� Explanation of the current program, its accom-plishments and areas needing attention.

� Comparison of the current year’s budget withthe proposed budget, explaining any differencesdue to changes in departmental spending andservices.

� Review of projections for any revenues gener-ated by departmental activities.

Budget requests based on an incremental increase overthe past year’s costs are a minimum starting point.Department heads should use the budget process toplan and manage the services they provide to thecommunity. Departments need to review operations todetermine if things could be done more efficiently andto look closely at the cost effectiveness of newproposals. Any requests for additional funds have tobe supported by convincing justification based on thebudget goals and guidelines of the governing body.Any new programs or services need to be completelycosted out, including all foreseeable expenditures forpersonnel, materials and equipment. Service optionsshould be presented. If a department head is facedwith the necessity to scale back or eliminate anexisting service, all potential options should bepresented.

Budget documents from departmental worksheetsthrough finalized requests to the municipality’sproposed budget should use the coding systemadopted with the municipal accounting system. TheDepartment of Community and Economic Develop-ment’s Chart of Accounts numbering system is alsoused in the DCED audit report.

Projections for personnel costs may be delegated todepartment heads or worked out for the entire munici-pality as a whole. If the municipality has a collectivebargaining agreement that covers the budget year,calculating personnel costs will be fairly easy. If oneor more contracts are to expire during the year,estimates of wage or benefit increases must be used.For municipalities with no bargaining units, it is up tothe governing body to set policy on wage or benefitincreases for employes. Wherever possible, retire-ments should be anticipated so an allowance can bemade in the budget for starting the replacement at alower salary. Personnel costs must include theminimum financial obligation of the municipality toits pension funds for the coming year. This figuremust be determined by the chief administrative officerof each fund and submitted to the governing body bySeptember 30.

For help in budget projections, as well as monitoringthe costs of services during the year, departmentheads, or the municipal secretary in small places, willfind the development of cost statistics useful. Forinstance, from prior paving projects, the cost of pavingone mile of road can be calculated. Similar statisticsshould be developed for annual charges for fuel,maintenance and repair of police cars or road equip-ment. If these figures are maintained during the year,they can be pulled out and used at budget time. Othertypical cost statistics that may be calculated include:

� Snow removal costs per mile of road, per inch ofsnowfall.

� Fire department cost per household.

� Electrical charges per year per street light.

� Library cost per capita.

� Tax collection cost per tax bill.

� Refuse collection cost per ton or per household.

� Building maintenance cost per square foot offloor space.

Revenue Estimates

During the time frame that the departments are formu-lating their budget requests, the governing body mustsettle upon a revenue estimate for the coming budgetyear. Preliminary revenue estimates need to be devel-oped early in the budget process. This provides thenecessary data for the formulation of budget guide-lines on tax and user charge policy for the budget year.At this stage, the preliminary estimate is calculatedthrough a review of revenue performance for thecurrent year to date and expectations for the remaining

19

months of the current year. By this time, almost allreal estate and per capita taxes are collected, andadditional revenues from earned income taxes andsewer and water charges can be calculated withrelative accuracy. However, these early estimates are“soft” because they are done with five months to go inthe fiscal year.

Before the proposed budget is formulated, thegoverning body will have to agree on a more “solid”revenue estimate for the budget year. Hopefully, bythis time the total amount of the new real estate taxduplicate is available from the county. This figure,combined with historical trends in the percentage oftaxes collected, will provide a fairly accurate estimateof real estate revenues. Earned income tax collectionscan be projected based on national or regional changesin personal income projected for the future year.However, care must be taken to relate changes in thelocal economy to what is happening regionally ornationally. If a large local employer will be closing afacility, it is apparent local earned income tax collec-tions will be adversely affected regardless of thetrends at the national level. Sewer, water, garbage andelectric revenues are easier to project based on pastuse. However, keep in mind the incentive effect toreduced use caused by any increase in price. Changesin building and zoning permit revenues, as well asreceipts from realty transfer taxes, are tied into thelocal and national economies. If the business cycle isat the beginning of an expansion period, expect anincrease in such fees, but if interest rates areincreasing sharply, a slowdown in new building isindicated. Projection of intergovernmental income isdifficult, but some basic grants such as liquid fuels,Public Utility Realty Tax Act (PURTA) and commu-nity development block grants do not vary greatlyfrom year to year. Be aware of any change in legisla-tion or agency regulations that would have a signifi-cant impact on revenues you can expect from thesesources such as with the Public Utility Realty Tax Act.

The final stage in making a revenue estimate is calcu-lating the year-end balance of the various funds. Thegoverning body must make the decision of whether tospend down any carryover balance to meet revenueneeds for the next year, or to raise taxes, utilitycharges or other user fees. The governing bodyshould calculate and even graph the year-end balancesof all significant funds to delineate trends over thepast five years. Although tax or fee increases are notpolitically popular, small increases from year to yearto retain adequate fund balances are more acceptablethan a “hold-the-line” approach at all cost for several

years, followed by substantial increases in taxesand/or charges which pose hardships to householdswith tight budgets.

Budget Review and Adoption

Following submission of departmental budget requestsand completion of the final revenue estimate, all thepieces must be pulled together in a proposed budget.This can be done by the manager, secretary or financeofficer. In municipalities without professionalmanagement, it is often done by a budget committeeof the governing body, or in smaller places by thegoverning body itself working as an informal budgetcommittee. In larger places, this process may involveformal meetings with the department heads duringwhich they can present justification for their budgetrequests.

Completion of a proposed budget requires makingdifficult decisions on the allocation of limitedresources. When it is done by a staff employe, closeattention must be paid to the budget goals establishedat the beginning of the process by the governing body.The nature of proposed budgets varies in complexity,often depending on the size of the municipal opera-tion. Almost all municipalities have a detailedworking budget that breaks out costs by departmentand within departments by cost centers. In moresophisticated municipalities, the proposed budget caninclude a budget narrative that reviews the programsof the municipality and outlining changes for thecoming year. The budget can be used to justify totaxpayers how their tax dollars are spent and why anychange in taxes or service charges is necessary.

The proposed budget must be presented at a publicmeeting at least 30 days before the final adoption ofthe budget. Only the Third Class City Code specifiesthat this is to be at the last council meeting inNovember, but most proposed budgets are presented atNovember meetings. At this meeting, citizen input isreceived and any necessary changes can be made inthe document by the governing body. The governingbody then directs the municipal secretary to advertisethe budget for public inspection. All the codes exceptthe Borough Code (10 day inspection period) require apublic inspection period of at least 20 days. Readver-tising and a new inspection period are required if thereare substantial increases in the final budget from thatoriginally available during the first inspection period(except in boroughs). At the same time the budget isadvertised for inspection, the secretary should alsopublish notice of the real estate tax ordinance (resolu-tion in the case of second class townships). Unlike

20

FIG

UR

E2

WO

RK

ING

BU

DG

ET

-G

EN

ER

AL

FU

ND

RE

VE

NU

ES

Acco

un

tN

um

ber

Cla

ssif

icati

on

or

Cate

go

ry

1Tw

oyear

pri

or

reven

ue

2O

ne

year

pri

or

reven

ue

3C

urr

en

tB

ud

get

4R

even

ue

Year

toD

ate

5E

sti

mate

dR

even

ue

Cu

rren

tYear

6P

rop

osed

Bu

dg

et

7In

cre

ase

or

Decre

ase

8Fin

al

Bu

dg

et

100

10

Cash

on

Han

d

300

RealE

sta

teTaxes

300

01

RealE

sta

teTaxes

(Cu

rren

t)

300

02

RealE

sta

teTaxes

(Pri

or

years

)

300

03

RealE

sta

teTaxes

(Delin

qu

en

t)

305

Occu

pati

on

Taxes

305

01

Occu

pati

on

Taxes

(Cu

rren

t)

305

02

Occu

pati

on

Taxes

(Pri

or

years

)

310

Lo

calE

nab

lin

gTax

(511)

310

01

Per

Cap

ita

Tax

(Cu

rren

t)

310

02

Per

Cap

ita

Tax

(Pri

or

years

)

310

03

RealE

sta

teTra

nsfe

rTax

310

04

Earn

ed

Inco

me

Tax

(Cu

rren

t)

310

05

Earn

ed

Inco

me

Tax

(Pri

or

years

)

310

06

Merc

an

tile

Tax

310

09

Occu

pati

on

alP

rivileg

eTax

310

10

Ad

mis

sio

ns

Taxes

310

11

Mech

an

icalD

evic

es

Tax

1 2 3 4 5 6 7 8 9 10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

21

FIG

UR

E3

WO

RK

ING

BU

DG

ET

-G

EN

ER

AL

FU

ND

EX

PE

ND

ITU

RE

S

Acco

un

tN

um

ber

Cla

ssif

icati

on

or

Cate

go

ry

1Tw

oyear

pri

or

reven

ue

2O

ne

year

pri

or

reven

ue

3B

ud

get

4E

xp

en

dYear

toD

ate

5E

sti

mate

dE

xp

en

dC

urr

en

tYear

6P

rop

osed

Bu

dg

et

7In

cre

ase

or

Decre

ase

8Fin

al

Bu

dg

et

400

-G

en

.G

ovt

Ad

min

istr

ati

on

1 2 3 4 5 6 7 8 9 10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

400

01

Sala

ry-

Ele

cte

dO

ffic

ials

400

02

Sala

ry-

Mayo

r

400

03

Sala

ry-

Secre

tary

400

04

Sala

ry-

Tre

asu

rer

400

06

Sala

ry-

Man

ag

er

400

07

Sala

ries

&W

ag

es

-C

lerk

setc

.

400

10

Mate

rials

&S

up

plies

-G

en

era

l

400

20

Gen

era

lE

xp

en

ses

400

21

Ad

vert

isin

g&

Pri

nti

ng

400

22

Insu

ran

ce

&B

on

din

g

400

23

Eq

uip

men

tR

en

tal(o

fc)

400

24

En

gin

eeri

ng

Serv

ices

400

28

Au

dit

ing

Serv

ices

400

29

Leg

alS

erv

ices

400

30

Tele

ph

on

e&

Co

mm

un

icati

on

400

40

Main

t.&

Rep

air

-Eq

uip

men

t

400

50

Veh

icle

Op

era

tin

gE

xp

en

se

400

60

Min

or

Eq

uip

.P

urc

hase

or

Rep

l.

400

80

Cap

italO

utl

ay

22

Act 511 taxes, real estate taxes must be re-adoptedevery year, even if the tax rate remains unchanged. Ifthere are new Act 511 taxes adopted or rates arechanged, advertising requirements in the Local TaxEnabling Act must be followed.

After the termination of the inspection period, thegoverning body must adopt the budget at a publicmeeting. The deadline for adoption of the budget isDecember 31. If the budget is not adopted on time,the municipality loses all authority to spend money inthe new year until a budget is adopted. In practice,municipalities have continued to make expendituresthey would have been obliged to pay anyway, such asutility bills and payrolls. However, it is wise to refrainfrom any discretionary expenditures until the budget ispassed. Real estate tax bills cannot be mailed out untilthe tax ordinance (resolution in the case of secondclass townships) is adopted. If the budget is delayed,revenues from real estate taxes will be similarlydelayed.

Amending Your Budget

A municipal budget is a financial plan. As with allplans which look into the future and attempt to projectwhat will actually occur, your budget must be flexibleenough to take into account unexpected events. Mostplans — in this case the budget — are made to bechanged and should be changed when necessary.

The various municipal codes under which Pennsyl-vania municipalities operate contain provisions formaking changes to the budget during the year.However, the rules and methods differ somewhatbetween townships and boroughs.

There are two basic types of budget changes whichmay be made. First, during the January following anymunicipal election, the adopted budget may bereopened and the tax rate changed. Any changes madeunder these conditions must be re-advertised and madeavailable for public inspection. The amended budgetmust then be adopted on or before February 15th. Themain purpose of budget reopening is to permit newlyelected officials to adjust the budget to their own setof priorities. However, reopening may be made eventhough all of the former supervisors or councillorshave been reelected.

The codes for townships specify the maximumamounts which the budget may be raised in areopening under these conditions. Your solicitor orfinancial advisor should be consulted before reopeningthe budget to assure that you are following the proce-dures outlined by your municipal code.

The codes also provide for a second method to changeyour budget. Essentially, the codes allow you totransfer unencumbered money from one account toanother. The term “unencumbered” means money notalready committed. For example, if a typewriter hasbeen ordered but not yet delivered, the money in thebudget for the typewriter is encumbered, that is, it iscommitted formally by the purchase order. Anymoney you may have promised to pay or which musteventually be paid because of prior commitments isencumbered and budget items involving this moneymay not be changed. Also, any funds committed todebt repayment, to special funds such as the HighwayAid Fund, or revenue which has been collected for aspecial purpose (such as money resulting from a streetlight levy) may not be altered in a budget change.

While the boroughs may transfer money betweenaccounts at any time during the year, townships maymake such transfers only during the last nine monthsof the year. In addition to transfers, boroughs andtownships may make supplemental appropriations forany item at any time during the year. The items forwhich supplemental appropriations are made need nothave appeared in the original budget document at all.The supplemental appropriations are made from fundson hand or expected to be received that have nototherwise been appropriated. Money may beborrowed to make the supplemental appropriations.

Although the municipal codes make provisions forchanging or amending the municipal budget, thisauthority must not be used as an excuse for makingcontinual unplanned or improperly thought outchanges. A carefully prepared budget will havereceived considerable study and analysis comparingexpected revenues with the municipal goods andservices needed by your community. This plan — thebudget — should be carried out to provide the serviceswithin your revenue limitations. Changes are usuallyonly necessary under conditions such as:

1. An “emergency” situation creates new needs notapparent when the budget was originally ap-proved.

2. Unexpected new revenues are received or reve-nues are much less than expected.

3. An unusual opportunity to obtain matching grantor loan funds at a particular time for a neededproject may indicate you should shift a projectscheduled for next year into the current year andpostpone a currently budgeted project.

23

Generally, you should attempt to avoid changing oramending your budget except when absolutely neces-sary. When it does become necessary, the proposedchanges should be studied carefully for their impacton your ability to provide essential services to yourcitizens. Budget changes should be made as carefully,if not more carefully, than your original formulation,and you should consult with your planning commis-sion, solicitor, consultants or other appropriateadvisors before making major changes.

Capital Budget

Part of an overall budget is for items called “capitaloutlays.” In general terms, capital items include highcost, nonrecurring purchases to provide a permanentimprovement; such things as a new municipalbuilding, land for a playground, rebuilding a street orhighway and purchasing a fire truck. It is impossibleto prepare a capital item list applicable to all munici-palities. Most people agree on what constitutes acapital improvement at the upper end of the cost scale,but as you approach the lower end of the scale capitalitems vary from place to place. In most municipalitiesa $10,000 computer system is considered a capitalpurchase but a $100 office machine is not. As aninitial step in capital budgeting, you should define theterm as it will apply in your municipality.

Since you usually need more high cost items than youcan afford in any one year, capital budgeting should bebased on a capital improvement program. Thisprogram is essentially a schedule of planned majorimprovements extending several years into the future.After you initially formulate a capital improvementprogram, capital budgeting becomes a process ofannually updating the program — dropping the currentyear and adding a new year to the schedule. Thisusually entails adding some items, perhaps deletingsome, and adjusting priorities.

As compared with the overall municipal budget, thecapital budget will ordinarily include a relatively smallnumber of items; however, the costs involved mayapproach or even exceed the annual expenses foroperation and maintenance. Decisions regarding thesemajor expenditures should not be made in haste.Because of special financing arrangements required topay for a project, you may need time to obtain publicsupport for special a tax levy or a bond issue.

For these reasons, you will find it wise to beginconsidering the needs for capital improvementssomewhat earlier than the more routine matters consti-tuting the greater portion of your municipal budget.

Below is a suggested timetable for unhurried consider-ation of capital improvements:

June-July Solicit ideas for new projects.

Aug. -Sept. Review municipal fiscal position andupdate capital improvement program.

Oct. Tentatively approval capital items tobe included in municipal budget.

Dec. Formally approve capital outlays aspart of overall municipal budget.

Of course, you can either start earlier or compress theschedule to suit the needs of your own municipality.

Capital Reserve Funds

Capital reserve funds may be created to accumulatemoney for anticipated capital expenditures. Capitalreserve funds may be created for construction ofmunicipal buildings, purchase of equipment,machinery, motor vehicles or other capital assets. Thepurpose of the fund is specified at the time of itscreation, but may be altered by the governing body.

As many capital reserve funds as are necessary may beestablished. Similar anticipated capital expendituresmay be combined into a single fund to reduce theproblems of administering a large number of funds. Forexample, if a bulldozer and two dump trucks are beingplanned for purchase within the next several years, itmay be advisable to establish a single capital reservefund for rolling equipment.

Funds are transferred annually from the general fund insufficient amounts to meet anticipated needs. Annualtransfer should be kept as constant as possible to avoidstrains on any particular year’s budget. Receipts fromsale or lease of property or any other general fundrevenue not earmarked for another purpose may beplaced in capital reserve funds.

Capital reserve funds should be invested in interestbearing accounts or investments to increase thepurchasing power of the fund. Since withdrawal timecan be anticipated, you may be able to make longerterm investments, resulting in improved return.

Capital reserve funds allow municipalities to accumu-late money for necessary large capital purchases,keeping municipal finances on a pay-as-you-go basis.However, it does require considerable self control onthe part of municipal officials not to skip annualtransfer into the fund in tight budget years.

24

V. Accounting, Bookkeeping and Auditing

The accounting and bookkeeping system is thebackbone of fiscal management in the municipality. Itis this system which records the “facts’’ upon whichresponsible fiscal management must be based, that isthe actual performance of the municipality.

All municipal officials accept the need for some formof accounting. The question that is frequently raised,though, is “Why does the accounting system have tobe so complex?’’ The answer is... “For your protec-tion.’’ First, as a taxpayer, you are entitled to know asystem of checks and balances exists to protect yourmoney from being misused. Secondly, as an official ofthe municipality you are entitled to a system to protectyour reputation through a series of reviews byindependent parties. In this latter case, more than yourreputation is protected since you may be liable for apersonal surcharge for negligent performance.

Within that basic guideline, every effort is made toassure that the accounting requirements are keptsimple and straightforward.

Who specifies the accounting requirements?Ultimately, of course, it is the people. They have aright to know what you are doing with their moneyand be assured that public funds are being wellhandled. There are five considerations impacting onwhat the accounting system has to look like and whatkind of figures it can produce. The first of these is therequirement that public funds can be audited. In actualpractice, the elected auditor is the primary representa-tive of the people in Pennsylvania for auditing mostmunicipal funds. The municipal audit, however, canalso be per- formed by an accounting firm, a publicaccountant or a Certified Public Accountant. In thiscase, you would proceed according to your respectivemunicipal code.

For specific funds from sources other than local taxes,there are occasionally separate audit agencies. ThePennsylvania Department of Transportation maintainsits own group of auditors to verify expenditures of thestate Liquid Fuels Fund. Other agencies may requireseparate accounts to be maintained for their grants andretain the right to audit those expenditures. Again, allof these are representatives of the taxpayers assuringtax monies are being properly handled and utilized.

The first set of requirements your accounting systemmust meet is to provide a record of financial transac-tions readily audited by all interested agencies. Theseare described in detail in the next section on requiredaccounting procedures.

The second set of requirements an accounting andbookkeeping system must meet is equally important.The accounting system must tell the elected andappointed officials of the municipality what the truefinancial position of the municipality is so they canproperly make decisions concerning capital improve-ments, local services and programs. The accountingsystem must permit a continuing comparison betweenthe revenue and expenditures estimated in the budgetand those actually occurring. This comparison must bepresented in a clear and concise fashion, and it mustbe timely so decisions of the officials are based onup-to-date information. Requirements of the managingofficials of the municipality do not much affect theaccounting and bookkeeping system as long as thesystem can provide periodic summaries of the status ofaccounts. The types of fiscal management and controlsummaries required are described in Chapter VII,Fiscal Management Techniques.

A third set of requirements affecting your accountingand bookkeeping system is the requirement at the statelevel to compare performance of municipalities fortheir mutual benefit. These comparisons are translatedinto packages of new legislation for the relief ofmunicipalities in financial difficulty and into advisoryservice programs to assist municipalities in learningfrom each other. This third set of requirements takesthe form of a set of account guidelines and a struc-tured chart of accounts for all municipalities so theyall will be using the same accounting language. Thedetails of these guidelines are contained in the Chart

of Accounts prepared by the Department of Commu-nity and Economic Development.

The fourth set of requirements imposed on youraccounting and bookkeeping system is that theaccounting procedures themselves must be proceduresrecognized by professional accountants as acceptableaccounting practice. This requirement assures theprocedures have been used and evaluated in the pastas providing an accurate and representative picture of

25

the financial transactions recorded. The final require-ment arises from the need of the accounting andbookkeeping system to be able to identify taxes due toother governmental agencies. These are especiallyapplicable in the handling of payroll information.

The remaining sections of this chapter expand on theessential requirements municipal accounting andbookkeeping systems must meet, and provide detailson the variations in accounting systems used bymunicipalities to meet these requirements.

Required Accounting Procedures

The most stringent requirements on the municipalaccounting system are those of the auditors, whetherthey be elected auditors, an appointed auditing firm orrepresentatives of the state. To obtain the best possibleunderstanding of the requirements your accountingand bookkeeping system must meet, you must under-stand what the auditors are going to be looking for.

You must leave an “Audit Trail”

The first and most important requirement on yoursystem is that there be an audit trail. Every number inyour accounting system must be traceable ultimatelyto a receipt, voucher or canceled check. For example,the figure below shows a municipality with total

receipts for the month of May of $21,000. Theauditors must be able to establish a trail from this$21,000 to each and every receipt made out during themonth of May. One of these trails might lead as shownin Figure 4.

Licenses and Permits made up $950 of that$21,000.

Building Permits made up $225 of that $950.

A Building Permit for J.Smith represented $75 ofthat $225.

There is a receipt made out to J. Smith on the 22nd

of May for a Building Permit for $75.

Thus, the auditors establish a trail all the way from thetotal receipts for the month down to an individualreceipt. They must be able to establish a similar trailfor every receipt and expenditure made by the munici-pality. That is the basic concept of the auditor’s role.The specifics the auditors check in their review of theaccounts are much more complex, but they are basedon this concept. The general guidelines for auditingmunicipal accounts are listed below.

1. General guidelines for auditing of revenues andreceipts:

a. Make tests to determine money collected byall departments, boards, commissions, officesor individuals has been turned over to the

FIGURE 4THE AUDIT TRAIL

StartingPoint

(Ledger)

Make-up ofTotal Receipts

(Ledger or Journal)

Make-up ofLicenses & Permits

(Journal)Receipts

TOWNSHIPABLE

TOTAL RECEIPTSFOR MAY

$21,000

Real Estate Taxes$10,500

Occupation Taxes$2,500

Licenses & Permits$950

Fines, Forfeitures & Costs$2,450

Local Enabling Taxes$2,600

Grants & Gifts$1,000

Miscellaneous$1,000

Total: $21,000

Beverage Licenses$275

Building Permits$225

Mercantile Licenses$100

Junk Yard Licenses$100

Zoning Permits$250

Total: $950

W. King$75

J. Smith$75

R. Walters$75

Total: $225

26

treasurer, promptly and intact, in accordancewith laws, ordinances or regulations and hasbeen credited to the proper funds.

b. Determine all money received by the treasurerhas been deposited, promptly and intact, tothe credit of the governmental unit.

c. Test the accuracy of cash receipts records,noting whether cash or its equivalent in cur-rent funds have been received, for receipts is-sued.

d. Test cash transactions between funds, be-tween the governmental unit under audit andother governmental jurisdictions.

e. Review the authority for all cancellations, re-missions, adjustments or abatements.

f. Review general journal entries involving rev-enues and receipts.

2. General guidelines for auditing of expendituresand disbursement:

a. Determine whether expenditures were prop-erly authorized and incurred and are chargedto the proper fund.

b. Determine expenditures are supported byitemized invoices, vouchers, contracts orother supporting documents approved by theproper officials and are marked so they cannotbe used again.

c. Determine whether disbursements were madeby checks, properly signed, for authorizedpurposes.

d. Scrutinize the endorsements and cancellationson checks and warrants.

e. Test the mathematical accuracy of disburse-ment records.

f. Test noncash expenditures represented by in-iter-departmental transactions. Determine allsuch expenditures are supported by properlyauthorized vouchers and the proper accountshave been charged.

These general guidelines are applied to all aspects ofeach of the municipal funds.

A good system of internal controls must be estab-lished, especially where there might be any opportu-nity for fraud. These controls should extend beyondthe accounting system to all procedures for handlingmunicipal finances or equipment. For example, in thehandling of cash there should always be more than oneperson aware of the transactions. These tight internalcontrols are recommended for your protection of thefunds of the local taxpayers. Without them, you run

the risk of being falsely accused with no way to proveyour innocence.

Types of Accounting Systems

Many municipal accounting systems in Pennsylvaniaare still on the “backs of envelopes.” Some record ofthe receipts and expenditures of the municipality iskept, but the record is often not adequate. In contrastto this, the accountants recommend “fund accountingusing the double entry accounting methods on an ac-crual basis.”

What should you do? First, you should understand themeaning of the terms “fund accounting’’ and “doubleentry systems,” and the difference between “cashbasis” and “accrual basis’’ systems. Then, you shouldreevaluate the needs of your municipality in light ofthe requirements described in the previous section ofthis chapter. Finally, you should change your presentaccounting system... if necessary... to be sure yourtaxpayers have adequate information to evaluate yourhandling of their money.

This section defines the terms fund accounting, doubleentry and accrual so you may see how these re- late toyour system.

Fund Accounting

Fund accounting is an accounting method where acomplete, self-balancing set of accounts (a fund) ismaintained for keeping track of special receipts andexpenditures. An easy way to visualize a fund is tothink of it as a completely separate “pot” of moneythat should be kept separate from all other “pots."Fund accounting is a generally accepted method ofaccounting for governmental units. Professionalaccountants agree this method can provide an accuratefinancial picture of the governmental unit.

Separate funds are needed to avoid intermixing ofmoney received or collected for specific purposes orwhen required by law or regulation. For example, thelaws providing the highway aid money receivedannually from the state require this money beaccounted for separately. Similarly, the municipalcodes specify revenue from certain special taxeslevied for a specific purpose (for example, for streetlighting) be kept separate and distinct from othermunicipal revenues. The most clear-cut way of doingthis is to establish separate funds having no connec-tion with the general funds of the municipality.

27

EACH FUND HAS ITS OWN RECEIPTS AND

EXPENDITURES, AND MAINTAINS ITS OWN

BALANCE

Each fund is a completely separate accounting systemin itself, with its own unique accounts to record thevarious revenues and expenditures. The list of accountnumbers and titles is called the “chart of accounts” ofthe fund. Finally, each fund will be self-balancing.That is, at any point in time the status of the fund maybe determined as shown in the following example.

Month End, 20

Cash $ 500

Comprised of:

Cash on hand, beginning of year $1,000

Revenues collected in current year 2,500

$3,500

Expenditures in current year 3,000

Cash balance, ending $ 500

The primary fund in any municipality is called theGeneral Fund. Unless there is a specific reason for notusing the General Fund, all revenues and receiptsshould enter the General Fund, and all operatingexpenditures and disbursements should be made fromthis fund. Special funds should be established only asabsolutely necessary to meet legal requirements or toisolate certain receipts and/or expenditures. Thenumber of such funds should be kept to a minimum.Numerous funds create complex accounting problemsand result in loss of efficiency.

“TOO MANY FUNDS”

Borough Static established a fund for paving LittleStreet in June. In August they established another fundfor paving Short Street. Later that fall they establisheda fund for landscaping and putting benches in thedowntown park. Two years later, the boroughcompleted all three projects However, the accountingwas complex, and they had leftover money in eachfund which came to a considerable amount when itwas all added together.

Borough Modern had three similar projects in mind.In June they created one fund “ear-marked” for allthree of the projects. This cut the bookkeeping to onethird of Borough Static. Furthermore, since they werepooling their money for all three projects in one fund,they could afford the first project earlier. Borough

Modern completed the paving of Little Street eightmonths after they started the fund; the paving of ShortStreet sixteen months after the start of the fund, andthe improvements to the park were completed in lessthan two years by using the excess funds from theother two projects.

The residents of Borough Modern had their pavedstreets and park improvements sooner, and a minimumof money was sitting idle.

SEPARATE REVENUE FUNDS

KEEP REVENUE SEPARATE

Why have separate funds? The law requires that somefunds be established. This is the case with theHighway Aid Fund. The main reason for establishingfunds is to record the relationship between certainrevenue and expenditures. For example, when aspecial tax is levied for street lights, a fund should becreated to show the money collected is being spent forstreet lighting. This type of fund is called a specialrevenue fund because the purpose is to maintainseparate records of the revenue being collected.

UTILITY FUNDS RELATE SERVICES

TO USER CHARGES

Another type of fund with the same purpose, calledthe utility fund, is used to relate the service being pro-vided (water, electricity, sewers) to the user chargesbeing collected for that service. Bond funds are usedto relate the proceeds from bond sales to the costs ofthe projects financed by the bonds.

SINKING FUNDS ACCUMULATE MONEY

TO PAY BOND DEBT SERVICE

Sinking funds, as required by the Local GovernmentUnit Debt Act, are set up to accumulate money for theretirement of bonds and the payment of interest. InPennsylvania, the role of sinking funds has diminishedin importance with the general use of serial bonds.Presently, sinking funds act generally as conduitsthrough which money appropriated from the generalor other funds is passed to the paying agent.

CAPITAL RESERVE FUNDS ACCUMULATE

MONEY FOR CAPITAL PURCHASES

The capital reserve fund has been called one of the“most useful devices available to municipalities.” Thisfund permits the municipality to accumulate moneyfor use at a future time for buying or replacing capitalequipment It is essentially a method of saving forfuture purchases. The money accumulated for futurepurchases should be invested in interest-bearingaccounts, in certificates of deposit or in treasury bills.

28

The management of these reserve funds should becarefully studied and reviewed by you and your solic-itor or consultant to assure the maximum possiblegrowth in your assets.

Double Entry Accounting Method

Double entry is a term frequently misunderstood bylocal government officials. They feel it representsconsiderable change to their present methods and istoo complex for the smaller units of government. Inreality, just the opposite is true. Double entryaccounting represents minimal change and the benefitsare numerous. This system provides the opportunity toaccurately record financial transactions not possibleunder single entry systems. In addition, all transac-tions are formally recorded in the ledgers. The benefitsof this are well known to those local officials whohave inherited situations where records were incom-plete. An accounting system should provide accurateand complete information which double entry doesprovide. This procedure is also in keeping with gener-ally accepted accounting principles.

The double entry accounting method is an accountingprocedure where at least two entries are made for eachtransaction: one entry shows the effect (increase ordecrease) on cash; the other entry shows whichrevenue or expenditure account caused the increase ordecrease in cash.

The explanation is, of course, oversimplified. Moreaccurately, one entry shows the change in assets orliabilities; the other entry shows which revenue orexpenditure account caused the change. However, theessential point is included in each definition, that isthe use of the double entry method produces abalanced group of accounts. It’s like adding or takingaway weight from a balanced seesaw. As long as youalways do the same thing to each of the two sides, theseesaw stays in balance. Similarly, as long as youmake the two entries in the double entry system, youraccounts stay in balance. By testing for this balance,you can quickly determine whether you made an errorin your recording.

The double entry method is not a guarantee against allerrors. If you fail to enter a transaction, the accountswill still balance. But, they will not be correct. If youenter balancing errors, or enter the amounts in thewrong accounts, your books may balance but will notbe correct. However, double entry accounting makes iteasier to detect the fact an error has been made, andalert the accountant to the need to make corrections.

In formal use of the double entry method, some simpletechnique to keep track of when to add and when tosubtract is needed. The terms “debit” and “credit’’ areused for this purpose. Although these words are usedto record increases and decreases, their meaningchanges depending upon the kind of an account theyare used with.

Cash or Accrual Basis

The difference between cash and accrual basis ac-counting is like the difference between paying cashand using a charge account. If your system is on thecash basis, you record expenditures when you paythem. If your system is on the accrual basis, yourecord expenditures when you “accrue” them... that is,when liability is incurred—usually when an invoice isreceived.

In a true accrual basis system, you would also re- cordrevenue at the time it is due. However, the Govern-mental Accounting Standards Board (G.A.S.B.) doesnot require this for municipal accounting. Theysuggest a modified accrual basis be used. With thismethod, revenues are not recorded until received, butexpenditures are recorded when liability is incurred.

MODIFIED ACCRUAL

Cash Basis:

Expenditures are recorded when paid.Revenues are recorded when received.

Modified Accrual Basis:

Expenditures are recorded when the liabilityis incurred, generally, if measurable.

Revenues are recorded when they becomeavailable and measurable.

In actuality, the cash basis of accounting can beacceptable if the difference in operating results isnearly the same as it would be on an accrual basis; thatis, if very few bills are held past thirty days. This isthe case for most small to medium-sized municipali-ties in Pennsylvania. It is essential, however, to plancarefully at year-end to be certain all collected receiptsare recorded and all expenditures due are paid.

29

Summary

Given the meaning of the terms “fund accounting,”“double entry accounting method’’ and “accrualbasis,’’ you should evaluate your municipal systemand determine how these accounting procedures canimprove your present system.

Summary of Principles of Accounting

The basis for the accounting principles your systemshould meet has been presented. This section willbriefly summarize the principles. The summary is notin- tended to be complete but only to highlightespecially significant points. Detailed accountingprinciples and procedures are available in a variety ofexcellent text-books.

Four minimum requirements should be structured intoany municipal accounting system.

1. The system must comply with local and state le-gal provisions.

2. The system should be an accurate reflection ofthe fiscal condition of the municipality to pro-vide a basis for money decisions and control.

3. Required financial reports should be easilyextractable from the system, such as monthly fi-nancial reports, or the Department of Transporta-tion’s required report of liquid fuel expenditures.

4. The system must be capable of being audited,preferably in a simple manner.

There is no one ideal system for all municipalities andtherefore one single system cannot be recommended.The basic accounting principles apply to all types offinancial record keeping. They should be used to helpselect an adequate accounting system now, or toupdate your system in the future according to newdemands in your jurisdiction.

Each municipality should establish funds as requiredby their local needs and in accordance with legalprovisions.

Depending on legal and financial requirements, thefollowing types of funds are recognized as basic:

Governmental Funds:

General FundSpecial Revenue Funds, including Highway

Aid or Fire ProtectionDebt Service Funds, including Sinking FundsCapital Projects Funds, including Capital

Reserve Funds

Proprietary Funds:

Enterprise Funds, such as Water, Sewer orRefuse Collection

Internal Service Funds, such as Motor Pool orPrint Shop

Trust and Agency Funds:

Trust Funds, such as Pension FundsAgency Funds, such as Fire Relief Fund or

Payroll Fund

All funds established should be included in the budgetand in all of the municipality’s financial reports.

In compliance with simplicity, as few funds aspossible should be established while making certainall legal and financial requirements are met. Byappro- priate use of accounts within the funds, desiredcontrol of revenue and expenditure can be maintainedwithout the necessity for establishing a multitude ofseparate funds for each particular purpose.

If there is a most common deficiency in municipalaccounting systems, it is in maintaining too manyfunds in the books and failing to close funds whichhave ceased to be applicable.

A complete balancing group of accounts shouldbe established for each fund.

Each fund should have accounts for cash and otherassets, liabilities, revenues, expenditures and a fundbalance. By providing for internal balancing of eachfund, and by interrelating the funds through the use ofdouble entry recording, the total fiscal condition canbe analyzed for weak points on an individual fundbasis.

The accounting system should provide for bud-getary control for both revenues and expendi-tures.

If the budget is prepared using the accounting system,a quick glance should provide useful information incontrolling revenues and expenditures in each fundaccording to the budget.

Cash basis accounting (revenues recorded whenreceived, expenditures recorded when paid) isthe simplest of accounting systems.

30

The cash basis of accounting is used by most smallermunicipalities. However, if this basis is to be mosteffective, it is necessary to be certain all revenueswhich should be received are timely received andrecorded, and all expenditures promptly paid.

For improved fiscal control of an approved bud-get, use of the modified accrual basis of ac-counting is recommended.

The Governmental Accounting Standards Boardsuggests this modified accrual system as a minimumfor municipal accounting. This system requiresrecording of an expenditure when a liability isincurred, but revenue is not recorded until received.

Revenues should be classified by fund andsource; and expenditures by fund and function,department, activity, character and by mainclasses of objects.

The chart of accounts provided by the PennsylvaniaDepartment of Community and Economic Develop-ment satisfies this principle.

A common terminology and classificationshould be used consistently throughout the bud-get, the accounts, and the financial reports.

Together these constitute a continuous and repetitivecycle of financial information. It is important theyread alike. Again, these requirements are met in thechart of accounts designed by the state for use byPennsylvania municipalities.

Financial reports should be prepared at leastmonthly.

These should show the current condition of thebudgetary accounts and other information necessary tocontrol operations. At least once each year a generalfinancial report must be prepared and published.

Good financial reports are a primary requirement of anadequate accounting system. They must provide infor-mation that is useful at all levels — internal andexternal. Some of the reasons many financial reportsfail to achieve this goal are:

a. Incompleteness — failure to present fund bal-ance sheets showing financial position of thevarious funds.

b. Too much detail — too many statements ofdetailed breakdown.

c. Too little summarization of principal facts, ina form useful to elected officials and adminis-trators and for informative purposes to thepublic.

d. Too little standardization among governmentsof similar type.

If your accounting system meets the minimum require-ments and generally follows these accounting princi-ples, it should be an adequate system. If you are indoubt, you should study the material in this Handbook

on municipal accounting systems, or contact anaccounting or municipal consulting firm.

The Meaning of Debit and Credit

One of the most difficult concepts for the layperson tomaster is the meaning of the terms debit and credit.Common use of the terms in other than accountingapplications adds to the confusion. Statements such as“we will credit your account for the returned merchan-dise,’’ and “we have completed your credit check soyour charge account is approved” seem to convey thatthe term “credit’’ is good. Yet, in accounting, a creditto a cash account is a decrease in the amount of cashin the account.

These terms are important in a double entry ac-counting system. How can you keep them straight?The best suggestion for those who use them often is tomemorize their meaning. Or, you might write yourselfa note and keep it near the account books. It may beeasier for you to remember if you associate the wordsdebit and credit with left and right. They arefrequently explained using the following form, calleda “T-account."

debit credit

�

In order to determine whether debit means increase ordecrease, it is necessary to know to what type ofaccount you are referring.

The first type of accounts we will consider are assetaccounts. Assets include such items as cash, savingsaccounts, investments and other things you own.Assets should have debit balances. Therefore, it isnecessary that increases in assets be recorded asdebits. Consequently, assets are recorded this way:

31

ASSETS

debit credit

increases � decreases

The second type of accounts to be considered areliability accounts. Liabilities include such items asmoney due to other governmental units, temporaryloans and other debts you may owe. Liabilities are theopposite of assets. Thus, increases in liabilities arerecorded as credits.

LIABILITIES

debit credit

decreases � increases

As stated earlier, in a double entry accounting systemthe key is “balance.” The debit and credit concept isused to maintain that balance. When entries are made,each entry consists of a debit to one account and acredit to another. For example, when a $100 check isreceived, it increases your assets. Therefore the assetsaccount “Cash” should be debited or increased by$100. However, since there is a double entry system,there must be an offsetting credit entry somewhere. Ifthe money were borrowed, the $100 check would bean increase in liabilities because you would owe themoney to someone. The appropriate liability accountshould therefore be credited or increased by $100.

Transaction: Borrowed $100 from the bank

ASSETS — Cash

debit credit

$100 �

LIABILITIES — Money Owed to the Bank

debit credit

� $100

If you add the debits and credits together, you wouldhave $100 worth of debits, and $100 worth of credits.Therefore, your accounts are balanced — the sum ofthe debits equals the sum of credits.

If another check were received for $50, this time inpayment for a license of some type, again the assetaccount Cash would be increased or debited. Tobalance the accounts, there must be an offsetting creditentry somewhere. This time the logical account tocredit would be a revenue account established to keeptrack of the money received from licenses.

Transaction: Received $50 in payment for a license

ASSETS — Cash

debit credit

$50 �

REVENUE — Licenses

debit credit

� $50

Revenue accounts include taxes, grants, fees, permits,licenses, departmental earnings, and all other sourcesof money except those producing liabilities such asloans. As you can see from the above example,increases in revenue are recorded as credits.

REVENUE

debit credit

decreases � increases

Expenditure accounts are the opposite of revenueaccounts Revenue represents money coming in;expenditures represent money going out. Accordingly,increases in expenditures are recorded as debits.

EXPENDITURE

debit credit

increases � decreases

As an example of recording an expenditure, assumeyou pay an invoice of $25 for road repair. Your checkrepresents a decrease or credit to cash (an assetaccount). This time the offsetting entry must be adebit. The account to be debited would be the expen-diture account for road repair.

Transaction: $25 paid for road repair

ASSETS — Cash

debit credit

� $25

EXPENDITURE — Road Repair

debit credit

$25 �

Again, as they must in a double entry system, debitand credit entries offset each other.

32

To summarize the meaning of debit and credit for eachof the types of accounts:

ASSETS LIABILITIES

debit credit debit credit

increases � decreases decreases� increases

EXPENDITURES REVENUE

debit credit debit credit

increases � decreases decreases� increases

Although, as stated earlier, the meaning of the termsdebit and credit is difficult for the layperson to under-stand, the advantages in use more than offset this diffi-culty. It is recommended that each municipality use

the double entry method. If your municipality is notusing this now but decides to change, it is furtherrecommended that you seek the services of a munic-ipal consulting or accounting firm to help you getstarted.

For those small municipalities that decide not tochange to double entry accounting, a simplifiedbookkeeping system has been designed under theguidance of the Pennsylvania Department of Transpor-tation, Bureau of Municipal Services. This systemachieves some of the effects of the double entrysystem without requiring the use of the formal termi-nology. A description of the system can be found inthe Treasurer’s Account Book distributed by theDepartment of Transportation.

33

VI. Accounting Guidelines

This chapter provides selected background data forthe municipal treasurer, describes the forms andaccount books needed in Pennsylvania and presentssome examples of the fundamental accounting entriesfor the forms and books. The chart of accounts used inpresenting this material is based on the accountnumbering system used for the Treasurer’s Account

Book and the Annual Budget Report and AnnualFinancial Report. Copies are available from theDepartment of Community and Economic Develop-ment or the Bureau of Municipal Services in theDepartment of Transportation. The forms used in theexamples are those designed by the Department ofTransportation for use in the Treasurer’s Account

Book.

The Books of Account

In the simplest terms, the financial transactions of amunicipality involve receiving cash (receipts) andspending it (expenditures or disbursements). Thesetransactions must be recorded as soon as possible inthe municipal account books. They are recorded inwhat is formally called “books of original entry.” Thetwo most common and most important books oforiginal entry are called:

Receipts Journal

Expenditures Journal

Sample forms for these journals, showing the types ofinformation required in the journal, might look likethis:

The abbreviations of “Dr” and “Cr” on these form re-fer to Debit (Dr) and Credit (Cr). They are included onthe form so it can be used for double entry methodbookkeeping. However, the forms are equally usefulfor recording the required information in single entrybookkeeping systems.

The blank space at the top of each form is used toidentify the fund for which the form is being used,such as General Fund, Highway Aid Fund or others.

Some transactions which do not involve cash directlyalso require a book of original entry. For instance, cor-rections to previous entries must be recorded some-where. They do not easily fit into one of the abovetwo books because they do not change the cash situa-tion. Therefore, a third book of original entry is usedin municipal systems called the General Journal.

There is no particular form for the General Journal.All that is needed is a place for the date and enoughroom for explanation of the entry. Double entry sys-tems also need two columns for debit and credit en-tries.

If your municipality uses the modified accrual system,you will have one other book of original entry to re-cord commitments to spend money. This is called thePurchase Journal or Voucher Register. The form forthe Purchase Journal is the same as for cash expendi-tures except the “Net Amt” is recorded as accountspayable instead of as a decrease in cash.

The Payroll Journal may also be considered a book oforiginal entry. However, since payroll is one of themost complex tasks for the municipal bookkeeper, aseparate section later in this chapter discusses the han-dling of payroll in detail.

34

These are all of the books of original entry. Any trans-actions of a municipality may be recorded using thesebooks. However, it is necessary to summarize the trans-actions somewhere so the information can be used inthe management of the municipality and the financialstatus can be compared against the budget. The name ofthe account book used for this purpose is the GeneralLedger.

The General Ledger normally consists of an accountbook with one separate page for each account whereyou keep track of the total transaction in that accountsince the beginning of the year and of the amount bud-geted for that account. A sample of a typical municipalledger form follows:

Financial reports should be made directly from thisledger.

In summary, in a cash basis accounting system, you willhave the following account books in each fund:

A Receipts Journal — to record all the receipts inthat fund.

An Expenditures Journal — to record all expendi-tures made from that fund.

A General Journal — to record all transactionswhich do not properly fit into one of the otherjournals.

A General Ledger — to record the budget and keeptrack of cumulative receipts and expenditures.

If you have a modified accrual system, you will alsohave a Purchase Journal to record accrued expenses orcommitments to spend money.

The flow of information among the account books isshown in Figure 5.

The following sections of this chapter describe how toset up and use each of the above books.

Double Entry or Not Double Entry

A question that is frequently raised in growing Pennsyl-vania municipalities is: “Should we change over to dou-ble entry method bookkeeping?” In many cases thequestion is not answered because no one can explainwhat you can do with double entry that you are not do-ing already.

Double entry bookkeeping is less subject to mathemati-cal error, it is accepted by professional accountants as agenerally accepted method of accounting for govern-mental units, and it is a flexible technique which canaccurately account for the entire financial picture of themunicipality. Specifically:

1. Such items as petty cash, investments and otherassets can be adequately contained in the books.

2. Joint projects where your municipality is collect-ing money for other agencies can be handledwithout giving the impression all of the moneycollected was revenue for your municipality.

3. Returns of excess taxes can be shown as a de-crease in revenue instead of another increase inexpenditures.

4. Returns of overpayments from vendors can beshown as a decrease in expenditures instead of asanother increase in receipts.

5. The debts and other liabilities of the municipalityhave a logical place in the double entry system.

For these reasons, double entry method bookkeeping isrecommended highly as the best method for use inPennsylvania municipal accounting. However, manymunicipalities feel the traditional method they havebeen using is what they want to continue to use. Thisconsists essentially of a type of combined receiptsjournal and ledger and a combined expenditures journaland ledger.

In order to make this chapter useful to all municipalitiesin reacting to changing guidelines from the state, thediscussions of municipal account books will cover bothdouble entry method bookkeeping and the traditionalapproach still in use in many communities.

Accounting Procedures and Forms

Setting up the Books

Knowing what books should be maintained is notenough to tell you how to physically organize the booksso you can operate efficiently. There are no legal con-straints on the number of account books used, or on

35

which forms must be kept separate from which. How-ever, some combinations help to minimize errors.

The receipts forms for each fund should be kept to-gether, separated from the receipts forms for otherfunds. The same holds for expenditures. A separatebinder is usually used for receipts forms for the Gen-eral Fund. This is then called the Receipts Journal ofthe General Fund. The Expenditures Journal of theGeneral Fund would then be a separate binder used forexpenditure forms for this fund.

Adding a New Fund

The secretary/treasurer of Township Able used the tra-ditional approach to municipal bookkeeping (they donot use double entry method bookkeeping). The super-visors passed an ordinance establishing a separatefund for street lighting. The secretary set up the ac-counting for the fund. Here are the steps TownshipAble followed.

1. Select a chart of accounts for this fund fromthe DCED Chart of Accounts. This was easybecause there is a special account numberspecifically for “Street Lighting Tax Fund.”

2. Set up new sections in the “other funds”binder of the township for the ReceiptsJournal and Expenditures Journal of thenew Street Lighting Tax Fund.

3. Set up Ledger pages for the Receipts/RevenueLedger and for the Expenditures Ledger...one page for each account.

4. Place a copy of the Charts of Accounts for theStreet Lighting Tax Fund in front of eachJournal and Ledger.

SEPARATEBINDERS

TABS FOREACH FUND

EXPENDITURES

JOURNALS

FOR OTHER FUNDS

RECEIPTS

JOURNALS

FOR OTHER FUNDS

GENERAL FUND

EXPENDITURE

JOURNAL

GENERAL FUND

RECEIPTS

JOURNALS

FIGURE 5 FLOW OF ACCOUNTING INFORMATION

CASHRECEIPTSJOURNAL

GENERALJOURNAL

CASHEXPENDITURE

JOURNAL

Payments toMunicipality

Opening andClosing Accounts;Non-cash Transactions

Payments byMunicipality

Corrections Corrections

GENERAL LEDGER

Summaries Summaries

PURCHASEJOURNAL

Commitmentsby Municipality

Modified Accrual Systems Only

Summaries

MONTHLY, QUARTERLY ANDANNUAL FINANCIAL STATEMENTS

Balance Beginning $xxxxxx. xx(+) Revenues xxxxxx. xx

= Total Available $xxxxxx. xx

(-) Expenditures xxxxxx. xx

= Balance Ending $xxxxxx. xx

36

Since the other funds are normally not used often, itmay be convenient to place all of the receipts formsfor these funds in one binder and the expenditureforms in another. They should be separated by tabs orindex pages so no mistakes are made in recordingentries to the individual funds. It is recommended thatyou choose binders that will lay flat for ease ofwriting. Standard three-ring binders have proven quiteacceptable.

There are two basic ways to set up your General Led-ger depending upon whether or not you are using dou-ble entry bookkeeping. If you are using double entry,you might establish one binder as a General Ledgerfor all other funds as shown on the right hand side ofthe illustration below. Again, the other funds shouldbe separated from each other by tabs.

If you are not using the double entry method, it is rec-ommended that you place the ledger sheets for receiptsand revenue accounts in the back of the Receipts Jour-nal, and the ledger sheets for expenditures in the backof the Expenditures Journal for each fund. The result-ing binders are shown on the left hand side of the il-lustration below.

There are no legal constraints on how many bindersyou use, or on what kind. However, the use ofthree-ring binders as shown in the illustration hasproven effective and efficient.

Some form of General Journal to record correctionsand noncash transactions should be added. If amodified accrual system is used, a purchase journalwould also have to be added.

The Chart of Accounts

The account numbering system shown throughout thisHandbook is based on the Chart of Accounts. Theaccount numbers and descriptions contained in theAnnual Audit and Financial Report, Form No.DCED-CLGS-30, correspond directly to the accountslisted in the Chart of Accounts. These accountnumbers and descriptions are also used in the Depart-ment of Transportation forms: Form 903, Treasurer’sAccount Book; Form 965, Actual Use Report of StateFunds.

Prior to 1972, there were different account numberingsystems for the respective classes of municipality.While account titles or descriptions were basically thesame for each class of municipality, the accountnumbers were different with no uniformity betweenclasses. The Combined Forms Committee for eachclass of municipality agreed, in their review andrevision of the budget and financial reports, to adoptthe chart of accounts referred to in this section as theaccount numbering system to be used in these reports.As shown in the next figure, the numbers have beendivided into three parts: the prefix, the number, andthe suffix.

TRADITIONALBOOKKEEPING

DOUBLE ENTRYMETHOD BOOKKEEPING

General Fund

Receipts Journal

and Receipts/Revenue

Ledger

Other Funds

Expenditures

Journal & Expenditures

Ledger

General Fund

Expenditures

Journal and

Expenditures Ledger

Other Funds

Receipts Journal

and Receipts/Revenue

Ledger

General Fund

Receipts Journal

General Fund

Expenditures

Journal

General Fund

General Ledger

SEPARATE

BOOKS

OR

Other Fund

Ledger

Other Funds

Expenditure Journal

Other Funds

Receipts Journal

37

The Account Number System

For Example: 01.409.20 *

Prefix Number Suffix

Identifies Fund Identifies the kind Identifies the

01. General of account and its specific expenditure

Fund* purpose 409 .20 Supplies

General Government

Building Expense

Prefix Numbers

The first two digits of the number are the prefix num-bers. These identify the fund. In the above example of01.409.20, the “01" tells you this is the GeneralFund.* Prefix numbers for other funds you may estab-lish are listed below.

01. General Fund*

02. Street Lighting Tax Fund (a special revenuefund)

03. Fire Protection Tax Fund (a special revenuefund)

04. Special Revenue Fund – (as required)

05. Special Revenue Fund – (as required)

06. Water Fund (an enterprise fund)

07. Electric Fund (an enterprise fund)

08. Sewer Fund (an enterprise fund)

09. Enterprise fund – (as required)

10. Special Assessment Bond Fund –Series of_______(a special assessment fund)

11. Special Assessment Bond Fund –Series of________(a special assessment fund)

12. Special Assessment Bond Fund –Series of________(a special assessment fund)

13. Special Assessment for Street Lighting Fund

14. Special Assessment for Fire Protection Fund

15. General Obligation Bond Fund –Series of________(a capital projects fund)

16. General Obligation Bond Fund –Series of ________(a capital projects fund)

17. General Obligation Bond Fund – Seriesof______ _____(a capital project fund)

18. Capital Projects Fund – (as required)

19. Capital Projects Fund – (as required)

20. Sinking Fund –Series of (a debt service fund)

21. Sinking Fund –Series of (a debt service fund)

22. Sinking Fund –Series of (a debt service fund)

23. Debt Service Fund – (as required)

24. Debt Service Fund – (as required)

25. Debt Service Fund – (as required)

26. Debt Service Fund – (as required)

27. Debt Service Fund – (as required)

28. Debt Service Fund – (as required)

29. Debt Service Fund – (as required)

30. Capital Reserve Fund (a capital projects fund)

35. Highway Aid Fund (a special revenue fund)

40. Revolving Fund

50. Fire Relief Fund (an agency fund)

55. Fire Pension Fund (a pension trust fund)

60. Police Pension Fund (a pension trust fund)

65. Municipal (Non-uniformed) Pension Fund(a pension trust fund)

70. General Fixed Asset Account

80. General Long-Term Debt Account Group

90. Payroll Fund (an agency fund)

The “01. — General Fund,” and the “35. — HighwayAid Fund” are the minimum funds required of everymunicipality. Other funds may be established andclosed as needed. The funds should be tailored to yourspecific municipality.

The Number

The main part of the number, the three digits in themiddle, tells you two things: what kind of an accountit is (Revenue, Expenditure, etc.) and what the particu-lar account is for. For example, in the number 409.20*the 409 refers to expenditures for the municipal build-ing. The fact that the number starts with a four (4)means that this is an expenditure.

All 400 accounts are expenditure accounts.

All 300 accounts are revenue accounts.

All 200 accounts indicate liabilities and fund equity.

All 100 accounts indicate assets.

*Note: Although 01. refers to the General Fund,

usually the number is not actually written because this

fund is used so frequently. Thus, the number 409.20 is

understood to be in the General Fund.

The Suffix

The last two digits of the account number are used todefine a specific account. In the example 409.20,* the

38

.20 refers to Supplies. When you put the wholenumber together, it identifies:

01. the General Fund.

409 General Government Building Expense.

.20 for Supplies.

A specific suffix number always means the same thingwhen it is used with expenditures (400 accounts). Forexample 403.20* refers to the tax collector’s (403)Supplies (.20); while 456.20* refers to the library(456), but still identifies Supplies (.20).

When used with the Revenue Accounts (300 ac-counts), the suffix numbers have different meanings.Refer to the Chart of Accounts in each case to find outwhat the suffix means.

Using the Books

Receipts Journal

All cash received by the municipality from any sourceshould be recorded in this book. Each entry in thebook should be supported by a copy of a receipt or amemorandum. The receipts and/or memoranda shouldbe filed in date sequence to provide an audit trail.

The data to be entered in the Receipts Journal isshown by the following form currently used in theTreasurer’s Account Book published by the Pennsyl-vania Department of Transportation.

The procedure for using the receipts forms is to recordevery receipt in the date order it is received, enteringwhom the money was received from, the account, thereceipt number and the date. Write the account numberand the amount in the last columns on the page. Thiscompletes the original entry in the Receipts Journal.

The Account # used to show what category of receiptwas received (taxes, licenses, loans, etc.) should beselected from the Chart of Accounts published by thePennsylvania Department of Community andEconomic Development.

To familiarize you with normal use of the receiptsjournal, several examples of typical entries are provided.

Example 1: Assume that John Smith brings in $10 fora Zoning Permit. This entry in the Receipts Journalwould be:

Example 2: Suppose Mr. Smith gives you $20; $10 isfor a Zoning Permit and $10 is for a Building Permit.To record this receipt, you would use two lines as fol-lows.

Example 3: If you have many small receipts of thesame kind, such as from selling maps, you may makeone entry for the day provided you keep the day’s re-ceipts bundled together and properly filed so the audi-tors can identify the exact receipts included in eachentry in the Receipts Journal. For example, thefollowing entry shows the sale of maps as a Miscella-neous Receipt (380). The individual receipts for thisentry, which add up to $24.50, have been stapled to-gether and filed.___________________________________________*Remember the 01. for the General Fund is always

understood if no number is written.

39

Example 4: When depositing receipts in the bank, apractice in many municipalities is to use a line of thereceipts journal to show the deposit. This provides animmediate check on the items included in each bankdeposit slip.

The entries in the receipts journal should be totaledmonthly and balanced. The sum of the totals of thecash column should equal the sum of the totals of theaccount columns showing what categories the moneycame from.

You should now be able to set up and maintain the Re-ceipts Journal. You have seen examples of recordingsimple receipts such as John Smith’s $10 for a zoningpermit, and more difficult receipts such as the receiptof $20 distributed to two separate accounts. An exam-ple of combining receipts and of bank deposits hasalso been presented. In these examples, you used all ofthe columns in the Journal except the small columnheaded by a check mark.

The check mark column is used to indicate you haveentered or “posted” the information on that line ontothe ledger sheets. In the Ledger you keep track of totalexpenses in each account and of the budget for eachaccount. The section on setting up and using the Led-ger provides examples of posting.

Expenditures Journal

All cash disbursed by the municipality for any purposeshould be recorded in this book.

The data that must be entered into the ExpendituresJournal for each transaction is shown by the followingform, which is also a part of the Treasurer’s AccountBook.

All entries should be supported by a voucher whichshould, as a minimum, consist of a vendor’s invoiceand evidence of receipt of the goods or services. Thevoucher should be verified as to the accuracy of thequantities billed, description of goods or services, unitprices and the totals. Further, an authorized approvalfor payment should be entered on the invoice. Uponpayment, the voucher should be stamped “paid” andthe date and/or the disbursing check number recorded.Paid vouchers should be filed alphabetically byvendor.

If a voucher check is used, a copy of the check shouldbe attached to the voucher.

The procedure for recording expenditures is the sameas for recording receipts. When you have to distributethe net amount of the check over several accounts, youmerely use another line of the page to record each ofthe accounts that receive portions of the net amountand the portion they should receive.

As with the Receipts Journal, the entries in the cashcolumn and the distribution column should be addedand balanced to be certain all entries have beendistributed to numbered accounts. Also, as with theReceipts Journal, the check mark column is for usewhen posting the information onto the ledger sheets.Examples of this are provided in the section on theGeneral Ledger.

General Journal

This is the book to take care of transactions whichcannot be recorded in one of the other books of origi-nal entry. Examples of transactions that would be en-tered in the General Journal are:

1. Changes or corrections to transactions recordedat an earlier time.

40

2. The opening of the municipal accounts at the be-ginning of the year.

3. The closing of the accounts at the end of theyear.

The data which should be recorded in the GeneralJournal are the date, an explanation of the entry andthe pertinent account numbers and amounts. It is im-portant to record a full explanation as a part of everyentry in the General Journal so the purpose of the en-try can be easily understood by others at a later time.There is no preset form for the General Journal. A va-riety of locally available accounting forms will servethe purpose. One sample appears below:

As an example of a General Journal entry, assume thatin distributing payroll to the various accounts, $520was recorded as salary and wages for “Highways” (ac-count #430) when it really should have been shown assalary and wages for working on “General RecreationServices” (450).

The General Journal entry in a Double Entry Methodsystem would look as follows:

The essential characteristics of the General Journalentries include being self-balancing and having a fullexplanation included as a part of the entry. The aboveillustration is obviously self-balancing because itcontains both a debit and a credit for $520. The expla-nation is minimal. It would be proper to include moredescription of the reason the error was made such as amisread time card or a mathematical error duringposting point.

In single entry systems in use across Pennsylvania, theentry might look like this:

Again, the requirements have been met: a self-balanc-ing entry accompanied by the date and a full explana-tion of the transaction.

General Journal entries should be entered (posted) im-mediately to the General Ledger. Since they are notmade frequently, it is easy to forget to post the Journalif you wait until the end of the month.

The Ledger

Here is where the traditional accounting practice andthe double entry method part ways. The municipalityusing the double entry method will create one Ledgerfor each fund... called the General Ledger. The infor-mation from the Receipts Journal, ExpendituresJournal and General Journal will come together in thisbook, but will be integrated correctly through the useof the concept of debit and credit. Ledger sheets willbe included in the General Ledger for all municipalassets and liabilities.

Those municipalities using the traditional approachwill create two ledgers for each fund; theReceipts/Revenue Ledger for summarizing receipts byaccount and the Expenditures Ledger for summarizingexpenditures by account. General Journal entries willbe integrated into one or the other of these Ledgers.However, it will be impossible to have proper ledgersheets for all Assets and Liabilities. Instead, thesemunicipalities should maintain separate lists of assetsother than the cash in the checking account and of allliabilities.

Once the ledgers are set up, the instructions for theiruse are identical until the point of checking whetherthe ledgers balance. A separate discussion is providedat the end of this ledger section to show the differ-ences.

1

2

3

4

5

6

7

8

Date Explanation

1

Debt

2

Credit

3

1

2

3

4

5

6

7

8

Date Explanation

1

Debt

2

Credit

3

June 10 In distributing the June 5th payroll anerror of $520.00 was made. This entry isto reallocate that $520.00 from HighwayServices to Recreation Services.Recreation Services, Acct. # $450.00Highway Services, Acct. # $430.00

$520.00$520.00

June 10 In distributing the June 5th payroll an error of$520.00 was made. This entry is to reallocatethat $520.00 from Highway Services toRecreation Services.Subtract $520.00 from

Acct. # $450.00 - Recreation ServicesAdd $520.00 to

Acct. # $430.00 - Highway Services

41

The Ledgers are not books of original entry. In fact, noentries may be made in the Ledgers unless they havefirst been recorded in one of the books of originalentry.

Typical data which must be entered in the Ledger isprovided by the form below, which is part of the Trea-

surer’s Account Book.

The first information a ledger sheet must contain is adetailed identification of the Fund and of the specificaccount within the Fund. This is provided on theabove form by the spaces for:

Fund

Type Account

Account Category

Account Title

Account #

To set up the ledger, select the accounts your munici-pality needs from the Chart of Accounts and fill in thetop of a blank ledger form for each account.Remember to include nonrevenue accounts such asShort-Term Liabilities and Tax Anticipation Loans.These may be found in either the 200 or 300 blocks ofthe Chart of Accounts. For example, receipts fromloans are liabilities and would be numbered in the200s. Transfers from other funds, however, are in the300s.

Remember to also include the nongovernmentalexpenditure accounts such as Purchase of Investmentsand Principal Paid on Bonded Debt. These may befound in the 100 and 400 blocks of the Chart ofAccounts. For example, expenditures for TemporaryInvestments would be Account #120.

In double entry systems, these would be the standardasset and liability accounts selected for the Ledger.

As an example of how to set up the Ledger forms,assume you want to set up an account for your expen-ditures for contracted services for garbage collectionand disposal. In the Chart of Accounts, you would findthe following:

The titles to the left are the titles on the same LedgerForm. The proper entry on the sample ledger form forthis account is as follows:

Follow the same instructions for each additionalaccount you wish to add to your ledger.

Note that the account number should really be01.427.30. The prefix for the General Fund, (01.) wasleft off. Since the General Fund is used so extensively,the prefix is not used. If no prefix appears it is under-stood that the account belongs to the General Fund.

Making Entries or “Posting” from the

Receipts Journal to the Ledger

In using the Ledger, there are several ways to enterdata onto the forms. One way is to record each amountfrom the right hand column of the Receipts Journal onthe proper page of the ledger. A second approach is torecapitulate the entries at the end of each week ormonth and post these totals to the Ledger.

GENERAL FUNDCHART OF EXPENDITURE ACCOUNTS

AccountNumber Classification

426 Public Works - Sanitation

Solid Waste Collection and Disposal

427.30 Other Services and Charges

427.70 Capital Purchases427.80 Depreciation Expense

428.00 Weed Control

427.00427.10 Personal Services427.20 Supplies

427.50 Contributions, Grants and Subsidies427.60 Capital Construction

420.10 Personal Services428.20 Supplies428.30 Other Services and Charges428.50 Contributions, Grants and Subsidies428.60 Capital Construction428.70 Capital Purchases428.80 Depreciation Expense

Fund

Type Acct.

AccountCategory

AccountTitle

Acct. #

42

Specifically, two items from the Receipts Journalshould be written or “posted” in the Ledger: the dateand the amount. Which page of the Ledger these areentered on is determined by the “Account # ”columnon the Receipts Form.

For example, when the $10 entry for a Zoning Permitwas made in the Receipts Journal for John Smith,Account #320.07 was written in the column forAccount #.

Now you should find the ledger page for Account#320.07 (Actually 01.320.07). Enter on that page thedate (June 1) and the amount to be distributed to thataccount ($10) as follows:

After the entry is made, put a check mark in theReceipts Journal in the small column by the Account #so that you know you have “posted” this entry.

The second entry where Mr. Smith gave the munici-pality $20, $10 for a Zoning Permit and $10 for aBuilding Permit, requires that you post each line. The$10 for the Zoning Permit would be posted to theLedger sheet for account #320.07; the $10 for theBuilding Permit would be posted to the Ledger sheetfor Account #320.02 This is shown by the followingillustration:

Note that there are two amount columns on the Ledgerpage: Amount Dr. (debit) and Amount Cr. dit). TheReceipts Journal forms indicate which column shouldbe used for receipts, because the right hand column istitled Amount Cr. Thus the entry would be “posted” tothe column titled Amount Cr. on the ledger sheet.

That completed the entries in all of your books forSmith’s $20 payment. To review the procedure:

You receive $20 from John Smith for a ZoningPermit and a Building Permit.

You made a two-line entry in your Receipts Journal.

You entered the date and amount for each line entryon the proper ledger pages.

43

Making Entries or “Posting” from the

Expenditures Journal to the Ledger

An example of the Journal entry and Ledger posting ofan expenditure is shown below. In this example, it isassumed that check number 241 is made out for $530to Jones Construction for repair of the MunicipalBuilding — Account #409.37. Accordingly, in theright hand columns of the Expenditure Journal, weenter 409.37 and the total amount of $530.

To post this entry to the Expenditure Ledger, we findthe sheet for account #409.37 (preceded by 01. be-cause this is the General Fund). The date (June 1) andamount ($530) are entered on this page as shown be-low. You will note that in this ledger a new balance iscomputed with every entry, and the remaining bud-geted funds are also computed on every line. Thesecomputations can also be done once a month if the in-formation is not needed more often.

The procedure for completing the ledger forms forExpenditures is the same as for Receipts. The date andamount of each entry in the Expenditures Journalshould be posted or written on the page for thataccount in the General Ledger. The only difference isthe Amount column on the Expenditures form is titled“Amount Dr.” for debit. Therefore, when the amountis posted to the Expenditures Ledger, it should beentered in the “Amount Dr.” column.

It is not necessary to post each entry in the Journals tothe Ledger. Where the volume of transactions is heavy,the totals for each day or even each week might beposted. The only requirement is that there be an audittrail: that is, it must be possible to trace from each en-try in the ledger back through the Journal to the spe-cific journal entry for that transaction.

The General Ledger — Double Entry

Method

In maintaining a General Ledger for double entrybookkeeping, you must formally open the books. Thisis done at the beginning of the year, before any currenttransactions are recorded, by entering the remainingbalances in the cash and other asset accounts, the lia-bility accounts and the fund balance account. Theseare the only accounts that will have balances at the be-ginning of the year.

As an example of Ledger entries in a double entry sys-tem, a sample of the Ledger sheet for the Assets ac-count “Cash — Regular Checking Account” is shownbelow. On this Ledger sheet, the receipt and expendi-ture entries from the Journals are netted in order to de-termine the account balance. Since both Debit andCredit entries are made, it is necessary to show thebalance on each line.

The ledger should be checked at least once a monthfor errors. This is done by adding together all of thedebit balances in the Ledger and comparing that totalwith the total of all the credit balances. This is calledrunning a trial balance. It gives you a cross check tobe sure you have made all of the entries properly. Thetotals should be equal. If they are not, there is an errorin the books that must be tracked down.

The accuracy of the balances in certain of the accountsshould be proven by reconciliation or analysis. Forexample, the balance in the Cash — Regular CheckingAccount should be reconciled to the bank statementfor the same date.

44

The treasurer of Baker Borough uses the dou-ble entry method of municipal bookkeeping. Itis the beginning of the year, the General Fundbooks for last year must be closed and thenopened for this year. The steps taken were:

1. Ran a trial balance to be certain that thebooks being closed were in balance.

2. Made a General Journal entry to do thefollowing:

a. Debit all revenue accounts with theamount of their credit balance to bringthe balance of the account to zero.

b. Credit all expenditure accounts withthe amount of their debit balance tobring the balance of the account tozero.

c. Enter the difference between the sumof the balances of the revenue accountsand the sum of the balances of theexpenditures accounts in account296 - Fund Balance:

As a debit, if the sum of the ex-penditure accounts exceeds thesum of the revenue accounts.

As a credit, if the sum of therevenue accounts exceeds thesum of the expenditure ac-

counts.

3. Checked to see that the sum of the bal-ances of the asset accounts equaled thesum of the balances of the liability andfund equity accounts.

4. Posted the General Journal entry into theGeneral Ledger.

5. Made and posted a General Journal entryto reduce all of the balances of the assetand liability accounts in last year’s booksto zero by making debit entries in all ac-counts with credit balances, and viceversa. For each entry, an offsetting entrywas made to place the balance of the ac-count in the new books for this year. Theeffect these entries represent was that anincrease in balances in the asset, liabilityand fund equity accounts were recopiedinto the new account books.

Receipts/Revenue and Expenditure Ledgers

— The Traditional Approach

In maintaining separate ledgers for Receipts/Revenueand Expenditures, you have no logical place to recordmunicipal debts or assets other than the cash in theregular checking accounts. At the beginning of theyear, you should prepare a separate sheet itemizingboth the assets and liabilities.

At least once a month, you should total the receipts oneach page of the Receipts/Revenue Ledger, and theExpenditures on each page of the ExpendituresLedger. The totals should be placed in the columnheaded Balance as shown in the following illustration.

If you need totals more often, you can enter the newtotal in the Balance column every time you make anentry. In the above illustration, the balance for Januaryis $1,200; the balance for the two months, January andFebruary is $2,300.

Each month, check your ledgers to be certain that allentries have been properly made. This is done byadding together the totals or balances on each page ofthe Receipts/Revenue Ledger and comparing this sumwith the total receipts received during the year. Thetotals should be the same. If they are not, there is anerror in the books that must be found.

Each month, you should add together the balances oneach page of the Expenditures Ledger and compare itto the total expenditures during the year. Again thetotals should be the same. If they are not, you musttrack down the error.

All Ledgers

The Budget column of the Ledgers is important andshould be used to show the current approved budgetfor all revenue and expenditure accounts. It can beused in whatever way is most convenient to you. One

45

of the frequently used techniques is shown in the pre-ceding illustration. The yearly budget amount is re-corded on the first line. At the end of the month whenyou are totaling the receipts in that account, the totalreceived to date is subtracted from the budget and theremainder of the budget is entered on the same line asthe total received to date. For example, in the figureabove, the budgeted amount for Account #342.02 is$10,400. Since $1,200 was received in January, thatleaves $9,200 as the remaining portion of the bud-geted amount still outstanding at the end of January.

The comparison of actual revenues or expenditureswith budget estimates provides management with thenecessary information to control existing programswithin the remaining budget limitations.

Monthly financial statements should be prepared di-rectly from the Ledger. For a discussion of these state-ments, refer to Chapter VII, Fiscal ManagementTechniques.

Purchase Journal or Voucher Register

This book will only be used by those municipalities

maintaining their books on a modified accrual basis

(recording expenses when they are incurred instead ofwhen they are paid). Entries should be made when theliability for the expenditure is incurred upon receipt ofthe vendor’s bill.

The data which must be entered in the Purchase Jour-nal is the same as that required for the ExpendituresJournal. The only difference is that instead of record-ing a decrease (or credit) to Cash, as would be done inthe Expenditures Journal, the credit is made to Ac-counts Payable. When actual payment is made, thepayment then will be recorded in the ExpendituresJournal as a decrease (or credit) to Cash and a debit toAccounts Payable.

For example, suppose that Blank Borough decided topurchase a sign machine for $900. They obtain bidsand send a purchase order to the low bidder for themachine. The following accounting entries would bemade upon receipt of the vendor’s invoice.

EXPENDITURES LIABILITIES

Minor Equipment Accounts Payable

Purchase

debit credit debit credit

$900 | | $900

These entries represent an increase in expenditures forthe purchase of a sign machine. They also represent anincrease in liabilities because the borough has commit-ted itself to the expenditure.

Later, Blank Borough will pay the invoices; the entriesat that time will be:

ASSETS LIABILITIES

Cash Accounts Payable

debit credit debit credit

� $900 $900 � $900

These underlined entries show the decrease in cashwhich results from issuing the check, and the decreasein liabilities which results from payment of the bill. Asindicated in the Liabilities account, the former entry of$900 and this entry cancel each other out. This isproper. The objective of Accounts Payable is to recordexpenses at the earliest possible time to provide themost up-to-date picture of the municipal finances at alltimes.

The support data for entries in the Purchase Journal isthe same as for the Expenditures Journal describedearlier. All entries should be supported by a voucher,which should be verified, approved and filed in dateorder.

The entries in the Purchase Journal should be totaledand balanced monthly. The totals should then be en-tered or posted in the General Ledger under the appro-priate account numbers.

Payroll Accounting

Accounting for payroll is probably the most difficultand time-consuming portion of the municipal trea-surer’s job. The requirements to withhold more anddifferent kinds of taxes, unemployment and social se-curity contributions, insurance, pension, and otherfringe benefits create accounting problems. The addi-tional requirement to deposit or remit the individualwithholdings at different times to different agencies bycertain deadlines compounds those problems. The in-dividuals being paid have usually worked on morethan one type of activity in the municipality, so thepayroll amounts must be distributed over several ac-counts in the municipal books. Accurate payroll re-cords are extremely important, especially as theyrelate to the Highway Aid Fund.

Bookkeepers who work without professional advicemay unknowingly make the task even more complex.In many cases, for example, bookkeepers will distrib-

46

ute the net payroll to the various highway, park andrecreation, administrative and other accounts. Later,they will distribute the federal income tax withheld. Atstill another time, they will distribute the state incometax withheld, the local tax withheld, etc. This is unnec-essary, and the added complexity which results cancreate many errors in the books.

There are several alternative approaches to handlingpayroll. Some of them are listed below with brief de-scriptions of their advantages and disadvantages. Fol-lowing that, one method is selected and described inmore detail to provide specific guidance to the munici-pal employe responsible for payroll.

The alternative approaches include:

1. Preparing payroll checks from the General Fundaccount. Frequently, these checks are signed bymore than one official making the system cum-bersome. Furthermore, transferring payroll fundsfrom the Highway Aid Fund and other fundstends to make bookkeeping complex and to in-crease the chance of error.

2. Establishing a separate checking account forpayroll within the General Fund and transferringgross payroll into the account. This is simpler,but still requires passing payrolls for other fundsthrough the General Fund.

3. Establishing a separate checking account forpayroll within the General Fund and transferringnet payroll into the account. In addition to theabove problems, under this method a double en-try system should be maintained so the variouswithholdings can be recorded as liabilities at thetime of payroll preparation.

4. Establishing a separate checking account and aseparate fund for handling payroll. Normally,creating another fund is not recommended, but itis the cleanest and simplest approach to handlingthe problem.

This handbook recommends the third alternative —the General Fund — as the approach that is least likelyto result in accounting errors and most likely to be ac-ceptable to the municipal treasurers. Accordingly, thatapproach is described in some detail in later portionsof this section. First, the specific tasks involved in thehandling of payroll will be described.

Payroll Activities

What is really involved in the task of payroll? Manyofficials not directly involved have a difficult time un-derstanding the complexity. The best suggestion is to

sit down and learn to make out the payroll yourself. Inthe absence of the time and opportunity to do that,here is a capsule description of the step-by-step pro-cess involved:

1. Obtain time cards from each employee showingregular and overtime hours and distributing thehours to various funds and accounts.

2. Verify the cards are properly made out, properlysigned and mathematically correct.

3. Compute gross pay for each employee (includingcalculation of overtime pay).

4. Compute tax deductions for each employee(F.I.C.A., federal withholding, state income tax,local taxes).

5. Compute other deductions for each employee(insurance, pension, etc.).

6. Determine net (take-home) pay for eachemployee.

7. Complete an earnings record for each employee.

8. Prepare payroll check and stub record for eachemployee.

9. Complete a payroll summary to compute totalnet payroll, total F.I.C.A. withheld, total federalincome tax withheld, total state income tax with-held, total local taxes withheld, total insurancepayments withheld and others.

10. Calculate the gross payroll amounts to be distrib-uted to each account in each fund where workwas performed.

11. Prepare checks to transfer any net payroll fromthe other appropriate funds to the General Fund.

12. Make accounting entries in each fund distribut-ing the gross payroll to the proper accounts.

13. Distribute net payroll checks to employees.

14. Obtain the matching amount for the municipalcontribution to the F.I.C.A. payment from Gen-eral Fund and other funds. (Also obtain munici-pal contributions to shared insurance payment ifapplicable.)

15. Deposit the F.I.C.A. withheld monthly or quar-terly as required depending on the size of thepayroll.

16. Deposit the federal income tax withheld monthlyor quarterly as required.

17. Send the state income tax to the PennsylvaniaDepartment of Revenue monthly or quarterly asrequired.

18. Send insurance, pension and other withholdingsto the proper agencies as required.

47

19. Reconcile the cash balance in the General Fundand other funds with the checks outstanding, andwith the federal, state and other payments not yetmade.

20. At the end of the year, prepare:

� W-2 forms for each employee.

� W-3 forms for IRS or Income Tax withheld.

Not later than January 31 of each year, the law re-quires employers to furnish each employee fromwhom income taxes have been withheld the Wage andTax Statement, Form W-2. For an employee terminat-ing before the end of the year, the W-2 should be is-sued within thirty days of termination. Deductionsmade or F.I.C.A. must also be shown on the W-2 form.Each W-2 and other tax reports must contain the em-ployer’s identification number in the upper right cor-ner block.

At least four copies of the W-2 form are prepared.Copy A goes to the Internal Revenue Service Centerwith the fourth quarterly report. Copy B and C arefurnished to the employe. Copy D is kept by theemployer for records. Additional copies may befurnished the employee for state and local incometaxes.

Those are the steps involved in preparing and account-ing for the municipal payroll. With all of the calcula-tions and duplicate entries required, there is muchopportunity for error. Accordingly, the simplest systemfor handling payroll is desirable.

The Payroll Fund and Payroll Forms

The simplest approach to handling payroll for munici-palities without double entry accounting systems ap-pears to be the establishment of a Payroll Fund. Thenany other fund which incurs payroll costs. . . the Gen-eral Fund, the Highway Aid Fund, the Sewer Fund,Water Fund. . . merely transfers the gross amount ofthe payroll cost to the Payroll Fund. All employechecks and withholding payments are drawn from thePayroll Fund directly.

The sequence of activities involved in taking care ofpayroll requires a series of forms for payroll account-ing. Employes hand in a time card or time sheet indi-cating which funds they worked for and whichaccounts within those funds should be charged fortheir time. These time cards or time sheets are theoriginal invoices for the Payroll Fund. It is these timerecords the auditor will verify.

Time records can take a variety of forms depending onthe desires of the municipality. The essential informa-

tion is simply the dates, the employee’s signature, andthe number of hours worked on each account.Employes must fill in the different accounts theyworked on. The form should be signed by the immedi-ate supervisor to verify that the work was completed.As with any vouchers, the time sheet should be ap-proved by the elected officials. A sample combinedtime sheet and Payroll Journal is shown in Figure 8 onpage 50.

Information from the time cards is recorded in twoplaces. The total hours worked are recorded on theEmploye Earnings Record for the computation ofgross salary and withholdings; and, the percentage oftime worked by the employee on each account and/oreach fund is recorded in the Payroll Journal so you cancompute the proper amounts to be entered in the mu-nicipal books for each account.

A copy of a typical Employee Earnings Record is pro-vided in Figure 7 on page 49. As you can see on thisform, for the period ending October 13th, John Smithworked 40 regular hours, and ten overtime hours.Since his rate is $3 per hour, his regular earnings areshown as 3 x 40 or $120. His overtime earnings, sincehis municipality pays time and a half for overtime, are3 x 1-1/2 x 10 or $45. Thus his total earnings areshown as $165. The taxes and other deductions arecomputed according to the applicable tables and regu-lations available from the taxing agencies.

The data on the Employee Earnings Record not onlyprovides the base for the payroll activity, but also pro-vides the history of each employe’s earnings requiredfor end-of-year reporting such as the W-2 forms.

A copy of a typical Payroll Journal is shown in Figure8 on page 50. The percentage of time spent by JohnSmith on each account should be multiplied by hisgross pay and the result entered on the right hand sideof the form. For example, John Smith is receiving$165 this pay period. His time sheet showed that hespent 52 percent of his time (26 out of 50 hours) work-ing on general municipal snow and ice removal(432.00), and 48 percent of his time on a Highway Aidproject for street markings (35.433.00). Therefore, 52percent of his pay, or $85.80, should come from theGeneral Fund where it should be charged against sala-ries on the snow and ice removal account (432.00),and 48 percent of his pay, $79.20, should come fromthe Highway Aid Fund where it should be chargedagainst salaries on the Street Signs and Markings ac-count (35.433.00).

The information on taxes and other withholdingsshould be transcribed as is from each individualEmployee Earnings Record to the Payroll Journal.

48

FIG

UR

E6

ST

EP

SIN

PA

YR

OL

LA

CC

OU

NT

ING

Dep

osi

tby

Req

uire

d

Dea

dlin

es

Pay

by

Due

Dat

e

Com

ple

teC

heck

s

for

Insu

ranc

e,

Pen

sion

&O

ther

Pay

men

ts

Com

ple

teC

heck

sfo

r

FIC

A,

Fed.

Tax,

Sta

te

Tax,

Loca

l Tax

...

Com

ple

te

Emplo

yee

Pay

roll

Che

cks

Tran

sfer

Gro

ss

Pay

roll

from

each

Fund

toPay

roll

Fund

PA

YM

EN

TS

Tran

sfer

Mun

icip

al

Por

tion

ofFI

CA

FU

ND

TR

AN

SFE

RS

Det

erm

ine

Gro

ssC

harg

es

toea

chA

ccou

nt

Dis

trib

ute

Pay

roll

Che

cks

toEm

plo

yees

Ente

rD

istr

ibut

ion

ofH

ours

to

Fund

s&

Acc

ount

son

Pay

roll

Jou

rnal

Ente

rG

ross

Pay

for

each

Emplo

yee

on

Pay

roll

Jou

rnal

and

Com

put

e

Tota

ls

Ent

erTa

x

Ded

ucti

ons

onPay

roll

Jou

rnal

&

Com

put

eTo

tals

Ente

rO

ther

Ded

ucti

ons

onPay

roll

Jou

rnal

&

Com

put

eTo

tals

Ent

erN

et

Pay

on

Pay

roll

Jou

rnal

PA

YR

OLL

JO

UR

NA

L

Det

erm

ine

Net

Pay

for

each

Emplo

yee

Com

put

eO

ther

Ded

ucti

ons:

Insu

ranc

e

Pen

sion

Com

put

eTa

x

Ded

ucti

ons:

FIC

A

Fed.

Tax

Sta

teTa

x

Loca

l Tax

Com

put

e

Gro

ssPay

roll

for

each

Emplo

yee

on

Emplo

yee

Earn

ings

Rec

ord

Ver

ify

that

Car

ds

are

Pro

per

ly

Mad

eO

ut

Obta

inTim

e

Car

ds

from

Emplo

yees

wit

hH

ours

Dis

trib

uted

toA

ccou

nts

EA

RN

ING

S

RE

CO

RD

FE

DE

RA

LA

ND

STA

TE

RE

CO

RD

SC

omple

teW

-2Fo

rms,

W-3

Form

s,et

c.

49

Each employee will only require one line on the Jour-nal. The Journal provides the information required torequest money from the other funds.

When all of the employees’ earnings have been en-tered on their individual Employe Earnings Recordsand transcribed to the Payroll Journal, each column ofthe Payroll Journal should be totaled. The totals to theright tell you how much money to draw out of theGeneral Fund, the Highway Aid Fund and any otherfunds your municipality may be using. Specific ac-count columns under each fund tell you the proper ac-counting entries for distributing the payroll when youmake the check out for each fund. As you can see onthe sample payroll journal, $211.20 should be drawnfrom the Highway Aid Fund and $173.80 from theGeneral Fund. The totals to the left of the Payroll ac-count distribution, (federal tax, social security) tellyou how much money should be deposited or paid foreach of the withholdings made.

The time cards, the Employee Earnings Records andthe Payroll Journal make up an almost complete pay-roll system. The remaining parts of the system are thepayroll check and the check stub. The check stubmaintains a record of the receipt of money from each

fund. It also keeps you appraised of your bank bal-ance.

The Payroll Fund should be opened with some mini-mal amount. Each pay period, a deposit should bemade to exactly cover the checks written. After thechecks are issued, the bank balance should return tothe minimal amount deposited when the account wasopened. If it does not, you should immediately checkto determine whether an error has been made.

One other feature of payroll withholdings should benoted. The social security payments withheld from theemployes must be matched by the municipality. Thetotal social security deposit will be twice the amountwithheld from the employes. It is recommended thatthe municipality contribution for social security alsobe deposited into the Payroll Fund and one check writ-ten for the combined amount when the social securitypayment is made.

FIGURE 7

EMPLOYEE EARNINGS RECORD

50

FIGURE 8

A TYPICAL PAYROLL JOURNAL

51

Shortcuts, Mechanical Aids andAutomated Services

Because of the increasing complexity of municipalaccounting, and the frequently changing state andfederal regulations on taxes and withholdings, moreand more communities are looking for techniques tosimplify their accounting and bookkeeping functions.There are two basic approaches to making thisfunction more efficient: one is to purchase mechanicalaids; the second is to purchase a service to take care ofthe accounting/bookkeeping problems for you.

Mechanical aids can range from simple addingmachines and calculators to personal computers usedfor a variety of municipal problems. In the small tomedium-sized municipalities toward which thishandbook is directed, there is seldom a requirementfor large, expensive computers. However, personalcomputers are now available on the market within themeans of even small municipalities. Specializedsoftware programs to handle the payroll function areavailable from vendors.

There is one form of mechanical aid available to manysmall to medium-sized municipalities, and it is wellwithin the reach of their finances. This is the “pegboard” system for handling payroll. Payroll is one ofthe most confusing and time-consuming administrativetasks in the small municipality. Payroll informationmust be recorded on earnings records, monthly payrolljournals and check stubs. It must be summarized forF.I.C.A., federal income tax withholding, state incometax, local taxes and others. The “peg board” systemsminimize the amount of duplication in this complexprocess.

With this system, the three records required (EarningsRecord, Payroll Journal and Check Stub) are placedon top of one another with carbon paper in between(specially treated paper may also be used). Thetreasurer writes all of the pertinent information ongross pay, withholdings and net pay through thecarbon paper. This minimizes both the time requiredand the chance for errors in recopying the information.The cost of systems suitable to municipal payrolls isless than $300.

Automated services are also a distinct possibility forthe small to medium-sized community. Althoughthese services appear to cost more than“doing-it-yourself,” frequently that is amisimpression. The overhead costs in these servicesare compensated for by the greatly increasedefficiency with which they can handle your accounts.

Payroll services are offered by many local banks at asmall fee per check. The banks minimize the costbecause they get the advantage of having your depositin their bank.

General municipal accounting services are offered byseveral firms in Pennsylvania at the present time.These services include an entire range of payrollservices, automated billing services, municipalbookkeeping, financial control systems and any otherspecial requirements of the municipalities. Your state-wide municipal association can provide guidance incontacting these firms.

Figure 9 on page 53 presents a sample municipalpayroll summary form to account for personnel costson an annual basis.

52

FIGURE 9

53

VII. Fiscal Management Techniques

The day-to-day management of municipal financeswill determine how successful you are in followingthe annual budget. This management function consistsbasically of administrative procedures and budget con-trols.

The main controls you exercise over municipal expen-ditures should include:

� Quarterly allotments of funds to control the timeduring the year when expenditures are made.

� A purchasing system assuring responsible offi-cials or employes approve purchases in advance,and assuring sufficient funds are available to payfor the purchases.

� A system of numbered vouchers and receipts toprovide organized evidence of payments madeby and to the municipality.

� Periodic financial reports to illustrate the reve-nues and expenditures to date, the unpaid billsand purchase orders outstanding and the unen-cumbered balance remaining.

The controls and the administrative procedures to im-plement them are discussed in the sections which fol-low. There are also discussions of procedures forfinancing capital improvements; for managing shortand long term municipal indebtedness; and for tempo-rarily investing idle funds to provide additional in-come to pay for the costs of municipal government.

Cash Flow Management

Municipal expenses occur throughout the year in afairly predictable pattern, generally similar from yearto year. The flow of cash into the municipality fromtaxes, fees, highway aid and other sources also occurseach year in a consistent pattern. The problem of cashflow management is simply planning and arrangingyour expenditures throughout the year so revenuesavailable at any given time are adequate to make in-voice and payroll payments on schedule. When cashflow is not managed properly your municipality willfind it necessary to delay payment of invoices fromsuppliers or to borrow short-term money to make thepayments. Either a delay in payment or unexpectedborrowing can result in extra costs to your municipal-ity and should be avoided whenever possible.

Good cash flow management is essentially a planningfunction. It requires advance planning of your pattern

of budgeted expenditures throughout the year basedon the times revenues are expected. You may have de-veloped a balanced budget for an entire year, yet finda serious imbalance between cash on hand and currentobligations some time during the year. This is the dis-tinction between budget planning and cash flow plan-ning.

Tables 5 and 6 on page 54 illustrate a simple methodyou can use to project cash receipts and expendituresthroughout the year. Table 5, dealing with cash, con-tains your estimates of monthly cash receipts in eachof several categories. These estimates can be obtainedfrom your past records. It is only necessary to deter-mine the average, over several years, of the cash re-ceipts you experienced in each category, adjust it tothe conditions of the present year, and insert it into theform. The beginning balance for the year is shown asa cash inflow in January only. When the form is com-pleted, you total the receipts across the form for eachmonth and then keep a cumulative sum in theright-hand column of total receipts throughout theyear.

A similar method is used in the expenditures estimateform of Table 7 on page 54. To assure a solid cash po-sition, the cumulative receipts column must be largerat the end of each month than the cumulative expendi-ture column. The amount of difference between cashand expenditures, or the “net cash on hand” your mu-nicipality should attempt to maintain, will differ frommunicipality to municipality depending on the size ofbudget, nature of planned projects and a variety ofother factors. In planning for this cushion, you shouldtempt to maintain adequate cash to take care of possi-ble emergencies such as the need for an expensivetruck overhaul, the need for additional part-timeemployes, and other expenses arising unexpectedly. Inmany cases, excess cash is being kept in noninterestbearing accounts. This practice results in unnecessaryloss of revenue to the municipality. On the other hand,failure to keep adequate cash for emergencies can re-sult in the need for tax anticipation loans.

In larger municipalities which use monthly or quar-terly allotments for each department or municipalagency, the use of cash flow planning and manage-ment will aid in determining the timing and amountsof the allotments.

54

55

Petty Cash Control

From a practical standpoint, nearly every municipalityneeds a petty cash fund to handle small disbursementsfor such items as postage, small quantities of minor of-fice supplies, express charges on shipment of goodsand similar items. The items purchased from a pettycash fund still must be accounted for and these expen-ditures must be reflected in the municipal books of ac-count. This section will outline a relatively simplemethod of petty cash control to satisfy accounting andauditing requirements, and yet not place an undulyheavy burden on the clerk or secretary.

The first tasks are to designate some employe or offi-cial of the municipality to be responsible for pettycash, and to establish the amount of cash needed.

The major steps in establishing and maintaining thepetty cash system are as follows:

1. Designate a petty cash custodian—usually thesecretary, treasurer or clerk.

2. Determine the amount needed. This will vary de-pending on the specific municipality, however anamount of $100 to $150 is usually appropriate.

3. Prepare a Petty Cash Book to record all pettycash transactions.

4. Write a check from the General Fund to theper-son responsible for the Petty Cash Book.

5. As petty cash expenditures are made, record theamounts and the account numbers. Keep vouch-ers and receipts.

6. Periodically write further checks to the responsi-ble person in order to replenish the fund.

Figure 10 is an illustration of a page from a Petty CashBook which you may adopt for your municipality. Asshown, the check from the General Fund made out tothe Petty Cash Custodian on January 1, 2003, estab-lishes an initial balance of $50. During the month ofJanuary, as expenditures are made, the date, purpose,amount and the account number are recorded, alongwith a running balance. In this example, at the end ofJanuary, the balance remaining is $27. On the first ofFebruary, a check is written in an amount sufficient tobring the Petty Cash back up to $50. In this case, thecheck would be for $23. All of the expenditures madeduring January (which total $23) are then entered inthe General Fund Expenditures Journal from whichthe check was drawn. The Petty Cash Book serves asthe voucher for each of the expenditures, and the en-tries in the Expenditures Journal assure all funds areaccounted for. This process, followed each month,maintains the level of the fund at the predeterminedamount.

FIGURE 10 PETTY CASH BOOK

Several cautions should be noted with respect to PettyCash. First, Petty Cash should be used only for smallexpenditures of an emergency nature, where paymentmust be made on the spot. All other expendituresshould be brought before the governing body forapproval. In addition, you should avoid buying suchitems as pencils, tape, paper, nuts and bolts andsimilar items from Petty Cash. You nearly always canobtain a better price by buying such items in quantityusing the normal purchase order process. Petty Cashshould only be used for emergency needs, and not as asubstitute for proper purchasing procedures.

Purchasing Controls

The purchasing of materials, supplies and services bymunicipal governments is often handled in a fairly for-mal way, with little control or uniformity in proce-dures for recording and accounting. For a smalltownship with no full-time employes except a supervi-sor/ roadmaster, complicated systems of requisitionforms, purchase orders and procedures may not be ap-propriate. However, as a minimum, all municipalitiesshould have controls over their purchases that accom-plish at least the following:

1. Assure materials and services are ordered onlyby authorized employes and officials.

2. Purchases over $10,000 are advertised and bidsobtained in accordance with the respective mu-nicipal codes.

3. Purchases between $4,000 and $10,000 are madeonly after three telephone or written price quota-tions have been obtained. Records of these pricequotations must be retained for three years.

4. Assure ordered goods are actually received priorto authorizing payment.

5. Identify monies encumbered for those purchasesordered, but not yet received.

In this section, a relatively simple purchasing proce-dure is presented, along with several sample formsused to implement the procedure. This procedure maybe modified and adjusted to the particular needs ofyour municipality, and it is particularly adaptable to

56

small municipalities without a large staff or a separatepurchasing department.

Figure 11 illustrates the major activities and responsi-bilities of municipal officials and employes in the pur-chasing cycle. Each of the steps shown in the figureare described below.

1. The governing body designates those municipalofficials or employes who are authorized to initi-ate purchase orders and disseminates that infor-mation to all who are involved in the municipalpurchasing process.

2. The municipal employe or official authorized tomake purchases prepares a listing of all needs ona Purchase Order Form. A sample of a PurchaseOrder Form is shown in Figure 12. With thisform, a separate requisition form is not required.The person authorizing the purchase fills in onlythe description and number of units required andsigns in the lower right above “authorized signa-ture.” The form is then forwarded to the munici-pal secretary or treasurer.

3. If the purchase will amount to more than$10,000, bids must be obtained as required bythe municipal codes. Even for purchases of lessthan $10,000, bids are usually desirable, how-

ever, these may be received more informally;perhaps through telephone calls or letters to po-tential bidders. Figure 13 on page 58 is a sampleof a form to be used to request quotations fromvendors. On high cost items, a bid bond mightbe appropriate on the advice of your solicitor.

When firm prices are received, or formal bidstabulated, the balance of the Purchase OrderForm is filled out to include the name of the ven-dor, purchase order number and the expenditureaccount to be charged. In addition, the treasureror finance officer signs the form to certify suffi-cient municipal funds are available to pay for thepurchase.

Even though no accounting entry is made whenthe purchase order is sent out, the money for theamount of the purchase is actually encumbered.It is desirable to have a record of the amount ofencumbered money at any time so you can ad-just your financial report to reflect the expendi-tures and the encumbrances as they affect yourfinancial position. For this purpose, you mayfind the Record of Outstanding Purchases formshown in Figure 14 a useful informal accountingdevice. As each purchase order is sent out, theamount, date and account number are recorded.

FIGURE 11 MUNICIPAL PURCHASING CYCLE

Supervisors, Councilmenor Commissioners

Treasureror Secretary

Municipal EmployeeAuthorized to Purchase

Vendor

1. Designate officials and/oremployees authorized toinitiate municipal purchases.

2. List items required on PurchaseOrder form.

3. Obtain quotations. Complete,sign and send Purchase Orderto Vendor. Recordemcumbrance and Accountnumber.

4. Ship ordered goods.5. Check received goods againstPurchase Order and Shipping List.

6. Receive Purchase Ordernoting goods received.Receive invoice. Make outcheck but do not sign.

7. Approve payment andsign check.

8. Sign check and send tovendor. Enter expenditure inJournal with account number.

57

FIG

UR

E1

2

PU

RC

HA

SE

OR

DER

FIG

UR

E1

3

REQ

UES

TFO

RQ

UO

TATIO

N

58

When the goods are received (as with the gaso-line and adding machine in the example) a line isdrawn through the entry and the date of receipt isentered. Whenever a financial report is prepared,the secretary can refer to the Record of Out-standing Purchases and note the encumbrancesfor each account and adjust the financial reportaccordingly.

4. On the basis of the Purchase Order Form, thevendor ships the desired materials.

5. The shipping list, the received goods and thePurchase Order are compared by the employe re-ceiving the shipment. If all materials are re-ceived as ordered, the recipient should note thisinformation on the purchase order, sign and re-turn the form to the secretary, treasurer or finan-cial officer.

If the accounts of your municipality are main-tained on a modified accrual basis, that is—pur-chases are recorded when the invoice is receivedrather than when the check is written—then anentry in the Purchase Journal of the municipalityshould be made at this time. If your accountingsystem is maintained on a cash basis, no formalentry would be made in the books until the checkis actually drawn for the purchase. (For furtherdiscussion of the use of the Purchase Journal, seeChapter VI.)

6. The secretary or treasurer then makes out acheck (without signature).

7. At the next regular meeting of the governingbody, the invoice is presented for approval.Upon approval, the check is signed and the trea-surer enters the expenditure in the ExpenditureJournal.

8. The check is signed by the treasurer andfor-warded to the vendor.

More information on purchasing procedures and re-quirements is found in the Purchasing Handbook for

Local Governments, available from the Department ofCommunity and Economic Development.

Municipal Investments

Municipalities are authorized to invest excess funds toearn interest. Municipalities with aggressive invest-ment policies can earn significant amounts of moneythrough investments, money that does not have to beraised by additional taxes.

Investments of sinking funds are governed by the Lo-cal Government Unit Debt Act. Sinking fund moneyscan be placed in accounts with banks, savings banksand savings and loan associations and can be used topurchase certificates of deposit. Deposits and certifi-cates above the limit of federal deposit insuranceagencies must be secured by collateral. In addition,sinking fund moneys can be invested in any securitythe Commonwealth is using for investment at the timeof the investment. Management of sinking funds isgoverned by Sections 1001 through 1006 of the LocalGovernment Unit Debt Act.

Municipalities are authorized to invest all other fundsof the municipality. They are required to invest fundsconsistent with sound business practice. The govern-ing body can adopt rules and regulations to govern theinvestment of municipal funds.

Five types of investments are authorized by the mu-nicipal codes:

Purchase

Order

Date

ItemAmount of

Expenditure

Account

Number

Date

Material

Received

Status of

Purchase

Order

3/10/2003 Gasoline $225.00 430.11 7/22/2003 Closed

3/10/2003 Paint $55.00 402.40 Open

3/15/2003 Adding Machine $160.00 400.20 7/28/2003 Closed

3/29/2003 Tires $300.00 411.52 Open

FIGURE 14 RECORD OF OUTSTANDING PURCHASES

59

1. United States Treasury bills.

2. Short-term obligations of the United States Gov-ernment or its agencies or instrumentalities.

3. Savings accounts, time deposits and certificate ofdeposit in banks, savings and loan associationsand credit unions insured by federal deposit in-surance agencies. Any deposits above the limitinsured by federal agencies must be secured bycollateral.

4. General obligation bonds of the United States,the Commonwealth of Pennsylvania or Pennsyl-vania political subdivisions or any of their agen-cies or instrumentalities backed by the full faithand credit of the issuing government.

5. Shares of registered investment companies, suchas mutual funds or money market funds, invest-ing solely in the types of securities listed above.Investment objectives and practices of any invest-ment company should be closely scrutinized bythe municipality to ensure its investments arelimited to the classifications permitted to it.

Monies from more than one fund can be combined topurchase a single investment, provided moneys of eachof the funds are accounted for separately and earningsare separately computed, recorded and credited to eachof the funds. Municipalities may also join with other po-litical subdivisions and municipal authorities for jointinvestment, provided separate accounting, recording andcrediting is maintained for each unit’s funds. Coopera-tive investment programs are available through thePennsylvania Local Government Investment Trust andthe State Treasury.

Treasury bills are short-term United States Governmentsecurities, issued with maturities as short as thirty days,traded daily in the open market, and may be purchasedby arrangement made through your local banking insti-tution. These securities are sold at discounts whichfluctuate, and they bear interest at variable rates. Be-cause of these fluctuations, you should discuss withyour banker the relative merits of treasury bills and theother authorized forms of investments at the time youare preparing to make an investment. Many municipali-ties neglect to take advantage of the extra earningswhich can result from careful planning of investmentprocedures.

Municipalities commonly receive large amounts ofmoney early in the year—around April and May—from such sources as tax collections and the state High-way Aid Fund. However, particularly in those munici-palities where snow removal costs are high, theheaviest expenditures often occur in the fourth quarter.

As an example, suppose your quarterly expenditure es-timates are as follows:

1st 2nd 3rd 4th

Quarter Quarter Quarter Quarter

Estimated

Expenditures $42,000 $28,000 $43,000 $73,000

Now, in this example, assume your municipality has$50,000 of revenues to invest during the second quarter.If this money were placed in ordinary savings accountsat 2-1/4 percent interest, it would be available any time,but the interest for a six-month period would onlyamount to about $630. However, since the funds will notbe required until the fourth quarter, it is also possible toinvest in five and six month time deposits which mayyield five percent. The dollar yield would be approxi-mately $1,250 on the $50,000 an improvement over thesavings account.

The use of time deposits rather than savings accountsrequires a more careful determination of when funds willbe needed since these deposits cannot be converted tocash until expiration of the term. Deposits should betimed to mature before large expenditures are likely tooccur. Of course, these investments should be distrib-uted among several saving institutions so that theF.D.I.C. insurance limits are not needed in any one insti-tution. If F.D.I.C. limits are exceeded, the municipalitymust verify that the financial institution has collateral-ized the excess deposit amount by pledge of assets. Thiscan be done on a pooled basis.

To gain maximum earnings on your municipal funds,you should discuss investment opportunities with localfinancial institutions and select those investment meth-ods best suited to your particular circumstances. Ifthere is any doubt about the legality of an investment,consult with your municipal solicitor.

Pensions

Municipalities are authorized by the General Assemblyto provide pensions or retirement benefits for theiremployes. Pension systems are mandated for policeand paid firefighters in third class cities and for bor-oughs and townships which employ three or morefull-time police officers. Pension benefits for otherclasses of employes are discretionary with the localgoverning body, but pensions are a valid subject forcollective bargaining with employe organizations.

Municipalities can use insurance or financial institu-tions as the funding agencies for their pension plans, orthey may manage them internally. Municipalities may

60

also become members of the Pennsylvania MunicipalRetirement System.

Since July 1, 1991, virtually all municipal employesnot covered by a retirement system must be covered bysocial security. This includes elected officials, tempo-rary and part-time workers. The cost of coverage issplit between the employe and the local government.

The Municipal Pension Plan Funding Standard andRecovery Act, Act 205 of 1984, requires full municipalfunding of all pension plans. The Act requires actuarialvaluation reports be made every two years and filedwith the Public Employe Retirement Study Commis-sion. The actuarial valuations must be made oncommon standards included in the Act. Based on theresults of the actuarial work, the chief administrativeofficer of each pension plan must determine the annualfinancial requirements of the pension plan for theupcoming year. This officer must annually certify theminimum financial obligation of the municipality forthe pension plan to the governing body of the munici-pality in September. The minimum financial obligationof the municipality is the full actuarial cost of thepension plan reduced by the expected amount of anymember contributions. The municipal governing bodymust include the certified minimum financial obliga-tion of the municipality for all its pension plans in itsbudget for the following year. The full amount of themunicipal obligation must be paid into the pensionfund by the end of December. Any amounts not paid bythe end of December accrue interest from the first ofthe year.

In cases where the municipal pension plans have beenunderfunded in past years, the Act requires all un-funded actuarial accrued liability to be paid off over aperiod of thirty years. The Act establishes recoveryprograms for distressed pension systems, based on ob-jective actuarial and municipal finance distress indica-tors. Municipalities participating in the programs aresubject to more stringent controls, but are eligible forsupplemental state pension aid.

Each municipality must make an an annual certifica-tion to the Auditor General of the number of policeofficers, firefighters and other municipal employesemployed full-time and participating in a pension plan.These figures are used in calculating the distribution offunds under the General Municipal System State AidProgram. The proceeds from the state tax on foreigncasualty insurance premiums fund the program. Alloca-tions are based on the number of employe units. Policeofficers and paid firefighters count for two units andother employes count for one unit. No municipality can

receive an amount more than the municipality’spension cost. Because of past overfunding of certainpension plans, some municipalities may receive lessthan the per unit allocation because this figure wouldexceed their actual pension costs. A transition periodthrough 1995 guarantees each municipality at leastthe amount it received in 1982, but in no case morethan the cost of police and paid firefighter pensionplans for the current year.

State aid must be deposited in the pension plan withinthirty days of receipt. If the municipality has morethan one pension plan, the governing body mustdetermine how to split the allocation. Of course,municipal officials must be aware they are responsiblefor full actuarial funding of all pension plans. Theannual actuarial cost of all plans must be met by acombination of employe contributions, state aid andmunicipal contributions. Further discussion of munic-ipal pension funding requirements is found in theMunicipal Pension Plan Handbook for Boroughs,

Towns and Townships, published by the Departmentof the Auditor General.

Risk and Insurance Management

Cost and availability of insurance periodically causeserious problems for municipal governments in Penn-sylvania. Enactment of the Political Subdivision TortClaims Act in 1978 has eased the situation somewhat.The Act now defines those situations where municipalgovernments may be sued and sets forth proceduresgoverning suits against local governments, their offi-cials and employes. The Act also gives local govern-ments the authority to hire professional risk managersto administer risk and insurance management pro-grams, to join together in a joint program to pool risksand coinsure and to self-insure.

The purpose of a risk and insurance managementprogram is to protect the financial integrity of themunicipality from potential perils. It becomes a wayof deciding the most effective means for handling agiven risk. All municipalities now manage risk insome way, even if it means ignoring many risks andgoing unprotected. There are five major elements to aplanned risk and insurance program: (1) a search forloss exposure, (2) evaluation of these exposures interms of dollar loss, (3) control of risk throughprecautionary measures, (4) selection of risk fundingtools, including insurance and (5) implementing arisk-handling program.

Loss exposures include damage to property from fire,wind and flooding, loss by theft, loss of income or ad-

61

ditional expenses to maintain services. The most seri-ous loss exposures are in liability to others resultingfrom accidental injury to persons or property. Potentiallosses should be evaluated in terms of probable fre-quency and severity. This is made easier through cre-ation of a loss history over the past five years.

Risk control means implementing programs to avoidlosses before they occur. These include measures suchas security devices, workplace safety programs, defen-sive driving training, fire inspections, emergency plansand careful review of contractual liability.

Insurance is only one of a number of risk funding toolsavailable to municipalities. The objective is to ensuresufficient funds are made available to meet loss situa-tions as they occur. Tools available are payment oflosses from current operating funds, creation of re-serves, borrowing, tax increases, pooling with othermunicipalities, federal or state reimbursement of disas-ter losses and purchase of insurance.

Many municipalities rely too heavily on insurancewhen they could retain part or all of some risks. Aguideline generally considered prudent is that the mu-nicipality should be willing to accept up to one tenth ofone percent of its operating budget in uninsured lossfrom a single occurrence, or up to one percent of theoperating budget as the aggregate of uninsured lossesin a single fiscal year. Many municipalities practicepartial self-insurance through use of deductibles or pur-chase of excess loss insurance coverage.

Forms of insurance available to municipalities fall inseveral general areas. Property insurance coverage in-cludes both fire and all-risk insurance on buildings,contents and property in transit. All-risk coverage gen-erally includes fire, collapse, water damage, earth-quake, flood, vandalism and malicious mischief. Otherproperty coverages include boiler and machinery, busi-ness interruption, extra expense and coverage on elec-tronic data processing equipment.

Crime coverage includes employe dishonesty and faith-ful performance bonds, some being required by the mu-nicipal codes. Insurance also offers protection against

burglary, robbery or theft. Consideration should begiven to property of others held by the municipality,such as impounded valuables.

Liability coverages include all forms of public liabil-ity insurance, automobile insurance and workers’compensation. Umbrella or excess liability coverageis advisable; generally it is available with a minimumlimit of $1 million. Liability coverage should be ex-tended to cover all officials and employes, boardsand agencies and volunteers acting on behalf of themunicipality. Both the Workmen’s CompensationAct and the Political Subdivision Tort Claims Actmake the municipality liable for volunteer firefightersoperating in official capacity. Special liability cover-age is available for certain professional fields.

Employe benefits are often provided through insur-ance policies, including health, major medical, hospi-talization, accident and group life insurancecoverage. These benefits are authorized by the mu-nicipal codes and are often the subject of collectivebargaining agreements. Participation in the unem-ployment compensation program is now mandatedfor municipal employers. Municipal pension and dis-ability plans are often funded through insurance poli-cies.

The wide variety of insurance programs and theirincreasing cost compel prudent officials to take aclose look at the insurance needs of the municipality.Existing policies should be reviewed on an annualbasis for adequacy of coverage, possibilities ofself-insurance, pooling and other means of financingrisk. Risk and insurance management should beapproached as a conscious policy even in the smallestmunicipality. A single individual should be appointedas risk manager with the responsibility to carry out awritten policy set by governing body on risk andinsurance management. At the very least, responsibil-ities should include risk exposure identification andevaluation, management of insurance coverage orother types of risk financing, processing claims andkeeping loss records.

62

VIII. Municipal Borrowing

Borrowing is one of the principal options open to localgovernments in considering how to pay for large capi-tal projects. A municipality borrows money by issuingbonds or notes and redeeming them over a period oftime, paying interest for the privilege of using themoney.

Borrowing is a common form of financing capital pro-jects in Pennsylvania. A survey by the Department ofCommunity and Economic Development showed 52 ofthe 66 county governments and 732 of the 2,573 mu-nicipal governments in the Commonwealth reportedoutstanding debt at the end of 1991.

The question of entering into a long-term debt to ob-tain needed municipal capital improvements (such asroads, swimming pool or municipal building) is oftenone of your most difficult decisions. There is no con-venient rule of thumb or other guideline which willmake the decision for you.

There are two basic approaches to financing capitalimprovements—"pay-as-you-go" and"pay-as-you-use."The pay-as-you-go approach essentially means thatbefore undertaking a project or making a capitalexpenditure, you acquire the necessary funds and paythe costs without debt. Pay-as-you-use financinginvolves borrowing money to pay for the capitaimprovement and repaying the debt while the project isbeing used.

In a book by the Municipal Finance Officers Associa-tion,* a series of arguments arriving at financing deci-sions, the major points of these arguments are asfollows.

Factors Favoring Pay-as-you-go

1. It requires facing up to the situation. Borrowingoften looks too easy. Municipalities utilizingpay-as-you-go must plan and discipline them-selves to accumulate the needed funds, and maytake a harder look at the true needs for capitalprojects before approving them.

* “Administration of Local Government Debt,”

Lennox L. Moak, Municipal Finance Officers Associa-

tion, Chicago, 1970.

2. In the event of an unexpected drop in revenue, orthe need for emergency expenditures, capital pro-jects may be postponed until a more favorableperiod to avoid the necessity for a tax increase.

3. The interest on each $1,000 bond issued at 6percent is approximately $1,200 over 20 years.Pay-as-you-go financing saves this interest cost.

4. Use of pay-as-you-go financing preserves yourborrowing capacity for times when it might begreatly needed.

5. When projects are paid for as they are obtained,large debt repayments are not passed on to futuregenerations.

Factors Favoring Pay-as-you-use

(Borrowing)

1. As per capita income increases over time, debtre-payments in the future will represent a smallershare of income. In addition, with continuing in-flation, future debt repayment dollars may beworth less than current dollars in terms of pur-chasing powers.

2. Postponement of projects because funds are notyet accumulated may severely hinder the full andproper development of the community and retardgrowth of the tax base and the local economy.

3. Since capital projects will be used over a longtime period, it is proper for future generations tocontribute their share of the cost through debtpayments under pay-as-you-use financing.

4. Families which now more frequently move frommunicipality to municipality pay, as part of theirtaxes, a share of the cost of the capital improve-ments which benefit them during the time theyare living in your municipality.

Debt Limits

Municipal borrowing is subject to limits set by theGeneral Assembly under the authority of Article IX,Section 10 of the Pennsylvania Constitution. This partof the Constitution was amended by the voters in 1968,making a basic change in the method of computingmunicipal debt limits. Prior debt limits were based onassessed valuation of real estate within the taxing unit.The new provision changes the base to a percentage of

63

the municipality’s total revenues. This allows moreflexible and realistic debt limits, based on the munici-pality’s total ability to pay.

Debt limits are set for all local government units, ex-cept the city of Philadelphia, by the Local GovernmentUnit Debt Act, 1972 P.L. 781, No. 185, as amended.Home rule municipalities are subject to the substantiveprovisions of the Act and may adopt the proceduralprovisions by reference in their home rule charters.

Major Provisions of the Act

The Local Government Unit Debt Act establishes thenonelectoral debt limit for third class cities, boroughsand townships as 250 percent of their average totalrevenue over the past three years. The total ofnonelectoral debt and lease rental debt cannot exceed350 percent of the borrowing base.

Later in this section an example explains this limit inmore detail. Other major provisions of the Act in-clude:

1. No limit on electoral debt—that is, on debt ap-proved by the electors of your municipality.

2. Bond anticipation notes can be issued in order toobtain funds, pending the sale of long-termbonds or notes.

3. The maturity date on bonds may not be morethan 40 years, or not more than the life of theproject being financed, whichever occurs first.

4. Bonds or notes may be sold at public or privatesale.

5. “Self-liquidating debt”—that is, debt which isrepaid solely from rents, special liens and assess-ment or other user charges—may be excludedwhen calculating outstanding debt.

6. Under certain conditions, municipalities in a fi-nancial crisis may fund “unfunded debt” in orderto meet their obligations.

7. Temporary indebtedness (tax and revenue antici-pation loans) is now governed by the Local Gov-ernment Unit Debt Act rather than by themunicipal codes. These tax and revenue antici-pation notes may not exceed 85 percent of theoutstanding revenues anticipated in the periodwhen the note is outstanding and must be repaidduring the fiscal year in which it is incurred.

Of course, before entering into any borrowing action,you should work out the legal and financial de-tailswith your solicitor, bond counsel, financial advisorand other consultants. Except for temporary indebted-

ness, or certain borrowings of under $125,000 all debtactions must be approved by the Office of Legal Ser-vices, Department of Community and Economic De-velopment. The Governor’s Center for LocalGovernment Services, is also available to provideguidance and information which you may need in pre-paring to incur municipal debt.

Although the new procedures for determining the re-maining debt limit for your municipality are quitecomplicated and involved, a simple example has beenprepared to illustrate some of the procedures and itemsused in evaluating your debt situation.

Figure 16 on page illustrates some of the factors to betaken into consideration. In this example, your debtlimit is first established, then your net nonelectoraldebt is calculated. The debt limit minus the netnonelectoral debt is the remaining debt capacity ofyour municipality. Nonelectoral debt is that debt yourgoverning body can incur without an election by yourcitizens.

The Local Government Unit Debt Act states that yournonelectoral debt limit is, in most cases, 250 per-centof your average total revenue over the past threeyears. As illustrated in the example, total revenue isobtained by subtracting from total municipal incomesuch one-time receipts as interest, grants, user charges,assessments and similar receipts specified in the Act.Total revenue is calculated for each of the past threeyears and is then averaged to obtain the average totalrevenue. This represents your borrowing base. Yournonelectoral debt limit is then calculated by taking 2.5times the borrowing base (or 250 percent). In the ex-ample, a borrowing base of $50,000 establishes a debtlimit of $125,000.

Once the nonelectoral debt limit is established, it isnecessary to calculate your current outstandingnon-electoral debt as shown in the lower half of the il-lustration. To do this, you begin with the total grossoutstanding principal of all debt, both electoral andnonelectoral. From this gross total you deduct elec-toral debt (that authorized by an election of your con-stituents) and lease rental debt. Further deductions aremade from this figure to represent money you have infunds due from assessments or liens which can be ap-plied toward the gross nonelectoral debt. Here you de-duct such amounts as are represented by sinking fundsestablished to repay existing debt, debts due the mu-nicipality, and any cash on hand which is not other-wise appropriated and which will be used to reduceyour existing debt. The remainder is your netnonelectoral debt which is deducted from your debt

64

limit to establish your remaining borrowing capacity.In the example, the remaining nonelectoral debt ca-pacity is $125,000 less $22,000, or $103,000.

In actual cases, specific funds and monies to becounted or deducted are stated more precisely and ingreater detail in the Act than in this example. Carefulstudy and legal advice are required to make the neces-sary calculations.

Lease Rental Debt

In addition to the terms identified above, the Act de-fines lease rental debt. In basic terms, lease rental debtis debt incurred by an authority or another local gov-ernment unit you are obligated to repay throughleases, subsidy contracts or other forms of guarantee.For example, you might have formed a municipal au-thority to construct a municipal building. You maythen have entered into a lease agreement with the au-thority requiring you to pay a fixed sum per month oryear for the use of the building. In this case, the au-thority debt you are obligated to repay through yourlease agreement for the building is considered a leaserental debt of your municipality.

Your lease rental debt limit is defined as 350 percentof your borrowing base, but nonelectoral debt andlease rental debt together cannot exceed 350 percentof the borrowing base. When borrowing, therefore, alloutstanding nonelectoral debt and lease rental debt

must be considered to determine the aggregate doesnot exceed the limit on the combined debt. This is adeparture from the previous law where the amount ofthe outstanding lease rental debt could not affect thenonelectoral capacity.

When you have incurred, or plan to incur, either ordi-nary nonelectoral debt or lease rental debt to be repaidsolely from service charges, rents or fees collectedfrom the users of the resulting project, this form ofdebt is self-liquidating debt and is not charged to out-standing debt provided it has been properly excludedin accordance with the Act. For example, if yourmunicipality borrows funds to make capital improve-ments to a municipal water company and the funds areto be repaid totally by the revenues from the sale ofwater, and tax funds are not pledged, then this isself-liquidating debt. If you use self-liquidating debtfor such projects as sewer, solid waste or watersystems, you may finance the project without regard todebt limit and without the necessity of forming amunicipal authority. However, any such decisionshould be arrived at only after careful consideration ofall factors and consultation with your engineer, solici-tor and other advisors.

Another form of debt not included under your debtlimit is subsidized debt. Subsidized debt is debt whichis self-liquidating to the local government unit,because the annual debt service will be covered, undercertain circumstances, by subsidies or reimbursements

FIGURE 15 DETERMINING NET NONELECTORAL DEBT

$70,000 $55,000 $65,000

200 0 300

3,800 5,000 7,700

1989 1990 1991

Revenues Received from All Sources . . . . . . . . . . . . . . . . . . . . . . . . . .

Less Interest on Sinking Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less Grant Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less Revenue from Sale of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 3,000 0

Total Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,000 $47,000 $57,000

Gross Outstanding of Bonds or Notes (electoral and nonelectoral) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $92,000

Less electoral debt outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less amount in Sinking Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

Less debts due municipality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Less assessments and liens expected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

Less surplus unappropriated cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$60,000

1,000

Gross Nonelectoral Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,000

Net Nonelectoral Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,000

Borrowing Base = = = $50,0003 3

46,000 + 47,000 + 57,000 150,000

Debt Limit = $50,000 X 250% = $125,000

Limit on new nonelectoral debt is “debt limit” less existing “net nonelectoral debt;”e.g., $125,000 - 22,000 = $103,000 remaining nonelectoral debt limit.

65

to be paid by either the state or federal government, orboth; or, if payments will be covered under a subsidycontract with another local government unit orauthority.

All in all, the Local Government Unit Debt Act is in-tended to provide greater flexibility to local govern-ments in their financial capabilities, and the Actshould be carefully studied before incurring municipaldebt. With the increasing importance of revenuesources such as the earned income tax, municipal utili-ties, user fees and departmental earnings, debt limita-tions based on revenue rather than assessed valuationprovide a more realistic basis for regulating local gov-ernment borrowing.

Borrowing Procedures

Before you enter into any borrowing action, youshould work out the legal and financial details withyour solicitor, bond counsel, financial advisor andother consultants. Except for temporary indebtednessor certain borrowings of under $125,000 all debt ac-tions must be approved by the Office of Legal Ser-vices, Department of Community and EconomicDevelopment. All borrowing actions must be filedwith that office.

The state’s concern about local government finances,and in particular about the way debt is in-cured, goesback more than half a century. Since 1927, state ap-proval has been required for several kinds of localdebt financing. This function has been carried out bythe Department of Community and Economic Devel-opment since its creation.

Basically, DCED’s role is to make sure a communityor a school district seeking to incur debt is within itslegal debt limits and is meeting other technical legalrequirements. This review extends to all bonds andnotes. However, the legislature has amended the LocalGovernment Unit Debt Act to permit local govern-ments to issue bonds or notes of $125,000 or 30 per-cent of their borrowing base, whichever is less,without DCED approval.

DCED has 20 days from the time a proposed localdebt proceeding is received to approve or reject it.Most are approved. When a proceeding cannot be ap-proved, DCED is required to state the reasons and ad-vise the municipality of correctable errors. As long asthe debt issue meets all legal and technical require-ments, it must be approved. DCED has no power to re-ject a note or bond issue on the grounds a municipalityis engaging in poor fiscal policy; for example, goinginto debt unnecessarily. There is nothing, of course, to

stop DCED officials from advising a municipality notto issue debt, and they have sometimes done so, butthe municipality is free to follow or ignore this advice.

Obligations sold and delivered without the approval ofthe department are invalid. Once approved, though,the validity of the bonds or notes cannot be questionedin court, unless a constitutional matter is involved.DCED has the power to audit the sinking funds estab-lished under the Act.

Application for Approval

Before delivering any bonds or notes in excess of$125,000 or 30 percent of the borrowing base,which-ever is less, the local government unit must ap-ply for the approval of DCED. The application in therequired form must be accompanied by a transcript ofthe proceedings consisting of certified copies of all thefollowing.

1. The ordinance calling the election in the case ofelectoral debt with proofs of all proper advertise-ments.

2. The return of the election.

3. The ordinance or resolution authorizing thebonds or notes and prescribing the manner ofsale with proof of proper publication.

4. The accepted proposal for the purchase of thebonds or notes.

5. The ordinance awarding the bonds or notes withthe proof of proper publications.

6. The debt statement prepared as described in Sec-tion 8110 of the Local Government Unit DebtAct.

7. The certificates and proofs which may be neces-sary for the exclusion of any portion of the seriesproposed to be delivered or any prior series asself-liquidating debt or subsidized debt if the ex-clusion is desired by the local government unit.

Before becoming bound to an amount in excess of$125,000 or 30 percent of the borrowing base, which-ever is less, on any lease evidencing the acquisition ofa capital asset, a local government unit must apply forand receive the approval of the Department of Com-munity and Economic Development. The application,in the form required by DCED, must be accompaniedby certified copies of the following:

1. The ordinance authorizing the execution of thelease.

2. The debt statement as required in Section 8110of the Local Government Unit Debt Act.

66

No lease executed and delivered after the effectivedate of the Act and prior to the approval or the pre-sumed approval will be valid or obligatory. Except asreference is made to lease rental debt, the Local Gov-ernment Unit Debt Act has no application to the au-thorization, issue or sale of obligations by anymunicipal authority.

Information and assistance on procedures and require-ments for filing proposed municipal borrowings canbe obtained from the Office of Legal Services. Thisoffice can answer technical questions on the LocalGovernment Unit Debt Act for your solicitor and bondcounsel. Copies of the Act are also available from thisoffice. Direct inquiries to:

Office of Legal ServicesDepartment of Communityand Economic DevelopmentCommonwealth Keystone Building400 North St., 4th Fl.Harrisburg, Pennsylvania 17120-0225(717) 720-7309

Temporary Indebtedness

The Local Government Unit Debt Act has repealedportions of the various municipal codes and replacedthe repealed portions with the authorization for localgovernments to issue tax anticipation notes. Tax andrevenue anticipation loans must be repaid within thefiscal year in which the debt was incurred. The majorprocedural points in obtaining tax and revenue antici-pation notes under the provisions of the Act includethe following:

1. The loan is authorized by enacting a municipalresolution.

2. Debt limitations do not apply to tax anticipationnotes.

3. The amount of the note may not exceed 85per-cent of the taxes levied for the year and thecurrent revenues remaining to be received untilthe time the note matures.

4. Tax anticipation notes may be sold by public orprivate sale.

The Act also lists the documentation to be assembledand submitted to Department of Community and Eco-nomic Development in order to make the notes valid.The list includes certified copies of:

1. The authorizing resolution.

2. A certificate of the remaining taxes and revenuesto be collected as prepared by the municipal gov-erning body.

3. A copy of the proposal by the lending institutionselected as the purchaser of the tax anticipationnotes.

Approval by the Department of Community and Eco-nomic Development is not required for tax anticipa-tion notes.

As discussed earlier in this Chapter, in order to re-re-duce the need for temporary indebtedness you shouldtime your expenditures to match receipt of revenues.In addition to the cost of interest paid on tax anticipa-tion loans, there is the danger borrowed money onhand may create a false impression of fiscal well-be-ing; and, of course, temporary debt complicates thebookkeeping system by necessitating additionalchecks to be drawn, funds maintained, and similar ad-ministrative tasks.

Municipal Authorities

An option to consider in municipal borrowing is theuse of the municipal authority. The municipal author-ity in Pennsylvania is a vehicle for accomplishingpublic purposes, not possible or practical through di-rect action of municipal governments. A municipal au-thority is created to acquire, construct or operateprojects and to borrow money and issue bonds to fi-nance them.

Authorities can be created by a single municipality orby joint action of two or more municipal governments.Authorities serving more than one municipality arecommon in water and sewer projects to take advantageof the economies of scale and larger service areas.

The debt obligations of authorities must be repaidsolely from the revenues of the projects it operates. Itcannot pledge the credit of the municipality or of thestate. Authorities were first formed in Pennsylvania tocircumvent restrictive debt limits to allow financing ofpublic works projects during the Depression.

Authorities are under the complete control of their ap-pointed boards and are not restricted by state lawsgoverning municipal operations. Terms of board mem-bers are for five years with one vacancy per year, soauthority operations are not directly affected by elec-tions.

There are a number of significant differences betweenthe operations of an authority and a municipality.

1. A municipal government exercises powers ofgovernmental and entrepreneurial nature, subjectto the expressed wishes of the electorate. Bycontrast, an authority exercises entrepreneurial

67

power only and is some distance removed fromthe voters.

2. An authority sells bonds to secure its initial capi-tal and must rely on user charges to cover ex-penses and debt retirement. A municipalgovernment may draw upon tax revenues in ad-dition to service charges and the proceeds ofloans.

3. An authority can raise and spend money withoutreference to the immediate wishes of the elector-ate. A municipal government is subject to ap-proval of its policies at the polls.

4. Municipal authorities are free from the restraintsimposed by the state on the budgetary and per-sonnel practices of municipalities, but are boundby the terms of their trust indentures.

5. Authorities usually concentrate on a single ser-vice while municipalities have multiple respon-sibilities.

These differences may be summarized by stating anauthority is restricted as to the functions it may per-form and is relatively free as to the methods it mayuse. On the other hand, a municipality is relativelyfree with regard to services rendered, but is restrictedas to the methods employed.

More information on the use of municipal authoritiescan be found in the booklet, Municipal Authorities in

Pennsylvania, available from the Department of Com-munity and Economic Development.

68

IX. Fiscal Monitoring System

Since the early 1980s, many Pennsylvania municipali-ties have been faced with fiscal crisis, either as theresult of a sudden loss of tax base caused by theclosing of a major industrial employer or the cumula-tive effects of a long-term decline in the localeconomy. Reduced resources have challenged localofficials to make drastic changes in the accepted wayof doing things in their communities. All too often,the local government’s overall financial position isconsidered only at budget time, and in far too manyplaces, not even then. Local officials need a way oftracking the financial condition of their communityover time, so potential problem areas can be spottedbefore they worsen into a crisis.

Local officials can set up a monitoring system thatuses financial statistics to compare performance or sta-tus with previous results or projections. Periodic com-putation of these factors or indicators and trackingthem on a time scale will give the local officials a pic-ture of how the community is performing and revealthe direction it is headed.

This chapter summarizes the fiscal monitoring systemdeveloped by the Intergovernmental CooperationProgram of the Allegheny League of Municipalities.Relevant factors were incorporated from nationalfiscal monitoring models into a simplified systemsuitable for smaller Pennsylvania municipalities.Training on the use of this system is periodicallyoffered by the Department of Community andEconomic Development. Local officials are encour-aged to select those factors most applicable to theircommunities in developing their own monitoringsystems.

Using the System

The system developed by the League includes 24factors related to municipal financial performance.Not all are suitable for every municipality, and theimportance of any particular factor may vary fromplace to place. Many are annual factors, to be recalcu-lated and examined each year. After calculation of thefactors selected by your municipality, you need tochart or graph the year to year change in order toevaluate trends. Where applicable, an action agendashould be prepared and specific steps taken to try todeal with unfavorable trends.

Some municipalities may want to go back severalyears and calculate factors for the recent past in orderto start trend analysis immediately. Others may wishto use the present as a starting point and moveforward. The best way to effectively use themonitoring system is to agree that it will be presentedto and reviewed by the governing body at a specifictime each year. Useful times may be after the auditreport is completed in the spring, or in late summerbefore budget preparation for the next year is begun.

Some may want to employ constant dollar compari-sons to eliminate the effect of inflation. This allowsthe comparison of factors over time based on constantdollars. A base year is selected and all financialfigures are adjusted to account for the change in theCPI since that base year, then entered on the graph fortrend analysis. Adjusting for inflation may show thateven though revenues are going up in current dollars,they are decreasing in constant dollars. The adjust-ment factor is calculated by dividing the CPI index forthe year being calculated into the CPI index for thebase year, then multiplying all financial figures by thisadjustment factor.

For further assistance on using the fiscal monitoringsystem, please contact the Allegheny League ofMunicipalities or the nearest regional office of theDepartment of Community and Economic Develop-ment.

69

FACTOR 1: Revenue Per Capita

Description: Shows how a municipality’s revenues are affected by changes in population and whetherrevenues are keeping pace with growth in the community. If revenues per capita are de-creasing, a municipality might be unable to maintain service levels unless new sources ofrevenues are found. Also look at expenditures per capita.

Formula: Total operating revenuesPopulation

Data Source: Total operating revenues are from the Annual Audit and Financial Report, General Fund,Liquid Fuels Fund and other funds with operating revenues such as utility funds.

Warning Signal: Decreasing operating revenues per capita over time.

FACTOR 2: Intergovernmental Revenue

Description: Shows if a municipality is becoming heavily dependent on revenues from other levels ofgovernment. Overdependence can be dangerous since the funding source may withdrawthe funding or reduce the level of support. The factor calculates the percentage of inter-governmental operating revenue as a percent of total operating revenue.

Formula: Intergovernmental operating revenuesTotal operating revenues

Data Source: Account 350 of Annual Audit and Financial Report (operating only) for intergovernmen-tal revenues. Use total operating revenues from Factor 1.

Warning Signal: Intergovernmental revenues increasing as a percentage of your total operating revenues.

FACTOR 3: Real Estate Tax Resources

Description: Shows how much additional revenue is potentially available from the real estate tax. Theability to raise additional property tax revenues is an important part of fiscal health.

Formula: (Maximum general purpose real estate millage rate) - (Current general purpose real estatemillage) X (Net value of one mill of real estate tax)

Data Source: Millage rate limit from municipal code; current general purpose millage from budget; netvalue of one mill by dividing last year’s collections by millage rate.

Warning Signal: Decreasing amount of unused real estate tax resources over time.

FACTOR 4: Expenditures Per Capita

Description: Shows the cost per person of running the municipal government and indicates the impactof adding or deleting services or changing service levels. Increasing expenditures per ca-pita are troublesome if revenues per capita are not keeping pace. If the trend of this factoris bad, every expenditure area should be examined.

Formula: Total operating expendituresPopulation

Data Source: Total operating expenditures are from the Annual Audit and Financial Report, GeneralFund, Liquid Fuels Fund and other funds with operating expenditures such as utilityfunds.

Warning Signal: Significantly increasing operating expenditures per capita.

70

FACTOR 5: Fringe Benefits

Description: Shows the impact that fringe benefits are having on the municipality’s finances. Rapidlyescalating health costs and premiums for worker compensation are a major financial drainfor employers, including municipalities.

Formula: Total fringe benefits costs

Total salaries and wages costs

Data Source: Municipal payroll records.

Warning Signal: An increase in fringe benefit costs compared to total salary and wage costs.

FACTOR 6: Cash Position

Description: Any business operation, including a municipality, needs enough cash on hand to pay itscurrent bills. This factor shows how the municipality stands at a specific point in time bycomparing cash (bank accounts and short-term investments) with current liabilities.Depending on the type of accounting system, this may be difficult to properly calculate.Tracking the cash position on a quarterly or more frequent interval is recommended.

Formula: Cash and short-term investments

Current liabilities

Data Source: The Annual Audit and Financial Report can be used if December 31 is the time pointselected, otherwise use monthly or quarterly financial statements. Current liabilities maynot be completely listed and may have to be calculated from bills payable and pendingpayrolls.

Warning Signal: Decreasing cash and short-term investments as a percentage of current liabilities.

FACTOR 7: Debt Service

Description: Shows the proportion of general operating revenues devoted to paying off outstandingdebt each year. Excessive debt loads can cripple the ability to provide services. Principalpayments on tax anticipation notes are excluded but interest on them is included.

Formula: Debt service payments

Total operating revenues

Data Source: Sum of principal and interest paid on long-term debt plus interest payments on short-termdebt during year is debt service. For total operating revenues, see Factor 1.

Warning Signal: Increasing amount of debt service as a percentage of total operating revenues.

FACTOR 8: Long-Term Debt

Description: Illustrates the debt burden by comparing debt to assessed valuation of real estate,comparing the amount promised to pay back with the ability to pay.

Formula: Long-term debt

Assessed valuation

Data Source: Schedules B-7 and B-3 of the Annual Audit and Financial Report.

Warning Signal: Increasing amount of long-term debt as a percentage of assessed valuation.

71

FACTOR 9: Debt Per Capita

Description: Measures the impact of long-term debt per individual municipal resident, reflecting theability of the citizens to repay loans through the taxes on their earnings.

Formula: Net long-term debt

Population

Data Source: Schedule B-7 of the Annual Audit and Financial Report

Warning Signal: Increasing long-term debt per capita.

FACTOR 10: Operating Position

Description: Shows whether a municipality is at least breaking even or whether it is relying onspending down fund balances for current operations. In this calculation, a number greaterthan one means you operated during the year at a deficit; one means you broke even; anumber less than one means you took in more than you spent.

Formula: Total operating expenditures

Total operating revenues

Data Source: See Factors 1 and 4.

Warning Signal: Increasing amount of total operating deficits as a percentage of your total operatingrevenues.

FACTOR 11: Unfunded Pensions

Description: Shows unfunded pension liability against assessed valuation as a measure of thecommunity’s ability to meet its pension commitments. One of the critical problems inmany Pennsylvania municipalities is unfunded pension liabilities. These are reallylong-term debt owed to employes and will eventually have to be paid.

Formula: Unfunded pension liability

Assessed valuation

Data Source: Unfunded pension liabilities are found in the municipal pension plan(s)’s latest actuarialreport. Assessed valuation can be taken from the current real estate tax duplicate.

Warning Signal: Increasing amount of unfunded pension liability as a percentage of assessed valuation.

FACTOR 12: Revenue Shortfalls

Description: Compares estimated revenues with actual revenues for the year. This examines both thefiscal condition and the success of municipal officials in controlling budgets. Persistentoverestimation of revenues to balance a budget will lead to financial problems anddifficulty in keeping expenditures in line with the budget.

Formula: Actual year-end revenues

Budgeted revenues

Data Source: The Budget Report and the Annual Audit and Financial Report.

Warning Signal: Increasing and/or consecutive revenue shortfalls.

72

FACTOR 13: Budget Overruns

Description: Shows whether there is a continuing pattern of exceeding appropriations to weigh theperformance of management. If this occurs along with revenue shortfalls, it indicates thebudgeting process is not realistic.

Formula Year-end actual expenditures

Budgeted expenditures

Data Source: The Budget Report and the Annual Audit and Financial Report.

Warning Signal: Consecutive budget overruns.

FACTOR 14: Uncollected Real Estate Tax

Description: Shows fiscal health and management productivity by comparing the percentage ofuncollected real estate tax to the total levy. The higher the percentage, the more theuncollected taxes.

Formula: Uncollected real estate tax

Net real estate tax levy

Data Source: Schedule B-3 of the Annual Audit and Financial Report.

Warning Signal: Increasing amount of uncollected real estate taxes as a percent of net real estate tax levy.

FACTOR 15: Tax Subsidy for User Fee Programs

Description: Shows whether user fees are high enough to cover all the costs associated with the serviceprovided. Where they are not, a subsidy from the general revenues supports the program.The extent of this subsidy is a policy decision, but municipal officials need to be aware ofthe extent of the subsidy.

Formula: Fees and user charge revenuesExpense of providing service

Data Source: For user charges, see accounts 361-379 in the Annual Audit and Financial Report; forexpenses, see accounts 400-468.

Warning Signal: Decreasing percentage of fee revenue to cover costs of user services.

FACTOR 16: Employees Per Capita

Description: Productivity is difficult to measure in a simple formula, but the community must havesome standard against which to measure the growth of the workforce. Employees percapita is a simplified measure. In order to have the result in whole numbers, multiply themeasure by 1,000.

Formula Full-time municipal employees X 1,000 = Municipal employees per

Population 1,000 population

Data Source: Payroll records; use the same date each year, or average employment for the year.

Warning Signal: Increasing number of municipal employees per 1,000 population over time.

73

FACTOR 17: Property Values

Description: Measures the growth in property values from year to year, a key sign of economic health.

Formula: (Current year property value) - (Prior year’s property value)

Prior year’s property value

Data Source: Used assessed value figures from the Annual Audit and Financial Report or market valuefigures from the County Assessment Office.

Warning Signal: Decreasing growth of property values or actual decline.

FACTOR 18: Fiscal Capacity

Description: Measures the community’s health by showing the ability to meets its obligations as reflected inits major asset, property values.

Formula: Assessed value

Population

Data Source: Schedule B-3 of the Annual Audit and Financial Report.

Warning Signal: Decreasing amount of assessed valuation per capita.

FACTORS 19, 20: Employment Base

Description: An important indicator of the community’s fiscal health, employment base may be measuredeither by the number of jobs in the community or the number of residents who are employed.For balanced communities, both factors may be worthwhile looking at. The formulas producea percentage of growth/decline.

Formula: (Number of occupation privilege accounts for current year) -(number of accounts for prior year)

Number of accounts for prior year

AND/OR

(Number of earned income tax accounts for current year) - (number of accounts for prior year)

Number of accounts for prior year

Data Source: Tax collector/treasurer records.

Warning Signal: Decreasing growth or actual decline in number of community jobs and/or working residents.

FACTOR 21: Construction Activity

Description: Measures economic activity and fiscal health from year to year.

Formula: Total number of permits issued and/or total value of permits.

Data Source: Building permit records.

Warning Signal: Decline in number/value of building permits.

74

FACTORS 22-24: Municipal Demographics

Description: Three critical population statistics are suggested for tracking: population growth,personal income and percent of population over 65. Adverse trends may be the result ofunique community characteristics, but an effort should be made to keep a balancedcommunity population through long-range planning.

Formula: Change from year to year in total population, personal income per capita and percent ofpopulation over 65.

Data Source: Census figures and intercensal estimates available from the county planning commissionor the State Data Center.

Warning Signal: Decline in population, decline in personal income per capita or increase in the percentageof population over 65.

75

Publications

For further information on various financial matters consult the publications listed below. They are available freeupon request from The Governor's Center for Local Government Services, Department of Community and Eco-nomic Development, 400 North Street, 4th Floor, Commonwealth Keystone Building, Harrisburg, Pennsylvania17120-0224, 1-888-223-6837 or www.inventpa.com.

Auditors Guide. Guide to auditing procedures forelected auditors of boroughs and townships, includingsuggested audit programs for various types of funds.

Computers for Municipal Government. Explainschoices for municipal computerization and the processfor selecting, buying and implementing a computersystem. Focuses on the computer as a tool for finan-cial management.

Debt Management Handbook. Introduces the processof incurring new debt and managing existing debt.Reviews factors for judging the appropriateness ofborrowing, the legal framework governing debt, theoptions for borrowing and the procedures used forissuing debt.

Insurance Primer for Municipal Secretaries. Providesintroduction to insurance concepts, explains varioustypes of insurance policies and methods of obtaininginsurance.

Manual for Municipal Secretaries. Comprehensivesurvey of office of borough and township secretaryand city clerk, describing duties and special areas ofinterest.

Municipal Authorities in Pennsylvania. Describescreation and operation of municipal authorities andcontains complete text of the Municipality AuthoritiesAct.

Purchasing Handbook for Local Governments.

Outlines basic procedures in the purchasing processwith legal requirements.

Taxation Manual. Describes taxes available to localgovernments under the municipal codes and Act 511with a analysis of each. Contains complete text of theLocal Tax Enabling Act.

Tax Collectors Manual. Describes office of taxcollector in third class cities and townships andoutlines their powers and duties. Contains completetext of Local Tax Collection Law.

Pe

nn

sylv

an

ia D

ep

artm

en

t of C

om

mu

nity

& E

con

om

ic D

ev

elo

pm

en

tG

ov

ern

or’s C

en

ter fo

r Lo

ca

l Go

ve

rnm

en

t Se

rvic

es

Co

mm

on

we

alth

Keysto

ne

Bu

ildin

g4

00

No

rth S

tree

t, 4th

Flo

or

Ha

rrisbu

rg, P

A 17

120

-02

25

US

PS

10

0A

PP

RO

VE

D P

OLY