Budget and Finance Frequently Asked Questions (FAQs)
1. Default Budgets
1.1 What is the law regarding the Default Budget?
RSA 40:13, IX (b) "Default budget" as used in this subdivision means the amount of the same appropriations as contained in the operating budget authorized for the previous year, reduced and increased, as the case may be, by debt service, contracts, and other obligations previously incurred or mandated by law, and reduced by one-time expenditures contained in the operating budget. For the purposes of this paragraph, one-time expenditures shall be appropriations not likely to recur in the succeeding budget, as determined by the governing body, unless the provisions of RSA 40:14-b are adopted, of the local political subdivision.
1.2 How do you follow the law in calculating the Default Budget?
First you start with the current budget as approved by the voters, remove all special warrant articles, and items of a one time nature that will not likely recur in the succeeding proposed budget. Items in the operating budget that are designated "one time" items can be anything that is appropriated in the current operating budget that is not commonplace nor has appeared with consistency in past budgets. For example, if a municipality had a past practice of placing appropriations for police cruisers in its operating budget, they would remain in the calculation of the town default budget. On the other hand, if a school district had an appropriation for a vehicle in its current budget, and did not have a history of purchasing such an item with any regularity in the past, that item should be removed from the school default budget.
After removing all special warrant articles and one time items, one would then adjust the default budget for changes in bonded debt, contractual and other obligations previously incurred, and items mandated by law. Bonded debt would be increased if there was new debt authorized by the voters such as a new bond for a capital project, or decreased if current debt payments declined in either interest or principal in the succeeding year. Examples of contractual and other obligations previously incurred or mandated by law would be employee benefits, previously approved employee labor contractual increases, facility requirements for providing a healthy and safe learning environment, and special education costs driven by individualized education programs per state and federal guidelines.
1.3 Can the Default Budget be amended at the Deliberative Session?
No. RSA 40:13 XI. (b) states that "This amount shall not be amended by the legislative body."
1.4 What if the proposed operating budget fails?
The default budget is adopted unless the governing body (School Board) decides to hold one special meeting to address a revised operating budget. See RSA 40:13, XI. In other words, the School Board has the option to either accept the default budget, or to hold a special meeting to look at revising the operating budget, which would then follow the same approval process of Budget Committee review, public hearings, and ballot voting.
1.5 Currently the School District calculates the Default Budget, can that authority be granted to the Budget Committee?
If a town wishes to have the Budget Committee calculate the default budget, the question can be put before the voters on the warrant for the annual meeting after a public hearing is held on the question. Passage requires a 3/5 majority ballot vote. Required wording per RSA 40:14-b is:
“Shall we adopt the provisions of RSA 40:14-b to delegate the determination of the default budget to the Municipal Budget Committee which has been adopted under RSA 32:14?”
1.6 If the Budget Committee is authorized by the voters to calculate the default budget, are they bound by the same laws and regulations as the school district?
2. Level Services vs. Level Funded Budget
2.1 What is a Level Services Budget and how does it differ from a Level Funded Budget?
A Level Services Budget is a budget that includes no new initiatives and incorporates all contractual and mandated obligations. It is in essence a default budget as it seeks to bring forward previously approved programs and existing levels of service forward one year. A Level Funded Budget attempts to offset the increases in contractual obligations, by reducing expenditures in other areas such as staffing as long as the minimum standards as prescribed by the New Hampshire Department of Education are still maintained. The Level Funded Budget is equal to the exact dollar figure of the current operating budget.
3. Surplus (Fund Balance)
3.1 What is surplus and how does it come about?
Surplus can come from two sources, under expending the budget (appropriations surplus) and/or realizing more revenue than was estimated (revenue surplus). When the operating budget is developed, it is representative of an estimate of our future obligations. That process begins almost a year before the school district begins to operate in that fiscal period. It includes assumptions for health rates, energy and supply costs, and a multitude of other items that comprise a budget with almost 1,000 unique accounts. If the estimates are greater than the actual expenditure when closing out the fiscal year, the result is an under expenditure that flows into surplus. The same holds true for revenue estimates if the school district receives more revenue than is estimated.
3.2 Where does this surplus go?
The entire surplus at year-end (June 30th) goes back to reduce the school portion of the tax rate for the following year.
3.3 Can the school district retain surplus in the same way a municipality can for tax rate stabilization and cash flow purposes?
No. All surplus generated in the current year is applied to reduce the tax rate unless there is a warrant article on the ballot to appropriate funds from surplus which is passed by the electorate. The reasoning behind this rule is that once the school district budget is passed, a municipality is legally responsible to fund that obligation regardless of how much money is actually collected in taxes. Towns need to have a retained surplus in order to ensure they have the cash necessary to meet their obligations in the event taxes for a particular year are not 100% collected. They also need a reserve to fund potential tax abatements (overlay), to guard against catastrophic expenditures that could happen in the event of a natural disaster, and to provide for tax rate stabilization to avoid peaks and valleys from one year to the next.
3.4 Should the school district use the most aggressive estimates with the goal of having no surplus at year end to use to reduce taxes?
The school district should use prudent estimates that minimize the probability of having a school system in a deficit position and allow it to meet its obligations during the school year. Also, school districts, like towns and private corporations, are rated by financial agencies such as Standard and Poor's, and Moody's. This rating impacts our borrowing rates for long-term capital projects. Investors in the municipal bond market look for entities that have a pattern of financial stability and the necessary resources to meet future bond payment obligations. An appropriate surplus used to reduce taxes at year-end is a desirable outcome in closing out the budget.