It’s budget season, which triggers perennial issues related to the budgeting process and substance of the annual budget ordinance. Some of these are addressed in past posts. This year I’ve had several inquiries about how specific a budget appropriation can be. Examples include the following:

• Can the board appropriate funds directed to a specific order placed with a vendor for parks and recreation supplies? NO
• Can the board appropriate funds to a specific capital project, such as repairing the roof on town hall? YES
• Can the board appropriate funds directed to a specific nonprofit? NO

Read on to find out why.

Every county, municipality, and public authority (collectively local units) subject to the Local Government Budget and Fiscal Control Act (LGBFCA) must adopt an annual budget ordinance. This is the main budgeting vehicle for the governing board to recognize revenues and authorize expenditures. Most local governments prepare detailed budget documents, identifying and justifying various revenues and expenditures, perhaps even at the line-item level. But the legal document that must be adopted by the governing board and that comprises the actual annual budget ordinance is much simpler. It includes only the following:

• Estimated revenues by major source
• Appropriated fund balance
• Appropriations by department, function, or project
• Tax levies

Let’s take a closer look at each of these components.

The annual budget ordinance must be balanced. A budget ordinance is balanced when, in each fund, “the sum of estimated net revenues and appropriated fund balances is equal to appropriations.” G.S. 159-8.

Estimated net revenues is the first variable in the balanced-budget equation; it comprises the revenues a unit expects to actually receive during the fiscal year, including amounts to be realized from collections of taxes or fees levied in prior fiscal years. Revenues must be budgeted by “major source.” G.S. 159-13(a). This includes, at a minimum, property taxes, sales and use taxes, special district taxes, licenses and permit fees, intergovernmental revenues, charges for services, specific grant programs, debt proceeds, and other taxes and revenues. (Typically, debt proceeds are not considered a form of revenue, but for budgetary purposes debt proceeds that are or will become available during the fiscal year are included in estimated net revenues.) The LGBFCA requires that a local unit make reasonable estimates as to the amount of revenue it expects to receive. G.S. 159-13(b)(7). A unit should have some demonstrable basis for its estimates, such as historical trends or other comparable data. The law places a specific limitation on property tax estimates. The estimated percentage of property tax collection budgeted for the coming fiscal year cannot exceed the percentage of collection realized in cash as of June 30 during the fiscal year preceding the budget year. G.S. 159-13(b)(6).

The second variable in the balanced-budget equation is appropriated fund balance. Appropriated fund balance is best understood as the amount of cash reserves needed to fill the gap between estimated revenues and appropriations. Only a portion of a local unit’s fund balance is available for appropriation each year. The LGBFCA defines the fund balance available for appropriation as “the sum of cash and investments minus the sum of liabilities, encumbrances, and deferred revenues arising from cash receipts, as those figures stand at the close of the fiscal year next preceding the budget year.” G.S. 159-13(b)(16). Legally available fund balance results when any of the following occurs: unbudgeted fund balance carries forward from prior years, actual revenues exceed estimated revenues in the current fiscal year, actual expenditures are less than appropriations in the current fiscal year, or actual revenues exceed actual expenditures in the current fiscal year. A portion of this fund balance usually is legally restricted to certain expenditures. A governing board may appropriate restricted fund balance only for those specified purposes. A unit’s governing board is not required to appropriate all the resulting fund balance, only that which is required, when added to estimated net revenues, to equal the budgeted appropriations for the fiscal year.

The third variable in the balanced-budget equation is appropriations for expenditures. The LGBFCA allows a governing board to make appropriations in the budget ordinance only by department, function, or project. G.S. 159-13(a). Department means the functional divisions of the local unit. For example, a board may appropriate total sums to the finance department, public works department, law enforcement department, planning and zoning department, and so on. Each department then has flexibility to fund its personnel, contracts, and other expenditures from its budget allocation.

The term function has two possible meanings for budgeting purposes. It allows a local government to group together multiple departments, such as law enforcement and fire under a broader budgeting category of “public safety.” This is the more common approach to a function level appropriation. Alternatively, it the term function may allow a board to appropriate moneys for major expenditure categories within each department, such as salaries/benefits, utilities, supplies, insurance, capital, and the like. In this case, the budget officer/manager, department heads, and other staff may not exceed the amounts budgeted for each function category. (The only guidance we have from the legislature on this issue comes from the uniform budget format for schools, which allows for budget appropriations in the local current expense fund to be made by purpose or function code. Function codes are more detailed categories within each purpose code. There is not a direct parallel from the particular function codes to other local government entities budgets, though.)

The statue also does not define project. The term is also susceptible of multiple meanings. The best guidance for local units on how to define project for this purpose, is to look at the parallel budgeting statute, G.S. 159-13.2. That statute provides an alternative budget process and format for capital projects and grant projects. According to that statute, a capital project “means a project financed in whole or in part by the proceeds of bonds or notes or debt instruments or a project involving the construction or acquisition of a capital asset.” And a grant project “means a project financed in whole or in part by revenues received from the federal and/or State government for operating or capital purposes as defined by the grant contract.” G.S. 159-13.2 states that a local unit has the option to budget for these type of projects either in the annual budget ordinance or a in a project ordinance. It seems reasonable to conclude then that the term “project” in the annual budget ordinance has the same meaning as either capital project or grant project.

A governing board may not make appropriations by line item or by an individual contract or other object of expenditure in the budget ordinance. The budget ordinance is a summary document that aggregates expenditures. Many governing boards require submittal of more-detailed, line-item budgets by each department to justify the expenditures being requested. A board may require the budget officer/manager or head of each department to follow the more-detailed budgets (“working budgets”) during the fiscal year. The budget ordinance represents the legal appropriations of the local unit, though.

What about funding for nonprofits and other community organizations? May a governing board appropriate funds in the budget ordinance to a specific private entity? The answer is no. Recall that an appropriation is a legal authorization to incur an obligation and make an expenditure. But it is not an actual obligation or expenditure. That means a budget appropriation, alone, is not a contract and does not represent a legal obligation to pay money to another entity. A governing board may include funding for a contract with a nonprofit or other community organization in a budget appropriation to a department, function, or project. The local unit must then execute a contract or other legal agreement with the nonprofit or community organization that specifies the obligations of the parties – the local unit is providing funding in exchange for the specific services or activities to be performed by the other entity. (And don’t forget that the substance of the contract must be authorized by statute. There is no legal authority to simply donate funds to a private entity, even if it is providing general community services.)

The final component of the annual budget ordinance is the tax levy or levies. If the governing board is authorized to levy property taxes, it must do so with the adoption of the budget ordinance. G.S. 159-13. There are limited opportunities to modify the property tax rate(s) once the budget ordinance is adopted. See G.S. 159-15. As detailed here, although most local units adopt an aggregated general property tax rate, legally it is a series of separate rates for specific authorized purposes. A local unit may choose to list some of these purposes, and the portion of the rate associated with them separately. This is often done for fire, EMS, and school purposes. Property tax levies for each special taxing district also must be levied in the budget ordinance. Note, however, that fee schedules are not legally adopted in the budget ordinance. A board should take separate action to adopt a new or modify an existing fee schedule.