Municipal Audits Support Good Governance

 

Courtesy of Clipart Library

Municipal audits may not be glamorous or exciting, but they offer taxpayers crucial insights into the financial operations of Massachusetts cities and towns.

According to Massachusetts General Law (M.G.L.) Part I, Title VII, Chapter 44, Section 40, the accounts of all municipalities should be audited annually. Those of regional school districts must be audited annually or biennially (though this M.G.L. indicates regional school audits must be annual).

MA Division of Local Services (DLS) recommends annual financial audits but notes that smaller municipalities may opt for audits only every other or every three years. In the latter cases, auditors will likely charge higher fees due to the increased complexity of these audits. To comply with the federal Single Audit Act, any non-federal entity expending $750,000 or more of federal funding during the previous fiscal year must submit to an audit.

Here is a quick overview of the financial audit process for cities and towns, including some highlights from Shutesbury’s fiscal year (FY) 2019 and 2021 financial audits, which I requested from the Shutesbury Town Clerk.

What Happens During a Municipal Financial Audit?

A municipal financial audit independently assesses a community’s financial performance and standing. The municipality engages a Certified Public Accountant firm to examine its “financial records, accounts, business transactions, accounting practices and internal controls” and ensure adequate controls are used to protect public assets. Financial documents included in audits are balance sheets, revenue and expenditures statements, and fund balances. 

The municipality’s audit committee (Shutesbury does not have one) should be responsible for hiring the auditing firm and should not be comprised of town officials whose activities or performance may be audited.

The three basic segments of an audit are:

1. The auditor’s opinion certifies that the audit used documents prepared under generally accepted accounting principles (GAAP). An unqualified opinion denotes an audit where the financial statements fairly reflect the local government’s standing and the auditor found no problems with the documents. A qualified opinion is the opposite and means that the auditor lacks confidence that one or more transactions followed GAAP.

2. Basic financial statements including all government financials, fund financials, notes to the financial statements, and supplementary information and schedules.

3. A management letter. This document, prepared by the auditor, points out any deficiencies encountered during the audit and makes suggestions for improvement. Not all audits contain a management letter, which must be separately included in the scope of services. The DLS Guide to Financial Management for Town Officials recommends including such a letter so weaknesses may be rectified immediately.

Why Audits are Necessary

Regular municipal audits are essential for several important reasons. As mentioned earlier, a primary motivator is ensuring that checks and balances exist to protect the community's assets and that all financial statements, transactions, and controls are fair and reliable. Audits can point out minor problems that can be corrected before they become major issues.

Shutesbury’s Municipal Finance Guidelines delve deeper in its "Audit Policy" section, emphasizing that regular audits ensure the integrity of departmental policies, increase public confidence in local government, and provide evidence to credit rating agencies of the town’s financial health. It also states, “The Town will put forward its best efforts to address, with corrective action, comments, and issues presented in the auditor’s management letter.”

DLS recommends that audits be presented by the auditor to the town council or select board during an open meeting. Many municipalities post their audits and management letters (if available) on their websites.

If a community needs help with its financial controls or wants a more thorough financial review of its procedures, it can ask for assistance from the Massachusetts Department of Revenue.

Shutesbury’s Most Recent Audits

Shutesbury contracts for an audit every two years, and these Select Board minutes from 12/19/2017 contain the presentation of the FY2017 audit by auditor Tom Scanlon. During that discussion, the Management Letter was referenced and Mr. Scanlon suggested the town develop an “internal controls manual” to document these procedures. The Town Administrator agreed with this suggestion. It is unknown whether this occurred since a thorough search of Shutesbury.org did not turn up such a document.

Neither the FY2019 nor FY2021 audits contain a Management Letter, despite the directive in the Municipal Finance Guidelines. Both audits received an unqualified opinion from the auditor regarding the integrity of the documents presented. I found no Select Board minutes indicating either audit was discussed at an open meeting.

Audit Focus and Highlights

Before we get to the notable aspects of the audits, here are some relevant definitions taken directly from the Scanlon & Associates audit reports:

• Deferred Outflows: This represents the usage of net position applicable for future period(s) and will not be recognized as expenditures until the future period to which it applies. 

• Deferred Inflows: Represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time.

• Net Position: The difference between all assets and deferred outflow of resources and all liabilities and deferred outflows of resources. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position is improving or deteriorating. Put simply, 

• Net position = all assets + deferred outflows - liabilities

• Net position represents the difference between resources and the claims against them and can be positive or negative.

• Governmental Funds: Governmental fund statements focus on near-term inflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating a government’s near-term financial requirements.

• General Fund: The General Fund is the Town’s primary operating fund and the largest source of day-to-day operations. NOTE: This corresponds to the last line of a given fiscal year’s budget, titled “Total Operating Expenses” and “Total Revenue Projections”. In a balanced budget, the two lines should be equal.

The financial highlights and changes between audits as stated by Shutesbury Town Management are shown below. 

• Shutesbury’s assets and deferred outflows of resources exceeded its liabilities and deferred inflows of resources by $6,473,807 in FY2019 and by $7,908,530 for FY2021 [Amanda’s note: This shows that Shutesbury’s net position increased between FY2019 and FY 2021 by $1,434,723, a positive indicator of the town’s financial position]. 

• Governmental funds reported an ending fund balance of $2,896,621 for FY2019 and $4,729,293 for FY2021;

• The General Fund balance for FY2019 was  $2,360,482 and $2,824,940 for FY2021;

• Certified Free Cash for FY2019 totaled $1,389,680 and $1,173,772 for FY2021.

Audit Costs

The FY2021 budget document lists the cost for the FY2017 audit as $12,500 and the FY2019 audit as $25,000. The FY2021 audit cost $12,500 according to the budget for FY2023.

This post is a simplified overview of the audit process and two specific audit reports for Shutesbury. For those who would like more detail and don’t mind wading through 70 pages of text and figures, I encourage you to obtain your own copies from the Shutesbury Town Clerk at townclerk@shutesbury.org.

The Massachusetts Inter-District School Choice Program

Photo by Jeffrey Hamilton on Unsplash

The Massachusetts school choice program, G.L. c. 76, § 12B, was enacted in 1991 to allow parents and their children to “obtain a quality education in public schools” by allowing attendance in schools outside their home district. Another of the legislation’s goals was to motivate school districts to “examine and strengthen their curriculum” to better compete with other public schools.

In fiscal year 2023, 17,688 full-time equivalent pupils participated in the program, with 184 receiving school districts (districts that accept non-resident school choice students) and 316 sending districts (home districts of school choice students). According to the law, student participation in school choice cannot exceed 2% of the state’s public school enrollment. For the 2022 - 2023 school year, participating students comprised 1.9% of the state's total public school enrollment of 913,735.

The law states that all districts will accept students from other districts, provided space is available. Unless a district opts out, it is automatically considered a school choice district.

How Districts Accommodate School Choice

There are three ways for School Committees to handle school choice:

1. Take no action before June 1, which will by default make the district a school choice district. In this instance, there are no restrictions on the schools, specific grades, and programs to which non-resident students may be accepted;

2. Vote before June 1 to accept school choice with some or all restrictions to schools, grades, and programs;

3. Vote before June 1 to opt out of school choice. This vote must include a public hearing on the opt-out issue and the public hearing may occur at the same time as the meeting as long as the public hearing aspect is advertised beforehand. The reasons for opting out must be recorded in the resolution voted on. The district must notify the  Department of Elementary and Secondary Education (DESE) of the vote as soon as practicable.

Districts may opt out of receiving non-resident students but not sending resident students outside of their home district. The law provides for withdrawing from the intra-district enrollment process only and guarantees the right of students in Massachusetts to attend any school of their choice within the state.

The opt-out hearing/vote process must be done every year before June 1 and the vote will only apply to the following school year. Districts participating with restrictions must vote on those restrictions every year before June 1. If there are more applicants than available seats, the District must choose school choice students through a lottery.

Student Rights under School Choice

According to G.L. c.76, § 12B, schools cannot discriminate based on “race, color, religious creed, national origin, sex, gender identity, age, sexual orientation, ancestry, athletic performance, physical handicap, special need, academic performance, or proficiency in the English language.” Schools may not consider a non-resident student’s disciplinary record when making enrollment decisions, but non-residents may be disciplined as any other student once they have gained admission. Siblings of students enrolled through school choice are given priority for acceptance to the same district. 

The law mandates that any non-resident student admitted through school choice must receive the same treatment as resident students and may participate in all programs available to residents. Once accepted, non-resident students have the right to continue their education in the chosen district until high school graduation or completion of the highest available grade in the district, unless there is a lack of funding.

If a district votes to withdraw from school choice after previously participating, non-resident students already enrolled must be retained. To protect their privacy, the names of students entering or leaving a school district cannot be made public by the School Committee.

School Choice Funding Formula

School choice funding is fairly straightforward.  Receiving districts are paid a set amount of money per student. In contrast, those districts that lose students to other school systems must pay. There are additional charges for special education students and transportation costs for those students if required by the student’s Individualized Education Program. 

In January, the MA Department of Elementary and Secondary Education (DESE) released the  FY 2024 Preliminary School Choice Tuition rate for school districts and the state’s two virtual schools based on the previous year’s enrollment data. The final rates will be released in June.

The FY 2024 per-student rate (except for special education students) for school districts was $5,000 – unchanged since at least 2016. This amount reflects the law’s language stating, “tuition amount shall be equal to seventy-five percent of the actual per pupil spending amount in the receiving district for such education as is required by such non-resident student, but not more than five thousand dollars”. By comparison, the per-student rate for virtual schools was reported as $9,597, which was recently increased to $9,727. Both rates include a $75 per-student administrative fee. 

The law requires tuition payments for non-resident students to be deducted from the sending district’s state Chapter 70 funds and deposited in the School Choice Tuition Fund by the state treasurer. Payments are then disbursed from the Fund to the receiving districts and placed, by law, in a special account for use by the district’s school committee.

More Questions About School Choice

My research for this overview answered some of my questions about school choice but many remain. For example:

1. Do wealthier school districts benefit more from school choice compared to less wealthy districts?

2.  Why do districts opt out of school choice, especially when they must still send their resident students to schools outside their district?

3. Does forcing underperforming (and possibly underfunded) schools to compete with others help or hurt the public school system?

4. Is the $5,000 tuition assessment sufficient to cover the cost of a student’s education?

I plan to cover these questions and more in future blog posts as I delve deeper into the complex and diverse issues surrounding the Bay State’s school choice program.

    

Momentum Builds to Abolish the Local Property Tax

Photo by Phil Hearing on Unsplash

Local real estate taxes are the primary funding method used by municipalities in the United States. According to the Institute on Taxation and Economic Policy, 75% of the $800 billion raised annually to support local government spending comes from property taxes. 

The Federal Reserve Bank of St. Louis put the total value of raised state and local property taxes in the U.S. at a little over $12 billion in 2023. The graph below shows how this amount grew over time and nearly doubled since the mid-2000s. The Tax Policy Center notes that localities generally levy taxes on real estate and states are more apt to tax only personal property, such as business equipment and furnishings in second homes.

The increasing burden on real estate property owners has spurred some states to consider abolishing property taxes. This is an interesting concept that begs the question: where will the funding for local government come from?

But first, a little history about property taxes.

A Tax Owed to Landlords and Kings

Property taxes were levied by kings in ancient Babylon, China, and Egypt, as well as other countries and city-states where land was taxed according to its production value. During feudal times, William the Conqueror instituted a land tax system whereby a list of property owners was kept in a book along with the land’s assessed value and the amount of tax due.

Until the 19th century, taxation schemes were disorganized and widely considered inequitable. States began the move toward uniformity, and the real property tax was seen as a realistic way for rural areas to raise money.

The 20th century saw growing discontent with property taxation methods. In some states, a mix of government entities and special districts would tax the same parcel multiple times. 

Reform efforts introduced the concept of exemptions, property classifications, and training for tax assessors. The economic expansion following World War II brought higher real estate prices, values, and tax bills. The property tax revolts of the 1970s led to the passage of Proposition 13 in California and Proposition 2 ½ in Massachusetts, both measures intended to put the brakes on escalating property taxes.

Where the Real Property Tax is Under Attack

Rapidly rising real estate prices and values have renewed the anti-tax vigor of the 1970s. Several states are considering eradicating property taxes but are finding it difficult to replace the revenue adequately.

Texas

Governor Greg Abbott has made it clear that he supports abolishing the local property tax. Last summer, Abbott signed a bill to cut local taxes by $18 billion. In November, voters approved a constitutional amendment, known as Proposition 4, to increase the state’s homestead exemption and restructure how schools are funded. Essentially, surplus state funds were used to supplement school maintenance and operations budgets, thus reducing the amount needed from property taxes.

North Dakota

In 2012, voters failed to pass a ballot question to end local property taxation. In July 2023, a group spearheaded by former state legislator Rick Becker began circulating a similar petition that, by January of this year, garnered a little more than half the signatures needed to be placed on the November ballot.

Becker claims that the lost revenue of $1+ billion would be replaced by “legacy fund earnings and operation prairie dog funds”, plus ending wasteful spending.

Florida

House Bill 1371, first filed on January 5, 2024, would have increased the homestead exemption for property owners under the age of 65 to $100,000  and for homeowners over the age of 65 to $250,000. The bill would also have required a study of the impact of replacing the real property tax with a new consumption tax.

A new filing on February 1 left only the language regarding an impact study intact; on March 8, the bill died a quiet death in the State Affairs Committee.

Michigan

An initiative seeking a place on the November ballot calls for the Michigan property tax to be voluntary for all services but “police, fire, and road commissions”. Whether or not the petition is placed before voters, the subject has elicited fiery debate between property owners on both sides of the question.

Addressing Calls for Property Tax Relief

So far, no state has eliminated the local property tax since no comprehensive plan replaces the revenue. Raising or instituting consumption taxes has been floated as a solution, though such revenues would be harder to predict than taxes on a stable tax base like real estate.

Escalating demands for relief have resulted in legislative actions to address the problem, primarily by using Covid-related relief funds to subsidize property tax revenues. With those funds drying up, some states, like Colorado, have passed bills to limit assessed valuations for tax purposes while other states, like Georgia, will put constitutional amendments limiting assessed values on the November ballot for voter approval.

With home prices continuing to rise, the momentum to reign in property taxes is not likely to slow. CoreLogic’s May 2024 report notes a 5.3% increase in home prices from March 2023 to March 2024, higher than its year-ago prediction of a 4.6% price increase–with Northeastern states leading the way. 

Massachusetts has one of the highest median home sale prices in the country. This chart from Rocket Homes, published May 8, shows our fair state sporting a median price of $571,436, with only California, Washington, D.C., and Hawaii commanding higher median prices. On May 24, The Mortgage Reports pegs Massachusetts’ median price at $622,639, nearly tied with Colorado and trailing California, Hawaii, Washington, D.C., and Washington state.

Notably, property owners in the Northeast have not joined in the current tax revolt. If home prices and values soar, that could change.