Article VIII of the State Constitution imposes limitations upon the amounts which local governments may raise by tax upon real property. These limitations have a history that goes back more than a century. They have had a pronounced impact on the financing of local government in the State of New York, particularly with regard to state aid, local non-property taxes, education financing, general purpose assistance and special city aid. The real property tax limitation has evoked much debate over the years.

Against a background of increasing state involvement in local finances, an 1884 constitutional amendment declared:

Thus the tax limitation first applied only to the cities of New York, Brooklyn, Buffalo and Rochester, and to New York, Kings, Erie and Monroe counties. With the consolidation of New York City in 1898, a single 2 percent limit was accepted as applying to the whole city and later to the overlying county government. As a result of population growth, Syracuse, Albany and Yonkers came within the constitutional tax limit, and with them Onondaga, Albany and Westchester counties.

The economic collapse of 1837 exposed serious weaknesses in the credit operations of local government and the speculative character of the public improvement debt of the period. One result was that the State Constitution of 1846 directed the Legislature to restrict the municipalities’ power of taxation, assessment and borrowing.

Unchecked growth in the debt of local governments continued. The Civil War was followed by inflation and great economic activity. New York City provided a special example of municipal extravagance. The unbridled expansion of local debt under Boss Tweed created acute difficulties for the city during the business depression of 1873.

In 1938, constitutional amendments extended debt limitation to towns and villages, prohibited the creation of new or novel units of local government possessing borrowing power, and required substantive guarantees for the repayment of municipal indebtedness.

Postwar changes in the debt provisions of the State Constitution have been numerous. The most significant occurred as a result of revisions in Article VIII which were approved in 1951. The 1938 and subsequent revisions resulted in the following features:

Article XVIII of the State Constitution prescribes the conditions under which a city, town, village or certain public corporations (other than a county) may aid certain low-income housing and nursing home accommodations, contract indebtedness, and provide for subsidies for these purposes. This article contains a separate 2 percent debt limit for cities, towns and villages computed on the basis of average equalized full valuations of taxable real property. Various conditions are attached to indebtedness incurred under Article XVIII.

To implement the 1938 constitutional amendments, the state undertook a comprehensive revision of the laws on local government financial affairs. In 1942, this effort produced the Local Finance Law. This statute regulates the issuance of municipal bonds and notes by local governments. It addresses the objects or purposes for which debt may be incurred, the maximum terms of indebtedness for various objects or purposes, the conditions of short-term loans, and the required content of municipal obligations.

While there are many legal requirements surrounding municipal debt procedures, they do not exhaust the subject of local debt management. The overlapping debt limits in the State Constitution and the safeguards and requirements of the Local Finance Law are necessarily controlling, but they are not substitutes for the exercise of prudence and sound judgment by local government officials.

Local officials may exercise discretion in debt management and borrowing policies in a number of vital respects. They make judgments as to the need for public improvements and their soundness from the standpoint of design, costs and architectural or engineering features. They decide whether such improvements are within the capacity of the community as measured by future annual costs for debt service and regular maintenance.

While state laws influence debt policies, the decisions of local officials have a direct bearing upon debt management. One feature of an orderly and manageable debt structure is early retirement of substantial amounts of outstanding debt. Another feature is to keep annual obligations for the payment of interest and principal within the limits of a reasonable relationship to total budgetary requirements. Local officials also find that it is good policy to make substantial contributions to the cost of public improvements from current revenue. Many capital outlays recur regularly, such as replacing motorized equipment or resurfacing streets, and borrowing for such purposes tends to effect on debt and debt charges.

The issuance and marketing of municipal obligations is a highly specialized subject. Since local officials wish to ensure the legality and marketability of the obligations and obtain the most favorable terms, they often utilize the services of bond counsel and other knowledgeable advisors.

Capital programming and capital budgeting are recognized methods for implementing debt management policies. Practices among local governments in the state vary. In some cases there are detailed charter requirements for public improvement planning and financing. In other cases localities adhere to “paper” plans. Sometimes the local practice is to bring forward public improvements piecemeal and not necessarily in relation to each other, to separately authorize the funds necessary to pay for various improvements, and to defer into the future the question of how everything fits together.

A capital program, as the term is used by the Government Finance Officers Association (GFOA), is “a plan for capital expenditures to be incurred each year over a fixed period of years to meet the need for public improvements.” General Municipal Law, section 99-g contains express provision for capital programs. The capital program under section 99-g is submitted with the municipality’s regular annual budget. The capital program itself includes descriptions of proposed projects, the proposed method of financing for each project and an estimate of the effect, if any, on operating costs in the three years following the completion of the project. The factor of integration with the regular budget removes capital programming from the area of paper plans.

The goal of a capital program generally is to plan, in advance, how to pay for various improvements and how the improvements will affect the regular municipal budget in added debt service charges, appropriations from current revenue, and the annual expense of operating new facilities.

Local government indebtedness is evaluated on an individual basis according to criteria by which financial position is customarily evaluated. Some areas of concern are growth in the amount of debt over a number of years, and purposes for which the debt is being issued. Local budgets traditionally include expenditures for which indebtedness could be issued. When local governments take expenditures that have traditionally been financed from current appropriations and begin to issue debt to finance such expenditures, it may be an indication that current revenues are not keeping pace with expenditures.

Other criteria extend beyond amounts of borrowings and debt and involve a number of factors indicative of fiscal capacity. A few such factors are the ratio of net debt to full valuations, the extent to which municipal debt is wholly or partially self-supporting, the relative amount of the municipal budget used for tax-supported debt, the amount of overlying debt, and the municipality’s tax collection.

Local officials often regard the annual budget as perhaps their greatest single obligation, since budget preparation and continuing administration may be labor intensive and time-consuming. General state law spells out the principal steps in budget preparation and adoption in most local governments. For counties, cities and villages that have charters, budget provisions are generally contained in such charters.

The budget process generally entails many choices. These tend to be most apparent on the expenditure side of the local budget, but many choices may also exist on the revenue side. They include:

Budget administration is generally preceded by the preparation and submission of departmental estimates. This process is usually followed by the formulation of the budget itself, which is a balanced plan of expenditures and revenues, normally prepared by or under the direction of the local government’s executive or budget officer. The budget is then submitted to the local legislative body for review, approval or amendment, and enactment of appropriation orders giving effect to the budget.

Beyond the legislative phase of budget review and adoption is the stage of budget administration and enforcement. This process involves the maintenance of appropriation control accounts and procedures for budget transfers or modifications.

In budget preparation, presentation and subsequent administration there are opportunities for local initiatives, consistent with the basic requirements of law. Initiatives may be expressed in budget format, supporting data and comparisons, and accompanying explanatory matter in the budget message. A budget is more than an array of figures — it is also a statement of public policy.

Quite often, budgetary allotments or expenditure quotas are established. These are often made on at least a quarterly basis, are formulated from work programs or activity schedules, and developed in consultation with operating officials. Newer developments in budgeting relate the provision of money more closely to the accomplishment of program objectives and to the efficiency with which municipal activities are performed.

Another essential aspect of municipal finance administration is the maintenance of an accounting control system. Fund accounting is a basic characteristic of municipal accounting. A “fund” is a fiscal and accounting entity with a self-balancing set of accounts. It contains recorded cash, other assets and financial resources, together with all related liabilities and residual equities or balances. A fund is segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations.

Municipal accounting systems include a general fund and, depending upon the local government entity, such special revenue funds as highway funds, debt service funds, capital project funds, enterprise funds, internal service funds, and trust and agency funds. The central principle is that funds will be self-contained.

Accounting for municipal resources and expenditures should generally be on a modified accrual basis. A fundamental feature of budget administration is the maintenance of appropriation control accounts whereby appropriations are encumbered as obligations are incurred.

In this summary discussion, it is not feasible to outline a comprehensive system of municipal accounts or to describe prevailing practices in all the local governments of the state. For most of the municipalities the standard resource on governmental accounting procedures is the Office of the State Comptroller (OSC).

The systematic recording of financial information can be used “(1) as a basis for managing the municipality’s affairs, (2) as a control to prevent waste and inefficiency, (3) as a check on the fidelity of persons administering municipal funds, and (4) as a means of informing interested parties of the municipality’s financial condition and operations.” ^[1]

The municipal accounting system is the source of both the municipality’s fiscal year-end statements and the periodic internal reports that localities find important for management purposes. These periodic reports show whether revenues are coming in and expenditures are going out at the times and in the amounts projected by the budget plan. Monitoring of this information allows management to make appropriate budgetary modifications during the year.

General Municipal Law section 30 requires local governments to file a financial report annually with the OSC. Until 1996 the law required municipalities to file a paper report on forms provided by OSC, but an amendment in that year allowed for electronic filing. Beginning with the reporting for the fiscal year ending in 1996, counties, cities, towns, villages, school districts and joint activities have been able to transmit their reports electronically using the internet or through the Comptroller’s Assistance Network (a 24 hour electronic bulletin board). Filing electronically with the free software provided by OSC (or by the State Education Department for school districts), saves time, improves accuracy and reduces paperwork.

Other leading aspects of local government finance administration include the functions of cash management, purchasing and property acquisition, insurance and risk management and post audit.

During the 1930s, there was a depression-born trend toward state scrutiny of municipal budgets and expenditure programs, review and approval of proposed municipal borrowings, and measures designed to assist in the marketing and acceptance of local bond issues. Municipal conditions inviting state intervention during these periods included persistent weaknesses in current accounts, the incurrence of large volumes of floating indebtedness, reliance upon borrowing for current expense to shore up sagging municipal budgets, debt readjustments and refunding, and actual or incipient defaults.

From these various factors and developments emerged the main ingredients commonly associated with state supervision of local finances: legal tax and debt limitation; debt regulation through uniform bond laws and their administration; reporting, auditing and accounting requirements; central review of debt proposals and expenditure programs; varying degrees of involvement in debt planning and issuance — all fortified by advisory and technical assistance.

Many of the leading features of state supervision of local finances in the State of New York derive from constitutional and statutory requirements previously discussed in this chapter. Chief responsibility for state supervision of municipal finance resides in the Office of the State Comptroller. Among other services, the OSC’s functions include:

This Division also performs periodic audits and reviews of local governments, conducts training for local officials and provides consulting services;

A review of each local government’s annual financial report is performed by the OSC to assess compliance with minimum established standards. The information from this process becomes an integral part of a Uniform Risk Assessment Process (developed in 1999). Based upon analysis of identified risk areas, assistance to improve local government operations is offered as appropriate.

Occasionally local governments accumulate deficits to a point that the only recourse left is to obtain special state legislation that authorizes the local government to issue debt to finance the deficit. This action enables the local government to pay off a portion of the debt (through annual debt service payments) over a number of years. Such legislation generally requires the OSC to certify to the amount of the deficit before any such indebtedness can be issued. The OSC also reviews and makes recommendations on the proposed budgets of these municipalities during the period such financing is outstanding.

In extreme situations the State Legislature has determined that certain local governments needed additional oversight. This action has been prompted by periods of prolonged fiscal difficulty or, in rare instances, because the local government has lost access to financial markets. Oversight boards typically have powers to approve debt issuances, approve budgets and/or financial plans, approve contracts including employee contracts, and, in rare instances, assure the payment of obligations through the intercept of state aid and tax revenues. Legislation creating control boards usually provide for members to represent interested parties such as the Governor, State Comptroller, State Legislature and generally the local government and/or, local business leaders and local representatives. The legislation also establishes criteria to determine when the local government has regained its financial health. Typically, once the local government meets those criteria, the oversight board approval powers cease.

The oversight activities rely heavily on an improved computerized data file known as the Local Government Data Base. This file is created and maintained by the OSC and contains comprehensive financial and other data on all local governments in the state from fiscal year 1977 onward. Much of this data is obtained from annual financial reports filed by each local government. The reports contain financial statement data (i.e., financial position and results of operations and changes in financial position) as well as detailed revenues and expenditures. This data file is regularly transmitted to the Division of the Budget, the Senate Finance Committee and the Assembly Ways and Means Committee to be used as the basis for much of the program analyses and fiscal impact studies regarding state and local relations.

Since the early 1900’s the Office of the State Comptroller has prescribed Uniform Systems of Accounts for local governments. The purpose of these systems has been to provide a means of gathering financial data from local governments that is consistent in classification and content. This information is used by financial analysts in the Comptroller’s Office, other agencies and the State Legislature.

These systems do not set Generally Accepted Accounting Principles (GAAP). They are promulgated by the Governmental Accounting Standards Board (GASB). GAAP is a technical term used to describe the conventions, rules and procedures that constitute accepted accounting practices on a nationwide basis.

Since the late 1970’s the Office of the State Comptroller has determined that adherence to Generally Accepted Accounting Principles is in the best interest of New York State and its local governments. Consequently the Uniform Systems of Accounts prescribed by the Comptroller are periodically updated to reflect changes in GAAP. In addition, the Comptroller’s Office issues accounting bulletins and conducts training sessions for local officials.

The Governmental Accounting Standards Board, which is the standard-setting body for establishing governmental accounting and financial reporting principles, from time to time will issue statements that prescribe accounting and financial reporting requirements for certain transactions. When a new accounting/financial reporting standard is issued by GASB, it must be critiqued by the Office of the State Comptroller to identify the accounting issues involved as well as what information is required in order to comply. As part of the accounting issues determination process, both financial reporting requirements and the affect on the State’s financial position must be identified. Input from the units, that may be impacted by the change, in OSC will be solicited. Based upon this information obtained, a decision is made whether to recommend implementation of the statement.