Chapter 1 - Municipal Finance: An Overview

Active citizen participation has long been a bedrock of local government in Massachusetts. As communities have grown and expanded their services, more and more residents have taken part in the superintendence of local affairs, frequently on a part-time or volunteer basis, resulting in a largely decentralized governmental structure, with many separate officials and committees responsible for various activities of local administration.

Complexity of Local Government

Learning the many issues relating to local government finance poses a daunting challenge for new municipal officials. Even experienced local officers frequently feel intimidated and confused, sometimes overwhelmed, by the broad range and complexity of the many issues that confront them. These issues include such complicated matters as Proposition 2½, which restricts increases in local tax levies, and the Education Reform Act of 1993, which establishes local education spending requirements.

Proposition 2½

Proposition 2½ (Ch. 59 §21C) limits the amount of money a community can levy, i.e., raise through real and personal property taxes. This limitation has two, discrete aspects. First, a community cannot levy more than 2.5 percent of the total full and fair cash value of all taxable real and personal property in the community. This constraint is generally called the community's "levy ceiling." Second, a community’s levy can only increase by a prescribed amount, discussed below, from year to year. This second constraint is generally called the community's "levy limit."

Proposition 2½ directs the Department of Revenue to annually adjust each community’s levy limit by applying two statutory increases: (1) an automatic increase of 2.5 percent over the prior fiscal year's levy, and (2) a "new growth" increase, based on the value of new construction in the community, including additions to and alterations of real property, that did not result from property revaluation.

Proposition 2½ also provides communities with local procedures whereby they can increase their tax levies above their levy limits. These procedures require voter approval at a referendum election. They include overrides, on the one hand, and debt exclusions and capital outlay exclusions, on the other. An override increases a community’s levy limit for the current fiscal year and becomes part of the base for calculating future years’ levy limits. Exclusions provide communities with a means to raise additional taxes to fund capital projects. Unlike overrides, though, exclusions do not become part of the tax base; therefore, they do not result in permanent increases in the tax levy.

Furthermore, specific statutory provisions allow special exclusions, permitting communities, for certain limited capital purposes, to assess taxes above the levy limit or ceiling. The amount of a special exclusion is only added to the levy limit or ceiling for a temporary period of time, and does not become part of the base upon which the levy limit is calculated for future years. One such special debt exclusion permits a community to add water and sewer project debt service costs to its levy limit or levy ceiling for the life of the debt, as long as it reduces water and sewer rates by the same amount. Another special exclusion permits a community to assist homeowners to repair or replace faulty septic systems, remove underground fuel storage tanks or remove dangerous levels of lead paint in order to meet public health and safety code requirements.

Proposition 2½ also permits communities, by referendum vote, to reduce their levy limits by passing an underride. An underride reduces the base upon which levy limits are calculated for future years, thereby resulting in a permanent decrease in the levy limit of a community.

Powers and Duties of Cities and Towns

Establishing towns as territorial and political units began in New England shortly after colonization by the Pilgrims and the Puritans. By 1780, 220 towns had been organized in Massachusetts alone. Five years later, the Legislature officially confirmed each town boundary. It was not until 1821, however, that the Constitution was amended to permit the General Court to establish the city form of government in any town with a population of 12,000 or more. The following year the town of Boston, with a population of 40,000, became a city.

In 1893 the Supreme Judicial Court, in Larcom v Olan, [1] distinguished between cities and towns as follows:

The marked and characteristic distinction between a town organization and that of a city is that in the former all qualified inhabitants meet, deliberate, act and vote in their natural and personal capacities in the exercise of their corporate powers, whereas under a city government, this is done by representation.

The Legal Foundation of Municipal Finance

The General Laws set out the legal foundation of municipal finance in Massachusetts. The Division of Local Services of the Department of Revenue publishes a volume entitled Laws Relating to Municipal Finance and Taxation which provides municipal officials with most of the statutes relative to city and town government.

Important supplements to the General Laws include court decisions, agency regulations, guidelines and interpretations pertaining to cities and towns. Local officials can obtain copies of these materials from the respective administrative agency that promulgated them. Agency regulations may also be obtained from the State House Bookstore in Boston.

Municipal Powers and Duties

As times have changed, so too has the nature of municipal powers and duties. Traditionally, the rule had been that municipalities enjoy only those powers they derive from the state that creates them. This rule, enunciated by Judge Dillon, long served as the law in Massachusetts. The so-called Dillon’s Rule stipulates:

A municipal corporation possesses and can exercise the following powers, and no others: First, those granted in express words; second, those necessarily or fairly implied in or incident to the powers expressly granted; third, those essential to the accomplishment of the declared objects and purposes of the [municipal] corporation---not simply convenient, but indispensable. Any fair, reasonable, substantial doubt concerning the existence of power is resolved by the courts against the [municipal] corporation and the power is denied. (Dillon, Municipal Corporations, §237, (5th ed., 1911), pp. 449-450.)

With its enactment in 1966 of the Home Rule Amendment to the Massachusetts Constitution (Article 89 as reported in Article 2 of the Articles of Amendment), the Legislature discarded this restrictive rule and granted broad home rule powers to both cities and towns. Pursuant to the Home Rule Amendment, municipalities may now exercise any power or function that the Legislature has the power to confer, through the adoption, amendment, or repeal of local ordinances or bylaws. The Home Rule Amendment contains important exceptions and qualifiers, which limit the legislative power of cities and towns. These are set out in Article II §7, which states:

Nothing in this article shall be deemed to grant to any city or town the power to (1) regulate elections other than those prescribed by sections three and four; (2) to levy, assess and collect taxes; (3) to borrow money or pledge the credit of the city or town; (4) to dispose of park land; (5) to enact private or civil law governing civil relationships except as an incident to an exercise of an independent municipal power; or (6) to define and provide for the punishment of a felony or to impose imprisonment as a punishment for any violation of law.

Furthermore, the Home-Rule Amendment prohibits a municipality from exercising any power that is (a) denied to it by its own charter, or (b) reserved to the state under the Constitution. Also, the exercise a municipality's powers must be consistent both with the Constitution and with all general and special laws enacted by the Legislature.

The Legislature has conferred upon cities and towns the power or duty to:

The development of the powers and duties of Massachusetts cities and towns has been an evolutionary process which has transpired over the past 350 years. This evolution will surely continue, constantly reshaping municipal powers and duties in conformity with changing times, lifestyles and technologies.

The Structure of City Government

Mayor and City Council

The mayor generally serves as the chief executive officer in a city. However, the extent of the power and responsibility of the mayor differs widely from city to city, depending on the specific form of government adopted by a particular city. For example, under a Plan A form of government, mayors serve as full-time administrators with extensive power; conversely, under a Plan E form of government, mayors serve as ceremonial heads and possess little more authority than a city councilor.

A city council or board of aldermen possesses legislative authority, pursuant to Ch. 43 §72, to enact ordinances and adopt resolutions; however, their actions frequently require the concurrence of the mayor in order to take effect. The council is the appropriating body of a city, but it can ordinarily act only to accept, reduce or reject outright the recommended appropriations submitted by the mayor. The council cannot increase those recommendations. (44:32)

Notwithstanding, the city council, on the recommendation of the school committee, may, by a 2/3 vote, increase the appropriation for the school budget or the regional school district assessment over the amount requested by the mayor. However, any increase under this provision does not permit the city to exceed its Proposition 2½ levy limit.

The mayor has 120 days to submit the annual budget to the council. The council can act on its own initiative if the mayor does not act within the 120-day period. (IGR 86-202, pp. 1-19 through 1-20) The council may also enact municipal ordinances; such ordinances, however, may have to be approved by the mayor, either under provisions of the General Laws, such as Ch. 43 §125, or by terms of the city charter. The acceptance and revocation of acceptance of local option legislation is likewise the prerogative of the city council, with the mayor’s approval where required by charter or other provisions of law. (4:4, 4A, 4B)

The Structure of Town Government

Selectmen (41:20-23C)

The selectmen serve as a town’s chief executive body. They have overall responsibility for the general operations of town government. They constitute the primary, non-school appointing authority for a town. In addition, the selectmen may enter into contracts on behalf of the municipality.

Generally, the board contains three or five members. In the smallest towns, the board of selectmen may supervise almost all town operations. In larger towns, however, the board primarily develops administrative policies and leaves general administration to a professional manager.

Selectmen possess responsibility for the appointment and supervision of town employees, but they may delegate this authority. Selectmen are required to set the amounts of the performance bonds for those municipal officers required to be bonded, provided that these amounts are not less than the amounts established by the Commissioner of Revenue. In addition, no bills chargeable to the appropriations of a town can be paid unless they are drawn upon a warrant prepared by the accountant and approved by a majority of the selectmen. (41:56) No bonds or notes may be issued by a town unless they have been signed by a majority of the members of the board. (44:16) All town property not expressly under the control of some other officer or board is under the authority of the selectmen. (40:3) The selectmen also serve as a town's licensing board. [See Randall and Franklin, 18 Massachusetts Practice § 135 (4th ed.).]

The selectmen have the sole power to place a Proposition 2½ override or exclusion question on the ballot for voter consideration. Override or exclusion questions may not be placed on the ballot by vote of town meeting or through use of a local initiative process. Unless a local initiative process is provided by law, the selectmen also have the sole power to place an underride question on the ballot. (If a local initiative process is available in a community, the people, as well as the selectmen, may place an underride question on the ballot by using the initiative process.)

Town Meeting

Town meeting possesses the legislative authority of a town. A town meeting may only be called pursuant to a warrant, a document that notifies the inhabitants of the time, place and subject matter of the meeting. The warrant is normally issued by the selectmen; however, the voters of a town may petition a meeting. (39:10) Each town must hold an annual town meeting in February, March, April, or May. (39:9) Town meeting may be delayed by a vote of the selectmen, but all business must be completed on or before June 30^th. That portion of the town meeting providing for the election or certification of officers and ballot questions may not be delayed. (See IGR 86-202 for more information.) A town may also hold as many additional special town meetings as necessary to consider and conduct town business. Town meetings are open, with all registered voters eligible to participate, unless a community has adopted a representative town meeting form of government pursuant to Ch. 43A §2.

Town meeting is responsible for all appropriations (40:5) and for the enactment of all bylaws. (43B: 13) It acts on behalf of the town to accept local option statutes, unless a statute specifies another mode of acceptance. (4:4) Town meeting may authorize the selectmen to sell town land (40:3) or to act as water and sewer commissioners, assessors, etc. (41:21) The town meeting also decides whether to establish certain town boards (such as trust fund commissioners under 41:45).

Other Municipal Officers

Assessors

The General Laws provide for one, three, five, seven, or nine assessors to serve in each city and for one, three, or five to serve in each town. Assessors may be elected or appointed; the mode of selection depends on provisions of the local charter or bylaw. (41:24)

An assessor’s term in office continues for one or more years. Under no circumstances may an assessor serve as a tax collector or deputy tax collector. (41:24) The Commissioner of Revenue serves in a general supervisory and oversight capacity over municipal assessors. (58:1-7)

Massachusetts cities and towns finance themselves with an “ad valorem” [2] property tax system, under which each taxpayer contributes toward the maintenance of municipal government an amount in proportion to the value of his or her property.

The duties of the board of assessors include (a) assigning value to real and personal property, utilizing state-authorized mass appraisal techniques, for the purposes of apportioning the property tax, (b) ensuring that these values correlate with full and fair cash value standards and (c) complying with the Commissioner of Revenue’s re-certification requirements of property valuation every three years.

Assessors must maintain information concerning each parcel of property in the community. This information is typically recorded on property record cards, so-called. This information includes the area of the parcel, a description of any structures located there, including their quality and condition, the address of the property or its owner, and details about the deed or probate record of ownership of the parcel.

Assessors must exercise particular care in obtaining accurate, legal identification of property ownership since effective collection and enforcement of taxes levied on property depend on that correctness.

Other responsibilities of the assessors include:

Reviewing and responding to taxpayer abatement and exemption applications. (59:5 & 59)

Assessors have the authority to grant abatements and exemptions to taxpayers. A taxpayer who feels his or her property has been overvalued or disproportionately assessed may file an application for abatement. If the assessors agree with the taxpayer, they may grant an abatement, and the taxpayer will receive a reduction in the amount of the tax owed. Taxpayers unhappy with a decision of the assessors may appeal that decision to the Appellate Tax Board (ATB).

Exemption from taxation is a statutory privilege conferred on various categories of persons or property. Some of the most frequent recipients of exemptions are religious or charitable organizations, disabled veterans, elderly persons, surviving spouses and blind persons.

All abatements and exemptions are funded from an account called the overlay reserve for abatements and exemptions. The assessors annually establish the amount to set aside in this special account prior to setting the tax rate. This amount should correspond with their estimation of the aggregate of (a) abatement and exemption costs expected for the year and (b) property taxes anticipated not to be collected that year. The Department of Revenue must authorize this amount as part of the tax rate approval process.
Determining actual tax rates, which must comply with Proposition 2½ and result in an assessment sufficient to finance the budget. (59:23)
Preparing a tax list and warrant in a form approved by the Commissioner of Revenue. (59:54)
Committing the tax list and warrant to the tax collector and, in a community with one or more tax-levying districts, committing a separate tax list and warrant to each district. (59:53)
Applying to the Department of Revenue for the “new construction” adjustment to the levy limit under Proposition 2½. (59:21C(f))

Assessors must establish and maintain public trust and confidence in the valuation process. They can expand that trust and confidence by being ever sensitive to their accessibility by taxpayers.

The property tax is usually the largest revenue source of a municipality. Hence, the assessors, with their key responsibility in overseeing real and personal property valuations, play a crucial role in the financial wellbeing of the community. Any delay or error in the valuation or tax billing process may result in the necessity of borrowing, with related costs, or in a misallocation of the tax burden. Interest costs divert funds the town could otherwise spend on goods and services. Moreover, late tax bills result in a significant decrease in investment earnings since they delay the deposit of revenues in interest-bearing bank accounts. Lastly, errors in assessed ownership preclude collection enforcement and add additional cost outlays for legal fees, particularly costs for title examinations, renunciations, re-takings and advertising.

Collectors

Municipalities may adopt charter provisions or enact ordinances or bylaws relating to the appointment and term of office of the tax collector. In the absence of such local regulations, however, a town must elect one or more collectors for a term of one or more years. (41:1) The collector must annually obtain a performance bond, in an amount set by the selectmen, but not less than the minimum amount established by the Commissioner of Revenue. (60:13)

The collector’s primary function entails the collection of taxes, motor vehicle excises, betterments and special assessments in accordance with the commitment list and warrant prepared by the assessors. In a community that accepts Ch. 41 §38A, the tax collector has the further responsibility to collect all other monies due to the municipality, such as user fees and charges for certain permits and licenses.

The General Laws detail the manner in which the collector is to proceed in enforcing the collection of all committed taxes. Upon receiving the tax list or commitment and warrant from the assessors, the collector must send a tax bill to each assessed property owner. Once a week, or more often, the collector must pay over to the treasurer all money received from the payment of taxes and interest during the preceding week (or lesser period). (60:2)

A tax collector must establish and maintain an effective and reliable record-keeping system. All money received should be deposited as quickly as is reasonably possible.

If payment is not received by the collector within the statutory period, a demand for payment must be sent to the taxpayer before collection enforcement procedures may be initiated. Such collection enforcement procedures include:

The institution of a civil suit. Collectors generally resort to this procedure, when a tax taking cannot be made. (60:35) A suit must be brought within six years of the due date of the tax.
The performance of a tax taking. A tax taking perfects the lien that arises automatically upon the commitment of a tax on real estate. Upon the taking, title vests in the city or town, subject to the taxpayer’s right of redemption or until such time as that right has been foreclosed. (60:53-57)

Tax collectors should work aggressively to collect all bills committed to them. Clearly, uncollected revenues may substantially impair a town’s financial position.

City Auditors /Town Accountants

In cities, the charter generally sets out procedures for the appointment of the city auditor. In towns that have established the position of town accountant, the office of town auditor may be abolished. Town accountants cannot hold any office that involves the receipt or disbursement of money, except for the office of town clerk. (41:55)

A critical responsibility of the city auditor (41:52) and the town accountant (41:56) relates to the payment of bills and payrolls, which must be examined for legality and the requisite oaths and approvals. Should any claim be deemed fraudulent, unlawful, or excessive, payment authorization may be withheld. In such instances, a statement must be filed with the city or town treasurer, outlining the reasons for the refusal. Alternatively, if all is in order, the auditor or accountant must draw a warrant upon the treasury for payment.

The town accountant must maintain (a) a complete set of municipal books, including each specific appropriation, with the amounts and purposes of each expenditure from each appropriation (b) a detailed record of the town debt, including borrowing purposes, rates of interest, due dates, and payment provisions and c) all town contracts. (41:57) In cities, the city clerk maintains municipal contracts. (41:17)

The town accountant must inform town officers at regular intervals of unexpended balances in their appropriations. (41:58) Immediately upon the close of the calendar year, the accountant must prepare statements detailing the preceding fiscal year’s appropriations and expenditures, appropriations for the current fiscal year, and expenditures incurred during its first six months, as well as estimated expenditures for the second six months and estimates for the ensuing fiscal year. By August 1^st, the city auditor, town accountant, or treasurer must furnish the assessors with a written report of the money received, other than from taxes, loans, and trust funds, for the preceding fiscal year. (41:54A)

Town Auditors

The powers of town auditors are more limited than those of town accountants or city auditors. They have a purely auditing function, rather than an auditing and control function, examining transactions after the fact rather than approving or disapproving them as they occur.

Town auditors cannot disallow the payment of bills as illegal, fraudulent, or excessive; also, town auditors possess no role in the budgetary process comparable to the accountant’s role under Ch. 41 §§59-60. The principal duty of town auditors is to examine the books of all town officers and boards that handle money or have charge of appropriations. Town auditors must file an annual report of the result of their audit, verify cash balances, and reconcile bank balances. They must also audit certain public trusts and certify annually the source and total of town receipts other than taxes, loans, and trust income. A town may have several town auditors.

City and Town Clerks

A city or town clerk possesses as an essential function the maintenance of the official records of the municipality. Because clerks receive money for such functions as issuing licenses and certifying copies of official documents, they must obtain an annual performance bond, in an amount set by the mayor or selectmen, but not less than the minimum amount established by the Commissioner of Revenue. (41:13, 13A)

Clerks record town meeting votes, administer oaths of office, and keep an index of those instruments entered in the clerk’s office that are required by law to be recorded (e.g., records of births and deaths, business names, and security agreements between private parties). (41:15)

Clerks must also keep a record of all appropriations and certify them to the auditor or accountant, if any, otherwise to the treasurer, as well as to the assessors for use in setting the tax rate. City clerks must certify appropriations to the treasurer in any case. The certification must give details of the appropriations, identifying the provisions the appropriating authority made for funding the expenditure, if specified in the appropriation order or vote. (41:15A)

Whenever a city, town, or district votes to authorize the use of debt, the city, town, or district clerk must furnish a copy of the vote to the Director of the Bureau of Accounts within 48 hours after the vote becomes effective. (44:28)

All contracts made by a city officer on behalf of the city must be filed with the city clerk as well as with the city auditor. Such contracts are public records and must be indexed. (41:17)

Additional duties of the clerk include:

Notifying the secretary of state of local acceptance of statutes. (4:5)
Supervising the state census, if appointed to do so by the mayor or selectmen. (9:7)
Making regulations concerning (a) the handling of ballot boxes and (b) the counting and returning of votes. (50:7)
Acting as custodian of the municipality’s public records. (66:6,7)

Finance Committee

Every town with an equalized valuation exceeding one million dollars must, and any other town may, legislate the mandatory election or appointment of a finance committee (also called an advisory, appropriation, or prudential committee). The terms of committee members may not exceed three years, although the size and composition of its membership may vary.

In all cases, the finance committee has the responsibility to consider all municipal questions for the purpose of making a report to town meeting. Furthermore, unless a provision of a town's bylaw gives the responsibility to the selectmen, the finance committee must present a budget at the annual town meeting. Even if that ultimate responsibility lies with the selectmen, the finance committee possesses an important role in budget preparation. The committee should review estimates provided by the various municipal departments and formulate them into spending recommendations for inclusion in the town meeting warrant.

Furthermore, the finance committee has the power to approve transfers from the reserve fund, a contingency fund usually appropriated as part of the annual budget, to departmental budgets for extraordinary or unforeseen occurrences. (40:6)

The finance committee is the official fiscal watchdog for a town. Finance committees were established to permit a representative group of taxpayers to conduct a thorough review of municipal finance questions on behalf of all citizens.

Districts

A district is an area comprising all or a portion of one or more municipalities, having fixed borders, and organized for the purpose of carrying out some governmental function, such as providing fire protection, water, education, electricity, common sewers, water pollution abatement or refuse disposal. In Massachusetts, districts fall into one of two basic types, either tax-levying districts, which levy taxes directly upon individual citizens and taxpayers, or assessment districts, which assess charges and costs upon cities and towns, either directly or through the Cherry Sheet. Fire and water districts generally levy taxes directly. Regional school and regional transportation districts, on the other hand, generally assess member cities and towns, either directly, as in the case of regional schools, or through the Cherry Sheet, as in the case of regional transportation authorities.

Tax-levying districts ordinarily rely upon the assessors and collectors of the municipality or municipalities in which they are located to assess and collect district taxes and other charges. Both tax-levying and assessment districts generally have their own treasurer to handle and manage district funds.

District Treasurers

Treasurers of tax-levying districts possess the essential powers and duties of town treasurers, holding responsibility for the custody, management, and investment of district funds. (44:53, 55) Nothing in the General Laws, however, explicitly makes all provisions pertaining to city and town treasurers applicable to district treasurers. Therefore, unless a district’s enabling legislation otherwise provides, the district treasurer may not, for example, appoint an assistant treasurer since Ch. 41 §39A, which authorizes such appointments in cities and towns, fails to mention districts. Similarly, the statutory authorization for city and town treasurers to make deductions for employees’ deferred compensation and individual retirement accounts (44:67, 67A) does not extend to district treasurers. Conversely, Ch. 41 §121 expressly makes district treasurers subject to the bonding requirements and the exculpatory provisions relating to a loss of certain investments set out for municipal treasurers by Ch. 41 §35 and Ch. 44 §55A, respectively.

The sections in Ch. 44 relating to temporary and long-term borrowing are as applicable to districts as they are to towns. The Ch. 44 provisions relating to revenue and grant anticipation notes can be found in §§4 and 6A, and information on the issuance and form of notes and bonds, in §§16-20; state house notes are discussed in §§23-28.

Districts possess the authority of cities and towns to incur long-term debt (44:7, 8), but only if they are authorized by law to spend money for the purposes for which the debt is to be incurred. (44:9) A district’s enabling act generally sets out the purposes for which the district may expend money.

Optional Forms of Municipal Administration

A community that desires to establish a consolidated department of municipal finance may do so by accepting the provisions of Ch. 43C §11. Such a consolidated department may include the offices of assessors, collector, accountant, auditor or comptroller, and treasurer.

The consolidated municipal finance department must have an appointed director serving ex officio as the accountant, auditor, comptroller, treasurer, collector or treasurer/collector of the community. The bylaw or ordinance must specify the scope and structure of the department. All other personnel necessary to staff the department must be appointed by the director, subject to approval by the selectman or mayor, unless some other provision is made in the municipal charter.

Chapter 43C also permits a municipality to establish two other consolidated departments, one consolidating persons and departments involved in community development activities, and the other consolidating those performing municipal inspections.

(Role of) Department Heads

A department head’s ultimate role or mission is to strive to provide to the community the highest level of service possible from the available resources of the municipal budget. Usually, department heads prepare their own individual budgets. These budgets must be created within the broad framework and guidelines of the charter and the rules or procedures established by the finance committee, selectmen, and/or manager. Department heads should participate actively in the budget review process. Following budget approval, department heads have direct legal obligations to spend within the allocated amount of their respective budgets.

Department heads also should play a major role in their respective municipality's capital planning process by identifying the capital needs of their particular departments. In addition, they should carefully provide for proper care and maintenance of capital items under their control, endeavoring to extend the useful life of those items as much as possible.

[2] L. ad valorem means according to the value

MCTA Treasurer’s Manual