Understanding Your City Budget: Where Does All the Money Go?


It’s budget season for New Jersey municipalities.  Actually, budget season began six months ago in finance and administration departments across the state.  To understand the process of how cities and towns manage budgets, it’s first helpful to understand your towns form of government, which dictates budget responsibility.

There are 12 forms of municipal government in New Jersey.  In Clifton’s case, it is a Council-Manager form of government under the Council-Manager Act of 1923.  This means a City Manager, not a Mayor, is the Chief Executive Officer who oversees day-to-day operations, including preparation of a budget. The Mayor and Council serve as the legislative branch of municipal government. Their primary function collectively is to establish policies to create or approve budgetary goals and objectives as well as establish local laws.  In Clifton, the City Manager submits a prepared budget to the Mayor and Council who then reviews, potentially amends, and ultimately votes to adopt a budget to fund the city’s operation for the fiscal year.

Budget Responsibilities

A closer look at the administrative side of municipal government will illustrate the key staff members involved in the creation of a budget. By State statute, all municipalities are required to have four basic positions:  a Municipal Clerk, Tax Assessor, Tax Collector, and Chief Municipal Finance Officer. Each of these positions are filled by individuals with a license issued by the State of NJ and can receive tenure in their positions to protect them from political interference in the execution of their role. The Council – Manager Act of 1923 also requires the position of a City Manager, however this position does not require a license nor is it granted tenure protection.

While all of these Statutory positions have specific responsibilities in the budget process, the City Manager and CFO are the most involved in the development and implementation of a municipal budget. It is the responsibility of the City Manager to plan the upcoming budget. But the City Manger works closely with the CFO to ensure the budget is compliant with State statutes and Administrative Code requirements. A licensed CFO has passed 8 college level courses and a State exam, with a current pass rate of 28% state-wide, to demonstrate expertise in municipal finance. To put this into perspective, there are 565 municipalities in the NJ required to appoint a licensed CFO and currently only 280 active licensed CMFO’s.

Budgeting Process 

The budget process begins in October when the City Manager meets with the City’s department heads to review current year expenses. Unlike private sector budgets or even personal budgets, there are many State imposed rules and regulations to protect tax-payer money and ensure that tax dollars are spent in the most fiscally sound way. These rules range from cash basis accounting to a 2% tax levy cap, a 3.5% spending cap and rules to prevent municipalities from defaulting on bond, note, and loan payments to name a few. The CFO is responsible for ensuring the City Manager stays in compliance with the budget and spending restrictions imposed by the State.

During the first step of reviewing the current year budget, the City Manager focuses on evaluating the current year expenses while the CFO focuses on identifying budget lines that may be over expended, usually due to unforeseen circumstances. Likewise, budget lines are identified that are underspent, again usually because of unforeseen or changing circumstances. Unlike school district budgets that are permitted to make transfers throughout the year, municipalities are only allowed to transfer funds in the last two months of the budget year.

It is common in all 565 municipalities to see resolutions authorizing the transfer of funds in November and December to maintain a balanced budget. These budget transfer resolutions are a standard process in public finance, and must be approved by a 2/3 majority of a seven-member Mayor and Council. Failure to make these transfers would require the city to raise the deficit in full in the following year’s tax levy (the city’s portion of your property taxes). If a Council voted against the transfer of existing available funds in a current year budget to cover unforeseen over expenditures, the city would create an artificial deficit and guarantee a tax increase in the following year, essentially doubling what needed to be raised by taxation.

Once the balancing of the current year budget is completed, the City Manager and Department Heads move to projecting a budget for the upcoming year. In addition to determining the needs of each department, the City Manager is also incorporating the direction provided by the policy goals of the Mayor and Council. Ideally, the Mayor and Council have provided this prior to October. Because the CFO is responsible for ensuring the budget proposal complies with the State’s requirements, once it is introduced at a Council Meeting, the CFO submits the budget to the State for review. Once the State approves the budget, the City will hold a public hearing to adopt the budget.

Revenue and Fund Balance

A municipal budget must be balanced and is comprised of a revenue side and an appropriation (expense) side. The largest component on the revenue side is the “Amount to Be Raised by Taxation” (property taxes). But the revenue side also includes Local Revenues, such as recreation fees, court fines, grants receivable, and fund balance which is sometimes referred to in layman terms as “surplus.”  A simplistic view of fund balance is the amount of money held in bank accounts. But because taxes are collected only quarterly, fund balance is an important cash flow tool. Too little fund balance and the city will have problems paying bills and making payroll.  While credit rating agencies typically want to see 25% of an operating budget as fund balance, they recognize the difficulty of holding 3 months of tax revenue in reserve. Cities with excellent bond ratings typically have 4% - 8% of operating costs in fund balance. These ratings affect the interest rates towns receive on bonds and notes; low fund balance contributes to a poor rating that results in hundreds of thousands of additional dollars spent in interest payments.

There are also two types of fund balance, restricted and unrestricted. While the city can utilize unrestricted fund balance as a revenue source, restricted surplus can only be used for the purpose it was brought in and cannot be used to lower the tax rate. The most common source of a restricted fund balance are grant awards, such as the American Rescue Plan Act for the Covid-19 Pandemic.


Appropriations or the expense side of the municipal budget for the most part can be defined as four major areas:

  • Statutory expenditures, such as pension contributions, debt service, reserve for uncollected taxes.
  • Utilities and insurance encompassing everything from liability insurance to health benefits.
  • Salaries and wages, the bulk of which are contractual obligations.
  • Other expenses, the items and supplies needed by personnel to do their jobs.

As an example, the chart below shows the appropriations breakdown in Clifton’s 2021 budget:

Statutory expenses are items that are required to be in the budget and cannot be changed, they include:

  • Debt service, which is the paying of principal and interest on borrowed funds in the form of long-term bonds and short-term notes, moves up or down based on prior years capital budgeting and spending.
  • Reserve for Uncollected Taxes (RUT) is a mandatory budget appropriation. The City acts as a collecting agency for County and School District taxes. Both government agencies are required to receive 100% of their tax levy despite most towns rarely collecting 100% of taxes billed. A statutory formula is used to ensure there will be sufficient funds collected to protect the municipal budget from a shortfall and deficit spending. This reserve is largely dependent on the County and School budgets and beyond the control of the City. Typically, it accounts for about 3% - 6% of the total municipal budget.

Statutory budget lines are large and slow moving, meaning it takes multiple years to increase or decrease this part of the budget. It would take the City Council setting a policy of reducing the capital budget in 2022 to begin to show tax relief in 2023 at the earliest. The same would hold true for staffing decisions and its relationship to pension obligations.

Utilities and insurance are also a budget area that is fairly rigid but is more directly tied to services. For example, it is possible to reduce liability insurance and utility bills by closing the senior center or the recreation center but the impact on services to the residents is obvious. Liability insurance is also affected by such matters as lawsuits against the City. Settlements in RLUIPA cases or Zoning matters drive up premiums the following year. Even unsuccessful lawsuits against the City tend to increase premiums particularly if the source of the lawsuit is still active. Sound fiscal planning usually sees Health Benefit insurance produce a small surplus at the end of the year when employees don’t upgrade their plan from single to married, or married to family. It is possible to reduce premiums by downsizing staff but a reduction in workforce tends to translate into reduced services.

As is clear in the chart above, the largest part of a municipal budget is Salary and Wages. This aspect of the budget is also slow moving because employees’ pay are tied to contracts with the unions of municipal government (City Hall employees, DPW, Police, and Fire) that typically span 3 or 4 years. Decisions made by the City Council to approve a union contract in 2020 are what dictate the required level of spending in salaries and wages for the next several years.

For example, the following chart shows the allocation of Clifton salary and wages in 2021.

A breakdown of these three categories are:

  • Public Safety: The police and fire department.
  • Public Works. Staff responsible for maintaining parks, plowing streets, and fixing pot holes, to name a few.
  • General Government includes 12 other departments each having a specific function, but four of these functions Municipal Clerk, Tax Assessor, Tax Collector, and Finance are required by State statute. The next chart breaks down these salary and wages to a departmental level

A breakdown of Clifton's 2021 Salary & Wages by department and percentage is shown here:

To date in Clifton, Administration has presented a budget and the City Council has held several budget work sessions to review their priorities for 2022. The next session is scheduled for April 9th where the elected officials will determine how to meets the needs of the residents in the most cost-effective way. The Clifton Times will report the results of their deliberations, what policy priorities were approved, and what that will cost the taxpayers of Clifton.

My next article will explain in more detail the NJ State laws that municipalities are required to follow when budgeting.

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