Budgets, Audits and Financial Reports

The tenth article in an ongoing series intended to help NJ residents, especially students, understand their local and state government.

Every year during budget season, residents hear a lot of numbers that do not always match from one meeting or document to another. If you do not know what each document is meant to show, it is easy to compare the wrong things and become confused.

This installment of our “Know Your NJ Government” series hopes to clarify the major financial reports used by New Jersey towns and school districts, what each one tells you and why no single document gives the full picture.

Timing and Confusion

Most towns run on a calendar year from January 1 through December 31. School districts, however, operate on a fiscal year that runs from July 1 through June 30. The most complete financial reports, which are the audited ones, don’t come out until several months after the year is over which can lead to folks looking at next year’s budget while comparing it to last year’s actual results and hearing about this year’s spending.

The numbers will never match because they answer different questions.

Municipal Timeline

School District Timeline

Temporary Budget

Because the full budget is not ready on January 1, towns pass a temporary budget so they can pay bills and continue to operate. It is usually limited to about one quarter of the prior year’s budget.

Adopted Budgets

This is the official budget passed before the year begins and shows:

• How much money the town or district expects to bring in and spend
• How much of the tax levy is needed
• What programs and staffing levels are planned

It does not show midyear changes, bills from last year that get paid this year or actual final spending. It is a plan, not a report card.

Adopted budgets are often presented to the public as simplified overviews and leave out detailed line by line information.

School districts must publish a User Friendly Budget that shows spending categories in plain language, per pupil costs and major cost drivers. Towns are required to provide a plain-language or user-friendly budget presentation, but it is not a standardized document and is not audited.

After a budget is voted on residents can request the full detailed version from their school district or municipality through OPRA.

Annual financial statement (AFS) & Audit Summary

Because the final audit takes months to complete, the State requires an “early look” at the books to ensure local governments are solvent.

Towns need to file the AFS by February 10 which shows fund balances, revenues, expenditures and reserves. It is an unaudited snapshot – rough draft – of the previous year’s performance and is required by the State to track local finances before the full audit is done.

Instead of an AFS, school districts submit an Audit Summary (Audsum) to the Department of Education in the fall which reflects the fiscal year that ended on June 30.

In both cases, these are unaudited numbers and are subject to change once the independent auditors finish their deep dive for the ACFR.

Annual Audit

An independent auditor reviews the town’s books to check compliance with laws, internal controls and financial procedures. A clean audit means the rules were followed. It does not speak to the quality of spending choices. A clean audit does not mean a town or district used its resources wisely and findings on an audit do not mean a town or district was irresponsible with how it spent its money.

Annual comprehensive financial report (ACFR) – FKA CAFR

This is the final audited financial report and shows actual revenues and spending, transfers between accounts, bills from prior years that were paid and long term obligations such as debt and pensions.

This is the only document that fully reconciles all funds and gives the complete financial picture. Auditors must verify every fund, adjustment and account before the results can be certified.

Municipal ACFRs reflect the calendar year while school district ACFRs reflect the July to June fiscal year.

Fund accounting

Towns do not use one big checkbook- they use several…

Current Fund for day to day operations,
Capital Fund for long term projects
Trust Funds for money that must be used for specific purposes.

Separate funds are used because state law requires certain types of money to be kept separate and spent only for specific purposes. Because each fund follows different rules, numbers in the budget may not match numbers in the ACFR.

The 2 percent Tax Levy Cap

New Jersey limits how much a municipality or school district can increase the total amount raised by taxation (the “Levy”) to 2% over the previous year.

However, this is not a cap on your individual tax bill of a hard ceiling on the total budget.

The law allows for specific costs to be added outside of that 2% limit:

New Ratables – If a town adds new construction (a new apartment complex or shopping center), it can increase the levy to account for the value of that new property.

Debt Service- Payments on bonds and notes (money borrowed for capital projects like road work or new schools).

Pension Increases– Only the portion of the pension contribution increase that exceeds 2% is exempt.

Health Benefit Increases- Cost increases for employee health insurance, though this is capped at the percentage increase of the State Health Benefits Program.

Capital Improvements– Direct spending on major infrastructure.

Emergency Appropriations– Unforeseen costs such as a declared state of emergency for storm recovery.

Understanding “Banked Cap“

If a town or school district only increases its levy by 1% in a given year, they “bank” the remaining 1%. They are allowed to use that “banked cap” to go above 2% in any of the next three years.

For example…,

If you see a 4% increase in the tax levy it doesn’t necessarily mean the law was broken; the town may be using “banked cap” from previous years or have high debt and health insurance costs that fall under the exemptions.

Explore the Entire ‘Understanding Your NJ Government’ Series