The thirteenth article in an ongoing series intended to help NJ residents, especially students, understand their local and state government
Our tenth entry into the series covered the different kinds of financial documents attached to towns and school districts. This article of the series is going to dive down further into Municipal budgets. In New Jersey, a municipal budget is a legal document that outlines how much money a town can spend in the year ahead with rules for how that money can be raised. As we’ve pointed out in that article, it’s not a record of what already happened but rather the plan.
Most municipalities in NJ operate on a calendar year, which runs from January 1 through December 31. When a budget is adopted, it creates legal spending limits called appropriations- these cannot be exceeded without a formal vote by the Council. The budget also determines the total municipal tax levy which is the amount that needs to be raised from property owners to balance the town’s books AFTER accounting for fees, state aid, and the use of surplus.
The budget also authorizes the use of fund balance- or surplus, which is money from prior years that went unspent can be applied to the current budget to stabilize taxes. While using the surplus can help avoid sharp increases in the short term overusing it can create issues later on if it isn’t replenished through under spending or higher revenues.
Remember – how much a municipality actually spends is only known after the year ends and the town’s Audit and Annual Financial Statement are completed. Also important to keep in mind – the budget also doesn’t present the full amount of a town’s long-term debt in one place- only the debt service payments due in the current year.
Since 2010, New Jersey law has a 2% limit on annual increases to the municipal tax levy – what people refer to as the “2% cap”. The cap applies to the base levy calculation, not to every cost a municipality faces. State law allows for exceptions that allow towns to raise the levy beyond 2% when certain mandated or unavoidable costs increase.
The most common levy cap exceptions involve..
-Debt service payments for previously approved capital projects
-Increases in state-mandated pension and health benefit costs
Towns and Cities can also use a cap bank, which allows them to apply unused levy increase authority from the prior two years to the current budget.
And while state law technically allows a municipality to exceed the levy cap through voter approval this is virtually unheard of in practice for obvious reasons.
Understanding this framework is especially important in 2026, which is shaping up to be a difficult budget year for NJ municipalities with sharp increases in health benefit costs being a primary reason. Local employers participating in SHBP are facing some of the largest premium increases in decades – with average increases exceeding 30 percent across many 2026 plans.
Because employee health benefits are treated as a levy cap exclusion under state law, municipalities are permitted to raise the tax levy beyond the standard 2 percent limit to cover the mandated increases. As a result, residents may see tax increases of 5 or 6 percent even where most departmental spending is otherwise flat.
Appropriation Cap
Municipalities are subject to a spending control known as the appropriation cap which dates back to 1977 and limits how much a town’s total budgeted appropriations can increase year to year. The base increase is tied to an annual cost of living adjustment set by the state. For 2026, that adjustment is 2.0 percent.
With that said, Towns and Cities are able to adopt an ordinance to increase the appropriation cap up to 3.5 percent, which provides additional legal authority to spend if revenues are available. This cap applies to spending, not taxes, so raising the appropriation cap doesn’t magically bring in new revenue on its own. It simply expands how much a town allowed to set aside IF funds can be raised through taxes, fees or other sources. This cap is often overlooked by residents despite its importance during years of rapid cost growth because it works quietly in the background.
Property Tax Bill
The total amount of the property tax bill that lands in your mail box is divided into three parts – your municipal government is only in control of one of them. Their slice typically makes up about 25 to 30 percent of the total that goes to local services such as police, public works, and administration. The school portion, controlled by the BOE, is usually the biggest of the three and represents 50 to 60 percent. The county portion, typically 15 to 20 percent, goes to countywide services including roads, parks, courts and corrections.
Since one of the three portions of the bill is set by the town, an increase in total property taxes doesn’t mean municipal spending increased. It’s common for the municipal levy to remain flat while school or county taxes rise. The best way to see how the three change over time is to review the tax rate table on the bill which will show you the year to year shifts.
To make it easier for folks to understand the numbers, New Jersey requires every municipality to publish a User-Friendly Budget on its website, which condenses the official budget. While it doesn’t provide a complete picture, this summary highlights the tax rate calculation, year-over-year changes in major spending categories, total personnel costs including salaries and benefits and a summary of outstanding debt. It can be a good starting point to determine where you might want to dig deeper.
Debt and State Aid
The debt section of the budget is particularly important and includes a per capita net debt figure (how much of the municipality’s debt each resident carries)- providing a context for long-term obligations that may not be obvious from the annual budget alone. The User-Friendly Budget also lists shared service agreements with neighboring municipalities, which are often promoted as tools to reduce costs or improve efficiency but have also been a point of controversy.
State law limits how much debt a municipality can carry. A town’s net debt generally can’t exceed 3.5% of the average value of all taxable property within its borders. The Local Finance Board would need to approve anything above this threshold – a rare step that’s typically reserved for emergencies or major capital projects.
At the same time, municipalities aren’t getting much help – Energy Tax Receipts remaining largely flat for years while the cost of providing basic services continues to rise as an example. Then there’s the stuff that gets more expensive every year- fuel, salt, asphalt, insurance and labor – that has to be absorbed locally if state aid doesn’t keep up.
Important Loose Ends
We covered this extensively in the last entry but it’s worth pointing out here – the confusion connected to the mismatch between budget numbers and audit results.
The budget represents the maximum amount the town is authorized to spend.
The audit shows what was actually spent.
If a department budgets more than it ultimately needs- the unused funds do not disappear. They flow back into surplus and can help offset future tax increases.
Example… if a town sets aside $100,000 for snow removal but only spends only $40,000 – the budget will still reflect the higher amount. The differencewill show up later in the audit and contributes to the fund balance in subsequent years.
State property tax relief programs can affect what residents pay even when local budgets remain unchanged. The Stay NJ program as an example, provides direct property tax relief of up to $6,500 for eligible seniors based on age and income thresholds. Because this happens through state level delivery mechanisms, two households in the same town may see very different tax bills despite identical local tax rates.
What You Can Ask
Residents who attend budget hearings can gain insight or a starting point for further discovery by asking a few focused questions…
How much of the tax increase is driven by levy cap exclusions (health care or pensions for example)?
How close is per-capita debt to the legal limit?
How much surplus is being used?
Has the amount of surplus used increased from year to year?
What are the expected short and long term cost implications of shared service agreements (keeping an eye to pensions and dual employment roles)?
Is the amount to be raised by taxation growing faster than actual spending and if so, why?
The municipal budget reflects a balance between local choices and state mandates and while the document can be dense, understanding how it functions allows you to look beyond the flood of numbers and better evaluate the financial decisions being made on your behalf.
A New Jersey municipal budget is not a receipt for past spending. It is a legal authorization that sets how much a town is allowed to spend and how much must be raised through property taxes after accounting for aid, fees and surplus.
Tax increases are shaped as much by state rules as by local choices. The 2 percent levy cap, its exclusions, the appropriation cap and the use of surplus all interact behind the scenes, often producing outcomes that look confusing on the surface.
In 2026, sharp increases in employee health benefit costs are driving higher tax levies even where departmental spending is flat. This is allowed under state law and explains why tax bills can rise faster than most line items in the budget.
Understanding the difference between budgets and audits, how debt is measured, and how municipal, school and county taxes combine on your bill gives residents the tools to ask better questions and spot when rising taxes are driven by mandates rather than mismanagement.
[Explore the Entire ‘Understanding Your NJ Government’ Series->]
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