Appendix D: Basis of Accounting & Budgeting

City of Somerville FY22 Budget

Basis of Accounting

The modified accrual basis of accounting is used by all governmental fund types, expendable trust funds, and agency funds. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual, that is, when they become both measurable and available. “Measurable” means the amount of the transaction can be determined and “available” means collectible within the current period, or soon enough thereafter to be used to pay liabilities of the current period. The City considers property taxes as available if they are collected within 60 days after year-end. Expenditures are recorded when the related fund liability is incurred. Principal and interest on general long-term debt are recorded as fund liabilities when due.

The accrual basis of accounting is utilized by non-expendable trust funds. Under this basis of accounting, revenues are recorded when earned, and expenses are recorded at the time liabilities are incurred.

Basis of Budgeting

The City’s General Fund annual budget is adopted on a statutory basis that differs in some respects from generally accepted accounting principles (GAAP). The major differences between the budget basis and GAAP basis of accounting are that:

1. Budgeted revenues are recorded when cash is received, except for real estate and personal property revenues, which are recorded as revenue when levied (budget), as opposed to when susceptible to accrual (GAAP).

2. Encumbrances are treated as expenditures in the year the commitment is made. Also, certain appropriations, known as special articles, do not lapse, and are treated as budgetary expenditures in the year they are authorized.

Budget Process and Schedule

The budget is developed based upon projected assumptions of available revenue. The budget is based upon a budget ceiling or levy limit of revenue derived from local property taxes in accordance with Proposition 2½. Added to these revenues are projections for state aid; miscellaneous revenues, such as fees, permits, and interest earned; and available funds, such as free cash and special revenues. This levy limit may be increased if an override is approved by a majority of voters at the polls.

While the projection of available revenues creates a budget ceiling for the City, an expenditure floor is created by calculating certain fixed or semi-fixed costs such as debt payments, employee benefits, and various assessments. These costs subtracted from projected revenues leave remaining funds that are available for discretionary spending, such as education, public safety, infrastructure maintenance, and community services.

For the past several fiscal years, departments have been instructed to provide budget requests that level fund or reduce non-personnel related line items. These requests were then further adjusted to meet revenue estimates while avoiding major service or personnel reductions.

Beginning in January each year, the Finance Department reviews the previous six months of revenue collections and expenditures. With the release of the Governor’s proposed budget in late January, the Finance Department develops an estimated revenue projection for the next fiscal year. In mid-February, the Finance Department distributes budget request forms to each of the departments. These forms require detailed information regarding personnel services and ordinary maintenance costs as well as justification for additional personnel or new service programs. Additionally, each revenue-generating department is required to project future revenue with supporting justification. If budget cuts appear to be inevitable, departments are to provide different budget reduction-scenarios and detail their effects on delivery service. These forms are due back to the Finance Department in mid-March.

After each department’s budget requests have been received, the Finance Department meets with each department as necessary to further refine the budget requests in order to reach a balanced budget. These meetings continue through the month of April. Also during this time, departments work with SomerStat analysts to develop department goals, objectives and performance measures. The Mayor’s Office, in coordination with the Finance Department, prioritizes expenditures and develops a balanced budget by mid-May. The Mayor submits a proposed budget to the City Council the first week of June. After a public hearing, the Board of Alderman approves a budget by June 30th. The graphic below provides a visual representation of the budget process.

Supplemental appropriations to the adopted budget may be made with the approval of the Mayor and the City Council until such time the City files the Tax Rate Recapitulation Sheet with the Massachusetts Department of Revenue. The Tax Rate Recapitulation Sheet reflects the total revenues a community must raise through taxation and other sources to fund local appropriations. The recapitulation sheet is submitted to the state DOR by the Board of Assessors and upon its approval, the community may issue its property tax bills.

Interdepartmental transfer of funds between city departments may be made with the approval of the Mayor and the City Council at any point throughout the fiscal year.