Understanding How Variations Flow Through the Budget is Key

Every summer, municipalities complete the strenuous task of annual budgeting. This entails estimating revenues (such as licenses and fees, federal and state aid, and charges for services), obtaining projected expenditure amounts from their numerous departments, compiling the budgeted amounts into a singular file, and determining whether the entity’s revenues are enough to pay for the expenditures. Once the estimated revenues and expenditures are calculated, the remaining amount of revenue needed to cover the expenditures equals the tax that is passed on to the citizens of the municipality.

The State of Kansas is the governing body responsible for the budgeting process. Most municipalities must follow Kansas Statutes Annotated (K.S.A.) when preparing their budgets. These Statutes dictate what expenditures can be spent out of each fund, as well as what receipts can be collected in each fund. After the budget is drafted, the municipality is required to give notice and conduct a public hearing to answer questions taxpayers may have about the proposed budget. When the budget is final, it is submitted to the Kansas Director of Accounts and Reports no later than August 25 of each year.

Some municipalities prepare their budgets in-house while others receive assistance with budget preparation from accounting firms such as Adams Brown. Some common questions and suggestions that come up during the budget-writing process are:

Start with the prior year

The first step in preparing your budget is making sure the prior year actual amounts are accurate. If your entity has had an audit, the prior year actual column in your budget should match the audit for that year. If you were not required to have an audit, your column should match your financial statements in their entirety. If your financial statements are kept in a fund accounting software, you will enter the receipts and expenditures from your financial statements into the budget by fund. If your financial statements are not kept on a fund accounting basis, you will have to use another method to check your work. One way to ensure you have all the data captured in your budget is by adding up the unencumbered cash balance for all the funds in your budget and comparing that to the total unencumbered cash from your financial statements. This will ensure you have all the receipts and expenditures included in your budget.

When changes are made, make sure all pages are updated.

The budget worksheet file the Director of Accounts and Reports provides to municipalities is formatted to calculate within itself, meaning, one page’s total carries to another page to calculate another total, and so on. However, there are a few items that require manual input to calculate, such as Neighborhood Revitalization (NHOOD). This calculation must be done at the very end of the budget process. Therefore, if you have drafted the budget and calculated the NHOOD, but a change is made after this calculation, you will have to delete your NHOOD work and start again to make sure your NHOOD is calculated correctly. This same concept applies throughout the budget. If you make a change on one page, make sure it flows through to the rest of the pages correctly.

Enter the budget into your accounting system.

At the beginning of each new fiscal year, the certified budget should be entered into your accounting system. Once it is entered, the municipality will be able to run reports that show the budget compared to actual receipts and expenditures for the year. This is important because no municipality wants to over-spend its budget. That would cause a Kansas Statute violation. When you are done entering the budget, print the result and compare it to the actual budget to make sure everything agrees. This will be much more efficient when comparing expenditures throughout the year and will help the governing body to see the comparison at any point in time rather than only at year-end.

Don’t get bogged down on the individual lines.

Budgets are prepared on a fund basis. Each separate budgeted fund has a certain amount of expenditures it can pay for each year. This is called the fund’s budget authority. If any fund exceeds its budget authority for the year, it would be in violation of a Kansas Statute. Therefore, when analyzing your budget versus actual expenditures throughout the year, it is vitally important to compare the total expenditures for the fund to the total budget authority. Some funds have departments within them. For example, the general fund within a city might have a separate department for general government, police, fire, street, etc. with a separate budget for each. If one department goes over budget, that does not mean the entire fund is in trouble. If the total expenditures within the fund are less than budgeted, the fund is still in compliance. Therefore, if the police department went over budget by $5,000 but the general government was under budget by $10,000, the fund would be within the budget authority.

Amend your budget, if necessary.

Budgets are estimates, which means that actual results will vary. If something comes up during the year that you had not originally planned for, you can amend your budget to account for the additional expenditures. The additional expenditures need to be balanced or “evened out” by previously unbudgeted increases in revenue. The new revenue estimates may not include property tax estimates higher than what you levied. The new revenue estimates must exceed your original estimates in order to support a higher spending authority. There are certain instances where a budget amendment would not be necessary. For example, donations, state or federal grants, and reimbursements not budgeted that are received during the year are considered budget credits and offset the expenditures so budget authority is not used. Budget credits explain why the fund was over-budget and do not require an amendment. An evaluation at the beginning of the fourth quarter should be completed to determine if amending the budget is necessary. Steps on how to proceed with an amendment can be found on the state municipal website.

While this list is not all-encompassing, we hope that it will help answer some common questions you may have while preparing and using your budget. Should you have any specific questions, you can always contact Adams Brown or the State of Kansas for more clarification.