Budget Shortfalls: Know Your Options
Does this sound familiar? Several months remain in the fiscal year, and one or more lines in the budget have been (or are about to be) entirely spent. Maybe it is April, the snow removal budget is gone, and you are hoping it does not snow this coming November. Or the local welfare budget has been spent, and there are still residents who require assistance—which the law requires you to provide. Now what?
Before you do anything, stop and consider the options. There is bad news on the horizon for those who overspend the budget without knowing the law. With very few exceptions, local officials may not spend any money for any purpose unless that amount was appropriated for that purpose by a vote of the legislative body (in towns, this means town meeting). RSA 32:8. Generally, selectmen are bound by the articles and operating budget passed by town meeting and may only spend up to the amounts of money appropriated for the purposes town meeting has approved. An official or employee who overspends the budget improperly runs the risk of being dismissed. Blake v. Pittsfield, 124 N.H. 555 (1984). In addition, an official who violates any part of the Municipal Budget Law (RSA Chapter 32) may be subject to removal by petition to the superior court. RSA 32:12.
Fortunately, there is also good news. You do have options. Understanding what they are and when to use them is the key to navigating this situation successfully.
Q. Can we move money from one part of the budget into another?
A. Yes. This is usually the first option to consider.
The governing body (in a town, the board of selectmen) has some ability to overspend one line or “purpose" of appropriation by transferring funds out of some other purpose. RSA 32:10. For example, if the highway department’s snow removal or road repair budget is depleted, the board of selectmen could transfer funds into that area from, as an example, the equipment budget line. The voters cannot limit the governing body’s ability to make transfers. RSA 32:10, I; Sullivan v. Hampton Bd. of Selectmen, 153 N.H. 690, 693-94 (2006).
Q. Does this mean that whenever we need more money, we can just add lines and amounts to the budget?
A. No. The transfer power is useful, but it has limits. First, the selectmen cannot create new purposes and transfer funds into them; they must work within the purposes the budget already contains. Second, transfers and expenditures may not result in overspending the bottom line of the budget. RSA 32:10, I(a). This means the distribution of funds within the budget may change but the overall budget amount does not increase.
Third, an amount appropriated by a special warrant article cannot be transferred and spent for other purposes. RSA 32:10, I(d). A “special" warrant article is a petitioned appropriations article, a bond or note issuance, an article creating a trust fund or capital reserve fund or any other article designated by the board of selectmen as special, non-lapsing or non-transferable. RSA 32:3. IV. (This prohibition is only on the transfer out of a special warrant article; amounts may still be transferred from the operating budget into a special warrant article appropriation.)
Finally, no funds may be spent on a purpose if the town meeting has deleted the purpose from the budget, or reduced the proposed appropriation to zero, or failed to approve a separate warrant article that contained the purpose. RSA 32:10, I(e). This is known as “no means no." Thus, if an article to buy a new fire truck is defeated by voters, the selectmen cannot transfer funds from somewhere else in the budget for the purpose of buying the fire truck, because that purpose is considered one for which no appropriation has been made.
Q. How does the transfer process work?
A. The board of selectmen may vote to formally transfer funds from one purpose to another, which is probably the easiest way to avoid accidentally overspending the bottom line. It is also acceptable for the board to authorize each expenditure through whatever manifest system it ordinarily uses. If the authorized expenditure results in overspending one account or line item, it is an implied transfer from other accounts that remain underspent. This will satisfy the requirement to keep public records of all transfers “such that the budget committee … or any citizen … may ascertain the purposes of appropriations to which, and from which, amounts have been transferred." RSA 32:10, I(b). Without these proper records, overspending any line of the budget is a violation of the budget law.
Q. If we have unanticipated revenues during the year, we can spend those, right?
A. Yes, but only if the selectmen have already been given permission to do this by town meeting.
If town meeting has voted to adopt the provisions of RSA 31:95-b, the board of selectmen may spend unanticipated money received during the year from state, federal or private sources. There are two conditions on this authority. First, the money must be spent in a way that does not require the town to spend other unappropriated funds. The most common example is the “matching funds" requirement of many state and federal emergency grants. If matching funds are required and the current budget does not include a purpose that the matching funds might come from, the grant may not be accepted or spent by the selectmen without further town meeting action to appropriate those matching funds.
The second requirement is public notice and, potentially, a public hearing. If the amount of unanticipated revenue is $5,000 or more, the selectmen must hold a public hearing on whether to accept and spend the funds, with at least seven days’ public notice in the newspaper. If the amount is less than $5,000, the selectmen must post notice of the funds in their meeting agenda and include notice in the minutes of the meeting at which the funds are discussed. Acceptance of the funds must occur in a public meeting of the selectmen. (In addition to these requirements, the selectmen may elect to hold a public hearing for amounts less than $5,000.)
This process is designed to be used each time unanticipated revenue becomes available. It should not be used by the selectmen to vote a “standing" acceptance or approval of expending a stream of revenue. It also should not be used for funds that are not “unanticipated." Town meeting has a method to appropriate and spend anticipated revenue streams through the regular budget process.
Q. What if we need to overspend the bottom line of the budget?
A. There are two options: obtain permission from the Department of Revenue Administration (DRA) or hold a special town meeting to appropriate more money.
DRA can grant the governing body permission to overspend the bottom line of the budget or to spend money on a purpose for which no appropriation has been made “when an unusual circumstance arises during the year which makes it necessary." RSA 32:11. The governing body applies in writing to DRA before spending the money. If there is an official budget committee, that committee must approve the application first. If there is no official budget committee, the governing body holds a public hearing on the application before submitting it to DRA. However, when there is a “sudden or unexpected emergency" that is unforeseen, unanticipated, comes without warning, and demands immediate attention, the governing body can expend funds first and then apply directly to DRA for approval, without budget committee approval or a public hearing. RSA 32:11, II. Remember that there is no guarantee of DRA approval after an expenditure, so the best practice is to call DRA first if at all possible.
In any case, permission will be granted only if the municipality designates a source of revenue for the expenditure, such as the unexpended fund balance. DRA cannot raise the tax rate to cover emergency expenditures.
If the governing body cannot identify a source of revenue, the only other option is to hold a special meeting to raise and appropriate money. Ordinarily the selectmen can hold a special town meeting whenever they believe it is appropriate. RSA 39:1. However, a special town meeting to raise money may only be held in two special circumstances. Either 50 percent of all voters on the checklist must attend the meeting, or the superior court must grant the town permission to hold the meeting. RSA 31:5. Unfortunately, since it is all but impossible to guarantee 50 percent voter turnout at any meeting, superior court permission should be sought before holding a special meeting.
The judge must find that an “emergency" exists. An emergency in this case means “a sudden or unexpected situation or occurrence … of a serious and urgent nature, that demands prompt, or immediate action, including an immediate expenditure of money." RSA 31:5, I(b). It doesn’t necessarily have to be a crisis. The court will look at the severity of the harm to be avoided, the urgency of the town’s need, whether the situation was foreseeable or avoidable, and whether there are alternative remedies that do not require an appropriation. For example, a natural disaster causing severe damage to roads and property probably is an emergency (it is unexpected, demands prompt action and cannot be accomplished without spending money). On the other hand, repairs to a town building that are important but can wait until the next budget cycle probably are not an emergency.
Q. Can’t we issue tax anticipation notes to raise extra money?
A. No. Tax anticipation notes are a way to manage cash flow, not to create appropriations. Towns and village districts may authorize their governing bodies to issue tax anticipation notes. RSA 33:7, V. These notes are a way to borrow money in anticipation of the tax revenues that will be received in that year, and are repaid as the tax revenue is actually received. They do not increase the total amount appropriated. RSA 33:1, III.