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Common Sense Citizen Group of East Hampton, CT
Some Budget Subtleties

All is not what it may seem to be in budgeting.

Its important to note when formulating a new budget, that significantly different budgets can result depending on whether previous budgets are used as a base or whether actual expenditures are used as a base. In East Hampton, the usual practice has been to use budgeted values. Thus:

1.   The existing mill rate is based on the budgeted values for the current fiscal year.

2.   The increase in mill rate is based on the increase in budgeted values.

3.  The % increase is based on the budgeted increase divided by the previous budget.

This is all probably done because the new budget is set before actuals for the previous year are available. However, that can present the well-known temptation to spend all the money the budget allows so as to maximize the new budget. Every effort should be made to estimate actuals as soon as possible.

So what happens if the actuals differ from the budgeted values? Consider the following simple example to illustrate the principles involved:

  • Current budget: $20                                          * Actual expenditure: $15
  • Requested increase: $10                                   * Requested increase: $10
  • New budget (if approved): $30                           * New budget (if approved): $25
  • Mill increase based on $10 increase.             * Mill increase based on $5 increase.
  • Fund increase = 0 (if budget spent)                    * Fund increase = $5

An under-expended budget can result if expenses are kept down by good management and/or if the original budget was conservatively estimated (i.e. too high). In either case, the Undesignated Fund (UDF) will benefit PROVIDED the potential surplus is NOT spent on other items.

The worst case happens when (a) the previous-year budget was initially too conservative (too high), (b) the potential surplus is spent within that budget, (c) the following year revenue is reduced because the UDF does not benefit because the potential surplus is spent, and (d) the increase requested for the following year is also conservatively estimated. This produces the highest requested budget for the following year. And since funds that could have gone into the UDF were instead spent, the greatest impact on the mill rate occurs.

 

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