MMC Budget Administration & Financial Oversight 5 — Questions and Answers
Question 1: A municipality receives an unexpected $2 million settlement from a lawsuit. Under sound fiscal policy, how should a one-time revenue source like this be used?
- Apply it to recurring personnel costs to reduce the tax rate
- Use it for one-time capital expenditures or to replenish reserves (Correct answer)
- Distribute it as a tax rebate to property owners
- Transfer it permanently to the general fund operating budget
Correct answer: Use it for one-time capital expenditures or to replenish reserves
Fiscal best practice requires matching one-time revenues with one-time expenditures to avoid creating structural budget imbalances in future years.
Question 2: What is 'Tax Increment Financing' (TIF) and its primary fiscal risk for a municipality?
- A method of issuing bonds backed by increased assessed values in a development district, which can divert tax revenues from overlapping taxing bodies (Correct answer)
- A federal tax credit program for affordable housing developments
- A technique for increasing property tax rates without voter approval
- A budgetary mechanism for deferring expenditures to future years
Correct answer: A method of issuing bonds backed by increased assessed values in a development district, which can divert tax revenues from overlapping taxing bodies
TIF captures the increment in property tax revenues from a development district to repay bonds, which can reduce revenues available to schools and other overlapping governments.
Question 3: Under the concept of 'structural balance,' a municipality's budget is considered structurally balanced when:
- Total revenues equal total expenditures in a given year
- Recurring revenues are sufficient to cover recurring expenditures without reliance on one-time sources (Correct answer)
- The fund balance meets the minimum reserve policy requirement
- No budget amendments are needed after adoption
Correct answer: Recurring revenues are sufficient to cover recurring expenditures without reliance on one-time sources
Structural balance means ongoing programs are funded by ongoing revenues, ensuring long-term fiscal sustainability without dependence on windfalls or reserves.
Question 4: A city clerk is responsible for publishing the notice of a budget hearing. Which element is most critical to include in the published notice to meet legal requirements?
- The names of all department directors who submitted budget requests
- The time, date, location, and summary of the proposed budget or tax rate (Correct answer)
- The city's bond rating and outstanding debt schedule
- The prior three years of actual expenditures by department
Correct answer: The time, date, location, and summary of the proposed budget or tax rate
Legal notice requirements typically mandate publication of the hearing time, date, location, and sufficient budget or tax rate information for the public to meaningfully participate.
Question 5: Which GFOA best practice recommends that municipalities prepare a multi-year financial forecast as part of the budget process?
- To replace the annual budget with a five-year spending plan
- To identify long-term fiscal trends and the sustainability of current service levels (Correct answer)
- To satisfy federal grant compliance requirements
- To eliminate the need for mid-year budget amendments
Correct answer: To identify long-term fiscal trends and the sustainability of current service levels
GFOA recommends multi-year forecasting to help governing bodies understand future fiscal impacts of current decisions and identify emerging imbalances early.
Question 6: When reviewing a proposed budget for potential legal issues, a city clerk should verify that appropriations do NOT exceed:
- Last year's actual expenditures
- The amount requested by department heads
- The legally authorized appropriation limit or revenue estimates (Correct answer)
- The amount recommended by the city manager
Correct answer: The legally authorized appropriation limit or revenue estimates
Appropriations exceeding legally authorized limits or available revenues are ultra vires and can expose the municipality to legal liability and audit findings.
Question 7: A municipality's general fund has a total fund balance of $3 million, of which $500,000 is nonspendable, $800,000 is restricted, and $400,000 is committed. The remaining $1.3 million is split between assigned ($300,000) and unassigned ($1 million). For reserve policy purposes, which component is the most liquid and available for appropriation?
- Restricted fund balance
- Committed fund balance
- Assigned fund balance
- Unassigned fund balance (Correct answer)
Correct answer: Unassigned fund balance
Unassigned fund balance has no external restrictions or formal constraints and represents the most available resources for future appropriation or emergency use.
MMC Budget Administration & Financial Oversight 5
A municipality receives an unexpected $2 million settlement from a lawsuit.
Under sound fiscal policy, how should a one-time revenue source like this be used?