Articles

COUNTY COMMISSIONERS ASSOCIATION OF PENNSYLVANIA
COUNTY SOLICITORS SEMINAR

JUNE 25, 2004

George M. Aman III

Budgets, Taxes and Reserves

1. Scope of Talk. This will not cover the details of the accounting changes required by GASB-34, about which there have been several programs. Also, there will be one more in September at the Academy as part of the course on county finances.
   
2. Budgets. While county financial reporting is becoming modernized under pressure of Federal regulations implementing Federal securities laws and grant programs, the basic financial structure remains tied to the dependence upon imposing an annual real estate tax as the major source of revenue. So there is little practical power to alter income during the year, although other taxes may be imposed during the year.
   
   • Annual budget preparation and adoption timetables are set forth in the County Code. 16 P.S. §§ 1781, 1782.
     
   • The budget may be amended after adoption only during a January which immediately follows a municipal election. 16 P.S. 1782.1.
     
   • That section provides percentage limitations upon the changes which may be made in an amended budget. However, possibly the percentage may be exceeded if the county can prove the changes are required by unanticipated legal requirements. See Doud v. Montgomery County, 87 Mont. L.R. 76 (1966); In Re: Clinton County Budget, 13 D. & C.3d 389 (1980).
     
3. Taxes. Two recent cases in this area relate to topics covered earlier in this program.
   

   • The first case deals with one of the more useful recent developments, the formation of the Regional Asset District in the County of Allegheny. English v. Cmmwlth., 845 A2d. 999 (Pa. Cmmwlth. 2004). The District was created to finance operations and properties that provide regional benefits in Allegheny County. The statutory provision permitting imposition of a sales and use tax was attacked on various constitutional grounds by citizens of the county. Because the tax was imposed by the County itself rather than the District, the court easily disposed of the challenge based on Article III, Section 31 of the Constitution. The most important challenge was based upon the operation of the sales and use tax. It created classifications of tax payers, namely those resident in the county and those not residents. The court held that this classification was not unreasonable, even though the petition alleged that 25% of the revenue produced by the tax would come from non-residents. Revenue sharing across municipal boundaries has been adopted in some other states, but it has not been used much in Pennsylvania thus far.

   • Taxability of land acquired for open space may become an issue as more properties are acquired for open space purposes, unless the need and timetable for development of it has been recorded. However, in a recent case the court upheld the tax exemption for land purchased to be used as a public recreation facility over the initial ruling by the county board of assessment. Upper Tulpehocken Township v. Berks County Board of Assessment Appeals, 842 A2d. 1041 (Pa. Cmmwlth. 2004). The Board had determined that the property was not being used for the intended purpose. The property for the park was acquired by a township but located in a borough, which may have had some influence on the Assessment Board's decision.

4. Reserves.
   
   • The County Code permits the creation of a capital reserve fund and an operating reserve fund. 16 P.S. §§ 513, 514. These provisions may have created an implied prohibition on creating any other reserves. However, they contain ambiguities, as noted initially by the lower court in a case involving these Sections. The appellate court, however, took a liberal view of them. Concerned Taxpayers of Clearfield County v. Clearfield County, 764 A.2d 656 (Pa. Cmwlth. 2000). The Commonwealth Court held in the Clearfield case that the excess of accumulated funds in the County's financial statements was not designated by the County as an operating reserve. Therefore, it was not bound by the 5% limit contained in the Code.
     

   • Following the decision in the Clearfield case, the Code was amended to provide that in establishing the county budget, estimated revenues and expenditures should be determined "excluding operating, capital and other reserve funds." Act 103 of 2002. 16 P.S. § 1783 (emphasis added). Thus, the loophole created by the Clearfield decision has been made larger by the new reference to "other reserve funds."

5. Form of budget. The Code previously provided that the budget should be prepared on forms provided by the Department of Community Affairs. That provision was deleted in the amendments mentioned above.
   
6. Fund balances. The year-end fund balance is watched closely by the bond rating agencies. Attached as Exhibit A is a discussion of this by Marcia Taylor, a well-known municipal finance director in the Pittsburgh area. Final fund balances are closely watched by the rating agencies. They watch their size as related to the total budget, and also trends in the balance from year to year. Therefore, a problem could arise under federal securities laws, as discussed earlier, if the closing balance were materially overstated in a document prepared for a financing.