State Pushes New Accounting Mandate on Counties for Income Tax Revenues

Monroe County Courthouse in the Fall

New Mandate from the State

This week, the Monroe County Auditor’s Office (along with every other auditor’s office in the state) received the following memorandum from the Indiana State Board of Accounts and the Department of Local Government Finance: DLGF Memo 24 July 2012 RE COIT Fund.

The relevant part of this memorandum states:

Implementation of the uniform county chart of accounts has brought to light that counties have been commingling income tax certified shares and distributive shares with property tax dollars. This practice fails to provide accountability for each of these revenue streams and any remaining balances. In order to avoid creating shortfalls in these commingled funds State Board of Accounts (SBOA) did not ask for change in 2012 but we are looking to improve the uniform accounting system in 2013 and beyond.

Beginning in 2013, the SBOA is instructing all county units to use funds, 1110, CAGIT County Certified Shares or 1121, COlT County Distributive Shares, as applicable, to receipt, disburse and account for balances of county income tax dollars not otherwise designated for special legislation or property tax relief. Planning and budgeting for this change is necessary during the 2013 budget process. Please enter these funds as new “home rule” funds in Gateway.

These new funds are separate income tax revenues for the purpose of fixing the county budget and may be used for any allowable governmental purpose. Salaries, fringe benefits, capital expenses are all appropriate uses of these funds. Income tax, however, is the only revenue source for the fund.

Two General Funds?

To understand why this is an issue, consider the way that most counties (including Monroe County) budget for their basic operations. There is a general fund that funds most basic functions of local government — law enforcement, record-keeping, tax collections, justice, etc. Highway funding is already separate, by statute. Revenues flow into this general fund from multiple sources — property taxes, excise taxes, income taxes, fees for service (such as building, planning, and recording fees), etc., and are then expended out of the general fund for the operations of county government, as appropriated by the County Council. This provides maximum flexibility for the County Council to express the priorities of the community in the county general fund budget.

This memo, however, is instructing counties to start segregating out the income tax revenues from all of the other revenue sources that flow into County General into a completely separate fund, and then budgeting for county expenses out of this fund as well. This essentially requires the creation of a second general fund — but without any clear policy distinction between the two (since at this point, property tax, income tax, and other miscellaneous revenues can be expended for any legal expense of county government).

In principle this new mandate from the state should make absolutely no difference. It neither increases nor decreases the amount of revenue available for county government, nor does it in any way restrict the way in which revenues are expended. What it does, however, is create, at the last minute (with respect to budget hearings) a significant budgeting challenge without any public policy benefit. Counties now have to decide arbitrarily which expenses to pay out of the regular old general fund (property tax plus other miscellaneous revenues) vs. which expenses to pay out of the new income tax general fund. Additional monitoring will be required throughout the year to ensure that one of the two general funds doesn’t accumulate a surplus while the other runs a deficit.

How to Slice Apart the General Fund

Since this mandate was just released, no approaches have yet been proven out.  However, different, counties are discussing different approaches. Some counties are considering segregating the income tax fund by function — in particular, by putting so-called “public safety” expenses in the new income tax fund, leaving the rest of county government expenses in the old general fund. I strongly oppose this approach, first, because it sets “public safety” (however that is defined) apart from and above other functions of county government, and second because it creates the temptation for a public safety entitlement if the income tax general fund winds up in surplus.

Another possible approach is to segregate expenses by category — for example, to put all supplies, services, and capital items in the income tax fund while paying personnel out of the old general fund. Paying personnel out of any fund creates particular cash flow problems — payroll may be required before the income tax is received, for example, and so the county would need to “seed” the new fund with money that would be available January 1, 2013, if payroll were to be made out of the fund (we probably want to seed the fund anyway, so that expenditures can be made January 1, but it becomes less urgent if the budgeted expenses are non-personnel).  I prefer this approach, although the fund will probably wind up in surplus, since the total of the county’s supply, services, and capital item expenditures in the general fund. This kind of approach, though, avoids setting up an entitlement mentality for certain essential county government functions over others.

Process Over Substance

In summary, while counties can certainly figure out ways to work with this mandate, it puts additional burden and complexity on the budget process with absolutely no additional public benefit. There is no more control over expenditures. No more transparency. No more accountability. This is simply process over substance. And the problem can be fixed by the General Assembly next session; the General Assembly can simply specify that income tax revenues should be distributed into the general fund.