The City of Palos Heights has moved to a new way of legally accounting for its spending. The traditional model is to issue a budget and appropriation, as we have always done in the past. In this model, the budget represents the spending aspirations in a given year while the appropriation represents the actual legal limit to spending for that year. There are some significant downsides to this system. First, the appropriation limits the allowable levy for the year. Because we set the appropriation in January and the levy in September/October, we might not be aware of significant necessary changes that we want to make to that year’s levy when we set the appropriation. This has hurt us a couple of times in the past when we wanted to increase our internet speed or hire an additional employee that would be covered by health insurance. The way that we have learned to get around this is by inflating our appropriation so that it is pretty wildly out of sync with our budget.
Which brings about the other major downside to the appropriation system: the public finds it confusing. What is an appropriation if it isn’t the budget and it isn’t the levy? If the appropriation is the limit to spending, why do we need a separate budget? Why not just make the appropriation the budget? For the lay outsider (and I think every Trustee has experienced this when trying to learn how we do these things), it doesn’t make obvious sense and looks like we’re trying to obfuscate what we’re really doing. For this reason, it’s common for municipalities to combine their budget and appropriation into a single document. And this gets us back to the previously mentioned problems of constraining the levy and not allowing any flexibility regarding unplanned expenses.
An alternative to this system is an Annual Budget system[1]. In this system, there is no appropriation. The budget itself is the legal limit to spending. But also, the budget can be amended throughout the year to allow for unforeseen changes. It allows for both more flexibility and better transparency with the public. While still less common than the appropriation system, the Annual Budget system is gaining in popularity.
The City didn’t consult with us in this decision, and we are not legally bound to follow suit. I’ve spoken with our attorney about our options regarding staying with a Budget and Appropriation system or following the City’s lead and adopting an Annual Budget System.
Option 1: We are free to remain with the current Budget and Appropriation system. Doing so would be a bit more complicated than in the past. It would require the City to hold an annual appropriation hearing on our behalf and then file our appropriation with the County on our behalf. Those are both things that the City will no longer be doing on its own behalf, so it would be creating extra work for them if we were to continue with the appropriation system. And we would still need to maintain an annual budget that adheres to the City’s new Annual Budget system so that they can be in compliance, since their budget legally incorporates ours as well.
Option 2: We can follow the City’s lead and adopt an Annual Budget system. This would entail adopting a budget for the ensuing fiscal year no later than 60 days prior to the beginning of that fiscal year (which is something that we already do). We would then need to amend that budget during the course of that fiscal year to account for any revenues or expenses beyond what was originally budgeted (which is not something that we currently do).
I recommend that we choose Option 2. Option 1 necessitates the small amount of extra work in Option 2 as well as requiring both us and the City to deal with the formalities of our ongoing appropriation. I believe that the net change in work for us with Option 2 is also in our favor as we no longer have to deal with the headaches of guessing at an appropriation that will suit the following year’s levy or explaining what an appropriation is and why we need to have it in addition to our budget.
I also asked the attorney if either system gives the City greater legal control over the Library’s finances. She stated that both systems allow equal financial independence for us. In both cases, the City has no legal standing to change our budget, levy, or appropriation from that which our Board of Trustees approves.
I also looked at our Financial Policy to see what changes would need to be made to it. The Policy doesn’t actually talk about our appropriation. I think this is a sign of a good policy. It doesn’t restate what is already legally obligated elsewhere, which can lead to confusion if the legal standard isn’t correctly reflected by the policy. Good policy incorporates the rule of law implicitly and only restates it insofar as it is necessary to guide our operations. In this case, the appropriation is not a significant guide to our operations, which are instead guided by our budget. In short, the Library Board’s spending is legally limited by an appropriation. But the Library staff’s spending, which this document is meant to guide, is limited by the budget. That’s exactly how we have functioned in the past and is as it should be in my opinion. Changing to an Annual Budget doesn’t change this at all and so wouldn’t require any changes to our Financial Policy.
Recommendation: No action needed at this time. I want to bring this up for discussion and collect any questions or concerns that you have for further consideration. Presuming any significant concerns can be resolved, I recommend taking formal action in April.
[1] See 65 ILCS 5/8-2-9.1 through 8-2-9.10 for the statutory requirements of the Annual Budget system.