Source: http://www.mtas.tennessee.edu/print/book/export/html/143185
Timestamp: 2020-01-23 11:14:12
Document Index: 628684407

Matched Legal Cases: ['§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 57', '§ 57', '§ 67', '§ 57', '§ 57', '§ 57', '§ 57', '§ 57', '§ 57', '§ 57', '§ 57', '§ 57', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 6', '§ 65', '§ 65', '§ 67', '§ 6', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 6', '§ 7', '§ 6', '§ 7', '§ 7', '§ 7', '§ 7', '§ 57', '§ 57', '§ 6', '§ 7', '§ 7', '§ 7', '§ 7', '§ 6', '§ 6', '§ 6', '§ 62', '§ 6', '§ 6', '§ 6', '§ 13', '§ 6', '§ 6', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 57', '§ 57', '§ 57', '§ 59', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 54', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 6', '§ 7', '§ 7', '§ 7', '§ 7', '§ 9', '§ 7', '§ 7', '§ 7', '§ 7', '§ 7', '§ 65', '§ 65', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 54', '§ 68', '§ 49']

MTAS-109
MTAS-1786
The state of Tennessee has a few things to say about your municipal budget. According to T.C.A. § 6-56-201 et seq., otherwise known as the Municipal Budget Law of 1982, “The governing body of each municipality shall adopt and operate under an annual budget ordinance. The budget ordinance shall present a financial plan for the ensuing year…” Furthermore, the city’s charter may dictate various other regulations, in addition to state law budget requirements. Refer to your city’s charter to ensure proper compliance. Besides being required by law, having a budget is not a bad idea. Can you imagine what it would be like if your city or town just took whatever money it received and simply paid for everything the departments spent? It might be fun to buy everything you think you need and want, but how long would it take for your checks to bounce? You need a plan of action with limits and controls.
MTAS-1787
There is more than one way to define a budget. Local governments usually use one of three types of budgets: line item, program, or performance. Which budget you should use will depend on what you plan to measure.
MTAS-1789
A performance budget allocates money to activities or programs; plus it describes the amount of services that will be produced with the money allocated. It allows an adjustment of the level of services provided as to both quality and quantity. It is a very useful budget system, but it is difficult to prepare because of the amount of information necessary to do so properly.
MTAS-1790
A program budget focuses on the services to be provided by the city and budgets money according to functions such as public safety, general government, public works, recreation, etc. It shows the purposes for which money will be spent and the importance the city places on these functions. It does not show the level of services provided, and some say that, as a result, its value as a tool for managing the quantity and quality of public service programs is weakened.
MTAS-1791
City and state laws dictate a large portion of the budget process. There are also other guidelines cities must follow. The Government Finance Officers Association publishes a book titled 'Governmental Accounting, Auditing, and Financial Reporting' (GAAFR), commonly known as "The Blue Book". This book outlines standards for governmental agencies to follow known as “generally accepted accounting principles” (GAAP). Among these principles is the formation of funds. Per the 'Fiscal Administration, Analysis and Applications for the Public Sector' by John L. Mikesell, the definition of a “fund” is:
… an accounting device established to control receipt and disbursement of income from sources set aside to support specific activities or attain certain objectives. In the accounts of individual governments, each fund is treated as a distinct fiscal entity.
In simpler terms, a fund is a smaller record of incoming and outgoing money that is divided by type of activity.
MTAS-1792
MTAS-1794
According to the GAAFR (the Blue Book), fiduciary funds are “used to account for resources that a government holds as a trustee or agent on behalf of an outside party that cannot be used to support the government’s own programs. The fiduciary fund category includes pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds and agency funds.” Examples of fiduciary funds a city may have include a law enforcement trust fund and firemen’s pension fund.
There is, in effect, no limit on the number of funds that a city can establish. However, since each new fund adds to the complexity of the city’s financial operations and takes away flexibility, it is advisable to keep the number of funds as low as possible within legal and financial requirements.
MTAS-1795
The constitutional purpose of a budget is to make government responsive to public opinion and responsible for its acts.
William Howard Taft (1857 – 1930),
Message to Congress. December 1909
The budget process actually begins with the preceding year’s audit. Municipalities have their fiscal affairs audited every year, another legal requirement found in T.C.A. § 6-56-105. The audit helps provide a picture of how well the city is doing financially. Information found in the audit can be used to help determine where new revenues are needed and what to set aside for bonded indebtedness, etc. The portion of the audit dealing with revenues and expenditures should be based on the prior fiscal year’s budget so that a municipal official can readily compare actual figures with budget estimates. This information, when considered with the staff’s day-to-day knowledge, provides a basis for developing a budget, as well as determining needs for improving the city’s fiscal picture. The auditor’s recommendations for changes in bookkeeping, accounting, etc. complete the review and allow deficiencies to be rectified. Once a review of the financial affairs is completed, this knowledge can be used to plan for the coming year.
Most cities are required to follow guidelines set forth in the Municipal Budget Law of 1982. T.C.A. § 6-56-201 et seq. However, there are exceptions. If your charter requires estimates of proposed expenditures for each department, board, office, or other agency of the city; and if your charter requires estimates of anticipated revenues from all sources, including current and delinquent taxes, non-tax revenues, and proceeds from selling bonds or long-term notes, then it is sufficient to follow your city’s charter and not the Municipal Budget Law. Mayor-aldermanic (general law) charters require following the budget law; however, modified-city manager-council (general law) charters already require sufficient detail and are not required to follow the budget law. Private act charter cities will have to examine their budgeting provisions to determine if the charter provides enough specificity. Finally, city-manager-commission (general law) charters seem to meet the detailed requirements; however, it is recommended that you contact your auditor for a conclusive determination.
With that being said, according to the Municipal Budget Law of 1982 (T.C.A. § 6-56-203), all budget ordinances require the following six elements:
Estimates of proposed expenditures for each department, board, office or other agency of the municipality, showing, in addition, expenditures for corresponding items for the last preceding fiscal year, projected expenditures for the current fiscal year and reasons for recommended departures from the current appropriation pattern in such detail as may be prescribed by the governing body. It is the intent of this subdivision that, except for monies expended pursuant to a project ordinance or accounted for in a proprietary type fund or a fiduciary type fund, which are excluded from the budget ordinance, all monies received and expended by a municipality shall be included in a budget ordinance. Therefore, notwithstanding any other provision of law, no municipality may expend any monies regardless of their source (including monies derived from bond and long-term note proceeds, federal, state or private grants or loans, or special assessments), except in accordance with a budget ordinance adopted under this section or through a proprietary type fund or a fiduciary type fund properly excluded from the budget ordinance;
Statements of bonded and other indebtedness of the municipality, including debt redemption and interest requirements, debt authorized and unissued, and the condition of the sinking fund;
Estimates of anticipated revenues of the municipality from all sources, including current and delinquent taxes, non-tax revenue, and proceeds from the sale of any bonds or long-term notes with a comparative statement of the amounts received by the municipality from each of such sources for the last preceding fiscal year, the current fiscal year, and the coming fiscal year in such detail as may be prescribed by the governing body;
A statement of the estimated balance or deficit as of the end of the current fiscal year;
A statement of pending capital projects and proposed new capital projects relating to respective amounts proposed to be raised therefore by appropriations in the budget and the respective amounts, if any, proposed to be raised therefore by the issuance of bonds during the fiscal year; and
Such other supporting schedules as the governing body deems necessary or are otherwise required by law.
MTAS-1796
The budget cycle consists of four main steps or phases: preparation, approval, execution and audit. The audit, previously mentioned, is typically considered the last phase of the budget cycle; however, it is an integral tool in budget preparation. The following chapters describe in detail how to perform and prepare budget estimates.
The budget calendar is centered around budget adoption. Refer to the appendices for samples of required budget documents, including the public notice, the budget ordinance, and a few sample pages from a General Fund budget narrative (line item descriptions of the individual departments). Keep in mind that charters may vary as to publication and public hearing requirements so be sure to double check your charter before setting your budget calendar.
Below is a sample budget calendar for small- to medium-sized cities. The size, complexity, and any additional charter requirements of your municipality may change the preparation dates; however, the end of the fiscal year for Tennessee municipalities is June 30, and audits should follow closely thereafter.
MTAS-1797
What do you do when a tornado rips through the middle of downtown or a blizzard dumps inches upon inches of snow on the ground and paralyzes the town for days? Of course you don’t intend for these events to happen when you prepare the budget, but you have to anticipate the realities of an emergency – and sooner rather than later.
According to state law (T.C.A. § 6-56-205), the governing body may spend more than the estimated available funds, but only when there is “an actual emergency threatening the health, property or lives of the inhabitants of the municipality and declared by a two-thirds (2/3) vote of all members of the governing body present, when there is a quorum.”
In such a case, T.C.A. § 6-56-304 (3) requires the following recordkeeping:
A record of any such emergency purchase shall be made by the person or body authorizing such emergency purchases, and shall specify the amount paid, the items purchased, from whom the purchase was made and the nature of the emergency. A report of any emergency purchase shall be made as soon as possible to the municipal governing body and the chief executive officer of the municipality, and shall include all items of information as required in the record.
From a financial perspective, this is why you have an unassigned fund balance, net assets and, possibly, contingency funds. Disaster assistance may be available in some situations; however, cities and towns should be prepared to handle the immediate circumstances. A good rule of thumb is to have the equivalent of at least two months’ operating expenses available as an unassigned fund balance.
MTAS-1798
In the event the governing body does not pass the budget by June 30, T.C.A. § 6-56-210 takes effect. It states:
If for any reason a budget ordinance is not adopted prior to the beginning of the next fiscal year, the appropriations for the last fiscal year shall become the appropriations for the next fiscal year, until the adoption of the new budget ordinance.
While this provision exists, municipalities are strongly urged to meet the June 30 deadline. Also, the state OSLF requires cities to file a continuation budget resolution.
MTAS-1799
What we have here is a failure to accumulate.
Jim Varney, Ernest Saves Christmas, 1988
Estimating revenue may seem like a daunting task, but it’s really not. It doesn’t require a degree in rocket science to be able to arrive at sound, logical figures. It’s really just using averages and common sense.
The governmental funds list of revenues includes the revenue class (local taxes, licenses and permits, intergovernmental, etc.), the fund (general, state street aid, etc.), account number, a description, any related authorizing state statutes, restrictions, the current rate if it applies, the timing of the payment, if late fees can be assessed, where the money comes from (taxpayers, businesses, the state, etc.), how the money is collected, and any use restrictions. This list is a great tool to help you learn the “who, what, when, where, and how” of each revenue source.
Assuming that you now know all the revenues you need to estimate, where do you begin? Let’s start in the governmental funds with the local tax class. This typically is the largest of the revenue classes, and it includes real property taxes, personal property taxes, public utility property taxes, property taxes from prior years, property tax penalties and interest, payments in-lieu-of taxes from electric utilities and industry, local option sales taxes from the city and county, wholesale beer taxes, wholesale liquor taxes, mixed drink taxes, minimum business taxes, natural gas franchise taxes, special assessments, room occupancy (hotel/motel) taxes, and cable TV franchise taxes.
MTAS-1818
Speech in the Virginia Convention, March 1775
If you know the basics of estimating revenue, you should have no trouble estimating expenditures. Often, the same method is applicable here: past history is a good indication of future performance. If, for the last two years, you haven’t spent as much on office supplies as budgeted, chances are you won’t spend as much in the upcoming year. However, there are always unusual circumstances that must be addressed, but overall, this is a useful method for estimating expenses.
MTAS-1819
The following comments apply to revenues, as well as to expenditures, but we have chosen to use expenditures to stress the benefits of a chart of accounts. Expenditure accounts are far more numerous than revenues in the typical city budget. Each city must determine the optimum number of line items required for financial management. Too few or too many accounts will decrease the ability of financial managers to properly analyze cost centers. For example, it is difficult to know if water, sewer or electrical rates are the cause for exceeding a line item if they are all included in a single line item.
A standardized chart of accounts should be used in the city’s budget, accounting records, and annual audit. This applies to any other finance-related activity. The benefits are uniformity in the city’s total financial picture, reduced audit costs, and simplicity if a city has or is going to have an automated accounting system. Furthermore, it is important that the same level of detail is used throughout financial documents. If utilities are listed separately in the budget and accounting records, but the auditor groups all utilities together, then obtaining the specific data you need to begin your budget next year is very difficult. A recommended chart of accounts [1]is posted on our website.
MTAS-1829
“Wealth,” English Traits (1856)
The International City/County Management Association publication Budgeting: A Guide for Local Governments defines a capital budget as “a spending plan for improvements to or acquisition of land, facilities, and infrastructure.” The definition continues by describing its elements: “The capital budget (1) balances revenues and expenditures, (2) specifies the sources of revenues, (3) lists each project or acquisition, and (4) must ordinarily be approved by the legislative body.”
MTAS-1830
MTAS-1831
The first step in developing a capital budget is to plan. This includes setting a calendar (much like the one for the annual budget); creating an inventory of equipment, buildings, and facilities; assessing the status of current large projects, including funding and targeted completion dates; identifying future needs; and finally prioritizing the items. All departments need to be involved in this process.
The next step is to look at finances. Assess and establish your financing options (Can we pay for this in cash if we set aside $10,000 each year for five years? Is lease/purchase a better option? What about issuing a bond for the new public works garage?); determine financial limits (How much will we have to work within two years?); and determine your current debt obligations (We owe $20,000 on this loan and will have it paid off in the middle of next year).
The last stage of the capital budgeting process is implementation. The CIP is normally approved by resolution, with the first year of the program (the capital budget) adopted as a separate section in the annual budget. As mentioned earlier, once the program has been adopted and firms are hired, land is purchased, and construction begins, close scrutiny of these large and expensive projects will save you a lot of headaches and, potentially, bad publicity in the future.
MTAS-1832
Okay, you’ve learned about the different funds, you set your calendar, you researched your revenues and expenditures, you compiled them into a meaningful document, you met your deadlines, and the governing body adopted the budget. Whew! Now you can sit back and relax until next spring, right? Sorry, try again. The last phase of budgeting is execution.
Budget execution requires overseeing revenue collections, purchases, cash management, and proper accounting and auditing. What are some of the rules you need to follow here? Again we look to the Tennessee Code Annotated for guidance. Chapter 56 of Title 6 offers us the most guidance. There we find the Municipal Budget Law of 1982 and the Municipal Purchasing Law of 1983.
The general provisions of this chapter include items such as the requirement of audits, where the municipality can legally invest idle money (bonds, notes, and treasury bills; non-convertible debt securities; U.S. guaranteed obligations; certificates of deposit; money market funds; and the local government investment pool to name a few); how soon you must deposit the money you’ve collected (within three working days); and the short and sweet statement that “All expenditures of money made by a municipality must be made for a lawful municipal purpose.” T.C.A. § 6-56-112.
MTAS-1833
Some items in the Municipal Budget Law of 1982 that we haven’t covered include the fact that municipalities can’t plan to spend more money than they expect to receive (T.C.A. § 6-56-205); municipalities can’t levy property taxes until a budget ordinance has been adopted (T.C.A. § 6-56-207); the budget officer may be given the right to transfer money from one appropriation to another within the same fund and must report the transfer to the governing body and have the transfer recorded in the minutes (T.C.A. § 6-56-209); and any money left over at the end of the fiscal year is credited to its appropriate fund for further appropriation. T.C.A. § 6-56-211.
MTAS-1835
The most important step of the budget process follows adoption: monitoring revenues and expenditures for the budget year. A few basic practices will help you adequately monitor the income and expenditures of your city.
First, devise a monthly report in order to give elected officials and department heads a current picture of the city’s finances.
Second, during the course of the fiscal year, prepare a quarterly or mid-year budget review. This will help with the third most important aspect of the monitoring process: budget amendments. Even the best budget will miss a line item. The law allows for amendments to the budget in order to bring actual expenditures in line with the budget. The budget ordinance may be amended “in the same manner as any other ordinance may be amended.” T.C.A. § 6-56-208. A public hearing is not required for a budget amendment.
It is impossible to overemphasize the need for budget monitoring. Without it, the budget process is incomplete and may place the city in a tenuous financial position.
MTAS-1836
One budget management issue that comes up frequently is the subject of charitable contributions. How many times have you been asked to contribute to the high school marching band, the Dixie Youth League, the Boy Scouts, the Girl Scouts, or a family who lost everything in a house fire? While your heart may go out to each one of those groups, oftentimes city money can’t. The attorney general has issued several opinions [2] on the subject. Before the governing body agrees to donate money, be very sure that the charity meets all legal requirements. T.C.A. § 6-54-111:
MTAS-1837
"The first thing to be done by a biographer in estimating character is to examine the stubs of his victim’s cheque-books."
Silas Weir Mitchell (1829–1914), U.S. physician, author.
Quoted in Harvey Cushing, Life of Sir William Osler, Vol. 1, Ch. 21 (1925)
The audit is the last phase of the budget cycle. As mentioned earlier, the audit is prepared after the fiscal year ends but usually before the end of the calendar year. Steps involved in acquiring an audit include creating a request for proposal, accepting proposals, selecting a firm or accountant to conduct the audit, agreeing to a contract, having the contract approved by the state, doing audit preparation work for the auditor, hosting the auditor at city hall during their field work, responding to any findings, and having the governing body receive and accept the audit report.
If you have done an adequate job of budget execution, the audit should go very smoothly with few or no findings. Referring to GAAFR for one last definition, a finding is a “published communication of an internal control weakness or instance of noncompliance … ” This is where your auditor tells you that you have room for improvement.
The basic components of a Comprehensive Annual Financial Report (CAFRj) are the introductory, financial and statistical sections. The introductory section usually consists of a report cover, title page, table of contents, list of principal officials, an organizational chart, and a letter of transmittal. The financial section includes the independent auditor’s report, management’s discussion and analysis (MD&A), basic financial statements, notes to the financial statements, required supplementary information (RSI) and other supplementary information. Finally, the statistical section comprises trend data (over the previous 10 years) and other non-financial information that is useful in determining a city’s credit worthiness.
While municipalities are encouraged to prepare a CAFR, a less detailed report is permitted. The minimum reports as required by the Governmental Accounting Standards Board (GASB) are required by the state. Additional statements and schedules are required by the State and can be found in the Audit Manual and Internal Control and Compliance Manual for Tennessee Municipalities. Both of these publications are available on the Comptroller’s website (http://www.comptroller.tn.gov/shared/manuals.asp [3]).
Many city officials and employees will refer to the audit only when they are preparing the next year’s budget. However, the audit also may be pulled off the shelf when a credit ranking agency calls, when the city is interested in issuing debt, and when fund balance is discussed as a funding source.
MTAS-1838
Click on the exhibits listed below in this section for more information
MTAS-1839
MTAS-1840
MTAS-1841
AN ORDINANCE OF THE CITY OF _______________, TENNESSEE
ADOPTING THE ANNUAL Operating and Capital BUDGET AND TAX RATE FOR THE FISCAL YEAR BEGINNING JULY 1, 20XX AND ENDING JUNE 30, 20XY
NOW THEREFORE BE IT ORDAINED BY THE CITY OF ___________________, TENNESSEE AS FOLLOWS:
Beg. Fund Balance
STATE STREET AID
FY 20XX
FY 20XY
FY 20XZ
SECTION 3: At the end of the current fiscal year the governing body estimates balances/(deficits) as follows:
SECTION 4: That the governing body recognizes that the municipality has bonded and other indebtedness as follows:
Bonded or Other Indebtedness
Debt Authorized and Unissued
Condition of Sinking Fund
SECTION 5: During the coming fiscal year the governing body has planned capital projects and proposed funding as follows:
Proposed Amount Financed by Appropriations
Proposed Amount Financed by Debt
SECTION 6: No appropriation listed above may be exceeded without an amendment of the budget ordinance as required by the Municipal Budget Law of 1982 T.C.A. Section 6-56-208. In addition, no appropriation may be made in excess of available funds except to provide for an actual emergency threatening the health, property or lives of the inhabitants of the municipality and declared by a two-thirds (2/3) vote of at least a quorum of the governing body in accord with Section 6-56-205 of the Tennessee Code Annotated.
SECTION 7: Money may be transferred from one appropriation to another in the same fund only by appropriate ordinance by the governing body, subject to such limitations and procedures as it may describe as allowed by Section 6-56-209 of the Tennessee Code Annotated. Any resulting transfers shall be reported to the governing body at its next regular meeting and entered into the minutes.
SECTION 8: A detailed financial plan will be attached to this budget and become part of this budget ordinance. In addition, the published operating budget and budgetary comparisons shown by fund with beginning and ending fund balances and the number of full time equivalent employees required by Section 6-56-206, Tennessee Code Annotated will be attached.
SECTION 9: If for any reason a budget ordinance is not adopted prior to the beginning of the next fiscal year, the appropriations in this budget ordinance shall become the appropriations for the next fiscal year until the adoption of the new budget ordinance in accordance with Section 6-56-210, Tennessee Code Annotated provided sufficient revenues are being collected to support the continuing appropriations. Approval of the Director of the Office of State and Local Finance in the Comptroller of the Treasury for a continuation budget will be requested if any indebtedness is outstanding.
SECTION 10: There is hereby levied a property tax of $ ______ per $100 of assessed value on all real and personal property.
SECTION 11: All unencumbered balances of appropriations remaining at the end of the fiscal year shall lapse and revert to the respective fund balances.
SECTION 12: This ordinance shall take effect July 1, 20XY, the public welfare requiring it.
MTAS-1842
The following are a list of municipal revenues. Click on each for more detailed information.
MTAS-1843
Account No.: 31111
Description: Ad valorem taxes levied within the municipality based on property appraisals.
Authorization: Article II, Section 28 of the Tennessee Constitution; T.C.A. § 67-1-701 et seq.; T.C.A. § 67-5-101 et seq.; T.C.A. § 67-5-801 et seq.
Public utility real property, 55 percent (see Public Utility Property Tax, Account # 31120);
Industrial and commercial real property, 40 percent;
Residential and farm real property, 25 percent.
Late Pay Penalty: See Interest on Property Taxes, Account #31300.
Exemptions: All government, religious, charitable, scientific, literary and educational properties are exempt (Article II, Section 28 of the Tennessee Constitution and T.C.A. § 67-5-201 et seq.). Tax relief is offered to certain disabled and elderly home owners (Article II, Section 28 of the Tennessee Constitution and T.C.A. § 67-5-701 et seq.) and cities may provide by ordinance a tax freeze for qualified taxpayers over 65 years of age on their principal place of residence.
Collection: Property taxes are usually paid directly to the municipality. Some counties collect taxes for their municipalities, as in T.C.A. § 67-1-702 and § 67-5-1801(a). Taxes cannot be collected after ten years from April 1 of the year following the year they become delinquent. T.C.A. § 67-5-1806.
MTAS-1844
Late Pay Interest: Interest of one and one half percent (1.5%) shall be added on March 1, (unless the municipality is authorized to establish other due dates) following the tax due date and on the first day of each succeeding month, except as otherwise provided in regard to municipal taxes under T.C.A. § 67-5-2010.
MTAS-1845
Late Pay Interest: The same interest listed in Property Tax, Account #31300, are applicable, but are assessed by the comptroller.
Collection: The public utilities tax roll is established and maintained by the state. Complete tax roll and tax bills are mailed to the municipality each year, which in turn re-mails the tax bill to individual taxpayers.
MTAS-1846
Account No.: 31200
Description: Some people do not pay their property taxes by the due date. This represents property tax payments from previous years that are received by the municipalities.
Authorization: Article II, Section 28 of the Tennessee Constitution; T.C.A. § 67-1-701 et seq.; T.C.A. § 67-1-801 et seq.; T.C.A. § 67-5-801 et seq.; T.C.A. § 67-5-901 et seq.; T.C.A. § 67-5-2001 et seq.
Requirements or Restrictions: N/A
Public utility real and tangible personal property – 55 percent;
Industrial and commercial real property – 40 percent;
Industrial and commercial tangible personal property – 30 percent;
Residential and farm real property – 25 percent;
Other tangible personal property – 5 percent.
Frequency of Payment: Varies.
Late Pay Interest: See Interest on Property Taxes, Account #31300.
Collection: There are several options for collecting delinquent property taxes, including publishing a list of delinquent taxpayers in a local newspaper, turning the delinquent list over to a tax attorney, distraint, garnishment and a tax sale. See T.C.A. § 67-5-2001 et seq. for a complete list and procedures.
Use Restrictions: N/A
MTAS-1847
Account No.: 31300
Description: Revenue received from interest on delinquent property tax payments.
Authorization: T.C.A. § 67-1-701 et seq.; T.C.A. § 67-1-801 et seq.; T.C.A. § 67-5-2010.
Current Rate: Interest of 1.5 percent imposed on March 1 and on the first day of each additional month, except as otherwise provided in reference to municipal taxes.
Frequency of Payment: N/A
Exemptions: For cities in any county having a population of not less than 24,600 nor more than 24,700 according to the federal census, upon approval by two-thirds of the governing body, the rate of interest may be reduced to an amount not less than 12 percent per year in the aggregate. In addition, members serving in the armed services in an active hostility outside the U.S. have additional time before interest accrues. T.C.A. § 67-5-2011.
Collection: Interest is collected, along with delinquent property taxes. T.C.A. § 67-5-2001 et seq.
MTAS-1848
Late Pay Interest: None.
MTAS-1849
Account No.: 31512
Description: A payment in lieu of tax that cannot exceed the amount of taxes payable on privately owned property of similar nature. A calculation worksheet may be found under "MTAS Resources: In-lieu-of tax calculator at: http://www.mtas.tennessee.edu/finance-and-accounting [4]
Authorization: T.C.A. § 7-34-115 (a)(9)
Requirements or Restrictions: Must be authorized by resolution.
Current Rate: Varies by municipality, based on 1) the equalized tax rate, 2) net book value of net fixed assets located within the city limits, and 3) book value of inventory located within the city limits.
Frequency of Payment: Established in the authorizing resolution.
Late Pay Interest: Not specified.
Collection: Payment is made by water utility to municipality pursuant to authorizing resolution.
MTAS-1850
Account No.: 31513
Description: A payment in lieu of tax that cannot exceed the amount of taxes payable on privately owned property of similar nature. A worksheet may be found under MTAS Resources: In-lieu-of tax calculator at http://www.mtas.tennessee.edu/finance-and-accounting [4]
Current Rate: Varies by municipality, based on 1) equalized tax rate, 2) net book value of net fixed assets located within the city limits, and 3) book value of inventory located within the city limits.
Frequency of Payment: Established in authorizing resolution.
Collection: Payment is made by sewer utility to municipality pursuant to authorizing resolution.
MTAS-1851
Account No.: 31514
Description: Revenue received as payment in lieu of tax on the gas system property and operations that represents the public utility’s fair share of the cost of local government. Payments are based on the value of the gas system and gas operations. It applies only to municipalities that own and operate a gas system. A worksheet can be found under MTAS Municipal Resources: In-lieu-of tax calculator on the http://www.mtas.tennessee.edu/finance-and-accounting [4].
Authorization: T.C.A. § 7-39-401 et seq. (Municipal Gas System Tax Equivalent Law).
Requirements or Restrictions: Payments cannot be made to the municipality unless the following expenses are paid or provided for: operating expenses, debt payments, reasonable reserves, and cash working capital adequate to cover operating expenses for a reasonable number of weeks. A resolution is required that sets forth the tax equivalent provisions.
Current Rate: In lieu of tax payments are computed under T.C.A. § 7-39-404 (1).
Frequency of Late Pay Interest: None.
Exemptions: Retail sales or use taxes on gas energy at the same rates applicable generally to sales or use of personal property or services are not included in the calculations. T.C.A. § 7-39-404(6).
Collection: Payments are transferred from the gas fund in accordance with resolution passed by the governing body. T.C.A. § 7-39-405.
MTAS-1853
Account No.: 31610
Description: Receipts from countywide local option sales tax that is levied within the municipality.
Authorization: T.C.A. § 67-6-701 et seq. (1963 Local Option Revenue Act)
Requirements or Restrictions: Tax can be increased only by ordinance after voters approve by referendum. T.C.A. § 67-6-706. Tax is applicable only to the first $1,600 on the sale or use of any single article of personal property. T.C.A. § 67-6-702. “Single article” applies only to motor vehicles, aircraft, watercraft, modular homes, manufactured homes, or mobile homes. After July 1, 2017, the tax levied on the sale, purchase, use, consumption of electricity, piped natural or artificial gasses, or other heating fuels delivered by the seller will be 0.5 percent. Also after July 1, 2019, there will be no local option sales tax exemption for cable or wireless cable television services.
Current Rate: Varies according to county and municipality; maximum rate is 2.75 percent.
Exemptions: Same as statewide sales tax, plus electricity and fuels through June 30, 2019 (see T.C.A. § 67-6-704) and the above listed restrictions. Until June 30, 2019, cable or wireless cable television services are exempted up to $27.50 per month. T.C.A. § 67-6-714.
Collection: State collects (and keeps 1.125 percent for administrative expenses), forwards the remainder to the county, and the county distributes 50 percent for school purposes and 50 percent to the jurisdiction where collected or as contracted between jurisdictions (less a 1% administrative fee retained by the county trustee). Local sales tax revenues that the Department of Revenue cannot identify to a particular situs are distributed 50 percent to municipalities based on population and 50 percent to counties based on population. For out-of-state internet sales collections that are voluntarily remitted (usually dealers with more than $100,000 in annual revenue), taxes that can be attributed to specific SITUS codes are distributed to those local governments. Taxes that are not attributable to specific SITUS codes are distributed baased on a Department of Revenue formula that weights the taxes based on known SITUS-specific collections.
Use Restrictions: None for the 50 percent returned to municipality, unless contracted differently.
MTAS-1855
Account No.: 31710
Description: State authorized tax on wholesale sales of beer. Wholesale beer deliveries to retail outlets in a city or county are taxed at flat rate of $35.60 per barrel sold. The tax is paid by each beer wholesaler directly to the city or county, and monthly reports on such sales are made to the state Department of Revenue and to each city and county. Of this tax, a wholesaler must remit $.17 to the state for administration and retain $.92 to defray the cost of collecting and remitting the tax. A city should check that tax payments are being received from beer wholesalers serving the area based on deliveries to all retail beer outlets in the city. If there is doubt about administration of the tax, an investigation by the Department of Revenue may be requested.
Authorization: T.C.A. § 57-6-101 et seq. (Wholesale Beer Tax Act)
Current Rate: $35.60 per barrel sold (31 gallons).
Frequency of Payment: Monthly by the 20th.
Late Pay Penalty: City may institute legal action for collection. T.C.A. § 57-6-107(b).
Exemptions: Wholesalers may deduct this amount from their gross receipts tax liability. T.C.A. § 67-4-711 (b)(5). Wholesale sales are tax-free if sold to U.S. armed forces. T.C.A. § 57-6-111.
Collection: Beer wholesalers remit monthly, directly to the municipality on state-prescribed forms.
MTAS-1856
Account No.: 31720
Description: State authorized tax on wholesale sales of liquor. City must pass an ordinance to impose an inspection fee upon licensed retailers of alcoholic beverages or upon retail food store wine licensees located within such municipality.
Authorization: T.C.A. § 57-3-501 et seq.
Requirements or Restrictions: As delineated in T.C.A.
Current Rate: Depending upon the size of municipality’s county, the municipality levies by ordinance a 5 percent or 8 percent inspection fee that is collected by the wholesalers from the retailer during distribution. The wholesalers then retain 5 percent of the fee for performing the collection. The fee cannot exceed 8 percent of the wholesale price of alcoholic beverages sold in municipalities located in counties having a population of less than 60,000; and cannot exceed 5 percent for municipalities located in counties having a population more than 60,000.
Late Pay Penalty: A penalty of 10 percent is assessed after the 20th of each month. T.C.A. § 57-3-503(b).
Collection: The inspection fee is collected by the wholesaler from the retailer and remitted by wholesalers to the municipality monthly on municipal-prescribed form.
MTAS-1857
Account No.: 31730
Description: Tax on the sale of alcoholic beverages for consumption on the premises.
Authorization: T.C.A. § 57-4-301(c); T.C.A. § 57-4-306
Current Rate: Fifteen percent of the sales price of all alcoholic beverages sold for consumption on the premises.
Exemptions: Not applicable to charitable, nonprofit, or political organizations selling alcohol under a special occasion license. T.C.A. § 57-4-301(e). Also exempted from this tax are commercial airlines (but not airline travel clubs), paddlewheel steamboat companies, and passenger trains. T.C.A. § 57-4-301(d).
Collection: State retains the first 50 percent for its general fund and it is earmarked for education; the remaining 50 percent is distributed to the municipality, if collected in an incorporated municipality, or to the county if collected in an unincorporated area. Recent legislation found at T.C.A. § 57-4-306 (b) provides detailed instructions on further distribution and should be reviewed carefully. Determining factors include whether or not municipalities have their own school system (LEA) or special school district (SSA). Also included are interim requirements through June 30, 2019, as well as compliance, notice and exemption provisions.
Use Restrictions: For premier tourist resorts, the municipality’s percentage must be spent on schools in the municipality. T.C.A. § 57-4-306 (d).
MTAS-1858
Account No.: 31810
Description: The business tax is levied in addition to all other privilege taxes and is intended by the legislature to be in-lieu-of any other ad valorem tax on “inventories of merchandise held for sale or exchange.” T.C.A. § 67-4-701 (b).
Authorization: T.C.A. § 67-4-701 et seq. (Business Tax Act)
Requirements or Restrictions: Businesses are required to file tax returns with the state on state subscribed forms.
Current Rate: A minimum of $22 annually is required for each taxpayer in classifications 1-4 and 5B ($450 annually fr classification 5A) for each fixed place, location or outlet from which a business is operated. The state has established different classifications of businesses and gross receipt rates assessed to the different classifications. The classifications and rates are listed in detail in T.C.A. § 67-4-708 and T.C.A. § 67-4-709. The rates include a wide range of percentages. Some examples are:
1/10 of 1 percent of all retail sales of the business for businesses classified under T.C.A. § 67-4-708 (1);
1/40 of 1 percent of all wholesale sales of the business by people classified under T.C.A. § 67-4-708 (1)(A);
3/8 of 1 percent of all wholesale sales of the business by people classified under T.C.A. § 67-4-708 (1)(B) and (1)(C), T.C.A. § 67-4-708 (2) and T.C.A. § 67-4-708 (3);
1/20 of 1 percent of all retail sales of the business by people classified under T.C.A. § 67-4-708 (1)(D);
Transient vendors must pay a minimum tax of $50 for each 14-day period of business in a municipality, but they are not subject to the percent of the gross receipts portion of the tax. T.C.A. § 67-4-710 (a)(2).
The Tennessee Department of Revenue Business Tax Guide can be found at : https://www.tn.gov/content/dam/tn/revenue/documents/taxguides/bustaxguide.pdf [5]
Frequency of Payment: Monthly. Due dates for different business classifications are listed under T.C.A. § 67-4-715.
Exemptions: Exemptions are listed under T.C.A. § 67-4-712. Businesses may deduct certain items from their gross receipts liability (listed under T.C.A. § 67-4-711). Certain credits are also allowed as listed in T.C.A. § 67-4-713.
Collection: State forwards municipality’s share monthly.
MTAS-1860
Account No.: 31911
Description: Municipalities can impose a franchise fee and other conditions upon the operation of a gas company within their corporate limits.
Authorization: T.C.A. § 6-54-109; T.C.A. § 65-4-107
Requirements or Restrictions: The franchise agreement is subject to the approval of the Tennessee Regulatory Authority. T.C.A. § 65-4-107. The franchise agreement is passed by municipal ordinance.
Current Rate: Varies; there is no maximum franchise fee.
MTAS-1862
Account No.: 31920
Description: Occupancy tax on hotel or motel room rentals, imposed by private act. Rates vary from 1.25 percent to 5 percent.
Authorization: T.C.A. § 67-4-1401 et seq.; T.C.A. § 6-55-102; and various private acts
Requirements or Restrictions: Tax must be approved by ordinance by two-thirds vote of the governing body at two consecutive regularly scheduled meetings; or be approved by referendum, and tax cannot exceed five percent. T.C.A. § 67-4-1402. City cannot assess the tax if the county has already levied an occupancy tax. T.C.A. § 67-4-1425 (a)(2). Additional limitations are found in T.C.A. § 67-4-1425.
Current Rate: Cannot exceed 5 percent. Hotel operator is allowed to retain 2 percent of the amount of the tax due for collecting the tax. T.C.A. § 67-4-1405 (b).
Late Pay Penalty: Interest is charged at 12 percent per annum plus a penalty of 1 percent for each month taxes are delinquent. T.C.A. § 67-4-1408.
Collection: Monthly. The municipality has the authority to collect delinquent taxes by any means available by law including issuing distress warrants and the seizure of assets. T.C.A. § 67-4-1408(d).
Use Restrictions: None unless the governing body specifies such in the authorizing ordinance. T.C.A. § 67-4-1403.
MTAS-1863
Account No.: 31930
Description: Municipalities have the power to design and execute construction and improvement or reconstruction and re-improvement of any street, avenue, alley, highway or public place including improvements or alterations for flood control, water management, soil erosion, and disaster relief and assess not less than two-thirds of the cost or expense of the work against the property abutting or adjacent to the street, avenue, alley, or any other public place that is improved. If 75 percent of the property owners whose lots about the proposed improvement petition for the work to be done, 100 percent of the cost of the project can be assessed to the property owners. T.C.A. § 7-32-118.
Authorization: T.C.A. § 7-32-101 et seq.
Requirements or Restrictions: The municipality needs to adopt an ordinance and hold a public hearing prior to making the improvements. The ordinance should describe in detail the nature of the intended work. After apportionments are made, the municipality must hold another hearing on objections to the assessments. T.C.A. § 7-32-121. Appeals to the assessment may be made to the circuit court. T.C.A. § 7-32-126. If any objections to an assessment to pay costs are made, the confirmation of the assessment shall require the unanimous approval of the members of the governing body present at the meeting at which the objection is considered. T.C.A. § 7-32-123.
Current Rate: Depends upon the cost of the project and the number and sizes of properties involved.
Frequency of Payment: Payments are due 30 days after the assessment is made final. At the request of the property owner, the assessment may be paid in five annual installments, and shall bear interest at the rate of 6 percent per annum, interest payable semiannually. T.C.A. § 7-32-133. An assessment levied in connection with a public facility may be paid back over thirty years. T.C.A. § 7-32-133.
Late Pay Penalty: If any property owner makes default in the payment schedule, all of the installments with interest and an additional sum equal to one-half the annual interest, shall become immediately due and payable T.C.A. § 7-32-137. After 60 days delinquency, the city recorder turns the collection over to the city attorney who may then attach a lien on the property. T.C.A. § 7-32-138.
Exemptions: The total assessment made against any lot or parcel of land shall not exceed one-half of the cash value (fair sale price of the lot and improvements on the lot if sold at a voluntary sale) of the lot and improvements. T.C.A. § 7-32-116.
Collection: Collected by the municipal tax collector following the assessment. The assessment is a lien on the property. T.C.A. § 7-32-131.
MTAS-1864
Account No.: 32110
Description: Municipalities may require by ordinance an automobile regulatory fee or inspection fee for all vehicles owned or operated by residents who live within its corporate boundaries.
Authorization: T.C.A. § 6-55-501 et seq.; T.C.A. § 7-51-701 et seq.
Requirements or Restrictions: Non-residents cannot be required to pay such fees (T.C.A § 6-55-502(c) and T.C.A. § 7-51-702).
Current Rate: Varies.
Frequency of Payment: Usually annually.
Exemptions: Varies.
Collection: Varies. The municipality may enter into an agreement with the county authorizing the county clerk to collect the motor vehicle regulatory fee at the same time the clerk sells a state license.
Use Restrictions: Some municipalities dedicate revenue to streets and highways, but this is not required by T.C.A.
MTAS-1865
Account No.: 32130
Description: Under the Tennessee Passenger Transportation Services Act, municipalities have the authority to license, control and regulate by ordinance or resolution passenger-for-hire vehicles providing transportation services within its jurisdiction. Municipalities in counties with populations greater than 500,000 also have the authority to regulate entry into the business of providing passenger transportation services.
Authorization: T.C.A. § 7-51-1001 et seq. (Tennessee Passenger Transportation Services Act)
Requirements or Restrictions: Allowable regulations include:
Entry into the transportation services business through licensing;
Rates charged;
Safety and insurance requirements;
Establishment of stands;
Limited or exclusive access to airports or other facilities within the municipality;
Regulations concerning the drivers;
Routes and stops of fixed routes;
Any other regulation that ensures safe and reliable passenger transportation service.
Current Rate: Variable.
Frequency of Payment: Not specified by T.C.A.
Late Pay Penalty: Not specified by T.C.A.
Exemptions: Does not apply to cities in counties with a population of between 287,700 and 287,800 (T.C.A. § 7-51-1006) and does not supercede authority of the department of safety (T.C.A. § 7-51-1005).
Collection: Not specified by T.C.A.
MTAS-1867
MTAS-1868
Account No.: 32220
Description: This is a privilege tax on those who engage in the business of selling retail alcoholic beverages for consumption on the premises. The tax varies by the type of establishment that sells the liquor by the drink.
Authorization: T.C.A. § 57-4-301 et seq.
Requirements or Restrictions: These same privilege taxes are paid twice by the businesses; once to the county and once to the municipality. Privilege tax increases imposed after fiscal year 2004 do not go to cities, but rather to the Alcoholic Beverage Commissioner to administer the law.
Current Rate: Municipalities are allowed to levy a privilege tax on the sale of alcoholic beverages for consumption on the premises. The taxes, paid annually, are:
Private club — $500
Convention center — $1,000
Premiere type tourist resort — $2,000
Historical performing arts center — $150
Urban park center — $150
Commercial passenger boat company — $1,250
Historic mansion house site — $150
Historic interpretive center — $150
Community theater — $150
Zoological institution — $150
Museum — $150
Establishment in commercial airport terminal — $1,500
Commercial airline travel club — $1,000
Public aquarium — $150
Motor speedway — $2,000
Sports Facility — $2,000
Theater — $150
Restaurant, according to seating capacity, on licensed premises:
40 – 74 seats — $650
75 – 125 seats — $750
126 – 175 seats — $925
176 – 225 seats — $975
226 – 275 seats — $1,100
276 or more seats — $1,200
Wine-only restaurant, according to seating capacity on licensed premises:
75 – 125 seats — $270
126 – 175 seats — $300
176 – 225 seats — $310
226 – 275 seats — $330
276 or more seats — $350
Caterers — $625
Hotels, according to room capacity, on licenses premises:
0 – 99 rooms — $1,000
100 – 399 rooms — $1,250
300 rooms and over — $1,500
Exemptions: No tax authorized or imposed by this section shall be levied or assessed from any charitable, nonprofit or political organization selling alcoholic beverages at retail pursuant to a special occasion license. T.C.A. § 57-4-301 (e).
Collection: The state notifies the municipality when renewal is due, then the municipality sends a letter to the establishment, which sends the revenue to the municipality.
MTAS-1869
Account No.: 32610
Description: Revenue received from the sale of building permits and builder and contractor licenses. Municipalities are authorized and empowered to enact laws or ordinances to safeguard and protect the home owner or prospective home owner, commercial property owner or assembly building property owner by requiring the licensing of the residential, commercial or assembly builders and residential, commercial and assembly maintenance and alteration contractors.
Authorization: T.C.A. § 6-54-501 et seq.; T.C.A. § 7-62-101 et seq.; T.C.A. § 7-62-201 et seq.
Requirements or Restrictions: City cannot issue more than 10 active building permits at one time to an unlicensed contractor. T.C.A. § 7-62-202 (b). Unlicensed contractors are required to post a cash bond with the city for a period of at least two years. T.C.A. § 7-62-203.
Frequency of Payment: Upon issuance of permit.
MTAS-1870
Account No.: 32620
Description: Revenue received from permits for electrical work.
Authorization: T.C.A. § 6-54-104; T.C.A. § 6-54-501 et seq.
Requirements or Restrictions: Permits issued only to contractors or appliance electricians licensed according to municipal ordinance or to a homeowner doing personal work within his/her residence.
MTAS-1871
Account No.: 32630
Description: Revenue received from permits for plumbing work.
Authorization: T.C.A. § 6-54-501 et seq.; T.C.A. § 62-6-401 et seq.
Requirements or Restrictions: Permits issued only to licensed plumbing contractors or to a homeowner doing personal work in his or her residence.
MTAS-1872
Account No.: 32660
Description: Fees for zoning permits and, in some municipalities, subdivision plats and other plans.
Authorization: Various general law charters T.C.A. § 6-2-201; T.C.A. § 6-19-101 and 102; T.C.A. § 6-33-101; T.C.A. § 13-7-201 et seq.
Requirements or Restrictions: Changes to the zoning ordinance must be made by an amending ordinance and include a public hearing.
MTAS-1873
Account No.: 33110
Description: Authorized by the Housing and Community Development Act of 1974 (42 USC 5301) replacing several community development categorical grant programs, Community Development Block Grants (CDBG) provide eligible metropolitan cities and urban counties (called “entitlement communities”) with annual direct grants that they can use to “revitalize neighborhoods, expand affordable housing and economic opportunities, and/or improve community facilities and services, principally to benefit low- and moderate-income persons.”
Authorization: T.C.A. § 6-54-124 and 42 USC 5301 et seq.
Requirements or Restrictions: T.C.A. § 6-54-124 requires municipalities that receive community development block grants and municipalities or industrial development corporations that are a party to an in-lieu-of property tax agreement to make a report addressing the expenditures of such funds. In addition, the municipality must place a copy of such report in the main branch of the municipality’s public library or place the report on the Internet.
MTAS-1874
Account No.: 33310
Description: Payments in lieu of taxes from local housing authority, based on gross rent receipts. Housing authorities “shall agree” to pay in-lieu-of taxes or special assessments not to exceed the cost of services, improvements, or facilities provided. A similar requirement provides that nonprofit housing corporations providing low-cost housing for elderly or handicapped people must agree to make in-lieu-of-tax payments for any project exceeding 12 units occupied after January 1, 1990. Bonds and notes of a housing authority are issued for a public purpose and together with the interest shall be exempt from taxation.
Authorization: T.C.A. § 67-5-206; T.C.A. § 67-5-207
Requirements or Restrictions: Subject to federal housing law and regulations. There also are several qualifications for nonprofit housing corporations that must be met to be eligible for the payment in-lieu-of taxes listed under T.C.A. § 67-5-207.
Collection: Varies.
MTAS-1875
Account No.: 33510
Description: The Retailers’ Sales Tax is applied to the sale, use, consumption, distribution, lease, or rental of tangible personal property and selected services, of which cities receive a population-based share of a portion of the total statewide collections. Additional money is available to cities that have sports authorities that have secured professional major league baseball, football, basketball or hockey franchises. Premier type tourist resorts that meet specified requirements (i.e., golf courses, ski slopes, theme parks, etc.) are entitled to additional distributions per T.C.A. § 67-6-103 (a)(3)(B).
Authorization: T.C.A. § 67-6-101 et seq.
Requirements or Restrictions: Municipalities may conduct only four special censuses after the decennial census to increase their population-based share. T.C.A. § 67-6-103(a)(3)(C) and (D). Special options exist for “premiere type tourist resort” cities, cities that have a major league sports team, and others as noted in T.C.A.
Current Rate: 99 percent of 4.6030 percent of 6 percent of the statewide 7 percent sales tax (which equates to 4.55697%). The 1 percent (which equates to 0.04603%) is retained by the state and sent to the University of Tennessee to partially fund the Municipal Technical Advisory Service (MTAS). For example, if the state collected $1 million in sales tax, MTAS would receive $418.46, and cities would split $45,569.70 based on population.
Exemptions: Revenues from fuel sales used for aviation, railways or water carriers are placed in the transportation equity fund.
MTAS-1876
Account No.: 33520
Description: State taxes levied on the earnings of stock dividends and interest on bonds earned by individuals, partnerships, associations, trusts and corporations. The municipality’s share depends upon the residence of taxpayers; i.e., if he/she resides within the corporate limits of the municipality.
Authorization: T.C.A. § 67-2-101 et seq.
Current Rate: The "IMPROVE Act" which passed in April of 2017 included a phaseout over the next five years, as follows:
4% for tax years beginning January 1, 2017
3% for tax years beginning January 1, 2018
2% for tax years beginning January 1, 2019
1% for tax years beginning January 1, 2020
Frequency of Payment: Annually on or on or before the fifteenth day of the fourth month commencing after the end of the taxpayer's tax year. Armed forces personnel have 180 days in which to file in certain circumstances.
Exemptions: Exemptions are listed in T.C.A. § 67-2-104. The most common exemptions include the first $1,250 of an individual’s return and the first $2,500 of income for a joint return; people 65 or older whose income is not more than $37,000 ($68,000/couple); blind people; pension trusts; profit-sharing trusts; and all income derived from government bonds and securities.
Collection: State forwards municipalities’ share annually.
MTAS-1877
Account No.: 33530
Description: State tax on the manufacture, sale, and transportation of beer, of which the municipalities receive a share of 10.05 percent of the total taxes, distributed based on population.
Authorization: T.C.A. § 57-5-201 et seq.
Requirements or Restrictions: None.
Current Rate: $4.29 per 31-gallon barrel; returns are based upon population. Revenue generated from the increase from $3.40 to $3.90 is allocated to the state highway fund
Frequency of Payment: Semi-annually.
Late Pay Penalty: 10 percent interest and penalty is collected by the state. T.C.A. § 57-5-204.
Exemptions: Beer and ale sold for consumption at U.S. military installations.
Collection: State forwards municipality’s share semi-annually.
MTAS-1878
Account No.: 33540
Description: Any seized intoxicating liquors or vehicles associated with the production or transport of illegal intoxicating liquors are turned over to the Alcoholic Beverage Commission for public sale as contraband by the Commissioner of General Services. A portion of the revenue from sales of these contraband items goes to the municipality where the officer who made the seizure works.
Authorization: T.C.A. § 57-9-115; T.C.A. § 59-9-201
Requirements or Restrictions: None
Current Rate: Ninety percent of proceeds from the sale of seized liquor and 50 percent of proceeds from the sale of seized vehicles, aircraft and boats.
Frequency of Payment: Periodic. Depends on the frequency of seizures by cities and sales by the state.
Collection: The Commissioner of General Services collects the money at the time of the sale then forwards it to municipalities.
MTAS-1879
Fund: State Street Aid
Account No.: 33551
Description: Local share of state gasoline and other motor fuel taxes comprising the Gasoline Tax, the Diesel Tax, the Liquified Gas Tax on vehicles, the Compressed Natural Gas Tax, and the Prepaid User Diesel Tax. Distribution to municipalities is based upon population.
Authorization: T.C.A. § 67-3-201; T.C.A. § 67-3-202; T.C.A. § 67-3-901; T.C.A. § 67-3-905; T.C.A. § 67-3-908; T.C.A. § 67-3-1102; T.C.A. § 67-3-1113; T.C.A. § 67-3-1309.
Requirements or Restrictions: Special census counts are limited to four in addition to the decennial census.
Gasoline Tax – Of the 25 cent tax per gallon (FY 2019), municipalities receive 99 percent (one percent is retained by the state for administration) of 14.38 percent of the first 11 cents (minus 0.1074 percent designated for boating safety); 33.33 percent of an additional two cents from increases in 1985 and 1986 (minus 0.1074 percent designated for boating safety); and 33.33 percent of an additional one cent increase in 1989. Public Chapter 181, known as the "IMPROVE Act" was passed in April of 2017. It adds 1 cent for fiscal year 2017-18, 1 cent for fiscal year 2018-19 and 1 cent for fiscal year 2019-2020. Beginning with fiscal year 2020-21 the tax will be 26 cents
Diesel Tax – The IMPROVE Act increases the tax to 21 cents in fiscal year 2017-18; an additional 3 cents in 2018-19,and an additional 3 cents in fiscal year 2019-20. Beginning with fiscal year 2020-21 the tax will be 27 cents. Of the original 17 cents tax per gallon, municipalities receive 12.38 percent of 12 cents.
Liquified Gas – Of the 14 cents tax per gallon, municipalities receive 14.14 percent of the first 11 cents and 99 percent of 33.33 percent of an additional one-cent increase in 1986.
Liquified Gas Tax on Vehicles – Municipalities receive 14.14 percent of a flat rate that varies depending on the classification of the vehicle (by gross vehicle weight). The rate varies from $70 to $114.
Compressed Natural Gas – Of the 13 cents tax per gallon, municipalities receive 12.38 percent.
Prepaid User Diesel Tax – Municipalities receive 12.38 percent of a flat rate ($56 – $159) for farmers whose use of diesel fuel is mostly for agricultural purposes yet who own diesel powered passenger cars or trucks.
Exemptions: As noted in T.C.A.
Use Restrictions: Outlined in T.C.A. § 54-4-204. Funds can be spent on street improvements; principal and interest payments for street improvement project loans; the costs of acquiring rights-of-way for approaches to bridges and tunnels; the city’s share of grade eliminations; one-third of the total costs of rights-of-way for state or federal highways; paying another municipality, county or TDOT for doing road improvements; and up to 22.22 percent can be spent on funding mass transit.
MTAS-1881
Account No.: 33591
Description: TVA pays five percent of gross power sales proceeds to the state in lieu of taxes. 48.5 percent of the increase in TVA payments made to the State of Tennessee above the amount received in the base year (1977-1978) is distributed to county and municipal governments.
Authorization: T.C.A. § 67-9-101 et seq. and 16 USC 831i
Requirements or Restrictions: Before making the 30 percent of the 48.5 percent distribution to cities and counties, the state deducts $4,462 monthly and appropriates it to the Tennessee Advisory Commission on Intergovernmental Relations (TACIR).
Current Rate: Thirty percent of 48.5 percent (minus $4,462) collected above the base rate set in 1978 to cities based upon population.
Frequency of Payment: Quarterly.
Collection: State remits municipality’s share quarterly.
MTAS-1882
Account No.: 33592
Description: Three percent of the increase in gross power sales paid by TVA as payments in-lieu-of property taxes since June 30, 1978, is paid to municipalities where TVA is performing construction activity on facilities to produce electric power.
Authorization: T.C.A. § 67-9-101 (a)(3); T.C.A. § 67-9-102(b)
Requirements or Restrictions: TVA designates the construction activity areas. Payments are made during the time of construction and for one year after the construction activity is completed. For the next three fiscal years, payments are made in decreasing amounts based on the last year of the entitlement. The first year yields 75 percent of the payment based on the last year of the entitlement, the second year yields 50 percent, and the third year yields 25 percent. T.C.A. § 67-9-102 (b)(2).
This impact allocation for one county and its cities cannot exceed 10 percent of funds received under the normal distribution of the TVA gross receipts tax. T.C.A. § 67-9-102 (b)(1).
Current Rate: Three percent of the increase in gross receipts taxes from the fiscal year ended June 30, 1978 is distributed to TVA-impacted cities and counties.
Exemptions: If in any fiscal year funds remain or there are no areas impacted by TVA construction activity, then no more than 30 percent of the impact funds are allocated to The University of Tennessee for the County Technical Assistance Service (CTAS). If there are still funds remaining, then no more than 20 percent of the impact funds are allocated to TACIR in two separate 20 percent increments. If there are still funds remaining, then they go to regional development authorities that have acquired a former nuclear site from TVA. Any money remaining after these allocations follows the normal distribution of TVA gross receipts tax.
MTAS-1883
Account No.: 33593
Description: The state corporate excise tax collected from banks is shared with municipalities and counties.
Local tax rates determine the payment allocation between the county and the city, so a city must levy a property tax to receive any funds. Another formula is prescribed for allocating such revenue if a bank has branches in more than one city and/or in more than one county. T.C.A. § 67-4-2017 (a)(1)(B).
Authorization: T.C.A. § 67-4-2017
Current Rate: The tax is 3 percent of net earnings (excluding interest from state bonds), less 7 percent of ad valorem taxes, divided between counties and municipalities based on property tax rates.
Frequency of Payment: Annually in the third quarter.
Collection: State forwards revenue to municipalities in third quarter of each year.
MTAS-1884
Interest by Month
Year(s) Delinquent
MTAS-1889
Many municipalities throughout Tennessee appropriate monies to nonprofit charitable organizations and nonprofit civic organizations. T.C.A. 6-54-111 includes specific guidelines for appropriating these funds. One question that often arises is whether a municipality is required to obtain audited financial statements before making a donation. Recently, the Tennessee Code was amended to provide that “either a copy of the entity’s most recently completed annual audit or an annual report detailing all receipts and expenditures in a form prescribed by the Comptroller of the Treasury and prepared and certified by the chief financial officer of such nonprofit organization” can be obtained.
Additionally, the relevant portion of the Comptroller’s Division of Local Government Audit Manual reads:
5. Municipal Donations to Nonprofit Organizations
Section 6-54-111, Tennessee Code Annotated, as amended, authorizes a municipality’s governing body to appropriate funds for the financial aid of any nonprofit charitable organization that provides services benefiting the general welfare of the residents of the municipality or any nonprofit civic organization working to maintain and increase employment opportunities in the municipality. This section also provides for the Comptroller of the Treasury to establish standard procedures to assist the municipal governing body in the disposition of funds so appropriated. The auditor should consider whether the municipality has complied with the following laws and rules:
A municipality may appropriate funds for only those nonprofit charitable organizations that provide services benefiting the general welfare of the residents of the municipality, or any nonprofit civic organization classified under Sections 501(c)(4) or (6) of the Internal Revenue Code working to maintain and increase employment opportunities in the municipality.
Municipal payments to nonprofit organizations shall be limited to the amounts appropriated for such purposes and in keeping with the municipality’s guidelines for how the appropriated funds may be spent.
The municipality shall require that each nonprofit organization that desires financial assistance from a municipality shall file with the city clerk of the municipality a copy of an annual report of its business affairs and transactions that includes, but is not limited to:
Laws and Regulations - Sect P.D
APP.D-17
Either a copy of the entity’s most recently completed annual audit or an annual report detailing all receipts and expenditures in a form prescribed by the comptroller of the treasury and prepared and certified by the chief financial officer of the nonprofit organization;
A description of the program that serves the residents of the municipality; and the proposed use of the municipal assistance.
The annual reporting form can be found at https://www.comptroller.tn.gov/content/dam/cot/la/documents/guidance/general [6]-guidance/AnnualReportingFormForNonprofitOrganizations.docx [6].
For appropriations to nonprofit civic organizations, notices shall be published in a newspaper of general circulation in the municipality of the intent to make an specifying the intended amount and purpose.
MTAS-1887
MTAS-1888
Tenn. Op. Atty. Gen. No. 91-106
Opinion No. 91-106
Municipally Owned Electrical Systems and Electric Cooperatives — Funding Economic and Community Organizations
Phillip E. Pinion
Can municipally owned electrical systems and electric cooperatives legally put money into economic and community organizations?
It is the opinion of this office that municipally owned electrical systems may be barred, and electric cooperatives are barred, by the statutes which govern their operations from using their revenues to fund economic and community organizations; further, each may be barred from such use of revenues by documents executed in connection with the issuance of any bonds to finance or refinance the system notwithstanding the lack of any specific bar to such action in the governing statutory scheme.
Both municipally owned electrical systems and electric cooperatives are creatures of statutes and it is to those statutes to which we must look, at least in part, for the answer to the question posed. Moreover, for purposes of this opinion, we assume that the phrase “economic and community organizations” means those organizations which are customarily thought of as tax-exempt or charitable organizations and that any appropriation by a municipality would be made in accordance with T.C.A. § 6-54-111, which provides guidelines for a municipality’s appropriating money for the financial aid of any nonprofit charitable organization or any nonprofit civic organization. In addition, we assume that the question posed is concerned with the use of surplus system revenues from operations and not with the use of bond proceeds.
The Tennessee judiciary has held that, in the absence of statutory prohibition, a municipality may divert its profits from the sale of a public works commodity to other municipal purposes. Killion vs. City of Paris, 192 Tenn. 466, 241 S.W.2d 524 (1951). In Killion, the city of Paris issued its general obligation debt to construct and acquire a water works system. Subsequently, the city passed an ordinance providing that a portion of the water works fees would be applied to retire debt service on all of the city’s bonded indebtedness. Water customer Killion sued to have the ordinance stricken.
The court noted that if the water works system were acquired under the authority of T.C.A. § 7-35-401 et seq., then surplus revenues would have to be applied exclusively to the improvements, extensions or additions to the water works system pursuant to T.C.A. § 7-35-417, 418. However, plaintiff in Killion did not allege application of the above cited statutes. Consequently, the Court held these statutes to be wholly inapplicable, and in the absence of any statutory prohibition, “a municipality may divert its profits from the sale of water to its customers to municipal purposes other than those of the water works enterprise.” 192 Tenn. at 453.
Also, we have opined previously that a municipality owning a gas system could apply surplus revenues from that system to other municipal purposes where the gas system was financed pursuant to the Municipal Recovery and Post War Aid Act of 1945, T.C.A. § 7-36-101 et seq. (repealed effective July 1, 1988, but not as to bonds issued before that date, 1988 Tenn. Public Acts Ch. 750, Sections 22 and 71). Op. Tenn. Atty. Gen. No. 87-03 (January 9, 1987); Op. Tenn. Atty. Gen. No. U87-47 (April 24, 1987).
In examining the statutory scheme governing the organization and operation of municipally owned electrical systems, we find that a municipally owned electrical system may be governed by one of a number of statutes. Some of these statutory schemes have been repealed and no longer govern municipally owned electrical systems, except in those cases where bonds were issued prior to the repeal of the statutes to finance or refinance the system.
Under current law, a municipality may organize a municipally owned electrical system pursuant to the Municipal Electric Plant Law of 1935, T.C.A. § 7-52-101 et seq., and issue its debt for the acquisition and improvement of the system pursuant to the Local Government Public Obligations Act of 1986, T.C.A. § 9-21-101 et seq. (“LGPOA”). Neither the Municipal Electric Plant Law of 1935 nor the LGPOA contains prohibitions against the municipality’s applying revenues from the municipally owned electrical system to economic and community organizations. Therefore, absent restrictive covenants in any bond documents executed in connection with financing or refinancing of the electrical system, the decision in Killion should permit a municipally to apply revenues from a municipally owned electrical system to economic and community organizations.
In addition, a municipality can organize and finance its municipally owned electrical system pursuant to the Revenue Bond Law, T.C.A. § 7-34-101 et seq. The Revenue Bond Law restricts the municipality in its use of surplus system revenues to fund economic and community organizations and provides that all surplus revenues can be used only to reduce rates. T.C.A. § 7-34-103(b) and § 7-34-115.
Under law prior to July 1, 1988, a municipality could both organize and finance a municipally owned electrical system under the Municipal Electric Plant Law of 1935. The portions of that law dealing with financing municipally owned electrical systems have now been repealed pursuant to 1988 Tenn. Pub. Acts, Ch. 750. However, prior to that repeal, T.C.A. § 7-52-130 (now repealed) states that the supervisory body of the municipally owned electric plant shall devote all moneys in the electric plant fund derived from any source other than the issuance of bonds to or for certain listed items of expenditure (not including funding economic and community organizations) and that any surplus thereafter remaining, after the establishment of proper reserves, if any, shall be devoted solely to the reduction of rates (the use of bond proceeds is governed by T.C.A. § 7-52-129 (now repealed), which also precludes the use of bond proceeds to fund economic and community organizations).
Tenn. Pub. Acts, Ch. 750, Section 71, states that nothing in the act affects the validity or enforceability of any bond, note or other obligation legally issued by a local government under any law existing prior to the effective date of the act. If bonds were issued pursuant to the Municipal Electric Plant Law of 1935 prior to its repeal, we interpret the repealing act to mean that the restrictions on the use of system revenues or bond proceeds could survive the repeal until the bonds were retired. If those restrictions affected the “enforceability” of the payment of the bonds, then we think they would survive the repeal. For example, if the system revenues were pledged for payment of the bonds, then we think the restrictions would survive since diversion of these revenues could affect the enforceability of the bonds by affecting the money available for payment of the bonds. However, we caution that each bond financing is unique and we cannot opine as to any one financing without reviewing it. If no such bonds are outstanding, then the use of system revenues would be governed by the Municipal Electric Plant Law of 1935 as now in effect (which as earlier noted does not contain restrictions precluding the use of system revenues to fund economic and community organizations).
In contrast to the multiple statutes which could govern a municipally owned electrical system, electric cooperatives are organized pursuant to and their operations governed by the Rural Electric and Community Cooperative Law, T.C.A. § 65-25-201 et seq. Revenues in excess of those necessary to pay certain listed items of expenditure are required by T.C.A. § 65-25-212 to be distributed by the cooperative to its patrons in the form of refunds or general reduction of rates. The permitted uses of revenues listed in the statute do not include payments to economic or community organizations and, therefore, such excess moneys must be distributed to the patrons in the form of refunds or general reduction of the rates. Although the statute permits a cooperative, prior to reducing rates or making refunds to patrons, to provide a “fund for education in cooperation and for the dissemination of information concerning the effective use and conservation of electric power and energy and concerning any other services made available by the cooperative,” we do not think that this provision would permit a payment to the organizations with which we are concerned. Thus, we conclude that an electric cooperative organized pursuant to this law cannot use its revenues to make payments to economic and community organizations.
In conclusion, for both municipally owned electrical systems and electric cooperatives, restrictions on funding economic and community organizations with surplus system revenues may be imposed by the statutes which govern their organization, financing and operation. Restrictions on such use of surplus system revenues may also be imposed by documents executed in connection with bonds issued to finance or refinance the construction of the electrical system. We cannot emphasize enough the importance of examining carefully those statutes and documents.
Charles W. Burson, Attorney General and Reporter
John Knox Walkup, Solicitor General
H. Phillip Carnes, Assistant Attorney General
MTAS-1890
Tenn. Op. Atty. Gen. No. 98-214
Opinion No. 98-214
Appropriation of Municipal Funds to Nonprofit Charitable Organizations Providing “year-round services”
War Memorial Building, Suite 110
Does a nonprofit day care center or similar child care facility, which does not operate all 12 months of the year, meet T.C.A. § 6-54-11(a)(2)(A)’s requirement that a nonprofit charitable organization provide “year-round services” in order to qualify for appropriated funds from a municipality?
No. A nonprofit charitable organization, including a day care center or similar child care facility, must operate during the entire year in order to meet the “year-round” services requirement of T.C.A. § 6-54-111(a)(2)(A).
The inquiry to this office requests a legal opinion regarding T.C.A. § 6-54-111(a)(2)(A). The specific question is the definition of “year- round services benefiting the general welfare” and whether a nonprofit day care center or similar child care facility which does not operate all 12 months of the year meets the requirement of providing “year-round services.”
T.C.A. § 6-54-111(a) provides:
(a)(1) The legislative body of each municipality may appropriate funds for the financial aid of any nonprofit charitable organization or any nonprofit civic organization in accordance with the guidelines required by subsection (b).
(2)(A) For the purposes of this section, a nonprofit charitable organization is one in which no part of the net earnings inures or may lawfully inure to the benefit of any private shareholder or individual and which provides year-round services benefiting the general welfare of the residents of the municipalities.
T.C.A. § 6-54-111(a) (emphasis added).
“The rule of statutory construction to which all others yield is that the intention of the legislature must prevail.” City of Caryville vs. Campbell County, 660 S.W.2d 510, 512 (Tenn. App. 1983), perm. app. denied (1983). Legislative intent is “derived from a reading of the statute in its entirety and within its statutory context.” Crown Enterprises, Inc. vs. Woods, 557 S.W.2d 491, 493 (Tenn.1977).
Whenever possible, legislative intent and purpose are “ascertained primarily from the natural and ordinary meaning of the language used, when read in the context of the entire statute, without any forced or subtle construction to limit or extend the impact of the language.” Worrall vs. Kroger Co., 545 S.W.2d 736, 738 (Tenn. 1977). City of Caryville vs. Campbell County, 660 S.W.2d 510, 512 (Tenn. App.), perm. app. denied (1983). If legislative intent is without contradiction or ambiguity, “there is no room for interpretation or construction, and the judges are not at liberty, on consideration of policy or hardship, to depart from the words of the statute; ... they have no right to make exceptions or insert qualifications, however abstract justice or the justice of a particular case may require it.” Carson Creek Vacation Resorts, Inc. vs. Woods, 865 S.W.2d 1, 2 (Tenn. 1993) (citations omitted). The ordinary and common meaning of a word may be established by its definition in a recognized dictionary. Edelman vs. State, 62 Wis.2d 613, 620, 215 N.W.2d 386 (1974).
The term “year-round” is not defined in T.C.A. § 6-54-111. The term is not used or defined in the regulations promulgated by the Comptroller of the Treasury pursuant to T.C.A. § 6-54-111(b). (Tenn. Admin. Comp. 0380-3-7-.01 et seq., Rules of Comptroller of the Treasury.) Tennessee courts have not addressed the meaning of the term “year-round” in T.C.A. § 6-54-111(a).
Black’s Law Dictionary defines “year” but not “year-round.”[1] English language dictionaries define the term “year-round.” It means “[e]xisting, active, or continuous throughout the year; during all seasons.” American Heritage Dictionary, p. 1400 (2d college ed. 1985). The Webster Dictionary defines the adjective “year-round” as “occurring, effective, employed, staying, or operating for the full year: not seasonal” and gives “a year-round resort” as an example. Webster Dictionary (Internet dictionary based on Merriam-Webster Collegiate Dictionary, 10th ed. 1998), entry for “year-round” as adjective, at
Based on the common, unambiguous meaning of “year-round,” a day care or similar child care facility must operate continuously throughout the year, during all seasons, in order to qualify as a “a nonprofit charitable organization ... which provides year-round services benefiting the general welfare of the residents of the municipalities” within the meaning of Tenn. Code Ann. § 6-54-111(a)(2)(A).[2]
John Knox Walkup, Attorney General and Reporter
Michael Moore, Solicitor General
Margaret M. Huff, Assistant Attorney General
[1] “Year” is “[t]he period in which the revolution of the earth round the sun, and the accompanying changes in the order of nature, are completed. Generally, when a statute speaks of a year, twelve calendar, and not lunar, months are intended.... When the period of a “year” is named, a calendar year is generally intended, but the subject-matter or context of statute or contract in which the term is found or to which it relates may alter its meaning.” Black’s Law Dictionary (6th ed. 1998).
[2] The term “year-round” is found, but not defined, in four other Tennessee statutes. In these statutes, as well as the statute at issue, the legislature has used the term “year-round” in a consistent way to mean during the entire year or continuously throughout the year and during all seasons. T.C.A. § 54-5-705, regarding eligibility of historic sites for interstate highway directional signs, requires that a historic site be “open to the public on a year-round basis.” T.C.A. § 68-221-703(19)(B)(i) of the Safe Drinking Water Act defines “Community water system” as “a public water system which serves at least 15 service connections used by year-round residents ...” A provision in the Education Finance Act at T.C.A. 49-3-317(b), regarding adjustments to reflect local changes, states, “Whenever the schools in any LEA are conducted on a year-round basis, such shall not operate to reduce the level of state support to the LEA ...” T.C.A. § 49-6-101(f)(2), regarding special services for preschools, states, “Programs should strive to assist families by providing full-day, year- round services ....”
MTAS-741
Since 1984, the Government Accounting Standards Board (GASB) has shouldered the responsibility of establishing consistent financial reporting standards for state and local governments. In the past, GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, adopted reporting standards for state and local governments to account for the liability associated with government pension plans. Newer GASB Statements No. 67, 68, 71 and 73 revised the previous Statements and address new reporting requirements and other related topics. GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, requires state and local governments to formally recognize the full cost of retirement promises made to employees, in addition to pensions related to their retirement. GASB Statements No. 74 (effective for fiscal years beginning after June 15, 2016) and No. 75 (effective for fiscal years beginning after June 15, 2017) revise previous Statements and address new reporting requirements and other related topics. Additionally, GASB Statement No. 78 (effective for periods beginning after December 15, 2015) and GASB Statement No. 82 (effective for the first reporting period where the measurement date is on or after June 15, 2017) have have revised the standards and should be reviewed carefully. These can be found at www.gasb.org [7].
The Government Finance Officers Association Committee on Pension and Benefit Administration has a number of best practices on this and other topics and can be accessed at: http://www.gfoa.org/best-practices [8]
MTAS-742
GASB Statement No. 74, "Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans " was issued in June of 2015. GASB's stated objective is to "improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability." It is effective for fiscal years beginning after June 15, 2016 but earlier implementation is encouraged. It amends and/or supecedes a number of previosly issued GASB Statements.
GASB Statement No. 75, "Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions" was issued in June of 2015. GASB's stated objective is to "improve the decision-usefulness of information in employer and governmental nonemployer contributing entity financial reports and will enhance its value for assessing accountability and interperiod equity by requiring recognition of the entire OPEB liability and a more comprehensive measure of OPEB expense. Decision-usefulness and accountability also will be enhanced through new note disclosures and required supplementary information." It is effective for fiscal years beginning after June 15, 2017 but earlier implementation is encouraged. It amends and/or supecedes a number of previosly issued GASB Statements.
An employer may offer postemployment benefits to its employees as part of their total compensation package as a reward for years of continuous service. These benefits are authorized in an agreement or policy that defines what the employer promises to provide a qualified retiring employee. Major categories of retirement benefits include retirement income – pensions and any other benefit as an integral part of a pension, such as healthcare or other group benefits.
The most familiar type of retirement benefit is postemployment income derived from a pension. Pensions may be separated into three categories:
Defined benefit plan; and
Although each type of plan provides for postemployment income, the structures are quite different, and, depending on which plan is chosen, the risk of funding retirement income may be with the employee or with the employer.
Defined contribution plans focus on the input or contributions made by the employee and, perhaps, on behalf of the employee by the employer. When plan contributions and applicable interest earnings have been distributed, the plan has no further obligation to the retiree. The only retirement promise made to the employee by the employer is that the contributions made toward the employee’s retirement, plus interest earned on the investment, will be returned to the employee upon retirement.
Under the defined contribution plan, the complete risk for postretirement income lies with the employee. Will the amount invested by the employee over time, plus the interest earned on the investment, provide enough money for retirement? Most employees do not have the expertise to plan for their income needs at retirement. They often employ the services of financial advisors who assist them in the process of investing for their retirement.
A second type of employee retirement pension is the defined benefit plan. This type of pension plan is based on the employer’s promise that future investment returns will be paid to the employee. Under this plan, the employer may or may not require the employee to make contributions. The focus of this plan is the guarantee that the employer will make payments to the employee from the time of retirement until the employee’s death, regardless of the amount the employee has contributed to the plan. Some of these plans provide options to allow the surviving spouse of an employee to continue to receive payments throughout his or her life as well.
This pension type is a guarantee of retirement income to the employee that is usually based on a formula considering the employee’s years of service and average annual compensation. In this case, the employer is assuming the full risk of the promise to provide the retiree’s income. In order to determine the future financial exposure to the organization regarding this retirement income guarantee, an employer will hire an actuarial firm to calculate the cost of this retirement promise. Actuarial calculations estimate the cost of the retirement plan by factoring payroll projections, ages, and years of service for all employees of the organization as well as the rate of return on investment of present and future assets of the retirement fund.
Since the organization assumes the total risk for this type of employee pension, the employer typically makes annual deposits into a retirement trust fund in order to guarantee a source of funds for these future obligations. In the past several years there has been a trend by employers to move from a defined benefit plan to a defined contribution plan for the reasons noted above. When this is done, current employees are typically 'grandfathered' into the old plan,, while all new employees fall under the new plan. Over time, the number of employees will increase in the DC plan and decrease in their DB plan.
The hybrid may be any combination of the defined contribution and defined benefit pension plans. Contributions are typically made to the plan each month. Options may include a guarantee from the employer of the rate of interest the employee will earn on the contributions, but there is no full retirement income guarantee.
The Government Finance Officers Association (GFOA) committe on Pension and Benefit Administration has a number of best practices related to pensions and may be accessed at: http://www.gfoa.org/best-practices [8]
MTAS-743
Due to the nature of the liability associated with retirement income, GASB established financial reporting standards regarding pensions with Statement No. 27. However, the costs of other postretirement benefits, such as group insurance benefits, were not being considered as an “accrued” liability.
As its budget is prepared each year, a government makes appropriations to fund the group-related benefits of its employees and, if applicable, the benefits of its retirees. If part of the employee’s total compensation package includes group insurance benefits at retirement, where is the line item appropriation? Since the payment of this portion of the employee’s compensation is not made until later, often many years later, the promise goes unfunded. Regardless of when the payment is actually made, the liability of the promise is accruing year by year at an ever-increasing cost.
Compensation related to benefits at retirement other than pensions are called other postemployment benefits (OPEBs) and are a part of the exchange of salaries and benefits for employee services rendered. Some of the exchange is used concurrent with the employee’s service as payment of salary and health insurance benefits. OPEBs are the part of compensation taken later when the employee’s services have ended.
The intent of GASB 45 is to account for the unused portion of compensation that has been promised to employees today for payment in the future. These costs of benefits should be accounted for when the promise is made, even if the payment is many years later.
NOTE: GASB Statements No. 74 and 75, issued in June of 2015 significantly amend and supersede a number of previously issued authoritative literature, including GASB 45. The implementation date for GASB 74 is for fiscal years beginning after June 15, 2016, and for GASB 75 fiscal years beginning after June 15, 2017. Many of the new requirements attributable to pensions are mirrored in the new OPEB reporting requirements.
GASB Statement No. 74 (Titled "Financial Reporting for Postemployment Benefit Plans other Than Pension Plans") replaces Statements No. 43 and 57, as well as parts of Nos. 25, 43 and 50. The scope of the new statement includes OPEB plans, both defined benefit and defined contribution, administered through trusts that meet the following criteria:
Contributions from employers and nonemployer contributiing enties to the OPEB plan and earnings on those contributions are irrevocable.
OPEB plan assets are legally protected from the creditors of employers, nonemployer contributing entities, and the OPEB plan administrator.
The statement also includes requirements to address financial reporting for assets accumulated for purposes of providing defined benefit OPEB through OPEB plans that are not administered through trusts. There are also new requirements for inclusion in the Notes to Financial Statements and Required Supplementary Information. GASB Statement No. 74 is complex and the prudent finance director should obtain a copy of the statement and become familiar with its requirements.
GASB Statement No 75 (Titled "Accounting and Financial Rporting for Postemployment Benefits Other Than Pensions") replaces Statements Nos. 45 and 57. The Statement addresses accounting and financial reporting for OPEB that is provided to the employees of state and local governmental employers. It establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. The same three criteria noted above apply to this statement as well.
This statement requires the liability of employers and nonemployer contributing enties to employees for defined benefit OPEB to be measured as the portion of the present value of projected benefit payments to be provided to current and inactive employees. Total OPEB liability generally is required to be determined through an acturarial valuation. There are exceptions for entities with fewer than 100 employees. This statement is very complex and will require a detailed analysis and study beyond the scope of this publication. A copy of the statement should be obtained and thoroughly studied.
MTAS-744
Postemployment benefits other than pensions, typically referred to as "OPEB" were addressed in GASB 74 and GASB 75. A brief summary of each statement follows. For a comprehensive study of this topic please refer to the GASB website at www.GASB.org [9].
This statement is very comprehensive and detailed, and beyond the scope of this article.State and local governments should go to www.GASB.org [9] and research this statement carefully, as well as discussing with external auditors and appropriate staff. There are many resources available to assist in implementing this statement. Following are links to some good resources:
https://www.gasb.org/cs/ContentServer?c=Pronouncement_C&cid=1176166370763&d=&pagename=GASB%2FPronouncement_C%2FGASBSummaryPage [10]
https://www.gasb.org/cs/ContentServer?c=Document_C&cid=1176166144750&d=&pagename=GASB%2FDocument_C%2FDocumentPage [11]
https://www.gasb.org/cs/ContentServer?c=Document_C&cid=1176169688973&d=&pagename=GASB%2FDocument_C%2FDocumentPage [12]
MTAS-746
By using the request for proposal process, a municipality is better prepared to communicate its needs regarding the actuarial valuation, and the firm submitting a proposal is better informed of the project parameters. See the sample RFP [13] requesting the services for an actuarial valuation.
MTAS-747
ACTUARIAL VALUATION OF POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS (OPEB)
The City of ________ (city/town name) is seeking proposals from qualified firms to complete an actuarial valuation of the City’s retiree _____ (life, health, vision, etc. benefit plan as appropriate) insurance plans. This valuation shall be performed in compliance with the actuarial standards/methods included in the Government Accounting Standards Board Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (OPEB).
The City of _________ (city/town name) currently provides _________ (life, health, vision, etc.) insurance benefits to qualifying retirees through fully insured plans. A summary description of the retiree insurance benefits is included at the end of this RFP.
The City of _________ (city/town name) was incorporated in ____ . For the fiscal year beginning July 1, ____, there are ___ budgeted full-time employees and ___ retired employees and spouses. Currently, retiree __________ (life, health, vision, etc.) insurance benefits are funded on a pay-as-you-go basis.
Given the number of retirees who already receive ______ (life, health, vision, etc.) insurance benefits and the number of current employees who will reach retirement age and qualify for retiree insurance benefits over time, the City wishes to proceed with the actuarial valuation and accurately assess its liability for these postemployment benefits in compliance with GASB Statement 45.
The results of this valuation will be used to assist the City in preparing for compliance with the GASB standard and guide the City in making policy decisions regarding possible modifications to its existing retiree ________ (life, health, vision, etc.) insurance benefit programs.
The proposed valuation shall consist of the following:
Phase 1 will consist of the actuarial valuation to determine the City’s liability for the existing retiree _______ (life, health, vision, etc.) insurance programs. This valuation shall be completed in a manner so as to comply with all of the actuarial valuation requirements of GASB Standard No. 45.
This phase will include a minimum of three meetings, including a kick-off meeting with City staff to discuss the proposed valuation, clarify issues regarding benefit plans, etc.; a meeting with staff at the conclusion of the valuation to review results; and a briefing for the city’s governing body to review the results.
Phase 2 would consist of an analysis of possible plan modifications or alternatives for City consideration. Initiation of Phase 2 would be at the City’s option based upon the results of Phase 1. If the City chooses to initiate Phase 2, the exact scope of work and fee would be negotiated at that time.
RFP Submittal Requirements
Submittals in response to this RFP shall include the following:
1. Summary of the firm’s experience in similar projects, including client reference contact information;
2. Discussion of the proposed methodology to be employed in the valuation;
3. Identification of and biography information for staff member(s) to be assigned to the valuation;
4. Proposed valuation schedule;
5. List of required data elements and other information to be provided by the City; and
6. Valuation fee proposal (Phase 1 only) and proposed payment terms.
City staff will review all submitted proposals and may choose to invite one or more firms for an interview to further discuss their proposal. Selection of a recommended firm will be based on three factors:
1. The firm’s experience in similar projects;
2. The proposed methodology and valuation schedule; and
3. The fee proposal.
The selection criteria are intended to allow the City to select the firm that submits the best overall proposal, not just the lowest cost proposal.
RFP Submittal Deadline
Proposals in response to this RFP should be sent to:
To be considered, proposals must be received by ____ (time) on ____ (day, month, year). Electronically submitted proposals will be accepted. All proposals should have the words “RFP Response” on the front of the envelope.or electronic submission forms. Proposals will not be opened publicly.
(Telephone number and email address)
(Attach appendices from appropriate sections of the city personnel policy that describe the health plan benefits for current employees and retirees.)
Thank you to Kirk Bednar for his comments and assistance, to the city of Brentwood, Tennessee, for providing MTAS with a copy of its request for proposal (RFP) for an actuarial study and the permission to use a variation of it in this publication, and to Janice Casteel and Mike Keith at the city of Cleveland, Tennessee, for their knowledge, expertise, and valuable comments.
[1] http://www.mtas.tennessee.edu/knowledgebase/state-tennessee-standard-chart-accounts-classification-fund-function-object
[2] http://www.mtas.tennessee.edu/reference/ag-opinion-appropriation-municipal-funds-nonprofit-charitable-organizations-providing-year
[3] http://www.comptroller.tn.gov/shared/manuals.asp
[4] http://www.mtas.tennessee.edu/finance-and-accounting
[5] https://www.tn.gov/content/dam/tn/revenue/documents/taxguides/bustaxguide.pdf
[6] https://www.comptroller.tn.gov/content/dam/cot/la/documents/guidance/general-guidance/AnnualReportingFormForNonprofitOrganizations.docx
[7] http://www.gasb.org
[8] http://www.gfoa.org/best-practices
[9] http://www.GASB.org
[10] https://www.gasb.org/cs/ContentServer?c=Pronouncement_C&amp;cid=1176166370763&amp;d=&amp;pagename=GASB%2FPronouncement_C%2FGASBSummaryPage
[11] https://www.gasb.org/cs/ContentServer?c=Document_C&amp;cid=1176166144750&amp;d=&amp;pagename=GASB%2FDocument_C%2FDocumentPage
[12] https://www.gasb.org/cs/ContentServer?c=Document_C&amp;cid=1176169688973&amp;d=&amp;pagename=GASB%2FDocument_C%2FDocumentPage
[13] http://www.mtas.tennessee.edu/reference/sample-request-proposals
Source URL (retrieved on 01/23/2020 - 6:14am): http://www.mtas.tennessee.edu/reference/budgets