Model Chart of Accounts for Municipalities

(from Maine Townsman, January 2007)
By Lee Burnett, Freelance Writer

The City of Saco has become a leader in trying to make its finances more understandable to the average citizen. The city is often one of the first in the state to adopt the latest governmental accounting standards and it regularly wins awards from the Government Finance Officers Association (GFOA) for its “easily readable, efficiently organized, and comprehensive” annual financial reports. City officials have also begun to publish “performance measures” of city operations.

But Saco Finance Director Lisa Parker believes the city still has a long way to go. Parker is among those pushing for a statewide uniform system of tracking municipal expenditures and revenues that will make it easier for citizens to compare one community’s performance against another’s. The hope is that the transparency will induce communities to learn from each other about the most efficient ways of providing services.

“My approach is (that) there’s always someone doing something more efficiently, more effectively and I want to find out why,” said Parker.

Two ingredients are necessary for this to happen – a common accounting system and a willingness to make comparisons. A common accounting system, called a “Model Chart of Accounts,” is well on its way to being created (see MMA website,, for a link to the new model and information on its development). But, it remains to be seen how many communities take the next step and adopt “benchmark budgeting,” which by making comparisons will inevitably expose both good and bad performance.

Development of a model chart of accounts was borne out of the frustration of people like Parker, for whom comparing municipal performance involved a huge effort.

Let’s say Community A has a hunch it’s spending too much for snowplowing and wants to learn from Community B – similar in size – why it has much lower overall costs. In delving into the numbers, Community A discovers its own accounting system includes employee benefit costs as part of each employee's salary, while Community B separates employee benefits and reports them collectively in a separate budget. Because of the differences in employee benefit accounting, Community A can’t learn much by comparing overall snowplow budgets. Community A is left wondering: are our higher costs simply a reflection of accounting differences or efficiency differences? The question sometimes never gets answered when accounting systems are different.

Parker has tried making the comparisons, but it involves substantial legwork. “Without doing a whole lot of research – on demographics and that Maine has a harsh climate so information is comparable – it makes it very difficult,” she said.

The result is frustration for lay people and experts alike when it comes to weighing municipal performance, says one of the tax experts in the Maine Legislature.

“If you don’t have common accounts, you can’t make a comparison,” said State Senator Peter Mills. Mills says he has been “enormously frustrated” when he tries to make simple inquiries about why spending in one municipal department is higher than in the same department in a different town. “Nobody can answer it,” he said.

Mills says he’s just as frustrated attempting to compare spending between school systems, a situation that gives school superintendents leeway to “prattle on” about special circumstances.

But it’s not just frustration at the local level that is giving rise to a uniform accounting system. There is also frustration at the state level concerning the calculation of Maine’s property tax burden and how it compares with other states.

It turns out that the Census Bureau’s calculation of Maine’s property tax collection – which is used in most of the state-by-state, tax burden rankings – relies on an estimate that is wildly higher than the actual figure reported by Maine’s own Department of Revenue Services. The census bureau uses sampling and extrapolation to arrive at its figure. Maine relies on actual tax collections reported by each of Maine’s municipalities. The discrepancy is $275 million – or about 15 percent. [See article “Measuring Tax Burden” in the December 2006, Maine Townsman].

Other states have taken control of how the Census Bureau reports their tax burden and Mills resolved to follow their lead by introducing legislation two years ago that would have mandated a uniform accounting system with reporting requirements. Mills’ idea did not fly, chiefly because of concerns raised by MMA that such a system would be onerous to municipalities.

“That was not going to work,” said MMA’s Kate Dufour. “Municipalities are already reporting to many different entities,” she said. “There are other ways to get Census the information without mandating reporting.”

Nothing happened until the Intergovernmental Advisory Commission took up the matter early last year. The IAC is a legislatively-created body charged with reducing duplication among the various levels of government and to improve efficiency. While it has no particular concern about the Census Bureau’s tax data collection, IAC shares a concern about the lack of standardized municipal data. The situation “prevents governmental units from sharing services, participating in interlocal agreements and engaging in a variety of activities where working together can create more efficient services and better fiscal management,” according to a summary of the IAC process prepared by the Maine State Planning Office.

To develop a unified accounting system, the IAC appointed a study committee led by the Department of Audit and composed of state and local finance officials, including Parker, and private and public CPAs. “The intent is to develop a chart of accounts that both larger cities and smaller towns can adopt and use and to have sufficient flexibility so that users can modify it to suit their needs while staying within the model,” according to the State Planning Office.

In spite of its arcane name, a model chart of accounts is simply a way of ensuring everybody is speaking the same language. The model breaks down spending into discrete items and assigns each function separate account numbers. For example, the new model lists “agency and permit fees” and then assigns separate numerical codes to many different kinds of fee revenue: zoning and subdivision fees, vital statistics records fees, health and inspection fees, building permit fees, plumbing permit fees, animal license fees, marriage license fees, hunting license fees, and motor vehicle fees.

The model meshes with one developed for school systems. The school system chart of accounts is being made mandatory because of reporting requirements connected to the new state education funding model, Essential Programs and Services (EPS).

Participants in the study committee seem pleased with their work. The goal was to make the model simple enough for small communities and rigorous enough for bigger communities, said participants.

“We’re hoping we can get a lot of towns to buy into it – small, medium, large,” explained Wanda Ouellette, finance director in Caribou, a community of 8,400 residents. “We didn’t want smaller towns overwhelmed with this, and we wanted to allow bigger towns to break down [information] further.”

Adoption of the new accounting system may entail changes in software programs, “I would say the extremely small municipalities, where change comes slowly, will probably oppose it . . . or they may not,” said Barbara Cox, treasurer in Dedham, population 1,400. “As long as their program can be adapted, there’s no need to buy new software.”

For communities with complex municipal finances, software can cost in excess of $10,000. State Auditor Neria Douglas said she hopes software vendors”will look at figuring out how to provide” flexibility in existing programs to incorporate the new model.”
“There will be some tweaks,” said Douglas.

Kathy Tyson, a CPA with Runyon, Kersteen and Ouellette, an accounting firm that advises 25-30 municipal clients, said she sees no urgency to adopt the new model. “It is a big project to undertake,” Tyson said. The cost “depends on where you’re starting from. If you’re not computerized, then it’s a bigger task. Most communities don’t make a change unless they’re [also] changing the software system.”
Tyson said she “feels positive” about the new model, but “I don’t feel like they need to jump on board right away.” She would advise adopting the new model soon “if they’ve inherited a chart of accounts that’s old and ... not as functional” or “if they’re changing software vendors.”

Tyson said standardizing information is valuable beyond the efficiency savings that might accrue because it provides “more information to elected officials.”

A uniform accounting system fits the trend toward more transparency in municipal finance. It follows GASB 34, an accounting rule requiring municipalities to place a value on infrastructure and its maintenance, an obligation if not followed that can be to the detriment of taxpayers in the long run. In the offing is GASB 45, a rule requiring municipalities to calculate the actuarial cost of retired employees’ health benefits, which will add “hundreds of millions of dollars in liabilities” to some municipal balance sheets, according to Saco’s Parker.

Life-cycle costing, or performance measures, also extends the time-line of accounting into the future. So the cost of a new snowplow, for example, can measured not just in its initial cost, but its productivity over time and useful life span. Performance measures would make it easier for a town manager to make an honest comparison between the cost of continuing to have the municipal public works crew plow the roads versus contracting out the service.

“Budget benchmarking and performance measures are where things are going,” said Lewiston City Administrator James Bennett. “It’s a much different world we’re moving in to.”

Without budget benchmarking, citizens are left with rather crude measures of municipal performance – the mill rate, one’s individual tax burden, or something as subjective as ‘do I like the mayor’?”

“Those are not very quantifiable ways of knowing whether we’re doing a good job or not,” Bennett said. There is growing pressure from citizens who want to know: “for the money invested in taxes, what am I getting in return,” he said.

Lewiston is not doing a lot of budget benchmarking, but is moving in that direction. Transitioning to budget benchmarking is a substantial effort that could take 60-70 percent of an employee’s time for an extended period, according to Bennett. Furthermore, he says, department heads need to be prepared that budget bench-marking may expose their department as underperforming. “Everyone needs to understand the principles and buy into the process,” says Bennett.

Parker echoes Bennett’s views. “That, honestly, is one of the biggest obstacles. Some (department heads) don’t want to start engaging in comparisons. There is apprehension: ‘what if my department is not as efficient and effective as Biddeford’s (right next door)?’ My response is that if someone is doing it more efficiently and effectively, I want to learn. Comparing is not a bad thing, but a proactive thing.”

There’s still a learning curve ahead for citizens. And it’s not as if most citizens are that savvy about governmental financial information to begin with. Despite the professional accolades that Saco receives for its financial reporting, Parker believes few Saco residents can “make heads or tails” of this year’s 123-page Comprehensive Annual Financial Report.

For the past three years, Saco has posted annual performance reports on the town’s website. The performance reports are an early glimpse of what benchmark budgeting is all about. Despite the effort at transparency, when Saco residents fill out annual satisfaction surveys on municipal government, one of the lowest rated areas is the residents’ feelings about Saco property taxes relative to services they receive.

“I was a little bit surprised,” said Parker. “It wasn’t that we were doing a terrible job, they really don’t understand. I think it’s going to take an educational effort.”