EXPENDITURE LIMITATIONS 

1. How is the expenditure limitation determined for a city or town?
    
2. Where can I obtain a city or town’s constitutional expenditure limitation?
    
3. What is the difference between an Alternative Expenditure Limitation (Home Rule), Permanent Base Adjustment, and a One-Time Override?
    
4. Can constitutionally allowable exclusions be taken by a city or town while under a home rule?
    
5. Can a city or town under a home rule adopt a permanent base adjustment?
    
6. Can a city or town adopt a home rule after voters have approved a permanent base adjustment?
    
7. What guidance is available to assist in preparation of a home rule or permanent base adjustment proposal?
    
8. What are the current inflation factors that should be used in a home rule proposal?
    
9. Where can current population projections be obtained for use in a home rule proposal?
   
   
10. What happens if a home rule proposal does not pass?

EXPENDITURES SUBJECT TO THE LIMITATION

1. Are all expenditures subject to the limitation?
    
2. Can a city or town subtract expenditures for new services or facilities on the Annual Expenditure Limitation Report (AELR) Reconciliation?
    
3. What are “Carryforwards”?
    
4. Are carryforwards accumulated prior to a city or town electing a home rule still excludable after the expiration of the home rule? Also, can a city or town accumulate additional carryforward while it is under a home rule?
    
5. What is the penalty for exceeding the expenditure limitation?

FILING REQUIREMENTS

1. When must a notice of chief fiscal officer (CFO) be filed with the Auditor General?
    
2. What reports must be sent to the Auditor General's Office?
    
3. When are reports due?
    
4. Can a city or town receive an extension to file reports?
    
5. What is the penalty for late reports?
    
6. What must be included in city/town audit reports to address reporting requirements for highway user revenue fund (HURF) monies received?
    
7. Where should a one-time override be included on the AELR?
    
8. What information is required to be included in the Notes to the AELR, besides Note 1 describing significant accounting policies?

EXPENDITURE LIMITATIONS 

1.  How is the expenditure limitation determined for a city or town?

The Economic Estimates Commission calculates the constitutional expenditure limitation for all cities and towns by adjusting the municipality’s base-year (generally fiscal year 1979-80) actual expenditures of local revenues for any voter-approved permanent base adjustments or annexations, changes in population, and inflation since the base year.

2.  Where can I obtain a city or town’s constitutional expenditure limitation?

Constitutional expenditure limitations can be obtained by contacting Diane Sosinski of the Arizona Department of Revenue, Office of Economic Research and Analysis at (602) 716-6797. The Economic Estimates Commission should notify cities and towns of their actual expenditure limitations by April 1, for the following fiscal year.

3.  What is the difference between an Alternative Expenditure Limitation (Home Rule), Permanent Base Adjustment, and a One-Time Override?

Home Rule—Arizona Constitution, Article IX, §20(9) allows a city or town to adopt an alternative expenditure limitation (home rule) with voter approval at a regularly scheduled election for the nomination or election of members of the governing board of the city or town. A home rule prescribes the method the municipality will use to calculate its own expenditure limitation each year. Approval of a home rule must occur prior to the first fiscal year in which it applies. Home rules apply for 4 succeeding fiscal years, after which the constitutional expenditure limitation becomes effective, unless a new home rule is adopted.

Permanent Base Adjustment—Arizona Constitution, Article IX, §20(6) allows a city or town to permanently adjust its base limit with voter approval at a regularly scheduled general election or at a nonpartisan election held for the nomination or election of members of the governing board. The adjustment will be used to calculate the constitutional expenditure limitation beginning with the fiscal year immediately following the fiscal year that the permanent base adjustment is approved. Permanent base adjustments apply to all future years; however, additional adjustments may be adopted.

One-Time Override—Arizona Constitution, Article IX §20(2)(c) allows a city or town to exceed its constitutional expenditure limitation with voter approval at a special election held on the third Tuesday in May, or at a regularly scheduled election for the nomination or election of the members of the governing board. A one-time override does NOT allow an entity to establish an alternative expenditure limitation for 1 year. Instead, a one-time override allows an entity to exceed its constitutional expenditure limitation by a specific amount in the fiscal year after the election. As such, the entity’s resolution and ballot language should include the specific amount of excess expenditures that voters are being asked to authorize.

4.  Can constitutionally allowable exclusions be taken by a city or town while under a home rule?

No, constitutionally allowable exclusions apply only to entities bound by the constitutional expenditure limitation. However, cities and towns under home rule may use any exclusions specifically identified in their voter-approved home rule proposals. (Attorney General Opinion I88-045)

5.  Can a city or town under home rule adopt a permanent base adjustment?

Yes, cities and towns under home rule may adopt a permanent base adjustment. The city or town’s constitutional expenditure limitation for the year following voter approval of a permanent base adjustment will be calculated using the adjusted base limit. However, the city or town is still subject to its home rule if it has not expired.

6.  Can a city or town adopt a home rule after voters have approved a permanent base adjustment?

Yes, cities and towns that have an adjusted base limit may adopt a home rule. A city or town's estimated constitutional expenditure limitation presented in the publicity pamphlet would be calculated using the adjusted base limit. The home rule process is otherwise not affected.

7.  What guidance is available to assist in preparation of a home rule or permanent base adjustment proposal?

Home rule and permanent base adjustment guides with information and sample forms are available on the Resources and Research page of the Arizona League of Cities and Towns Web site at http://www.azleague.org. The home rule or permanent base adjustment proposals, including the resolution, detailed analysis, summary analysis, and summary analysis worksheet, as applicable, must be submitted to the Auditor General's Office for review at least 60 days prior to the election. [Arizona Revised Statutes (A.R.S.) §41-563.03(D) and (E)]

8.  What are the current inflation factors that should be used in a home rule proposal?

Inflation factors for use in home rule proposals are provided by the Arizona Department of Revenue, Economic Research and Analysis unit. While these amounts are estimates and subject to change, the following are the most recent inflation factors issued on October 5, 2011. Cities and towns preparing home rule packets for fiscal years 2013, 2014, 2015 and 2016 should use the inflation factors listed for the 4 years beginning with calendar year 2011 to calculate the constitutional (state-imposed) expenditure limitations for those years.

9.  Where can current population projections be obtained for use in a home rule proposal?

Population projections can be obtained by contacting the Arizona Department of Administration, Office of Employment and Population Statistics at (602) 771-1236.

10.  What happens if a home rule proposal does not pass?

If a home rule is not adopted by a majority of the qualified voters, the state-imposed expenditure limitation applies and no new home rule may be submitted to the voters for at least 2 years. However, the city or town may submit to its voters a permanent base adjustment or one-time override as described in Expenditure Limitations FAQ #3.

EXPENDITURES SUBJECT TO THE LIMITATION

1.  Are all expenditures subject to the limitation?

No. The expenditure limitation only applies to expenditures of local revenues as defined by Arizona Constitution, Article IX, §20. Generally, local revenues include all monies received by or for the account of the city or town; however, some monies such as grants and aid from the federal government and certain revenues received from the State are excluded from the definition of local revenues. For a detailed explanation of expenditures not subject to the limitation, see the Uniform Expenditure Reporting System manual §VII.

2.  Can a city or town subtract expenditures for new services or facilities on the Annual Expenditure Limitation Report (AELR) Reconciliation?

No. There is no provision in the Arizona Constitution or Arizona Revised Statutes allowing a city or town subject to the constitutional expenditure limitation to exempt expenditures for new or expanded programs/facilities from expenditures subject to its expenditure limitation. However, a city or town under a home rule may include exclusions that are different from those provided in the constitution in their home rule resolution. These exclusions can be taken on line B.12 of the AELR, Part II.

3.  What are “Carryforwards”?

Carryforwards are nonlocal (excludable) revenues as defined by the Arizona Constitution, Article IX, §20 that remain unspent at the end of a fiscal year. Such amounts may be carried forward to subsequent fiscal years and exclusions claimed when the carried forward revenues are spent. Carryforwards should be specifically identified in the municipality’s accounting records by fund as to the nature of the exclusion, the amount of the carryforward, and the fiscal year in which the carryforward was generated.

4.  Are carryforwards accumulated prior to a city or town electing a home rule still excludable after the expiration of the home rule? Also, can a city or town accumulate additional carryforward while it is under a home rule?

After a home rule expires, and providing a new home rule is not elected, a city or town will be subject to the constitutional expenditure limitation. Expenditures of excludable revenues as defined by the Arizona Constitution, Article IX, §20 were not included by the Economic Estimates Commission in the calculation of the 1979-80 base limit. Therefore, excludable revenues received before or during periods governed by a home rule that remain unspent (carryforwards) are allowable exclusions when spent in subsequent periods governed by the constitutional expenditure limitation.

5.  What is the penalty for exceeding the expenditure limitation?

In accordance with A.R.S. §41-1279.07(H), a city or town that exceeds its expenditure limitation without authorization will have the following amount of state income tax (urban revenue sharing monies) withheld based on the percentage of the excess expenditures:

• If the excess expenditures are less than 5 percent of the limitation, the amount withheld is equal to the excess expenditures.

• If the excess expenditures are between 5 percent and 10 percent of the limitation, or are less than five percent of the limitation but it is at least the second consecutive instance of excess expenditures, the amount withheld is equal to three times the excess expenditures.

• If the excess expenditures are equal to 10 percent or more of the limitation, the amount withheld is equal to five times the excess expenditures or one-third of its allocation of state income tax, whichever is less.

 The penalty is withheld in the fiscal year following a hearing by the Auditor General.

FILING REQUIREMENTS

1.  When must a notice of chief fiscal officer (CFO) be filed with the Auditor General?

A.R.S. §41-1279.07(E) requires entities to provide to the Auditor General by July 31 the name of the CFO designated by the governing board to submit the current year’s expenditure limitation report. However, we do not require a new notice be filed if the previously designated CFO has not changed. A notice should be filed with our Office whenever a new CFO is appointed. Click here to access the CFO Designation Form.

2.  What reports must be sent to the Auditor General's Office

In accordance with A.R.S. §41-1279.07(C), cities and towns are required to submit audited financial statements and AELRs to our Office. Auditor's reports on internal controls and compliance for federal programs (single audit reports) are not required to be submitted. A.R.S §9-481 allows towns not subject to the Single Audit Act Amendments of 1996 to submit audited financial statement and audit reports on the AELR biennially. However, towns must submit at least an unaudited AELR annually. All required reports may be submitted electronically in portable document format (PDF) either on a CD/DVD or by e-mail at asd@azauditor.gov. If electronic files submitted do not include a signature on all pages that must be signed, such as the Independent Auditor's Report and Part I of the AELR, hard copies of the signed pages must also be submitted.

3.  When are reports due?

Reports are due 4 months after fiscal year-end (October 31). [A.R.S. §41-1279.07(C)].

4.  Can a city or town receive an extension to file reports?

Yes, A.R.S. §41-1279.07(C) allows our Office to grant an extension of up to 120 days (4 months), for filing reports. To receive an extension to file reports, an extension request should be e-mailed to the Accounting Services Division at asd@azauditor.gov. By law we are not able to grant requests for extensions beyond the 120 days. Therefore, if a longer extension is requested, only the 120-day extension will be granted. For more information on extension requests, see our August 9, 2002, memorandum.    

5.  What is the penalty for late reports?

Arizona Revised Statutes §41-1279.07(G) states that a chief fiscal officer who refuses to file the required reports with the Auditor General within the prescribed time period is guilty of a Class 1 misdemeanor.

6.  What must be included in city/town audit reports to address reporting requirements for highway user revenue find (HURF) monies received?

A determination must be included in the audit reports as to whether highway user revenue fund (HURF) monies received by the city/town, pursuant to A.R.S. Title 28, Chapter 18, Article 2, and any other dedicated state transportation revenues received by the city/town are being used solely for the authorized transportation purposes (see Reporting Guidelines).

7.  Where should a one-time override be included on the AELR?

A city or town whose voters have approved a one-time override should include the specific amount by which the entity may exceed its expenditure limitation as stated in the Resolution, on AELR Part I, line 7. The amount will be subtracted from the expenditures subject to the limitation.

8.  What information is required to be included in the Notes to the AELR, besides Note 1 describing significant accounting policies?

A note to the AELR should be presented for each exclusion, subtraction, and addition included on Part II and the Reconciliation, that cannot be agreed directly to an amount recorded in the fund financial statements. Each note must be in sufficient detail to enable identification of the exclusion in the fund financial statements and verification of the amount excluded, and properly disclose the nature of the subtraction or addition.