Official Site of The State of New Jersey

Many local governments operate reactively, making budget decisions year-to-year without formal policies or long-term planning. This approach creates serious risks:

• Inconsistent decision-making when leadership changes
• Structural imbalances that deplete reserves over time
• Inadequate cushions against revenue shortfalls or unexpected costs
• Poor bond ratings that can increase borrowing costs
• Erosion of public trust when financial problems emerge

Fortunately, these risks are often preventable. By adopting three fundamental financial policies, jurisdictions can support long-term fiscal health.

Formal, written financial policies are your first line of defense. They institutionalize sound practices and prevent the need to reinvent solutions during each crisis.

Critical policies to adopt:

• Fund balance reserves – How much to maintain and when reserves can be used
• Debt management – Determining when borrowing is appropriate and establishing allowable debt levels
• Revenue and expenditure guidelines – Principles for making budget decisions
• Capital planning – How to plan for and maintain infrastructure
• Risk management – How to identify and manage financial risks

Action items:

• Put policies in writing
• Make them publicly available
• Review and update them regularly
• Train staff on policy requirements

Maintaining an adequate balance acts as a financial reserve that safeguards your organization when revenues fall short, costs exceed projections, or the economy weakens.

Recommended minimum: At least two months of regular operating revenues or expenditures on unrestricted fund balance.

Your reserve needs may be higher if:

• Your revenues are volatile or unpredictable
• You face significant disaster risks
• You are vulnerable to federal/state aid cuts
• You have limited revenue diversification

Create a replenishment plan:

• Define when reserves can be used (emergencies only, not ongoing costs)
• Establish a timeline to restore depleted reserves (typically 1-3 years)
• Identify revenue sources for replenishment

A budget may satisfy legal requirements yet still be unsustainable. True structural balance means recurring revenues equal or exceed recurring expenditures without relying on one-time fixes.

Watch for red flags:

• Using fund balance to fund ongoing operations
• Relying on asset sales or settlements for recurring costs
• Deferring maintenance or capital needs
• Counting on optimistic or volatile revenue projections

Build a structurally balanced budget:

• Clearly identify recurring vs. one-time revenues
• Separate ongoing expenditures from capital projects
• Monitor reserve levels as a structural balance indicator
• If imbalanced, create a specific plan with a timeline to restore balance

NJ Department of Community Affairs, Division of Local Government Services
Provides technical assistance, training, and oversight for municipal and county finances. The Division’s Local Assistance Bureau provides direct support to local governments on financial management and compliance matters. These resources can be found at: https://www.nj.gov/dca/dlgs/.

Government Finance Officers Association (GFOA)
Offers national best practices, templates, and guidance on financial policies, fund balance, and budgeting—all available free online at: gfoa.org.

Strong financial policies, adequate reserves, and structurally balanced budgets are not just good governance, they provide essential safeguards for your community. These three practices will help you maintain stable services, build public trust, and weather financial storms that may lie ahead.