Key Takeaways
-
New Jersey municipalities prepare budgets on a cash basis, relying on Annual Debt Statement and Annual Financial Statement results to determine fund balance and guide 2026 budget development.
-
Revised statutes aligned with New Jersey Division of Local Government Services (NJDLGS) guidance moved budget introduction to March 31 and adoption to April 30 while raising temporary budget appropriations to 35%.
-
Two statutory controls — the 1977 Appropriation CAP and 2010 Property Tax Levy CAP limit spending growth and tax increases, requiring careful use of Cost-of-Living Adjustment (COLA) and cap bank capacity.
In case you missed our recent seminar on the New Jersey municipal budget process, PKF O’Connor Davies gathered several key insights to help local officials prepare for the months ahead. With statutory deadlines approaching, municipalities and counties across New Jersey are beginning the process of introducing and adopting their 2026 budgets.
Understanding New Jersey’s Unique Budget Timeline
During the seminar, we discussed several aspects of New Jersey’s municipal budget process and some of the unique challenges local governments face when preparing their annual budget. New Jersey municipalities and counties follow a budget process that differs from most other governmental entities. While other governmental entities adopt their budgets prior to the start of the fiscal year, New Jersey local governments operate on a cash basis, which relies heavily on finalized financial results, to complete their annual budget.
During the early months of the calendar year, municipalities and counties are required to prepare and file the Annual Debt Statement and Annual Financial Statement, which confirm the prior year’s actual results. These results serve as a basis for the budget. As noted during the budget seminar’s opening remarks, “Budgets cannot get moving until we have an idea of what fund balance represents.” Because local budgets must ultimately balance revenues and expenses, the early-year financial results help shape the budget discussions that follow.
Updated Budget Deadlines for 2026 and Beyond
In recent years, New Jersey’s Division of Local Government Services (NJDLGS) has issued Local Finance Notices extending statutory budget deadlines beyond the dates set forth in law. For 2026, although a Local Finance Notice was again released, subsequent legislation permanently amended the statutory calendar to reflect the notice and made the adjusted timelines permanent.
Under the revised statute, budget introduction may occur on or before March 31, or at the next scheduled governing body meeting thereafter. Budget adoption is required at least 28 days after introduction on or before April 30, or the next scheduled meeting thereafter. Because the adoption timeline now extends further into the year, the legislation also increased the temporary budget appropriation limit from 26.25% to 35%. The higher threshold ensures entities have funding that meets their needs from the start of the year through adoption.
Two Key Caps That Shape the Tax Rate
Another key takeaway from the seminar was the importance of understanding the two statutory mechanisms that have the most impact on what citizens care about most – the tax rate: the 1977 Appropriation CAP and the 2010 Property Tax Levy CAP.
The 1977 Appropriation CAP
The 1977 Appropriation CAP centers on expenses. This cap limits the increase in appropriations, or expenses, through an annual cost-of-living adjustment (COLA) applied to the prior year’s appropriations. Certain statutory exclusions apply to the cap, such as debt service, capital expenditures, grants, and other “outside cap” items. For calendar year 2026 budgets, the COLA is 2.0%. As noted during the seminar, decisions made throughout the year — including contract negotiations — must be evaluated in light of the appropriation cap. For example, if a contract negotiated in the prior year provides for a 4% salary increase, the municipality will need to be strategic in managing other appropriations in order to honor the agreement while remaining within the cap.
Within the 1977 CAP structure, municipalities may adopt a Cost of Living Adjustment (COLA) ordinance. The ordinance must be introduced prior to budget introduction and allows a municipality or county to increase the permitted appropriation increase to as much as 3.5%, provided unused appropriation capacity — commonly referred to as “cap bank” — exists from the prior two budget years. It is important to note that the COLA ordinance does not automatically increase spending; rather, it authorizes the use of previously accumulated cap bank. For instance, if there was no increase in appropriations in the prior two calendar years, appropriations could increase by as much as 3.5% in the current year if a COLA ordinance is adopted. Conversely, if an entity has consistently utilized some or all of the allowable increase each year, the current year increase would be limited. Once cap bank is utilized, it is no longer available for future years.
The 2010 Property Tax Levy CAP
Similar to the 1977 Appropriation CAP is the 2010 Property Tax Levy CAP, which limits the total a municipality is permitted to increase taxes. Per this cap law, tax rate increases are limited to 2%. Because the state realizes that certain costs vital to operations are out of local government entity control, such as health benefit increases, cap exceptions for these items exist. Unused levy cap funds may be banked and used in the next three subsequent years.
Budget Tools That Help Balance Revenues
While the appropriation cap and the property tax levy cap limit how much municipalities can increase spending and tax rates, the revenue side of the budget also contains other tools that assist in balancing the budget. Miscellaneous revenues — such as fines, fees, and court costs — may be anticipated, but generally only up to the amount realized in the prior year. Delinquent tax revenue may also be anticipated but budgeting is limited to the prior year delinquent collection percentage. Another important budgeting tool is fund balance, or surplus anticipated. While surplus can be utilized to help stabilize the tax rate and support the annual budget, governing bodies must carefully evaluate how much to appropriate in order to maintain a healthy and sustainable financial position in future years.
State Oversight and DLGS Review Cycles
State oversight is also an important component of New Jersey’s municipal budget process. The New Jersey Division of Local Government Services conducts inspections of every municipality’s budget at least once every three years to ensure compliance with state regulations.
Municipalities are divided into three inspection groups. In 2026 the review cycle applies to Group One municipalities. Municipal officials can determine their municipality’s assigned group by reviewing the Municipal Information Sheet available through the DLGS’ Financial Automation Submission Tracking (FAST) system. Certain circumstances also result in an automatic state review, including if a municipality conducted an accelerated tax sale or if the prior year’s tax collection percentage did not exceed 90 percent.
We Can Help
As municipalities move deeper into budget season, understanding the statutory requirements, cap calculations and surplus strategy become even more important. Thoughtful planning and experienced guidance can help ensure the process remains smooth, compliant, and sustainable. Our team remains available to assist local officials and finance offices as they navigate the months ahead.
Contact Us
If you have any questions, please contact your PKF O’Connor Davies client service team or:
Amy Neimeister, CPA, RMA
Partner
aneimeister@pkfod.com | 856.454.2325
Michael Cesaro, CPA, RMA
Partner
mcesaro@pkfod.com | 856.821.6863
Evan Palmer, CPA, RMA
Partner
epalmer@pkfod.com | 856.454.7819