Uniform Expenditure Reporting System (UERS)

The Constitution required the Economic Estimates Commission (Commission) to establish for each city and town a base limit from actual expenditures of local revenues for fiscal year 1980. For cities and towns created after fiscal year 1980, the Commission determines the base limit as described in A.R.S. §41-563(A)(6).

Each year, the Commission calculates the constitutional expenditure limitation for all cities and towns in accordance with A.R.S. §41-563 by adjusting their base limits for population and inflation changes since the base year, and any voter-approved permanent base adjustments or annexations, as applicable.

The Constitution provides cities and towns several voter-approved options to alter their expenditure limitations. These options include exceeding the expenditure limit for 1 year (one-time override), permanently adjusting the base limit used to calculate the expenditure limitation (permanent base adjustment), or a temporary alternative expenditure limitation (home rule). See the voter-approved expenditure limitations FAQs for detailed information on these constitutional provisions.

No. The expenditure limitation applies when a city or town spends local revenue, as defined by Arizona Constitution, Article IX, §20(3)(d). Generally, local revenues include all monies a city or town receives such as tax revenues, fines, fees, or charges for services; however, the Constitution excludes some monies such as grants and aid from the federal government and certain revenues received from the State from the local revenue definition. Cities and towns must consider the source of the money used to make payments to determine its expenditures subject to the limitation. For a detailed explanation of expenditures not subject to the limitation, see the instructions for UERS forms—Part II. In addition, see the Part II—exclusions and carryforwards FAQs for further information about calculating and tracking excludable revenue amounts.

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:

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

2. If the excess expenditures are between 5 percent and 10 percent of the limitation or are less than 5 percent of the limitation but it is at least the second consecutive instance of excess expenditures, the amount withheld is equal to 3 times the excess expenditures.

3. If the excess expenditures are equal to 10 percent or more of the limitation, the amount withheld is equal to 5 times the excess expenditures or one-third of its allocation of State income tax, whichever is less.

Before State monies are withheld, the Arizona Auditor General must hold a hearing to determine if the city or town has exceeded the expenditure limitation without authorization. To ensure due process, the city or town representatives are invited to attend and participate in this hearing. The State Treasurer withholds the penalty in the fiscal year following the Arizona Auditor General’s hearing.

Cities and towns can obtain their constitutional expenditure limitations from the Arizona Department of Revenue’s Economic Estimates Commission (Commission) website. The Commission should notify cities and towns of their actual expenditure limitations by April 1 for the following fiscal year. 

The council-approved resolution referring the alternative expenditure limitation to the voters describes how the limitation will be calculated each year, if passed. Many resolutions state that the expenditure limitation will be set equal to total budgeted expenditures each year the alternative limitation is in place. If a city or town uses this method, total expenditures reported on the adopted budget (schedule A) should be reported as the alternative expenditure limitation amount on AELR—Part I, line 2. Cities and towns may use other methods to calculate an alternative expenditure limitation if they agree with the resolution wording included in the voter-approved measure.

A.R.S. §41-563.01 describes the hearing and public notice requirements for a city or town council to approve expenditures in excess of the constitutional limit. 

A.R.S. §41-563.02 describes the requirements for calling a public election to approve the excess expenditure, if needed. See FAQ #3 above for information on when the expenditures may need to be approved by a majority of qualified electors.

Cities and towns must report the actual expenditures incurred as a result of the disaster on AELR–Part I and attach supporting documentation of the council authorization for those expenditures to the AELR such as the approved resolution, published public notice documenting the council votes, or disaster declaration documentation. In addition, cities and towns must retain adequate documentation to allow their auditors to verify the hearing, public notice, and election requirements were met, as applicable, and documentation that supports the expenditures shown on the AELR–Part I.

A city or town whose voters have approved a one-time override should include the specific amount by which it may exceed its expenditure limitation as stated in the resolution, on AELR–Part I, line 7, and subtract the amount from expenditures subject to the limitation.

No. Cities and towns should consider current financial resources when evaluating whether carryforwards are reasonable. Although governmental fund balances represent current financial resources, they do not necessarily limit carryforward balances. Proprietary fund net position cannot be used to evaluate whether carryforward balances are appropriate or reasonable since it includes the effects of long-term assets, long-term liabilities, and deferred outflows/inflows that do not represent current financial resources.

When evaluating whether calculated carryforward balances are reasonable, cities and towns should:

• Determine current asset amounts that represent unspent excludable revenues such as unspent interest revenue included in cash balances or amounts due from the State (if the amounts were reported as a revenue when the receivable was recorded).
• Reduce that amount for current liabilities that will be paid from those assets, as they were already recognized as expenditures in the current year.

Cities and towns that use the consumption method of accounting for prepaid expenditures and inventory purchases in their proprietary or governmental funds may count these noncash amounts as carryforward, since the expenditures are not recognized until items are consumed.

Any cash or receivables included in fund balance that represent local revenue (e.g., unspent property taxes or property taxes receivable) do not represent allowable carryforward balances.

No. The exclusion is available only in the year that the city or town spent the nonlocal revenues. A city or town may carry forward only nonlocal revenues that remain unspent at fiscal year-end. Further, if a city or town expends nonlocal revenues carried forward from a prior year but does not choose to exclude those revenues on the current year AELR, the city or town must also reduce its carryforward balance by the amount spent.

Yes. Expenditures, exclusions, and carryforwards a city or town reports on the AELR for federal grants should be consistent with what it reports on the SEFA as well as the audited financial statements. The city or town should report federal grant expenditures on the AELR in the same period it reports them on the SEFA. 

Expenditures subject to the limitation are calculated beginning with expenditures/expenses reported in the audited financial statements. Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, requires the SEFA to be presented fairly, in all material respects, in relation to the financial statements taken as a whole. Consequently, since both the AELR and SEFA are related to the financial statements, the 2 reports should be consistent. Although the State and federal laws that mandate the AELR and SEFA do not prescribe flow assumptions for either document, a city or town should not state in one report that it spent federal awards and state in the other report that it did not spend the federal awards.

Although cities and towns often receive federal monies on a reimbursement basis, the reimbursement is dependent on the city or town having spent revenues in accordance with a federal program. Therefore, the monies that it spent contingent on receiving federal grant monies are a federal expenditure, which it discloses on the SEFA. Also, other grant expenditures on the SEFA the city or town made from federal monies that it received in advance represent actual expenditures of those federal monies. In either case, the federal expenditures shown on the SEFA indicate that the city or town spent federal monies. Therefore, if the city or town reports the federal monies as expended on the SEFA, it may not report on the AELR that those monies were not expended and carried forward to future years.

Unless specifically identified in its voter-approved home rule proposal, constitutionally allowable exclusions apply only to entities bound by the constitutional expenditure limitation. (Attorney General Opinion I88-045)

No. If a city or town uses nonlocal revenues (e.g., amounts received from the State or grants and aid from the federal government) to make debt service payments, it may not exclude both the debt service payment amount and the nonlocal revenue amount paid. A city or town may exclude such expenditures only as either the use of nonlocal monies on the appropriate line for the related revenue on the AELR—Part II, or as a debt service expenditure on AELR—Part II, line B.1.

Carryforwards are nonlocal (excludable) revenues as defined by the Arizona Constitution, Article IX, §20, that remain unspent at fiscal year-end. A city or town may carry forward such amounts to subsequent fiscal years and claim exclusions when it spends those revenues. A city or town should specifically identify carryforwards in its accounting records by fund as to the exclusion’s nature, the carryforward amount, and the fiscal year in which it generated the carryforward.

Yes. After a home rule expires, and providing a new home rule is not approved, a city or town will be subject to the constitutional expenditure limitation. The Economic Estimates Commission excluded expenditures of nonlocal revenues as defined by the Arizona Constitution, Article IX, §20, from its 1979-80 base limit calculation. Therefore, excludable revenues a city or town received before or during periods a home rule governs that remain unspent (carryforwards) are allowable exclusions when the city or town spends them in subsequent periods that the constitutional expenditure limitation governs.

If the city or town did not track unspent excludable revenue during the home rule period, it must be able to provide documentation to its auditors that the excludable revenues received in a prior year were not spent until the year the exclusion is claimed.

To calculate exclusions and carryforwards, a city or town must establish revenue to expenditure flow assumptions to determine what revenues it spent and in what order. The flow assumptions the city or town uses for the AELR should be consistent with the flow assumptions it uses for the financial statements.

In many cases, the flow assumptions a city or town uses in preparing the financial statements should be adequate to determine whether it spent local or nonlocal monies when preparing the AELR. However, in some cases, revenues classified the same for financial statement purposes may include both local and nonlocal revenues, such as highway user revenues. In that case, additional assumptions are necessary for the AELR.

For example, the city or town may assume it spent local revenues first, thereby conserving unspent nonlocal (excludable) revenues for future years to maximize carryforwards. Alternatively, the city or town may assume that it spent nonlocal revenues first, thereby maximizing available exclusions in the current year. A city or town may still generate carryforwards under this alternative flow assumption if expenditures of nonlocal revenues are less than the nonlocal revenues received, but such carryforwards would be less than under the first assumption. Click here for examples of both methods’ impact.

No. Cities and towns should consider current financial resources when evaluating whether carryforwards are reasonable. Although governmental fund balances represent current financial resources, they do not necessarily limit carryforward balances. Proprietary fund net position cannot be used to evaluate whether carryforward balances are appropriate or reasonable since it includes the effects of long-term assets, long-term liabilities, and deferred outflows/inflows that do not represent current financial resources.

When evaluating whether calculated carryforward balances are reasonable, cities and towns should:

o Determine current asset amounts that represent unspent excludable revenues such as unspent interest revenue included in cash balances or amounts due from the State (if the amounts were reported as a revenue when the receivable was recorded).

o Reduce that amount for current liabilities that will be paid from those assets, as they were already recognized as expenditures in the current year.

Cities and towns that use the consumption method of accounting for prepaid expenditures and inventory purchases in their proprietary or governmental funds may count these noncash amounts as carryforward, since the expenditures are not recognized until items are consumed.

Any cash or receivables included in fund balance that represent local revenue (e.g., unspent property taxes or property taxes receivable) do not represent allowable carryforward balances.

No. The exclusion is available only in the year that the city or town spent the nonlocal revenues. A city or town may carry forward only nonlocal revenues that remain unspent at fiscal year-end. Further, if a city or town expends nonlocal revenues carried forward from a prior year but does not choose to exclude those revenues on the current year AELR, the city or town must also reduce its carryforward balance by the amount spent.

Yes. Expenditures, exclusions, and carryforwards a city or town reports on the AELR for federal grants should be consistent with what it reports on the SEFA as well as the audited financial statements. The city or town should report federal grant expenditures on the AELR in the same period it reports them on the SEFA. 

Expenditures subject to the limitation are calculated beginning with expenditures/expenses reported in the audited financial statements. Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, requires the SEFA to be presented fairly, in all material respects, in relation to the financial statements taken as a whole. Consequently, since both the AELR and SEFA are related to the financial statements, the 2 reports should be consistent. Although the State and federal laws that mandate the AELR and SEFA do not prescribe flow assumptions for either document, a city or town should not state in one report that it spent federal awards and state in the other report that it did not spend the federal awards.

Although cities and towns often receive federal monies on a reimbursement basis, the reimbursement is dependent on the city or town having spent revenues in accordance with a federal program. Therefore, the monies that it spent contingent on receiving federal grant monies are a federal expenditure, which it discloses on the SEFA. Also, other grant expenditures on the SEFA the city or town made from federal monies that it received in advance represent actual expenditures of those federal monies. In either case, the federal expenditures shown on the SEFA indicate that the city or town spent federal monies. Therefore, if the city or town reports the federal monies as expended on the SEFA, it may not report on the AELR that those monies were not expended and carried forward to future years.

Cities and towns report expenditures, expenses, and deductions in their annual financial statements in accordance with generally accepted accounting principles (GAAP). However, what GAAP defines as an expenditure in the financial statements is not always an expenditure as defined by the Constitution, and vice versa. Therefore, cities and towns must prepare a Reconciliation to arrive at the amount of constitutionally defined expenditures to be reported on AELR—Part II.

No. The Arizona Constitution and Arizona Revised Statutes have no provisions 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 in its home rule resolution that are different from those the constitution provides. These exclusions may be taken on AELR, Part II, line B.13.

Accountants should follow the American Institute of Certified Public Accountants’ Statements on Standards for Attestation Engagements, AT-C §205, when examining and reporting on the AELR.

The independent accountants’ report on the AELR must express an opinion on whether the AELR is presented in accordance with the UERS in all material respects. The UERS forms provide a sample of an independent accountants’ report containing an unmodified opinion for a city or town. If the accountants conclude that they cannot express an unmodified opinion on the AELR, the accountants should include a paragraph in the accountants’ report that describes the matter giving rise to the modification.

A.R.S. §41-1279.07(C) requires cities and towns to submit an annual expenditure limitation report (AELR), an accountants’ report on the AELR, and audited financial statements to us. Auditors’ reports on internal controls and compliance for federal programs (single audit reports) are not required to be submitted. See audit requirements FAQ #1 for information on when biennial audits are allowed and budgeting and FAQ #3 for information on when a city or town should submit certain budget information to us.

A city or town should email all required reports to asd@azauditor.gov. The city’s or town’s auditors must sign the independent accountants’ report and the city’s or town’s designated CFO must sign or include a digital e-signature on the AELR—Part I.

A.R.S. §41-1279.07(E) requires a city’s or town’s governing body (city or town council) to annually designate a chief fiscal officer (CFO) to officially submit the AELR on the governing body’s behalf.

We have developed a template Resolution that the city or town council must use to document the CFO designation. The council may not delegate the responsibility of designating the CFO. Cities and towns must attach the signed Resolution to our electronic CFO designation form for submittal.

Click here to access the electronic CFO designation form and template Resolution. 

A.R.S. §9-481 requires a city or town that has not completed and filed the financial statements required pursuant to A.R.S. §41-1279.07 with the Arizona Auditor General by March 31 to post a Notice of Pending Financial Statement Filing Form on its website until the reports are complete. Further, if the reports are not completed and filed before the city or town adopts its budget in the subsequent fiscal year, the city or town must include the late report form in the published budget. Any city or town that is required to complete the late reports form must also send a copy of the form to the Arizona Auditor General, Speaker of the Arizona House of Representatives, and President of the Arizona Senate.

A.R.S. §41-1279.07(H) states that a CFO who refuses to file the required reports with the Arizona Auditor General within the prescribed time period or who intentionally files erroneous reports is guilty of a class 1 misdemeanor. An erroneous report is one that contains a material misstatement.