HomeMy WebLinkAboutReconciliation RecommendationReconciliation of Utility Fund/Enterprise Accounts
Preliminary Conclusions and Recommendations
1) The utility's chart of accounts is a kind of hybrid of fund accounting and
enterprise accounting.
a) Account #101.601 "Sewer Operating and Maintenance" is not a fund; it is
an account - effectively the cash clearing account for sewer operating
expenses and most revenues. (It is not uncommon to see credit balances
in clearing accounts of this nature in operations in which cash is swept out
of operating accounts into investments or other corporate uses.)
b) What the credit balances in the Sewer O&M fund really reflect are
transfers to other utility accounts, most notably, to the "Cumulative
Improvement Reserve Fund" (also not a fund, but a cash account): I.e.,
neither the utility as a whole, nor the wastewater component of the ut#i~y,
are in deficit or "insolvent.'
2) The City's 1998 Bond Ordinance actually provides for a different fund
accounting and different flow of funds than those currently in practice -
although the City's current practices appear to be in substantial compliance
(i.e., the City meets all current obligations of sewage works O&M and debt
service). The Bond Ordinance provides that:
a) All revenues derived from the operation of the sewer system are to be
deposited into a "Sewage Works Revenue Fund."
b) From the Revenue Fund, these revenues are to be distributed to a
"Sewage Works Operation & Maintenance Fund" in an amount sufficient to
cover the cash O&M expenses of the "sewage works," but not for any
replacements, improvements, extensions or additions."
c) Also from the Revenue Fund, are to be transferred amounts sufficient to
meet the outstanding bonds' Sinking Fund requirements (both Bond and
interest and Debt Service Reserve).
Only after the first two required disbursements have been made may
revenues be transferred from the Revenue Fund to a "Sewage Works
Improvement Fund to "be used for improvements, replacements, additions
and extension of the sewage works." The Ordinance provides that cash
balances in the Improvement Fund "shall be transferred" to the Sinking
Fund or the O&M Fund to meet any deficiencies or "unforeseen
contingencies.
e) After paying all costs of construction, the balance in the Construction Fund
(funded with bond proceeds) may be transferred to the Sinking Fund or De
used for purposes substantially similar to those for which the bonds were
initially issued).
3) A number of preliminary conclusions flow from these provisions of the Bond
Ordinance, even if the City and the Sewer Board elect not to un(]ertake an
overhaul of the current chart of accounts:
a) The utility should book all revenue receipts to the Sewer O&M account.
b) The utility should not book any capital expenses (including force account
expenses) to the Sewer O&M account.
c) The utility should book a proportionate share of utility overhead (i.e., billing
and collection, administrative and engineering) expense to the Drainage
Fund.
d) The utility should reflect on its boOks the transfer of the Cumulative
Improvement Reserve Fund account balance to the Sewer O&M account.
e) The utility should determine whether the Bond Ordinance requirements for
transfer of the Construction Fund balance to the Cumulative Improvement
Reserve Fund balance have been met.
f) The utility should finance large long-term capital expenses from proceeds
of Additional Bonds, using the Cumulative Improvement Reserve Fund
only for interim financing and for small shorter-lived improvements and
replacements.
g) The utility should work toward establishing a chart of accounts that will
conform seamlessly with the fund and funds flow descriptions in the Bond
Ordinance and with Generally Accepted Accounting Principles