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Enterprise Fund Accounting System
Since 1995 Pioneer Consulting Group, Inc. has assisted municipalities establish enterprise fund accounting systems. Wesley Gardner, Jr., CPA has assisted more than 15 communities establish water, sewer and landfill enterprise funds.
What is an Enterprise Fund?
An enterprise fund establishes a separate accounting and financial reporting mechanism for municipal services for which a fee is charged in exchange for goods or services. Under enterprise accounting, the revenues in expenditures of services are separated into separate funds with its own financial statements, rather than commingled with the revenues and expenses of all other government activities.
Enterprise funds may be established, "for a utility, health care, recreational transportation facility." Examples of which include the following.
The community may not establish enterprise funds for normal government operations or services such as building rentals, inspectional services or cemeteries.
Establishing an enterprise fund does not create a separate or autonomous entity from the municipal government operation. The municipal department operating the enterprise service continues to fulfill financial and managerial reporting requirements like every other department.
Financial transactions are reported using standards similar to private sector accounting. Revenues are recognized when earned and expenses are recognized when incurred, under a full actual basis of accounting. An enterprise fund provides management and taxpayers with information to:
Enterprise accounting allows the community to demonstrate to the public the portions of total costs of a service that is recovered through user charges and, if any, the portion that is subsidized by tax levy or other available funds. A community may choose to recover total services costs through user charges, but is not required to. Enterprise funds frequently are used to account for services whose costs are partially funded by fees and charges.
At year-end, the performance of an enterprise fund is measured in terms of positive and negative operations. An operating surplus is a result of revenues collected in excess of estimates and appropriation turn backs, and translates into retained earnings that are maintained in the fund rather than closing to the general fund. Retained earnings of an enterprise fund are certified as available funds after submission of the end of the year balance sheet to state government. Once certified, retained earnings may be appropriate only for expenditures relating to the fund. Conversely, if during the year, the enterprise fund incurs an operating loss, the loss must be raised in the subsequent year's budget.
Adopting an Enterprise Fund
Generally, a City / Town may adopt an enterprise fund with approval by a City Council Vote or by Town Meeting. Each enterprise fund must be adopted separately with its own vote. This allows municipal legislative bodies to identify and evaluate each enterprise on its own merit.
We recommend that the community accept the enterprise statute in advance of the budget process and clearly state what services will be provided and when the fund will commence. Unless otherwise designated, the enterprise fund will commence as of the next fiscal year after it has received Town Meeting approval. Once adopted, the community may begin the process of transferring the estimated revenues and operating budget of the services and identifying the assets (capital items in infrastructure) and liabilities in the general fund to be transferred to the enterprise fund.
The following is sample language to adopt an enterprise fund: "To see if the (NAME) will accept the provisions of Chapter XX, Section XX of the XXXXXX General Laws, establishing (the service) as an enterprise fund effective fiscal year (year)."
The Enterprise Budget
Once an enterprise fund is enacted, a budget is subject to the appropriation process. A request is prepared like any other departments request for review any eventual adoption. Any transfers among the enterprise fund's line-item appropriations also require action by town meeting. The enterprise budget includes both revenue and expenditure estimates.
Similar to any operating department, revenue estimates are prepared. These may include user charges and fees, investment income, and any other enterprise revenues.
All enterprise revenues may only be used to support the expenditures of the enterprise fund. At no time may these funds be used to support ongoing municipal operations or subsidize the general fund.
All costs of operating the enterprise must be identified. This should include direct costs, indirect costs, employee benefits, legal and borrowing cost, and capital expenditures. These costs may also include an appropriation for emergency reserve and a budget surplus.
What are the Advantages of Enterprise Fund Accounting?
A community may account for a certain services in the general fund, special revenue fund or an enterprise fund. The advantages of using an enterprise fund rather than the other two methods are as follows.
Why would a community choose to adopt an enterprise fund?
Does an enterprise fund have to fully recover its costs through user fees or be self-sufficient?
No. An enterprise fund may be self-supporting or it may be subsidized (e.g., debt and capital exclusions) by the general fund. The extent to which it is subsidized is a policy decision that should be clearly identified when the Town Meeting is requested to adopt the enterprise fund budget.
Does the amount of the proposition 2 debt exclusion for an enterprise fund have to be reduced by the amount of any user fees and/or special assessments imposed for the same project?
(This applies to Massachusetts Only)
No. If the debt service for an enterprise project is funded through user fees, betterments or other local revenues, a community has the option of excluding a lesser amount by reporting the principal and interest net of the local revenue. However, if the community chooses to exclude the gross debt service amount instead, it must budget that property tax subsidy to the enterprise fund. The increase in allowable levy attributable to the exclusion cannot be spent for any other purpose.
When a community adopts enterprise fund is it subject to the appropriation process?
Yes. The community is responsible for appropriating all enterprise fund costs and identifying the revenue source from which these will be funded. The information is recorded on the tax rate recapitulation sheet.
Can enterprise fund use its retained earnings/surplus to pay for the expenditures that the Town Meeting voted to fund by borrowing?
No. The enterprise's retained earnings (or surplus) cannot be spent without appropriation nor can the town meetings decision about funding sources for expenditures be reversed by the enterprise fund. It would require a town meeting vote to change the funding source.
For what purpose can the community use budget surplus and/or retained earnings?
The community can choose to appropriate to budget surplus and retained earnings:
Can an enterprise fund operate independently under its own procedures?
An enterprise fund is just an accounting/budgeting tool. It does not grant additional powers to the department providing service. The enterprise fund is still a municipal department and is subject to ordinary municipal finance procedures. The rate setting process is established by statute or local charter. Property and assets included in the enterprise fund is owned by the municipality and may only be acquired, leased or disposed of by vote of the town meeting. At no time are these conditions altered through the adoption of enterprise.
Should services provided by other departments be billed directly to the enterprise fund? Are other indirect costs like health insurance charged directly to the enterprise fund?
No. Any services provided by other departments and indirect expenses/charges should be reimbursed to the general fund through inter-fund transfers from the enterprise fund. Ideally, these transfers should be done monthly so the enterprise fund expenses are tracked and its financial position is accurately reflected.
What happens if there is a disagreement on indirect costs (e.g., which expenses and how much) of an enterprise fund?
Indirect and allocated costs should be clearly set forth (e.g., what costs will be shared and how much) when the budget is adopted to avoid disputes later in the fiscal year. If, however, the enterprise still cannot agree with the community's financial officials what figure should be used for indirect and allocated costs the appropriate body to resolve the matter is Town Meeting.
How does the community provide for an enterprise operating loss?
Any operating loss will be provided for in the subsequent year's enterprise fund budget. This may be refunded by the enterprise revenues or available funds, or possibly a general fund subsidy.
How can an Enterprise Fund provide for extraordinary or other unforeseen expenditures?
Can Town Meeting vote to use enterprise funds for purposes not related to the enterprise?
No. The enterprise enabling statute provides that the enterprise remedies may only be used for enterprise-related expenses. Even if there is an understanding funds will be reimbursed to the enterprise, a community cannot use the enterprise fund as funding source for appropriations to pay for unrelated municipal expenses or for inter-fund borrowing for cash flow purposes.
What happens if they community decides it no longer wants to have enterprise fund?
After at least three years, the legislative body of the community (town meeting) can vote to terminate the enterprise fund. Once it ceases operation and all of the current liabilities are accounted for, the community would close any fund balance to the general fund and transfer any assets, debt and long-term liabilities to the general fund.
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