Author: Financial Management Resource Bureau
The DLS Financial Management Resource Bureau (formerly the Technical Assistance Bureau) has offered financial management advice to municipalities across the state for over 30 years. To share this guidance more broadly, we thought it would be helpful to highlight some of our more useful, timely, or interesting recommendations for the benefit of City & Town readers.
As allowed under M.G.L. c. 44, § 53F½, many communities throughout the state have established enterprise funds for a range of fee-based, business-type services, such as water or sewer utilities, ambulance service, skating rinks, or golf courses. With an enterprise fund, a city or town can manage the given program’s accounting transactions within a fund completely separate from the general fund. All of the enterprise program’s revenues and expenditures are segregated from all other governmental activities, and the fund also has its own financial statements.
Enterprise fund accounting enables a city or town to determine the true cost to run a particular service. As a policy decision, the community may endeavor to maintain a fully self-supporting enterprise operation, by which all related costs are paid for by the users of the service based on a fee schedule. Alternatively, the municipality could opt to subsidize some portion of the enterprise costs through the tax levy or other available funds. To ascertain the degree to which any enterprise fund is self-supporting requires the community to consider all the ways that the general fund indirectly supports the enterprise fund, to employ sound methods for calculating these indirect costs, and to factor them into the enterprise fund budget.
Some communities struggle to devise valid, consistent, and comprehensive procedures for calculating indirect costs, either because of gaps in policy or training or due to weak interdepartmental coordination. We recommend that every city or town with an enterprise fund adopt an indirect cost allocation policy that includes provisions that specify the relevant cost categories and calculation methods to be used, identify the parties involved in the analyses, and require documentation of the finalized calculations as part of the annual budget process.
Typically, the three main ways the general fund indirectly supports enterprise services are through its financing of (1) enterprise employee benefits, (2) certain expenditures that support overall town operations, and (3) enterprise-related administrative work performed by staff in non-enterprise departments. Specific examples of these include, but are not limited to:
- Personnel benefits for active and retired enterprise fund employees, such as pensions, insurance plans, Medicare taxes, unemployment, and workers’ compensation
- Town-wide operational costs:
- Information technology (IT) infrastructure and support
- Property and vehicle liability insurances
- Legal services
- Independent audit services
- Actuarial services related to other postemployment benefits
- Other costs that may be agreed to and documented
- Administrative work:
- Various financial management activities, such as general ledger bookkeeping, collections processing, payroll processing, and banking services, that are performed within the audit/accounting, collections, and treasury departments
- Personnel administration work done by the treasurer or human resources department
- Budget development and administration activities done by the community’s chief administrative officer
Once the cost categories are determined, the city or town must decide on specific methods for calculating the indirect costs from among the following options, as applicable:
- Actual cost – Identify the concrete costs attributable to the enterprise operation based on documented schedules or bills payable, including debt service and insurance premiums. Among items applicable under this method are personnel benefits, like health and life insurances plans, as well as Medicare costs.
- Proportional - Calculate the enterprise program’s net-of-debt budget as a percentage of the total combined net-of-debt budget of that program and the general fund. Then apply the percentage calculated for the enterprise against the total budget (including employee benefits) of each non-enterprise department that provides support to it or against the total cost of a specific type of expenditure. Appropriate examples of the latter would include contributory retirement, IT, and annual audits.
- Estimate of support - Apportion estimated work hours spent by non-enterprise department personnel in support of the enterprise. Let’s say, for example, the town accountant estimates she spends an average of three hours weekly, or 10 percent of her time, working on enterprise transactions (e.g., bookkeeping, processing warrants payable, etc.). Apply this percentage against the town accountant’s salary and benefits. The formula would look like this:
- Transaction-based – Quantify the actual number of transactions attributable to the enterprise service and translate it to a percentage of a whole. An example would be the total number of water bills processed by the collector’s office as a percentage of the total number of all types of collections processed by that office. Apply this percentage against the collector office’s total personnel budget. In this case, the formula would look like this:
Samples of indirect cost allocation policies can be found within the policy manuals created by DLS and posted on our website. In addition, DLS has published an Enterprise Fund Manual under Information Guideline Release 2022-16.
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Editor: Dan Bertrand
Editorial Board: Marcia Bohinc, Linda Bradley, Sean Cronin, Emily Izzo, Lisa Krzywicki and Tony Rassias
| Date published: | January 19, 2023 |
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