Author: Financial Management Resources 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.
Among the many responsibilities of the accounting office is the process of reviewing, reconciling, and verifying that all financial transactions and other aspects of the community’s general ledger are finalized at close of the fiscal year. Coordinating this activity involves collaborating with the financial team and departments to help ensure a smooth, timely, and accurate process. This article offers some pointers, general guidance, and resources for a successful year-end close.
Develop and adhere to a comprehensive year-end schedule: A year-end schedule identifies required activities and timeframes, deliverables, and expectations for department heads, administrators, and policymakers to avoid delays in the completion of closing entries, trial balances, reconciliations, account analyses, financial reporting, and ultimately the certification of free cash. A good practice for managing this step includes the accounting official issuing a memo with timetables and details for handling the final or split fiscal year payroll, accounts payable warrant schedule, treasurer’s requirements for departmental turnovers, and requesting encumbered funds. It is also recommended that an internal stakeholder meeting be held to review the key points of the procedures and schedule to ensure clarity on responsibilities, dates, and required documents.
Heed the DLS Bureau of Accounts Director’s Annual Year-End Letter: The letter for accountants, auditors, treasurers, collectors, clerks, and regional school business officials describes important updates, changes, and relevant actions specific to those roles and serves as a tool for financial officials to understand the specific obligations, deadlines, and required filings of their colleagues. To ensure receipt of this important announcement, finance officials should confirm that the city or town clerk has accurately entered their contact information in the DLS Gateway application. The latest year-end letters can be found on the DLS website here.
Plan for encumbering funds: The accounting official should communicate to department heads and officials the process, time, and documentation requirements for encumbering funds. Encumbering can be done throughout the year as part of a purchase order process. However, at year end, encumbrances are used to reserve funds for purchases or services clearly made before June 30 that remain outstanding. Therefore, departments, boards, and committees must provide documentation of any legal obligation for purchases made but not received or service contracts begun but not completed for funds to be encumbered. The encumbered funds will be released for payment in the next fiscal year when either the goods have been delivered or services completed, or if the contract has been canceled. Invoices received in the following fiscal year for purchases not encumbered must be presented to the legislative body as an unpaid prior year bill.
Review of all general ledger accounts: By early June, it is essential that accounting officers and department heads review the general fund appropriation accounts, special revenue funds, and all other accounts. By June 30, these accounts should be up to date, reconciled, and not in deficit.
General Fund – The general fund represents the budget appropriations passed by the legislative body. Officials with spending authority should be monitoring their respective accounts regularly to ensure expenditures through the end of the year do not exceed account appropriations. They should also confirm all personal service accounts will have sufficient balances for the final payrolls. Accounting officials have a responsibility to ensure there are no accounts with deficit balances and to deny an expenditure to an appropriation account that lacks sufficient funds. Legislative sessions, either town meetings or city council, can address potential deficits at any time in the fiscal year. Two additional options are available if the accounting officer and department heads identify any general fund accounts heading into deficit closing in on year-end: reserve fund transfers and appropriation or year-end transfers.
Cities and towns can authorize as part of the budget a reserve fund to provide for extraordinary or unforeseen expenditures at any time throughout the fiscal year. At year end, this fund can also be used for de minimis appropriation shortfalls. In a town, the finance committee authorizes the transfer (M.G.L. c. 40, § 6), whereas in a city, transfers are approved by a majority vote of the city council upon recommendation of the mayor and the city auditor or officer having similar duties (M.G.L. c.40, §5A).
The appropriation transfer, or year-end budget transfer, option gives budget flexibility to cities and towns during May and June and until July 15 (M.G.L. c.44, §33B). In a town, an appropriation transfer is permitted by a majority vote of the select board and a majority vote of the finance committee. During this year-end period in a city, a majority vote of the council with the mayor’s or manager’s recommendation to make a transfer is needed.
In both cities and towns, transfers in any amount are made from one appropriation to another appropriation except for funds from municipal light or school department budgets, which are not available for these transfers. In all cases, the amount of any operating appropriation available to be transferred is the unspent and unencumbered balance, meaning the amount after all potential liabilities to be charged are considered. Accounting officers should determine this amount before any transfer from an appropriation is requested. Click here to download the latest DLS informational guideline release on year-end transfers.
Special Revenue Funds – Finance officials should monitor these accounts throughout the year in coordination with the responsible department heads to ensure the funds do not go into deficit. Communities expending funds based on approved reimbursable grants should file the paperwork with the granting agency before June 30 and funds must be in hand before September 30 to avoid a year-end deficit and subsequent reduction in free cash. Additionally, communities must file Chapter 90 (the state program that provides annual roadway construction and maintenance funds to cities and towns) reimbursement requests by September 30 to avoid a hit to free cash.
Capital Projects and Special Article Accounts – Accounting officers and treasurers should ensure there are no unfunded or deficit balances for active capital projects or special article accounts. If the projects were authorized by borrowing funds, the funds, either short-term (temporary) or long-term bonds, should be in place by June 30.
Inactive and Outdated Accounts – Finance officials should review these accounts with department heads and the chief administrative officer to determine if they can either be closed by year-end or be reauthorized for another use. Additionally, accounting officials may want to confer with the community’s legal counsel or independent auditor to determine if a legal reason exists requiring the account to remain active. Closing accounts when a project or purchase is complete and there are no longer any pending obligations releases the available balance and increases the uncommitted fund balance, resulting in an increase in the community’s free cash. Alternatively, reauthorizing the accounts provides a direct funding source for a different purpose.
Internal Borrowing – Throughout the year, communities can access funding for authorized projects by borrowing internally from stabilization funds in advance of issuing bonds or notes, provided that the debt was previously authorized at a town meeting or by city council vote. This temporary source provides necessary funding, but the advanced funds must be formally accounted for and repaid by June 30. To restore the funds, the treasurer must issue either long-term or short-term debt. Any balance related to outstanding internal borrowing will result in a reduction to free cash in that amount. For more information on advance of funds, click here.
Collaboration and being well-organized is key to finalizing a community’s financial position for the June 30 fiscal year-end. Department heads and other officials should engage with the accounting office on a prescribed schedule to review all general fund and special revenue accounts, verify that all revenues and expenditures have been correctly recorded, confirm that there will be no deficit balances, and submit all available invoices for payment. The department heads also must provide documentation required for encumbering appropriation amounts for legal expenditure in the next fiscal year.
Click here for a sample FMRB year-end policy. This policy details the tasks that must be completed, their associated deadlines, and the parties responsible for timely and successful year-end closing process.
Helpful Resources
City & Town is brought to you by:
Editor: Dan Bertrand
Editorial Board: Tracy Callahan, Sean Cronin, Janie Dretler, Jessica Ferry, Emily Izzo, Christopher Ketchen, Paula King, Jennifer Mcallister and Tony Rassias
| Date published: | May 19, 2022 |
|---|