Financial Management
Environmental Improvement Fund
As a condition for providing project funding, the Environmental Improvement Fund (EIF), as a lender, requires that municipalities have an adequate system of financial management. This includes an adequate accounting system, user charge/collection system, management reporting system, records retention system and customer information related to the specific project being financed by the EIF.
Municipalities are expected to maintain their books in accordance with Generally Accepted Accounting Principles (ch. Adm. 35, Wis. Adm. Code), including:
This standard should be discussed with the municipality's auditors if there are any questions. The following sections are intended to provide some general guidance.
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The following is a brief description of the minimum bookkeeping requirements for recording transactions. The municipality may wish to establish additional accounting records in an effort to provide adequate financial control of its assets and liabilities and to account for program costs.
- Cash Receipts Register for the recording of funds received (all funds applied to the project). A combined Cash Receipts and Disbursements Register may be used in lieu of separate registers.
- Check Disbursements Register to record checks issued on the project.
- General Ledger to record all accounting transactions.
- Project Cost Control Ledger, which may be an account or a series of subaccounts, within the General Ledger to accumulate the costs applicable to the EIF project.
- General Journal to document and record transactions in the General Ledger and/or Cost Control Ledger which are not recorded from the Cash Receipts or Check Disbursements register. An example would be to correct the wrong classification of the purchase of a supply item that had originally been classified as equipment.
- Payroll Records to accumulate the payroll data required by Federal, State or local law with respect to each employee. In addition, time reports indicating the jobs and time worked by each employee.
- Property Records for each item of nonexpendable property acquired. At a minimum, these records should include a description of the property, serial numbers or model numbers, date of purchase, original cost, and location.
FUNDS REQUIRED FOR REVENUE BONDS AND G.O. BONDS/NOTES
Revenue Bonds and General Obligation Bonds/Notes issued by the municipality to finance a water or wastewater project require that certain funds be established. EIF program loans are collateralized by either a revenue bond or general obligation bond/note issued by the municipality to the EIF. Following is a general description of the funds typically needed for revenue bonds and for G.O. debts:
Funds Needed by the Utility for Revenue Bonds
- Revenue Fund, the revenue generated by the water utility or sewer utility is first deposited into this fund and then moved into the funds described below.
- Operation and Maintenance Fund, which is used to pay the operating and maintenance costs of the water or sewer utility.
- Debt Service Fund (also known as the special redemption fund), which shall be used to pay the principal and interest on the revenue bonds issued on behalf of the utility.
- Surplus Fund, money left over after paying operating and maintenance costs and debt service costs goes into this fund. Money in this fund can be used to make up any shortfall in revenues to pay operating costs or debt service costs. Or, money in this fund could be used to pay utility capital project costs.
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Applying Money in the Revenue Fund
Money in the Revenue Fund should be applied each month as follows:
- move to the Operation and Maintenance Fund, enough money to cover operating expenses for the current month and enough for the following month (after factoring in the amount already available in this fund from prior deposits);
- move to the Debt Service Fund, an amount equal to one-sixth (1/6) of the next installment of semi-annual interest coming due on the revenue bonds outstanding and an amount equal to one-twelfth (1/12) of the next annual principal coming due on the revenue bonds (after factoring in the amount already available in this fund from prior deposits);
- move to the Surplus Fund, any amount remaining in the Revenue Fund after the monthly transfers required above have been completed.
Transfers from the Revenue Fund to the Operation and Maintenance Fund, the Debt Service Fund and the Surplus Fund should be made monthly not later than the tenth day of each month, and based on the money on deposit in the Revenue Fund the last day of the preceding month.
Debt Service Fund (also known as special redemption fund). General Obligation debts are primarily payable from property taxes collected by the Municipalty. Once the property tax money has been collected, the Treasurer should deposit sufficient funds into this Debt Service Fund to make all of the principal and interest payments due on the General Obligation Bonds/Notes for the year. General Debt-Related Fund Information
Under the Wisconsin Statutes, the Debt Service Fund is a separate fund pledged solely for paying the principal of and interest on the applicable debt outstanding. For additional fund information pertaining to revenue bonds see Wis. Stats. 66.0621(4)(c)&(d)&(e)&(f). For additional fund information pertaining to general obligation debts see Wis. Stats. 67.10(3) and 67.11(3). Legal investments for fund monies is discussed in Wis. Stats. 66.0603(1m).
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The municipality is required to maintain an Equipment Replacement Fund to cover the replacement of equipment necessary for the wastewater system. This is a restricted fund and should be shown as such on financial statements. Annual deposits are made to this fund in order to maintain it at or above the minimum required level of funding. For additional information see Equipment Replacement Fund.
The municipality needs to implement a reporting system that informs the local governing body about utility issues. The local governing body should have at least quarterly financial information made available to them so that any unusual trends can be identified, analyzed, and appropriate action taken.
The quarterly financial information should include:
- Revenue and Expense statement
- Cash balances in funds/accounts
- Delinquent billings/accounts
- Unusual charges during the quarter
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Section 65.90, Wis. Stats., requires that municipalities prepare an Annual Budget. The Annual Budget should identify the utilities future financial needs. The process of preparing an annual budget helps to ensure that everyone knows what the operating plan is for the upcoming year.
The Financial Assistance Agreement, which is executed as part of the EIF loan closing, requires that the Municipality's User Charge System be reviewed at least every two years. The Municipality may need to review and update the User Charge System more frequently if changes are occurring within the service area or if the financial projections are not being realized. In general, the governing body should be monitoring the user charges to ensure that the system is fair and equitable and that the revenues being generated are sufficient to cover operating expenses, debt payments and debt coverage on revenue bonds. See (User Charge Systems)
COMPLIANCE WITH BOND COVENANTS
In the bond resolution authorizing the bonds or notes securing the EIF loan, there are various covenants that the municipality has with the holders of its bonds. These covenants should be considered by the Municipality to ensure compliance. One of the typical revenue bond covenants is that the municipality will generate a certain level of debt coverage each year. The municipality or its agent should workup this calculation to see if it is being met on a year to year basis.
Force Account refers to using the municipality's own employees to perform a portion of the project work. (See Force Account). Since no independent invoice is generated for force account work, the municipality needs to document how the cost is calculated.
If force account work is funded by the EIF, personnel time and equipment usage records should detail the following:
- Employee hours, rates, and dates of each individual who worked on the project. Document the hours spent on eligible and ineligible parts of the project and the type of work performed. The employee and supervisor must sign the timesheets, attesting to the hours and type of work performed.
- Machine or equipment usage - hours, rates, dates, and the project function for which the equipment was used. Keep daily logs or time equipment records. Equipment charge reflects the number of hours the piece of equipment is actually being operated throughout the EIF project. Do not charge equipment that is present on a job but standing idle. Charge equipment on a utilization basis only.
All entries in the accounting system should be supported by appropriate source documentation. Examples of source documentation are invoices, payroll registers and time records. The files of supporting documentation should contain all information necessary to explain every transaction. It should also be cross-referenced so the transaction can be tracked from any documentation dealing with the transaction.
All EIF project expenses should have supporting documents. This requires a filing system based on reference codes for each entry and related documents. Sequential numerical codes are usually best, not only for ease of referencing, but also for internal control. The coding system used should allow one to trace any transaction recorded on the books directly to the supporting source documentation and vice-versa.
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Internal control is the means by which the accounting, procurement, and management systems are regulated. It serves to assure management that proper procedures are being followed with respect to all project operations, as well as the receipt and disbursement of public funds. For example, a municipality should require that an invoice for construction services be accompanied by a monthly progress report from the consulting engineer certifying that the work for which they are requesting payment be properly completed in accordance with approved plans and specifications. Municipal officials should then review the billing and engineering firm's certification and authorize payment based on their knowledge of the progress being made on the project. The municipality should review and approve all contractor and engineering invoices before payment.
Some important elements of internal control are:
- No one person has complete control over all phases of a transaction involving expenditure of funds.
- Written procedures concerning how things are done and who has the responsibility for completing and approving all transactions.
- Written approval at each major step of the process.
- An internal review to verify that the established procedures are followed.
- Annual audits to confirm the fiscal integrity of financial transactions and compliance with the terms of the loan and/or grant.
- Timely and appropriate resolution of audit exceptions and recommendations.
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The Municipality should establish a record retention schedule for the records of the Municipality. Section 19.21, Wis. Stats. addresses this subject. In developing the record retention schedule, the municipality should consider the various parties that may request information, such as the IRS, State of Wisconsin, CPAs, EPA, etc. The Financial Assistance Agreement executed by the Municipality and the State call for a minimum retention of records for a period of 3 years from the date of project completion, or resolution of all appeals, disputes or litigation pertaining to the project.
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If additional assistance is needed in setting up an accounting system, contact the Wisconsin Department of Revenue to obtain a "Uniform Chart of Accounts for Wisconsin Municipalities" from:
Wisconsin Department of Revenue
PO Box 8971
Madison WI 53708-8971
kschuck@dor.state.wi.us
Questions regarding accounting requirements or general financial management, contact Maureen Hubeler at (608) 266-0849 or maureen.hubeler@wisconsin.gov.
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