_________________________________
David E. Sundstrom, Auditor-Controller
1.
POLICY
Commitments related to purchase orders, contracts,
or obligations, which are chargeable to appropriations,
shall have sufficient appropriations encumbered
(reserved) to ensure appropriations are available
to pay invoiced amounts.
1.1
Purpose
To establish a procedure for encumbering
appropriations for purchase orders, contracts,
and other commitments authorizing delivery
of merchandise or rendering of services. An
encumbrance system reduces the possibility
of commitments being made in excess of budgeted
appropriations due to the lag time between
issuance of purchase orders, contracts, and
other obligations, and the actual provision
of services or goods and subsequent receipt
of invoices and billings from the vendors
and contractors.
1.2
Authority
1.2.1
State of California Government Code
Section 26881
Authorizes the Auditor-Controller,
upon order from the Board of Supervisors,
to prescribe and exercise general supervision
over the accounting forms and methods
for all departments, agencies, and districts
under the control of the Board of Supervisors.
1.2.2
Board of Supervisors' Resolution No.
82-162, dated February 2, 1982
Authorizes the Auditor-Controller
to prescribe the accounting policies
for departments, agencies, and districts
under the control of the Board of Supervisors.
1.3
Definitions
1.3.1
Encumbrances
An anticipated expenditure in the
form of purchase orders, contracts,
and other commitments that are chargeable
to an appropriation and for which part
of the appropriation is reserved. The
appropriation remains encumbered until
payment is made, or the obligation expires,
or cancellation occurs, at which time
some or all of the encumbrance is reversed.
An encumbrance is not an expenditure
or a liability but merely a reserve
of appropriations. Expenditures and/or
liabilities are recorded when, and if,
goods are actually provided or services
are actually rendered.
1.3.2
Appropriations
The authorization by the Board of
Supervisors (Board) to make expenditures
and to incur obligations for specific
purposes, as provided for in the Board’s
adoption of the County Budget, and as
changed thereafter by budget transfers
and changes to the budget made by the
Board.
1.3.3
Unencumbered Balance of Appropriation
That portion of an appropriation not
yet expended or encumbered. Any such
balance remaining at the end of the
fiscal year shall revert to the available
balance of the fund from which appropriated.
1.3.4
Proprietary Funds
The enterprise and internal service
funds established within the 280 through
299 series of fund numbers. These funds
are treated differently than other funds
for budgeting, accounting, and encumbering,
as described in Section
2.3.
2.
PROCEDURE
2.1
Encumbering Appropriations
2.1.1
One-Time Purchases
One-time Centralized Purchase Order
documents, referred to as PC’s,
are always encumbered for the full amount
of the contract obligation without regard
to having multiple payment periods or
scheduled delivery dates.
2.1.2
Renewable Price Agreements
Price Agreement documents, referred
to as PA’s, are not encumbered
by themselves but use subordinate agreements
called PG’s. PG’s are used
by departments/agencies to encumber
the maximum obligation that may occur
over the following 12-month period.
At the beginning of the next 12-month
period, the remaining obligation is
encumbered or an amount equal to an
additional 12-month period is encumbered,
depending on when the obligation expires.
(For details on the types and examples
of PA’s, please refer to the County’s
Purchasing Training Manual.)
Certain exceptions are made for proprietary
funds (see Section 2.3)
and for Board-approved Social Services
Agency and Health Care Agency contracts
which are substantially offset by Federal
and State revenues (see Section
2.4).
2.1.3
Real Property Acquisitions
Board-approved acquisitions of real
property, such as eminent domain actions,
are encumbered for the amount estimated
by the Public Facilities and Resources
Department and the County Executive
Office/Real Estate Division.
2.2
Obligations Not Encumbered
2.2.1
Future Year's Obligations
Purchase orders/contracts that specify
effective dates in a future fiscal year
will not be encumbered until that fiscal
year.
2.2.2
Other
Appropriations are not encumbered
for:
Utilities,
Inventory items (Balance Sheet
Account Code 8500), or
Any fund for which appropriation
control is not maintained by the
Auditor-Controller.
2.3
Encumbrances for Proprietary Funds
Enterprise and internal service funds need
to match revenues and expenses on a full accrual
basis in accordance with generally accepted
accounting principles for proprietary funds.
Therefore, contracts for monthly services
are only encumbered through the end of the
fiscal year in these funds. One-time purchase
orders/contracts are encumbered for the entire
amount. Standing purchase orders/contracts
that are paid upon approval of invoice are
encumbered for the full amount.
2.4
Encumbrances for Revenue-Reimbursed Contracts:
Social Services
Agency and Health Care Agency
The Social Services Agency and the Health
Care Agency award materially large Board-approved
contracts every year for social and community
services and health care programs that are
substantially (at least 50 percent) reimbursed
by Federal and State program revenues. Because
revenues are based on expenditures, not encumbrances,
unreimbursed year-end encumbrance carryovers
cause variances to occur between budgeted
and actual net County costs. For these types
of large contracts, Board approval should
include specific instructions for the Auditor-Controller
to follow on how much to encumber for the
current fiscal year ending June 30 and the
following fiscal year(s) beginning July 1.
2.5
Encumbering Sequence
2.5.1
New Obligations
2.5.1.1
EPS Encumbrances
When a department/agency creates
a purchase order document through
the Extended Purchasing System
(EPS), the department/agency is
certifying that sufficient appropriations
are available to defray the cost
of the purchase. A PC or PG created
through EPS is automatically encumbered.
The encumbrance entry reduces
the department's/agency's unencumbered
balance of appropriations, and
creates a reserve of fund balance
in the fund in which the encumbrance
is recorded.
2.5.1.2
Non-EPS Encumbrances
Certain Board approved contracts
such as social service provider,
community service provider, architect
and engineer services, construction,
consultant, and health care provider
contracts not created through
EPS are encumbered by the Auditor-Controller
Claims Section or by agency accounting
units where claims processing
is decentralized.
2.5.2
Modifications
Contract alterations or changes to
terms and conditions, clauses, or language
are referred to as modifications. When
contract obligations or account codings
change, encumbrances may either be increased
or decreased through EPS, or through
the Auditor-Controller Claims Section/agency
accounting unit, depending on the original
agreement document used.
2.5.3
Encumbrances Reduced for Payments
As each payment is processed, an entry
is made against the purchase order/contract,
and an equal amount of encumbrance is
reversed. At the end of the contract
period, any remaining encumbrance balance
is reversed when the Auditor-Controller
Claims/agency accounting unit staff
is advised by memo, or if noted on the
final payment. Any encumbrance balance
still remaining is carried over as a
prior year encumbrance in the next fiscal
year. It does not create new appropriations
in the next fiscal year budget.
2.5.4
Encumbrances Reduced for Year-End
Accruals
As a part of the closing process each
fiscal year, the Auditor-Controller
Claims Section/agency accounting unit
inputs expenditure accrual transactions
into the accounting system for purchase
order/contract expenditure obligations
greater than $5,000. Departments/agencies
notify the Auditor-Controller Claims
Section/agency accounting unit by memo
of the amount to be accrued. As these
expenditure accrual transactions are
recorded, equal amounts of encumbrances
are automatically reversed. The accrued
amounts are then reversed in July and
the related encumbrances are reestablished.
Department/agency accounting and fiscal
staff may also use journal vouchers
to accrue expenditures at year-end for
non-encumbered contract/purchase orders.
Journal voucher accruals do not reduce
encumbrances and therefore should not
be used to record accrual entries for
encumbered contract/purchase orders.
2.5.5
Appropriations Encumbered at Fiscal
Year-End
At fiscal year-end, unused open encumbrances
are carried forward to the new fiscal
year. These carried-forward encumbrances
are referred to as prior year encumbrances
in subsequent fiscal year accounting
records. Appropriations are not carried
forward or created in the new fiscal
year for these prior year encumbrances.
Also, prior year encumbrances or prior
year expenditures do not impact the
current year budget appropriations.
Expenditures charged to these prior
years' encumbered appropriations are
referred to as prior year expenditures
in the accounting system, and equal
amounts of the prior year encumbrances
are reversed.
2.5.6
Canceling an Encumbrance
2.5.6.1
Current Year Encumbrances
A current year encumbrance may
be cancelled by expiration or
cancellation of the purchase order/contract.
This is accomplished by either
the Deputy Purchasing Agent issuing
a modification or by memo to the
Auditor-Controller Claims Section/agency
accounting unit. When this occurs,
available unencumbered appropriations
are increased and available for
other expenditures/encumbrances
of the department/agency.
2.5.6.2
Prior Year Encumbrances
Prior year encumbrances must
be canceled by sending a memo
to the Auditor-Controller Claims
Section/agency accounting unit,
specifying the purchase order
or contract and requesting the
cancellation of all or a portion
of the unneeded outstanding encumbrance.
Available unencumbered appropriations
for the subsequent fiscal year
are not increased by the cancellation
of prior year encumbrances.
2.6
Annual Review of Prior Year Encumbrances
Prior year encumbrances reduce funds' available
financing because reserves of fund balance
are maintained for all encumbrances. Therefore,
if prior years' encumbered purchase orders/contracts
are no longer required they must be cancelled.
Near the end of each fiscal year, all departments/agencies
must review prior year encumbrances to determine
which are still needed and which can be cancelled.
Departments/agencies must request cancellation
of those encumbrances that are no longer necessary
by sending a memo to the Auditor-Controller
Claims Section/agency accounting unit, detailing
the encumbrances to be cancelled by purchase
order/contract number and dollar amount. When
prior year encumbrances are cancelled, fund
balance available is increased. Board approval
is required to appropriate any fund balance
increase resulting from cancelled prior year
encumbrances.
Legal