Memorandum #869

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Memorandum #869

    State of North Carolina

    Department of State Treasurer

HARLAN E. BOYLES State and Local Government Finance Division ROBERT M. HIGH

     TREASURER and the Local Government Commission DEPUTY TREASURER

    Memorandum #869

    August 12, 1998


TO: Officials of Municipalities with Water and Sewer Systems

FROM: T. Vance Holloman, Director

     Fiscal Management Section

SUBJECT: Statistical Information on Water and Sewer Operations

    The following two reports have been prepared by our office to assist you in evaluating the overall financial condition and results of operations of your municipal water and sewer system:

     1) Financial Results and Key Ratios of Municipal Water and Sewer Systems

     2) Analysis of Capital Outlay Expenditures of Municipal Water and Sewer Systems.

    These reports include key financial ratios for your water and sewer system along with the corresponding statewide and population group averages. In calculating the statewide and population group averages, we segregated municipal water and sewer systems into one of two groups: municipalities with electric systems and municipalities without electric systems. In addition, we further segregated units in both groups into different population groupings. Finally, to give an indication of how your ratios compare to other similar units, we have included a statistical analysis with the first report, which includes the minimum, maximum, median, mean, and standard deviation for the items presented.

    For statistical information in this report to be meaningful, financial reporting between local governments must be consistent. We are concerned that some local governments may not be using appropriate financial reporting practices in two areas: accounting for reimbursements and quasi-external transactions and accrual of unbilled water and sewer services.

Accounting for Reimbursements and Quasi-External Transactions

    If the General Fund provides administrative services for the Water and Sewer Fund, payments for these shared services should be allocated correctly between the two funds. These payments should not be accounted for as operating transfers. The appropriate accounting treatment involves recording expenditures or expenses in the reimbursing fund (e.g., Water and Sewer Fund) and reductions of expenditures or expenses in the fund that is reimbursed (e.g., General Fund). The failure to properly record reimbursements understates the costs of operations in the Water and Sewer Fund. In addition, it 325 North Salisbury Street, Raleigh, North Carolina 27603-1385 (919) 733-3064 COURIER # 56-20-45 (FAX (919) 715-0229)

    An Equal Opportunity / Affirmative Action Employer

overstates expenditures in the General Fund, which causes fund balance available for appropriation as a

percentage of

     Memorandum #869

     Page 3

    expenditures to be understated. Furthermore, transactions that would be treated as revenues, expenditures, or expenses if they involved organizations external to the municipality, such as payments in lieu of taxes from the Water and Sewer Fund to the General Fund or water and sewer sales to other funds of the municipality should be accounted for as revenues, expenditures, or expenses in the funds involved. For example, the municipal use of water and sewer should be recorded as operating revenues in the Water and Sewer Fund and as expenditures in the General Fund. For further information on this subject, see Memorandum #717, “Accounting Issues”.

Accrual of Unbilled Water and Sewer Services

    Since the Water and Sewer Fund operates in a manner similar to a commercial business, it should generally follow financial reporting standards similar to those for commercial organizations. These standards require that the full accrual basis of accounting be used and that revenues be recorded when they are measurable and earned. In the Water and Sewer Fund, revenues and receivables should be accrued at the end of each month for services provided to customers even if the customers have not yet been billed. If a municipality has provided services to its customers, it has “earned” the revenues for these services and should record a revenue and receivable. The failure to record such unbilled receivables results in a misstatement of the Water and Sewer Fund financial statements because expenses that have been incurred are recognized while the related revenues and receivables are not recognized.

How to Interpret Figures in this Report

    In analyzing the statistics in this memorandum, the amounts for your unit for the 1996-97 fiscal year should be compared to your population group averages and to statewide averages.