Encumbrances

SUBJECT: ENCUMBRANCES NUMBER:
A.3.
DEPARTMENTS & DISTRICTS AFFECTED: ALL DEPARTMENTS, AGENCIES, AND DISTRICTS
EFFECTIVE: 6/78 REVISED: 7/84, 12/00
 signed
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.
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