MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Gayla Gjertsen, Finance Director, City of Tumwater, and Mike Bailey, Administrator of Finance and Information Services, City of Renton, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

Year End Financial Issues

December 2006

By Toni Nelson, Small Cities Specialist, State Auditors Office

Cities and towns throughout the state are wrapping up and finalizing 2007 budgets. All final public hearings needed to be completed by the first Monday in December and budget ordinances must be adopted by December 31. With these critical tasks behind you, it is time to focus on the remainder of the current fiscal year to ensure all remaining financial issues are being addressed and budget expenditures are being monitored for compliance with the budget ordinance.

There are several year-end procedures that need to be attended to and this article is designed to bring some additional clarification to two issues each city must consider -- budget amendments and open-period expenditures.

Budget amendments may or may not be needed in your city. The first step in determining whether this is a year-end issue is to review and monitor the year-to-date financials for compliance with the budget ordinance. If upon your review, it is discovered that a budget amendment is needed it will be necessary to adopt a budget amendment ordinance prior to the end of the current fiscal year.

There has been some confusion in the past over this issue, but RCW 35.33.121/35A.33.120 states in part, that expenditures as classified and itemized in the final budget shall constitute the city's appropriations for the fiscal year. The expenditure of city funds or the incurring of current liabilities on behalf of the city shall be limited to the total amount appropriated for each fund in the budget. It goes on to state that funds received in excess of estimated revenues during the current fiscal year, can be spent, but only when authorized by an ordinance amending the original budget.

Additionally, RCW 35.33.125/35A.33.125 states, “liabilities incurred by any officer or employee of the city in excess of any budget appropriations shall not be a liability of the city. The clerk shall issue no warrant and the city council or other authorized person shall approve no claim for an expenditure in excess of the total amount appropriated for any individual fund”, unless for emergencies as provided in the law. The law is very specific about the need to amend the budget if needed before money is spent.

Another year-end issue arises with RCW 35.33.151/35A.33.150. It states in part that all appropriations lapse on December 31, with one exception: those expenses that have been incurred but not yet paid. These also are known as “open-period” expenditures, “the accounts for budgetary control for each fiscal year shall be kept open for twenty days after the close of such fiscal year for the purpose of paying and recording claims for indebtedness incurred during such fiscal year” .

To help understand this year end requirement note that the RCW states “shall” be kept open. The interpretation of the word shall is that “the city will” keep its records open for the first 20 days. This is not an option. The intent of the RCW is to record expenditures in the appropriate fiscal period to assure accuracy of year end financial reporting. It is also worth noting that the city must have a remaining unexpended budget appropriation in order to record the expense.

These two concepts of open period expenditures and remaining budget appropriations are woven together at year end. Closely monitoring your financial reports during the last few months of the year will help to prevent any last minute financial issues and prepare the city for year end financial reporting.

If you have any questions about the requirement of the open period or when a budget amendment is needed do not hesitate to contact either the State Auditors Office or your local audit team. Understanding these legal compliance issues will help to eliminate audit concerns in the future.

Toni Nelson is the "Small Cities Specialist" for the Washington State Auditor's Office, providing both on and off site financial training and assistance to smaller cities and towns throughout the state. Ms. Nelson has been working with the Auditors office for 6 years and prior to that was the Clerk/Treasurer for a small town for 9 years. She has co-authored the "Small Cities Manual" a detailed reference guide for new clerk/treasurers on governmental accounting procedures and presents numerous training workshops throughout the state for AWC, WFOA, WMTA, WMCA and local/regional organizations such as EWFOA and SCWMCA. Ms. Nelson is also a member of and conference track coordinator for the WFOA Education Committee.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.