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Can We Amend Our 2012 Budget after the Year Has Ended?(and Other Year-End Issues)


November 29, 2012 by Judy Cox
Category: Budgets and Budgeting

During the last couple weeks, our office has received some calls/emails about passing amendments to the 2012 budget during 2013. That got me thinking about an article that Toni Nelson wrote for our “Finance Advisor” column some years back. (For those of you who do not know her, Toni was the Small Cities Specialist for the Washington State Auditor's Office for 11 years and the Clerk/Treasurer for a small town for 9 years. Currently, she is the Director of Professional Services for Vision Municipal Solutions.)

I tracked down the article in our archives and decided it contained information that is just as valuable today as it was in 2006. Some cities are still making the same errors in 2012 (six years later) and, alas, some will probably be making them six years from now, also. The original article has been reformatted and edited for this blog.

Year-End Financial Issues by Toni Nelson  

Cities and towns throughout the state are wrapping up their 2013 budgets. All have been holding a public hearing on the final budget and preparing a budget ordinance for adoption no later than December 31. In addition to attending to these critical tasks, it’s important to remember a few other year-end issues that need to be addressed, two of which are budget amendments and open-period expenditures.   

Budget amendments may or may not be needed in your city. Review the year-to-date financials to see if your expenses and liabilities are less than your budgeted appropriations. 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:

The expenditures as classified and itemized in the final budget shall constitute the city's or town’s appropriations for the ensuing fiscal year...[T]he expenditure of city or town 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 for the current fiscal year.


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, in part:

Liabilities incurred by any officer or employee of the city or town in excess of any budget appropriations shall not be a liability of the city. The clerk shall issue no warrant and the city or town legislative body [council] or other authorized person shall approve no claim for an expenditure in excess of the total amount appropriated for any individual fund...


There are exceptions for a court order or for emergencies as provided in the law. The law is very specific—an entity cannot incur the liability or honor the expense unless there is a budget appropriation in place. This means that a budget amendment must be adopted prior to incurring the liability instead of after the fact.

Another year-end issue arises with RCW35.33.151/35A.33.150. [1] 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 ensure accuracy of year-end financial reporting. Note 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 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 Auditor’s Office or your local audit team. Understanding these legal compliance issues will help eliminate audit concerns in the future.

Let me, as the editor, add the following comments.

 All right, all right, I know that some of you reading this blog might already have spent more money than you appropriated for 2012. What do you do now? You do everything correctly going forward. There is nothing you can do to make up for the fact that you should have passed an amendment before exceeding your original budget authority.
  • Talk to your department heads and make certain you have a list of what everyone has spent to date. (Lynn Nordby, a member of our staff and a former city administrator, says that he told his department heads to make no purchases after December 1.) 
  • Make a list of everything you plan to spend during the rest of 2012. Don’t forget those items for which you will receive statements in the first part of January, such as      utilities, or for which you have incurred liabilities, such as payroll and excise taxes.
  • Pass an amendment by December 31 to cover those items that will exceed your current budget appropriation (if applicable). You should have enough      unencumbered appropriation authority to meet the obligations imposed by the open period requirements.      



[1] Note that counties have statutes that parallel the ones we have been discussing for cities:
  • Amendments (authority granted under RCW 36.40.100, RCW 36.40.140, and RCW 36.40.195).
  • Limitation on expenditures (may not exceed lawful appropriation – RCW 36.40.130).
  • Appropriations lapsing at the end of the fiscal period (RCW 36.40.200).

Comments

"Jerry Thornton, Even though the RCWs that govern water and sewer districts do not have statutes comparable to those listed above for cities and counties, it would be a very good idea if you followed the practices described. Judy Cox MRSC Public Finance Consultant"

Judy Cox on Dec 13, 2012 8:54 AM

"I would add that: 1. A fund must have a positive (or zero) cash balance at year-end. For a cash-basis entity I believe that cash is defined as G/L cash minus open period accounts payable. Pooled cash at the entity level typically does not prevent one or more funds from having individual negative cash balances. When this happens one fund is benefiting from other fund, even if only a temporary basis. The way around this is to authorize an inter-fund loan. 2. Ditto for fund balance being a positive (or zero) balance, although I don't have a citation to back this up. Thanks, David DeGroot City of Fife"

David DeGroot on Dec 6, 2012 4:18 PM

"Good Morning- As is often the case w/ MRSC Insight postings, yours raises the same question that I have asked before...do the RCW's cited apply to Special Purpose Water & Sewer Districts that are authorized under RCW 57? THX for your clarification. Jerry B. Thornton, Sr. King County Water District 125"

Jerry B. Thornton, Sr. on Dec 3, 2012 10:23 AM

3 comments on Can We Amend Our 2012 Budget after the Year Has Ended?(and Other Year-End Issues)

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