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Environmental Loans (EL) Financial management & accounting

As a condition for providing project funding, the Environmental Loans Program, as a lender, requires that municipalities have an adequate financial management system. This includes subsystems for accounting, records retention, financial reporting, and information related to the specific project being funded by the EL Program. The following sections are intended to provide general guidance for financial management.

Accounting systems & generally accepted accounting principles

If assistance is needed in setting up an accounting system, review the Department of Revenue's manual Uniform Chart of Accounts for Wisconsin Municipalities [PDF exit DNR]. It provides an accounting framework that complies with generally accepted accounting principles (GAAP). In addition to organizing accounting activities the chart of accounts also offers a consistent classification structure for budgeting and financial reporting.

Municipalities are expected to maintain their books in accordance with generally accepted accounting principles (Municipal Finance s. 73.10, Wis. Stats. [exit DNR]), including:

  • Accurate, complete, and current records of project costs
  • Funding sources and uses of project funds
  • Documentation as to the eligibility of project costs
  • Records of refunds, rebates, and other credit relating to the project
  • All payments that constitute the dedicated source of revenue

GAAP standards should be discussed with the municipality's auditor or accountant if there are any questions.

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Bookkeeping and records

The following is a brief description of the minimum bookkeeping requirements for recording transactions. The municipality may wish to establish additional accounting records in an effort to provide adequate financial control of its assets and liabilities as well as to account for program costs.

  • General ledger to record all accounting transactions.

  • Project cost control ledger, which may be an account or a series of subaccounts, within the general ledger to accumulate the costs applicable to the CWFP or SDWLP project.

  • Cash receipts register for the recording of funds received (all funds applied to the project).

  • Check disbursements register to record checks issued on the project.

  • General journal to document and record transactions in the general ledger and/or project cost control ledger which are not recorded from the cash receipts or check disbursements register(s).
    • An example would be to correct the wrong classification of the purchase of a supply item that had originally been classified as equipment.

  • Property records for each item of nonexpendable property acquired. At a minimum, these records should include a description of the property, serial numbers or model numbers, date of purchase, original cost, and location.

  • Payroll records to accumulate the payroll data required by Federal, State, or local law with respect to each employee. In addition, time reports indicating the jobs and time worked by each employee.

Note: A combined cash receipts and checks disbursements register may be used in lieu of separate registers.

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Supporting documentation

All entries in the accounting system should be supported by appropriate source documentation. All CWFP and SDWLP project expenses should have supporting documents. Examples of source documentation are invoices, payroll registers, and time records.

The files of supporting documentation should contain all information necessary to explain every transaction. It should also be cross-referenced so the transaction can be tracked from any documentation dealing with the transaction.

This requires a filing system based on reference codes for each entry and related documents. Sequential numerical codes are usually best, not only for ease of referencing, but also for internal control.

The coding system used should allow one to trace any transaction recorded on the books directly to the supporting source documentation and vice-versa.

Records retention schedule

The municipality should establish a record retention schedule for the records of the municipality (Custody and Delivery of Official Property and Records s. 19.21, Wis. Stats. [exit DNR]). In developing the records retention schedule, the municipality should consider the various parties that may request information, such as Certified Public Accountants (CPAs), the IRS, the U.S. EPA, the State of Wisconsin, etc.

The Financial Assistance Agreement (FAA) executed by the municipality and the State call for a minimum retention of records for a period of 3 years from the date of project completion; or resolution of all appeals, disputes, or litigation pertaining to the project.

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Budgeting & reporting

Annual budget

Municipalities are required to prepare an annual budget (Municipal Budgets s. 65.90, Wis. Stats. [exit DNR]). The process of preparing an annual budget helps to ensure that everyone knows what the operating plan is for the upcoming year. The annual budget should identify the utilities' future financial needs.

Financial reporting

The municipality needs to implement a reporting system that informs the local governing body about utility issues. The local governing body should have at least quarterly financial information made available to them so any unusual trends can be identified and analyzed and then have appropriate action taken.

The quarterly financial information should include:

  • Revenue and expense statements
  • Cash balances in funds/accounts
  • Delinquent billings/accounts
  • Unusual charges during the quarter

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Internal control

Internal control is the means by which the accounting, procurement, and management systems are regulated. It serves to assure management that proper procedures are being followed with respect to all project operations, as well as the receipt and disbursement of public funds.

Some important elements of internal control are:

  • No one person has complete control over all phases of a transaction involving expenditure of funds.

  • Written procedures concerning how things are done and who has the responsibility for completing and approving all transactions.

  • Written approval at each major step of the process.

  • An internal review to verify that the established procedures are followed.

  • Annual audits to confirm the fiscal integrity of financial transactions and compliance with the terms of the loan and/or grant.

  • Timely and appropriate resolution of audit exceptions and recommendations.

Example of internal control

A municipality should require that an invoice for construction services be accompanied by a monthly progress report from the consulting engineer certifying that the work for which they are requesting payment be properly completed in accordance with approved plans and specifications.

Municipal officials should then review the billing and engineering firm's certification and authorize payment based on their knowledge of the progress being made on the project.

The municipality should review and approve all contractor and engineering invoices before payment.

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Subsystems related to EL projects

An adequate financial management system includes subsystems for information related to the specific project being funded by the EL Program, such as:

User charge system (UCS)

The Financial Assistance Agreement (FAA), which is executed as part of the EL loan closing, requires the municipality's user charge system be reviewed at least every two years. The municipality may need to review and update the UCS more frequently if changes are occurring within the service area or if the financial projections are not being realized.

In general, the governing body should be monitoring the user charges to ensure:

  • the user charge system is fair and equitable; and
  • the revenues being generated are sufficient to cover operating expenses, debt payments, and debt coverage on revenue bonds.

Equipment Replacement Fund (ERF)

The municipality is required to maintain an equipment replacement fund to cover the replacement of equipment necessary for the wastewater system. This is a restricted fund and should be shown as such on financial statements. Annual deposits are made to this fund in order to maintain it at or above the minimum required level of funding.

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Funds required for revenue bonds and G.O. bonds/notes

Revenue bonds and general obligation (G.O.) bonds/notes issued by the municipality to finance a water or wastewater project require certain funds be established. CWFP and SDWLP loans are collateralized by either a revenue bond or general obligation bond/note issued by the municipality to the Environmental Loans (EL) Program. The following are a general descriptions of the funds typically needed for revenue bonds and for G.O. debts:

Fund needed by the Municipality for general obligation bonds or notes

Debt Service Fund (also known as Special Redemption Fund) - general obligation debts are primarily payable from property taxes collected by the municipalty. Once the property tax money has been collected, the treasurer should deposit sufficient funds into this Debt Service Fund to make all of the principal and interest payments due on the general obligation bonds/notes for the year.

Funds needed by the Utility for revenue bonds

Revenue Fund - the revenue generated by the water or sewer utility is first deposited into this fund and then moved into the funds described below.

  1. Operation and Maintenance Fund - used to pay the operating and maintenance (O&M) costs of the water or sewer utility.

  2. Debt Service Fund - used to pay the principal and interest on the revenue bonds issued on behalf of the utility (a.k.a. Special Redemption Fund).

  3. Surplus Fund - money left over after paying O&M costs and debt service costs goes into this fund.
    • Money in this fund may be used to make up any shortfall in revenues to pay operating costs or debt service costs; or to pay utility capital project costs.

Money in the Revenue Fund should be applied (to the funds described above) each month as follows:

  1. Move to the Operation and Maintenance Fund - enough money to cover operating expenses for the current month and enough for the following month (after factoring in the amount already available in this fund from prior deposits).

  2. Move to the Debt Service Fund - (after factoring in the amount already available in this fund from prior deposits)
    • an amount equal to one-sixth (1/6) of the next installment of semi-annual interest coming due on the revenue bonds outstanding and
    • an amount equal to one-twelfth (1/12) of the next annual principal coming due on the revenue bonds.
  3. Move to the Surplus Fund - any amount remaining in the Revenue Fund after the monthly transfers required above have been completed.

Transfers from the Revenue Fund into the funds described above should be made no later than the tenth day of each month (monthly) and based on the money on deposit in the Revenue Fund the last day of the preceding month.

General debt-related fund information

Under the Wisconsin Statutes, the Debt Service Fund is a separate fund pledged solely for paying the principal of and interest on the applicable debt outstanding. For additional fund information pertaining to revenue bonds see Wis. Stats. 66.0621(4)(c)&(d)&(e)&(f). For additional fund information pertaining to general obligation debts see Wis. Stats. 67.10(3) and 67.11(3). Legal investments for fund monies is discussed in Wis. Stats. 66.0603(1m).

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Debt coverage & compliance with bond covenants

In the bond resolution authorizing the bonds or notes securing the CWFP or SDWLP loan, there are various covenants that the municipality has with the holders of its bonds. These covenants should be considered by the municipality to ensure compliance.

One of the typical revenue bond covenants is that the municipality will generate a certain level of debt coverage each year. The municipality or its agent should workup this calculation to see if it is being met on a year-to-year basis.

Force account documentation

Force account refers to using the municipality's own employees to perform a portion of the CWFP or SDWLP project work. Since no independent invoice is generated for force account work, the municipality needs to document how the cost is calculated.

If force account work is funded by the EL Program, personnel time and equipment usage records should detail the following:

  • Personnel time records - employee hours, rates, and dates of each individual who worked on the project. Document the hours spent on eligible and ineligible parts of the project and the type of work performed. The employee and supervisor must sign the timesheets, attesting to the hours and type of work performed.

  • Machine or equipment usage records - hours, rates, dates, and the project function for which the equipment was used. Keep daily logs of time equipment records. Equipment charge reflects the number of hours the piece of equipment is actually being operated throughout the CWFP or SDWLP project. Do not charge equipment that is present on a job but standing idle. Charge equipment on a utilization basis only.

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Last revised: Thursday June 29 2017