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Enterprise Funding: Pros and Cons

by Jeff Weise
October 25, 2010

Water Department Enterprise Funding: Pros and Cons  


 

In 1986 legislation was passed in Massachusetts that enabled communities to establish enterprise funds for specified municipal activities including water and waste water operations.  Enterprise funds are not a reserve or source of money.  Rather, enterprise funding is an accounting tool; used to account for operations that are financed and operated like a separate business or where greater accountability of revenues and expenses is desired.

To date approximately 700 individual municipal operations in MA are said to have converted to enterprise funding, including well over half of the water and sewer departments.  Enterprise funding is used for water in Ashland, Framingham, Medfield, Medway and Natick, among others.

 

Enterprise Funding: Pros and Cons  
                                                   
Pros          
1. Revenues remain with the enterprise. Funds can    
 be accumulated for capital projects so bonding can be avoided.   
             
2. The use of retained earnings from year to year can                         
 earn interest, help to stabilize rates, pay for capital    
 expenditures or improvements                                                          
            
3.  The extent of general government support is specifically    
 identified and the true cost  of the operation is
  presented.       
            
4) The cost of general government support is compensated    
 by the enterprise.       

5) The accounting of fixed assets and depreciation can
 provide a good indication of the value of the resources
 devoted to providing the service and the level of
 investment required to maintain those resources.

6) Financial transactions are reported using standard
 accounting practices similar to the private sector.
 Revenues are recognized when earned.  Expenses
 are recognized when incurred.  Both become more
 visable.

7) The DEP encourages the use of enterprise funds to keep
 up with maintenance and capital expenses and to remain
 self sustaining.

8) Using enterprise funding is encouraged to facilitate timely
 application for and utilization of grants.

Cons

1. Enterprise funds require somewhat more accounting time
to keep the funds separate and to account for the annual depreciation of assests.
             
2. Should revenues of the enterprise be deficient, they must
 be made up the following year through an increase in rates.

Establishing an enterprise fund allows communities to more easily account for revenues and expenses a sociated with a particular service, to maintain separate interest baring accounts, and to accumulate reserve funds for future capital needs. The intent is to improve the management and financing information for the enterprise by (a) indicating the total cost of providing the service, (b) presenting the impact on rates and charges of

any budget changes and (c) expressly identify the extent of tax support (if any).

Jeff Weise, Chair, Board of Water Commissioners. 

 

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Comments (1)

Thank you for a providing the taxpayers with a clear definition of the controversial enterprise fund proposal.

- Bill | 10/25/10 12:05 PM

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