Frequently Asked Questions About The Enterprise Fund

Why would a community choose to adopt an enterprise fund?

To determine the total cost of providing a service.
To demonstrate to the public which portion of the total cost of a service is covered through user charges vs. tax levy.
To allow the surplus or retained earnings generated by the operation of the enterprise to remain with that fund rather than close out at year end to the general fund and become part of "free cash". The surplus may be used to help fund future capital expenditures such as water replacement costs or to reduce rates.
It also prevent town Officials from taking a predatory action against water department revenues.

Does an enterprise fund have to fully recover its costs through user fees or be self-sufficient?
No. An enterprise fund may be self-supporting or it may be subsidized (e.g., debt and capital exclusions) by the general fund. The extent to which it is subsidized is a policy decision that should be clearly identified when the Town Meeting is requested to adopt the enterprise fund budget.

Does the amount of the proposition 2 debt exclusion for an enterprise fund have to be reduced by the amount of any user fees and/or special assessments imposed for the same project?
No. If the debt service for an enterprise project is funded through user fees, betterments or other local revenues, a community has the option of excluding a lesser amount by reporting the principal and interest net of the local revenue. However, if the community chooses to exclude the gross debt service amount instead, it must budget that property tax subsidy to the enterprise fund. The increase in allowable levy attributable to the exclusion cannot be spent for any other purpose.

When a community adopts enterprise fund is it subject to the appropriation process?
Yes. The community is responsible for appropriating all enterprise fund costs and identifying the revenue source from which these will be funded. The information is recorded on the tax rate recapitulation sheet.

Can enterprise fund use its retained earnings/surplus to pay for the expenditures that the Town Meeting voted to fund by borrowing?
No. The enterprise's retained earnings (or surplus) cannot be spent without appropriation nor can the town meetings decision about funding sources for expenditures be reversed by the enterprise fund. It would require a town meeting vote to change the funding source.

For what purpose can the community use budget surplus and/or retained earnings?
The community can choose to appropriate to budget surplus and retained earnings:

Operating costs to offset the need to increase user charges
Capital improvements
Reimbursement to the general fund to the extent the general fund has funded that particular service in prior years (which requires detailed documentation)
Enterprise revenue deficits (operating loss)

Can an enterprise fund operate independently under its own procedures?
An enterprise fund is just an accounting/budgeting tool. It does not grant additional powers to the department providing service. The enterprise fund is still a municipal department and is subject to ordinary municipal finance procedures. The rate setting process is established by statute or local charter. Property and assets included in the enterprise fund is owned by the municipality and may only be acquired, leased or disposed of by vote of the town meeting. At no time are these conditions altered through the adoption of enterprise.

Should services provided by other departments be billed directly to the enterprise fund? Are other indirect costs like health insurance charged directly to the enterprise fund?
No. Any services provided by other departments and indirect expenses/charges should be reimbursed to the general fund through inter-fund transfers from the enterprise fund. Ideally, these transfers should be done monthly so the enterprise fund expenses are tracked and its financial position is accurately reflected.

What happens if there is a disagreement on indirect costs (e.g., which expenses and how much) of an enterprise fund?
Indirect and allocated costs should be clearly set forth (e.g., what costs will be shared and how much) when the budget is adopted to avoid disputes later in the fiscal year. If, however, the enterprise still cannot agree with the community's financial officials what figure should be used for indirect and allocated costs the appropriate body to resolve the matter is Town Meeting.

How does the community provide for an enterprise operating loss?
Any operating loss will be provided for in the subsequent year's enterprise fund budget. This may be refunded by the enterprise revenues or available funds, or possibly a general fund subsidy.

How can an Enterprise Fund provide for extraordinary or other unforeseen expenditures?

The community may establish an emergency reserve for extraordinary or unforeseen expenditures similar to the general fund reserve fund (Chapter 40, Section 5A or Section6).
The community may establish the enterprise budgeted surplus which is subject to the appropriation process with the approval of town meeting.
Town Meeting may appropriate from this emergency reserve fund and/or retained earnings.
The department may request a transfer from the general fund reserve fund. The enterprise fund may later appropriate to reimburse the general fund for such transfer.

Can Town Meeting vote to use enterprise funds for purposes not related to the enterprise?
No. The enterprise enabling statute provides that the enterprise remedies may only be used for enterprise-related expenses. Even if there is an understanding funds will be reimbursed to the enterprise, a community cannot use the enterprise fund as funding source for appropriations to pay for unrelated municipal expenses or for inter-fund borrowing for cash flow purposes.

Water & Sewer
It is not unusual for a community to have both a water and sewer department. The Town of Harwich could combine both of these services within one Department. This is something that could be discussed at a further date. However, I would suggest that a separate Enterprise fund be established for each service.

What are the implications of the Enterprise Fund assuming the existing debt service?
Under the current law, once an enterprise fund is established, it could not use monies that were appropriated or voted for at a previous town meeting without a town meeting vote to change the funding source.

If the decision was made to have the existing debt service paid for under the new Enterprise Fund, the impact it would have on the 30-year capital improvements plan developed by the Water Department would need to be carefully evaluated.

There would have to be several scenarios for the ratepayers to discuss as to which scenario would better enable them to make a more informed decision as to the direction they would like to see the Department take.

Assume the existing debt, with no capital improvements
Do not assume the existing debt, continue with capital improvements
Raise rates, to assume existing debt, new debt, and capital improvements
Allow existing debt to be paid out of general fund
Stay status quo

Transition

How will the department make its transition from general fund to enterprise fund? How will this work?
There would be very little transition in converting to an enterprise fund. We would operate as we normally do, we would be operating on the upcoming fiscal years revenue. Our main concern would be not to over budget and end up with a shortfall.

Capital Plan / Capital Outlay
This year the Water Department is seeking to begin implementation of the 30-year capital improvements program, and intends to fund this effort through user fees. The only capital projects targeted for bonding, and therefore for which long-term debt service would be required, is for water storage tank projects. These tank projects have a projected overall present-day worth cost of $12 Million over the life of this plan.

The Water Department presented this Capital Improvements Plan to the Capital Outlay Committee; however the decision was made to not incorporate it into the FY '05 budget. The Department would like to formerly present this plan to both the Board of Selectmen and the Finance Committee for further discussion.

Privatization
Privatization of the Water Department has been presented as a possible alternative to the current management of the water system, and we offer the following concerns to this approach:

Under a privatized approach the Town would lose the direct control over the Department that it currently has or as an Enterprise Fund. Implementation of the Capital Improvements Plan, which is viewed by the Water Department as being a priority for improving and maintaining the system, would not be able to be as carefully managed or pursued as under Town-managed Department.
The incentive of a privatized firm operating a water system is to generate profits, not water conservation or maintenance of the system. This orientation would result in a gradual decline over the long-run of our infrastructure, and water conservation measures will not likely be pursued as rigorously as a Town-managed Department.
For the same reasons, a privatized firm is not likely to place as high a priority on resource protection and conservation of the aquifer as a Town-managed Department.

The Town needs to carefully evaluate the issues associated with privatized operation of the water system, and fully understand the experience of other communities that have taken this approach.

Cost Control
Cost control for the enterprise fund would remain the same as that for working out of the general fund. We would still follow the same budgetary process as has been followed in past years. The process would still hatless meet with the talent administrator, selectman, finance committee and then to four final approval at town meeting. There still remains all of the budgetary restraints had been in place in the past. An enterprise fund does not give the departments the ability spend revenues without town meeting the approval. Therefore all cost restraints would still be under control of the town.

How will Employee Negotiations be Handled?
Employing negotiations would be handled as they have been in the past. This would still fall under the purview of the Town Administrator. Converting to an enterprise fund would not change the process by which employee negotiations are handled.

How does Enterprise affect Town Bonding?
Because the Water Department is part of the town, it will continue to have its projects bonded as any other department. The only difference would be that bonds used to fund Water Department projects will be paid for with Water Department user fees, removing this burden from the tax levy. Unlike taxes, water usage can be managed by individual households through conservation practices and thereby influence the amount of their water bills.

Will the Water Department make a Payment to the Fire Department?
The Water Department maintains all of the infrastructure used to support fire protection, including distribution system piping, fire hydrants and gate valves and water storage reservoirs, that the Fire Department relies upon when having to respond to a fire.

For this reason, there is no rationale for making Water Department payments to the Fire Department, which is already funded through taxes.

What happens if they community decides it no longer wants to have enterprise fund?
After at least three years, the legislative body of the community (town meeting) can vote to terminate the enterprise fund. Once it ceases operation and all of the current liabilities are accounted for, the community would close any fund balance to the general fund and transfer any assets, debt and long-term liabilities to the general fund.

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