3.9 Interfund Activities 3.9.5 Overhead Cost Allocation 3.9.5.10 Overhead costs consist of the costs of central services or support functions shared across departments. They may include accounting, human resources, payroll, information technology, janitorial services and others. Overhead costs may include not only the salaries, wages and benefits of the employees who work in these departments, but the utilities, supplies, information technology, building maintenance and other costs that support these employees. Typically, such services are initially paid through the general fund or an internal service fund and charged back to the departments and programs that directly benefited from them. The cost allocation process must be guided by an overhead cost allocation plan that describes how the organization will allocate costs reasonably and equitably across funds and departments and identifies the documentation required to support the charges. Back to top Laws and requirements applicable to cost allocations 3.9.5.20 Under state law, government officials may charge a portion of the costs for their central overhead services to restricted funds, like utility funds or special revenue funds, only to the extent that each fund benefits from those services. Utilities charge user fees based on the cost of operating the utilities, and deposit those fees into utility operating accounts. Other restricted funds have dedicated revenue streams that can only be used for specific purposes. Governments must not allocate general government service costs, such as public safety, parks, law enforcement, community and economic development, or worker apprenticeship programs to the utilities or to other funds with restricted revenue sources that cannot pay for such charges. 3.9.5.30 RCW 43.09.210 indicates that when one fund is charging another, the fund being charged may only pay for the actual costs of the services it receives. Governments are expected to document those services and the costs of providing them to demonstrate these charges are fair, equitable and valid and reflect services provided. 3.9.5.40 RCW 43.09.210 states in part: All service rendered by…one department, public improvement, undertaking, institution and public service industry to another, shall be paid for at its true and full value by the department…receiving the same, and no department, public improvement, undertaking, institution or public service industry shall benefit in any financial manner whatever by an appropriation or fund made for the support of another... 3.9.5.50 Unlike all other funds, the general fund’s revenues consist largely of unrestricted sales taxes and property taxes that can be used to support any fund or undertaking of the government, including utilities or other restricted funds and their share of government-wide overhead costs. In contrast, a utility fund’s revenues consist of user fees that are restricted to paying for the costs of operating the utility, including necessary capital and debt service costs. These user fees cannot be used to support other funds or general government activities that benefit the public at large. Utility funds and other funds with restricted revenue sources should only reimburse the general fund for costs incurred to render services to those funds. Overhead allocation plans that equitably share overhead costs facilitate compliance with the above statute. 3.9.5.60 Similar to RCW 43.09.210, RCW 35A.33.122, RCW 35A.34.205 and RCW 35.33.123 indicate that a city may only charge its utilities for the value of services provided by general government staff:
RCW 35A.33.122 Administration, oversight, or supervision of utility - Reimbursement from utility budget authorized . . . Whenever any code city apportions a percentage of the city manager's, administrator's, or supervisor's time, or the time of other management or general government staff, for administration, oversight, or supervision of a utility operated by the city, or to provide services to the utility, the utility budget may identify such services and budget for reimbursement of the city's current expense fund for the value of such services. Back to top 3.9.5.70 Consistent with state law, local government is not allowed to charge general government costs that benefit the public at large to the utilities or to other funds with restricted revenues that cannot pay for such costs. General government costs that benefit the public at large, such as police, parks and recreation, community and economic development, worker apprenticeship programs, and other similar costs should not be charged to the utilities or to other funds with restricted funding sources that cannot be used for such expenditures. These costs do not benefit the utilities and may not benefit other funds with restricted revenue sources. In most instances, these costs must be charged to the general fund. Back to top 3.9.5.80 Local governments should carefully consider whether to charge the costs associated with elected officials to the utilities or other funds with legally restricted revenues. Ask the following question: “Do elected officials benefit the public at large in the form of citizen representation, or do they benefit the funds they oversee or legislate (municipal code, budget, etc.)?” If governments choose to allocate executive and legislative costs to the utilities or other funds with restricted revenues sources, they should exercise caution and should maintain documentation to show that those charges are equitable and reflect the cost of actual services provided to the utilities and other funds with restricted revenues. If local governments decide to allocate council/commission/oversight board costs across funds, the use of agenda items as the basis to allocate these costs across funds likely results in a fairer and more equitable allocation than one based solely on budgeted expenditures. Cities, counties and other local governments are typically prohibited by the cost principles requirements located in Subpart E of 2 CFR 200 – Uniform Guidance from allocating the costs of elected officials to federal awards. Back to top Methods of overhead allocation 3.9.5.90 Local governments must allocate overhead costs fairly and equitably to those funds that benefit from overhead services. Charges to the benefiting funds must not exceed the cost and level of service that each fund receives. Back to top Sound practices for fairly and equitably allocating overhead costs to benefiting funds 3.9.5.100 The beneficiary pays principle provides a foundation for cost allocation. Under this principle, the extent to which a support service provides a benefit to a fund/department, and the cost of providing those benefits, guides how much of the cost is paid by the fund/department. To achieve equity, the overhead allocation process must be well designed. By using leading practices for allocating overhead, local governments ensure they charge their utilities and other funds fairly. Such practices for allocating overhead among funds are discussed in our performance audit on Local Government Allocating Overhead Costs published November 28, 2011. 3.9.5.110 Sound practices start with a written cost allocation plan. Written overhead allocation plans document why and how an organization allocates overhead costs. The sound practices identified by our performance audit for accurately and equitably allocating overhead costs are summarized in Exhibit 1. These practices and requirements apply to all overhead cost allocations, including those that are accomplished through the use of internal service funds. Back to top
Back to top Exhibit 2
Back to top Additional resources Disclaimer: The following are links to non-authoritative resources and are not prescribed as part of BARS Manual requirements.
Back to top This section was last edited by SAO on 07/12/22 |