3 Accounting
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, but are not limited to accounting, human resources, payroll, information technology, and janitorial services. Overhead costs may include the salaries and wages, employee benefits, utilities, supplies, information technology, building maintenance and other costs that support operations of the central service or support function. Typically, services are initially paid through the general fund or an internal service fund and then charged 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.
Laws and requirements applicable to cost allocations
3.9.5.20 RCW 43.09.210 indicates that when one fund is charging another, the fund being charged must 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.
Unrestricted vs. restricted revenues
3.9.5.40 Unlike all other funds, the general fund revenues consist largely of unrestricted sales taxes, property taxes, and other general revenues that can be used to support any fund or undertaking of the government, including utilities or other funds with restricted revenues 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 or internal service fund for costs incurred to render services to the utility funds and other funds with restricted revenue sources.
3.9.5.50 Consistent with state law, general government costs that benefit the public at large should not be charged to the utilities or to other funds with restricted revenues that cannot be used for such expenditures. These costs include police, parks and recreation, community and economic development, worker apprenticeship programs, and other similar costs. 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.
General government staff costs allocated to funds with restricted revenues
3.9.5.60 Under state law, government officials may charge a portion of the costs for their central overhead services to funds with restricted revenues, like utility funds or special revenue funds, only to the extent that each fund benefits from those services.
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. Local governments are typically prohibited from allocating the costs of elected officials to federal awards by the cost principles requirements located in Subpart E of 2 CFR 200 – Uniform Guidance.
3.9.5.70 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 states:
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.
Overhead allocation plans
3.9.5.90 Overhead cost allocation plans allow a government to forecast the amount of overhead it will charge each department each year. Overhead allocation plans that equitably share overhead costs facilitate compliance with the above statutes. Governments should maintain a written cost allocation plan that documents why and how it allocates overhead costs. A cost allocation plan should include relevant, up-to-date information about overhead costs and how to allocate it equitably. Different factors are necessary to equitably allocate the various overhead costs and are dependent on the government’s determination of equitable allocation.
Examples of allocation factors include items such as, but not limited to, the following: square footage (for electric, other external utilities, maintenance, and janitorial costs), number of transactions/checks or warrants issued (for accounting or payroll where appropriate, accounts payable, or purchasing), number of staff (full-time employee equivalent – FTE) (for accounting, payroll, or human resources departments where appropriate), number of computers, phones, and other information technology equipment (for information technology services), etc.
3.9.5.100 Overhead costs must be allocated fairly and equitably to those funds and departments that benefit from overhead services. Charges to the benefiting funds must not exceed the cost and level of service that each fund receives.
3.9.5.110 Although costs can be charged quarterly, monthly, or more frequently, they must always be charged after services are rendered. If the general fund charges overhead costs before services are rendered, it has borrowed money from other funds, and interfund loan rules must be followed, see BARS (interfund loans 3.9.1). Additionally, if local governments charge departments and funds based on estimated overhead costs, they should reconcile and adjust those estimates to actual costs at least once a year.
3.9.5.120 In addition to the written plan, supporting charges and how they were determined need to be documented and retained to demonstrate compliance with RCW 43.09.210. Governments cannot demonstrate compliance with this law unless they maintain documentation that shows: (1) the cost of each overhead cost center, (2) the level of service each provided to benefitting funds and departments and how it was determined, and (3) the amount charged to each fund and department.