We have occasion to discuss from time to time the meaning of a preaudit certification by a finance officer, especially in terms of construction contracts that will be funded at least in part by borrowed money. A preaudit certificate imposes potential liability on a finance officer, so we try never to tell someone what they “should” or “shouldn’t” do. But let’s take a closer look at what you’re saying when you sign the certificate, and use as our example a construction contract where the contractor’s payments will stretch across more than one fiscal year. The statute (159-28(a) of the General Statutes) says that a preaudit certificate is designed to assure compliance with the following two requirements:
No obligation may be incurred in a program, function, or activity accounted for in a fund included in the budget ordinance unless the budget ordinance includes an appropriation authorizing the obligation and an unencumbered balance remains in the appropriation sufficient to pay in the current fiscal year the sums obligated by the transaction for the current fiscal year. No obligation may be incurred for a capital project or a grant project authorized by a project ordinance unless that project ordinance includes an appropriation authorizing the obligation and an unencumbered balance remains in the appropriation sufficient to pay the sums obligated by the transaction.
What does this mean – and what does it not mean?
- It doesn’t say you need to have money in the bank for all the payments due under the construction contract when you sign the certificate.
If the obligation is payable from a fund included in the budget ordinance, the preaudit certificate only says there’s been an appropriation made for any payments due in the current fiscal year. So, if your unit wants to sign a construction contract in May and the first payment to the contractor won’t be made until August, you don’t need to have any money in hand or even appropriated to preaudit the contract.
If the obligation is payable pursuant to a grant or capital project ordinance, then you need an appropriation that covers the entirely of the obligation. But the statute there says that a project ordinance balances when “revenues estimated to be available for the project” equal appropriations for the project (emphasis added). In our experience, many capital project ordinances include future debt proceeds as revenues “estimated to be available.” In that case, again, you don’t need to have the debt proceeds in the bank to preaudit a contract.
- Even if you have money in the bank to cover the obligation, you still need an appropriation to back it before you can preaudit.
If the project is covered by a grant or capital project ordinance, then the funds have been appropriated for the project. But if you’re funding something through the regular budget, then you need either an allocation in the budget or an appropriate budget amendment to appropriate the funds for the particular purpose. Your budget ordinance or amendment could even appropriate “fund balance or future debt proceeds” as alternative funding sources.
- You might still want to wait before preauditing the contract.
Some folks want to wait until the LGC has approved a borrowing. Some want to wait until bonds have been sold or private financing has been committed, even if the money isn’t yet on hand. Others in fact want to wait until funds are in the bank.
We’re not saying that waiting is a bad idea. The finance officer often has to be the gatekeeper in all sorts of circumstances where you don’t want folks to get too far ahead of themselves. We’re just saying those are not necessarily issues about preauditing the contract, even if referring to it as a preaudit issue is a way to help your colleagues understand the concern.
There’s always plenty to say about the preaudit requirement and the prudence of committing to spend money that’s not yet in the bank. We wanted to tease out a bit the difference between the legal requirement and other issues. If you’re the finance officer, we’ll do it your way!
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