What Are Enterprise Funds?
These local government funds ensure that money is spent on those services from where the money is raised.
Enterprise funds are a crucial component of a local government’s municipal budget, serving as a means to manage and account for specific services that operate similarly to private businesses. These funds are used to finance and track operations for services where users pay fees, such as water supply, wastewater treatment, electricity distribution, and airport operations.
In Ohio, enterprise funds are designed to be self-supporting, meaning that the revenue generated from user fees should cover the costs of providing the service. This approach allows municipalities to maintain and improve these services without relying on general tax revenues, ensuring that those who use the services are the ones paying for them.
Major Enterprise Funds
Ohio cities typically have several major enterprise funds. For instance, in Troy, these funds include water services, sewer services, stormwater management and trash disposal. These funds cover essential infrastructure and utilities that residents and businesses rely on daily.
Smaller Enterprise Funds
In addition to the major funds, many municipalities often manage smaller enterprise funds for various community services. These might include cemeteries, golf courses, parking facilities and public arenas and amphitheaters. While these may not be as critical as water or electricity, they still operate on a fee-for-service basis and are expected to be financially self-sufficient. These funds can be supplemented by a subsidy from the general fund, but the premise is that these enterprise operations are to be as fully self-funding as possible.
Financial Independence
One of the key characteristics of enterprise funds is their financial independence. The revenue generated by an enterprise fund is dedicated specifically to that fund and cannot be used to pay for projects or services unrelated to its purpose. For example, money collected from water bills can only be used for water-related expenses and improvements. This segregation ensures that each service maintains its financial integrity and that users' fees directly support the service they're paying for.
Budgeting and Financial Management
Enterprise funds require careful budgeting and financial management. Municipal finance officers must forecast revenue based on expected usage and set appropriate fee structures to cover operational costs, maintenance, and capital improvements. This process often involves long-term planning, as infrastructure projects may require significant investments over time.
The budgeting process for enterprise funds typically involves department heads, such as utility managers, working with the city manager and finance department to develop operational and capital budgets. These budgets are then presented to the city council for review and approval, often alongside any proposed rate increases necessary to support the recommended budget.
Legal Framework
In Ohio, enterprise funds operate within a specific legal framework. The Ohio Revised Code provides guidelines for the establishment and operation of these funds. For instance, federal and state grants or loans for enterprise fund purposes are "deemed appropriated" and must be recorded as such by the fiscal officer of the subdivision. This provision streamlines the budgeting process for external funding sources, allowing municipalities to quickly incorporate grants or loans into their enterprise fund budgets.
Limitations and Restrictions
While enterprise funds offer municipalities flexibility in managing service-related finances, they come with important restrictions. The funds generated through user fees cannot be diverted to support general governmental operations or unrelated projects. This limitation ensures that the fees collected are used solely for the benefit of the service users and not as a hidden form of taxation.
Additionally, enterprise funds are subject to specific accounting and reporting requirements. They must be accounted for on a full accrual basis, which means recording revenues when earned and expenses when incurred, regardless of when cash changes hands. This accounting method provides a more accurate picture of the fund's financial health and long-term sustainability.
Benefits to Municipal Finance
Enterprise funds offer several benefits to local governments. They promote transparency by clearly linking service costs to user fees. This connection can encourage efficiency and cost-effectiveness in service delivery, as managers are incentivized to balance quality service with reasonable fees to maintain user satisfaction.
Furthermore, enterprise funds can help municipalities maintain good credit ratings. By demonstrating that certain services are self-supporting and financially sound, cities can potentially secure better terms when borrowing for capital improvements or other needs.
Challenges and Considerations
Managing enterprise funds is not without challenges. Municipalities must carefully balance the need to maintain affordable services with the requirement to generate sufficient revenue to cover costs and fund necessary improvements. This balancing act can be particularly difficult during economic downturns or when faced with aging infrastructure requiring significant investment.
Another consideration is the potential for inequity. While the user-pays model of enterprise funds is generally considered fair, it can sometimes disproportionately affect lower-income residents who may struggle to pay for essential services like water or electricity.
Future of Enterprise Funds
As cities and villages continue to face financial pressures and aging infrastructure, enterprise funds are likely to play an increasingly important role in municipal finance. Cities may explore expanding the use of enterprise funds to other services or seek innovative ways to improve efficiency and reduce costs within existing enterprise-funded operations.
Moreover, with growing emphasis on sustainability and environmental responsibility, enterprise funds related to utilities like water and electricity may need to adapt to incorporate green technologies and practices, potentially requiring new approaches to budgeting and fee structures.
Enterprise funds are a vital tool in municipal budgeting, providing a mechanism for cities to deliver essential services efficiently and sustainably. By maintaining a clear separation between these funds and general government operations, municipalities can ensure that service users pay for what they use while maintaining the financial health of critical infrastructure and utilities. As our local communities evolve, enterprise funds will continue to be an essential component of sound fiscal management and service delivery.
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I have heard the term enterprise fund without having any idea what it meant. Now I know. I am grateful for the relative ease of understanding the function of enterprise funds. Some other aspects of municipal governance are more complicated than I care to absorb. A great aspect of this newsletter is that I can cherry pick what is of interest to me.