Enterprise Indirect Cost Allocations

There has been a lot of talk of the past few years on different methods of calculating indirect costs for Enterprise funds, to recover costs being budgeted in the General Fund.  The DOR has also been cracking down on communities who have long used the vague guidelines to bolster the General Fund on the backs of Enterprise receipts.

There are a number of different categories of costs, as well as calculation methods that can be used.  We are fans of a fairly straight forward method that looks at three categories of costs:

 

1) Employee benefits costs - The cost to the General Fund of retirement, town contributed employee benefits, and federal medicare cost, for each employee who is employed within an Enterprise Fund, or if working between a GF department and Enterprise Fund, has at least .25 FTE in said Enterprise Fund.

2) Direct Town Operational Costs - The cost to the General Fund for insurance, fuel, infrastructure, software, technology, and maintenance for assets related to the operation of an Enterprise Fund.  This category also included Debt Service, if not already being raised in the Enterprise Fund. In many cases the biggest contributing factors to these costs in the General Fund will be fuel for vehicles related to Enterprise Fund Operations, and coverage on specialty buildings in the Property/Liability policy Statement of Values.  Water and Wastewater Treatment facilities are complex operations, and a lot of relief to the General Fund can be recovered by assigning these costs back the Enterprise Funds.

3) Town Administrative Costs - The cost to the General Fund for staff to provide services for the operation of the Enterprise Fund.  This is by far the most controversial of the categories due to the wide latitude and fuzzy boundaries in calculating the quantity of time, and therefore cost, associated with the Enterprise Fund.  The best example is the chargeback of the Town Manager or Administrator's salary to the Enterprise Fund.  Many Town's will make the argument that this is an acceptable practice as the Town Manager is responsible for the oversight and management of all departments.  However on a day to day basis, the oversight responsibility generally falls more on the Public Works director or similar position, which begs the question of how to calculate the time the Manager spends on the Enterprise.

Once you have decided on what costs to recover, the next question is how to calculate the amount to recover. In our opinion, whenever you can use an actual amount tied to a definitive source document, that should be the path to take.  However, when you once again get to item #3,  there are several ways to slice the pie, and very few are considered "better", however several are not as bad.

If you are receiving push back from your Enterprise Funds on the amount they should be budgeting for these cost recovery items, there are several firms in the market that specialize in formulating policies, procedures, and calculation methods.  BMAG has completed a number of these assessments, and would be happy to discuss your project with you.