Guidance for Kansas Municipalities

Managing financial statements with precision and foresight is more than a responsibility—it’s a commitment to the communities you serve. Kansas municipalities can annually pass a resolution to prepare their financial statement in accordance with the Kansas Municipal Audit and Accounting Guide (KMAAG) or regulatory basis of accounting. This regulatory approach emphasizes the recording of cash transactions, accounts payable and encumbrances, which collectively influence the calculation of unencumbered cash for each municipal fund. 

While cash transactions and accounts payable are relatively straightforward, understanding encumbrances requires a bit more explanation.

What is an Encumbrance? 

In municipal finance, encumbrances represent commitments for future payments backed by official documentation, such as purchase orders or contracts. When a municipality enters into a contract or agreement, the financial commitment established by that document must be recorded as an encumbrance within the fiscal year of its approval. This ensures that if the expenditure is allocated from a budgeted fund, it is accurately reflected against the current budget. 

There has been an increase in supply chain and demand issues in recent years, with wait times for products and equipment exceeding a year. This scenario has prompted municipalities to authorize purchases intended for future budget cycles, raising the question of whether these commitments should be encumbered at the time of approval or during the intended budget year. According to K.S.A. 10-1113, it is unlawful for any governing body member of a municipality to facilitate or support the creation of debt exceeding available treasury funds at the time of the transaction, irrespective of supply chain and demand challenges. Thus, purchases planned for future years must be encumbered at the point of approval. 

Below are practical examples illustrating when an expenditure should or should not be encumbered: 

  • Encumbered Example: The County Commission approves a $1 million contract with a construction company for road replacements. This commitment is encumbered because it involves a specific agreement with a vendor. 
  • Non-Encumbered Example: The City Council allows the Sheriff to solicit bids for a new police vehicle. Encumbrance occurs only after the bid process concludes and a contract is formally accepted. 
  • Encumbered for a Previous Fiscal Year: In May 2023, a School Board agrees to purchase a bus from Company A for $50,000, designated for the 2024 budget. This purchase is encumbered in the 2023 budget year, aligning with the approval date. An exception to this would be the use of a cancelable purchase order. Per K.S.A. 10-1113, the School District can issue a cancelable purchase orders for school supplies and equipment, school buses, books purchased in conjunction with textbook rental programs and data processing equipment in advance of the budget year during which moneys will become available to pay for such purposes, but contracts for the purchase of such school supplies and equipment, books, buses and data processing equipment cannot be entered into except during the budget year in which moneys will become available for such purchases and risk of loss and title thereto shall not pass to the school district prior to entering into such contracts. 

If you have any questions on whether or not to encumber an expenditure, contact an Adams Brown advisor for guidance.  

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