To create an encumbrance means to set aside or reserve all, or a portion, of an appropriation for payment of future expenses such as payments for capital construction, monthly lease or maintenance agreements, or other contracts (including purchase orders). Appropriations are encumbered to ensure their availability for payment of specified expenses. Encumbered funds are not available for other than the specified purposes.

The Office of the State Comptroller is committed to ensuring that contractual obligations to contractors can be fulfilled and will utilize 'encumbrances' to record contract commitments that are likely to result in future payments to contractors. The use of encumbrance accounting:

• Offers contractors the protections of the "Prompt Payment Law" as intended by the Legislature,
• Significantly reduces the likelihood of over-committing State appropriations enacted by the Legislature and spending plans approved by the Director of the Budget,
• Provides decision makers with projections of true unexpended and unencumbered appropriation balances that are available for future agency needs, and
• Provides State managers with accurate reports of amounts reserved for future satisfaction of contract commitments.

Authority

Subdivision 2 of §112 of the State Finance Law provides in relevant part:
"Before any contract made for or by any state agency, department, board, officer, commission or institution, shall be executed or become effective, whenever such contract exceeds $15,000, it shall first be approved by the Comptroller and filed in his or her Office, …".

§40-a of the State Finance Law provides that:
"No part of any appropriation made as an advance pursuant to this section shall be available for expenditure until a written repayment agreement is entered into by the director of the budget and the agency, authority, fund or corporation to which the appropriation is made." Appropriated advances (also known as 'appropriated loans receivable') include, but are not limited to, payments to public authorities, public benefit corporations, local governments, or not-for-profits, regardless of the amount, where the legislation requires repayment. For advance appropriations, budget certificates that allocate such appropriations cannot be processed until a repayment agreement is entered into and approved by OSC.

In some instances, language contained in the annual budget bills provides that certain appropriations are provided for liabilities 'heretofore or hereafter' to accrue. These appropriations are available for contractual obligations incurred before, during and after the fiscal year in which the appropriation was enacted; but in no event will the period (i.e., the 'life') of the appropriation extend beyond the periods provided in §40 of the State Finance Law or, in limited cases, a different period provided in the appropriation bill. When a State budget has not been enacted by the start of the State's fiscal year or federal grant award authority is temporarily unavailable, the Office of the State Comptroller will work with agencies to temporarily amend, or modify, the procedures outlined below so long as the overall objective of ensuring that contractual obligations to contractors can be fulfilled is satisfied.

Process Overview

As part of the contract approval process, agencies must submit a Contract Encumbrance Request (AC340) or Purchase Order (AC130) with the appropriate encumbrance of funds. Immediately following the approval of the contract, the encumbrance will be recorded in the central accounting system (CAS) against the appropriation from which contract commitments will be paid. Once recorded, State departments and agencies must not reduce the contract encumbrance, except when the estimated liability for the fiscal year is reduced.

In some cases, agencies are permitted to data-enter contract encumbrances in the CAS and these must be recorded only in sequence of contract submissions. In the event that a contract is disapproved, the related contract encumbrance will be cancelled by OSC.

Encumbrance Policy

Consistent with the period for which State appropriations are provided, contract encumbrances will be recorded against the unspent balance of available program appropriations. In New York, all appropriations are classified in one of the following four categories:

State Operations. This category relates to appropriations for the operation of State agencies, regardless of fund source and includes amounts provided for personal service, non-personal service, fringe benefits, etc. An agency may have appropriations for such purposes in several different funds (or accounts within funds), and all these appropriations would be categorized as "State Operations." Also included in this category, although authorized by appropriation bills separate and distinct from those for the Executive branch, are the appropriations for the operation of the Legislature and the Judiciary.

State Operations Encumbrance Policy

In all cases where the Comptroller's approval of a contract is required (i.e., contracts for more than $15,000 except where a specific higher threshold is legislated), a formal written contract is required and the agency must encumber the full amount that is expected to be obligated during the period for which the appropriation is provided.

• Generally, the period for state operations appropriations is April 1 - March 31 unless exceptions are provided in budget bills or consolidated law(s). An exception currently exists for special revenue funds-federal appropriation enacted for grant period(s) that extend beyond March 31 of the fiscal year in which the appropriations are enacted and are available for liabilities incurred during such grant period after March 31.
  
  
• The period for state operations appropriations to the State University and City University is July 1 - June 30, unless different specific statutory authority is expressly provided in State statute.
  

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Local Assistance. This category includes all appropriations for payments to counties, cities, towns, villages, school districts, BOCES, private contractors, not-for-profits, community groups, municipal assistance corporations and certain payments to public authorities; regardless of fund source.

Local Assistance Encumbrance Policy

Contracts are required for all procurements from local assistance appropriations where the amount of such payments is greater than $15,000. Exceptions to this requirement include local assistance payments that are based on aid formulas (arithmetic calculations) prescribed by law, payments to municipal assistance corporations and any other exception expressly provided by law.

For procurements up to $15,000, agencies are encouraged to use the "T" contract process so they can encumber the required amount and make monies available to pay service providers.

All contracts over $15,000 will be encumbered for the estimated contract amount that will be obligated during the period for which the appropriation is provided.

• The period for Local Assistance type appropriations is April 1 - March 31 unless exceptions are provided in budget bills or consolidated law(s). An exception currently exists for special revenue funds-federal appropriation enacted for grant period(s) that extend beyond March 31 of the fiscal year in which the appropriations are enacted and are available for liabilities incurred during such grant period after March 31.
  
  
• The period for local assistance appropriations to the State University and City University is April 1 - March 31, unless different specific statutory authority is expressly provided in another State statute.
  
  
• Community Projects Fund appropriations are provided for liabilities incurred during the 17 ½ month period commencing April 1 of the year of enactment and ending September 15 following the close of the fiscal year. These appropriations will be encumbered for the full amount of the contract since community projects appropriations are generally provided for payment to recipients in amounts equal to the full value of the contract(s). Again, we encourage the use of "T" contracts for contracts valued at $15,000 or less.

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Capital Projects. When used as a category of appropriation, "Capital Projects" includes all appropriations for capital construction projects, regardless of fund source, for expenditures related to:

• construction or acquisition of capital facilities,
• acquisition, construction, demolition or replacement of a capital asset or assets,
• the major repair or renovation of a capital asset, or assets, which materially extends its useful life or improves or increases its capacity,
• the planning or design of the acquisition, construction, demolition, replacement, major repair or renovation of a capital asset or assets,
• construction management and supervision,
• advances to public authorities for capital projects undertaken on behalf of the State, or
• reimbursements for legislatively approved projects undertaken by local governments.

Capital assets are long-term and tangible assets which are intended to be held or used by the State, local governments or public authorities (on behalf of the State) including but not limited to land; buildings; improvements; machinery; equipment; roads; bridges; mass transportation facilities; and water, sewer and drainage systems.

Capital Projects Encumbrance Policy

• Appropriations are recommended by the Executive and provided by the Legislature for the total cost of the project to be undertaken. Furthermore, due to the multi-year nature of capital projects, it is the practice of the Executive and Legislature to annually renew the appropriation authority to undertake capital construction projects. This is done through reappropriating the amounts required to complete the construction project. Therefore, consistent with the manner in which capital projects are recommended and appropriated and §136 of the State Finance Law, the OSC has a fiduciary responsibility to ensure that adequate funds are reserved for contracts payable from State appropriations provided for capital purposes. To this end, OSC requires that all capital project contracts be fully encumbered to ensure their availability for payment of construction expenses incurred during the life of the contract or capital project period.

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Debt Service. This category includes all appropriations for tax-financed State debt service on long-term debt; contractual-obligation and lease-purchase arrangements with several public authorities and municipalities; and lease-purchase payments for State University, Health and Mental Hygiene facilities and for various highway projects (construction, reconstruction, reconditioning and preservation projects undertaken through contractual agreements with public authorities).

Debt Service Encumbrance Policy

State General Obligation Debt Service
The State Constitution requires that the Legislature shall annually provide by appropriation for the payment of interest on and installments of principal for all State bonds and further provides that, if at any time the Legislature shall fail to make any such appropriation, the Comptroller shall set aside from the first revenues of the General Fund a sum sufficient to pay such interest and principal installments and shall make the debt service payment when it is due. General obligation debt service payments do not require contract encumbrances.

Contractual Obligation and Lease-Purchase Payments
Contracts for contractual obligation and lease-purchase payments to local governments, public authorities, public benefit corporations or trustees acting on behalf of a non-State entity must be approved by the Comptroller's Office. Since these types of debt service payments are oftentimes based on variable rate interest calculations and appropriations are allocated by the Division of the Budget for the exact amount needed, after deduction(s) for accumulated interest earned on reserve funds, full encumbrances for the amount of payments chargeable to the current year appropriation are not required.

Additional Information

Questions relating to the information provided in the Encumbrance Accounting Policy should be directed to the Assistant Director, Bureau of Contracts at (518) 486-4117 in the Office of the State Comptroller.