You are here: Chapter XI Procurement and Contract Management > 2. Comptroller Approval of Contracts and General Contracts Processing > C. Encumbering a Contract

XI.2.C
Encumbering a Contract


OVERVIEW

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. 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 (OSC) is committed to ensuring that contractual obligations to contractors can be met, and accordingly requires full encumbrance on all contracts submitted for the State Comptroller’s approval. Full encumbrance means the full amount expected to be obligated during the period for which the appropriation is provided.


OFFICE OF THE STATE COMPTROLLER 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 State, 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 State Comptroller's approval of a contract is required (see Chapter XI, Section 2A - Thresholds  of this Guide for additional information), the agency must encumber the full amount 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 authority is expressly provided in State statute.

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 the OSC prior approval threshold established in State Finance Law §112 (see Chapter XI, Section 2A - Thresholds of this Guide for additional information). Exceptions to this requirement include local assistance payments based on aid formulas (arithmetic calculations) prescribed by law, payments to municipal assistance corporations, and any other exception expressly provided by law.

In all cases where the State Comptroller's approval of a contract is required (see Chapter XI, Section 2A - Thresholds  of this Guide for additional information), contracts must be encumbered for the estimated contract amount that will be obligated during the period for which the appropriation is provided.

 

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:

 

 

Capital assets are long-term and tangible assets 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 reappropriation of 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, OSC has a fiduciary responsibility to ensure adequate funds are reserved for contracts payable from state appropriations provided for capital purposes. To this end, OSC requires 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.

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; 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 State 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 OSC. Since these types of debt service payments are often 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.


EXCEPTIONS

OSC may consider modifications to its encumbrance policy in certain circumstances where such modification is consistent with OSC’s overall objective of ensuring contractual obligations to contractors can be fulfilled. For example, when a state budget has not been enacted by the start of the state’s fiscal year, interim procedures may be established. Agencies may request an exception to the policy in other situations where a full encumbrance is not feasible; for example, if federal grant award authority is temporarily unavailable.

The two most common situations in which a state agency might request that OSC approve a contract with less than a full encumbrance are:

 

 

The unavailability of sufficient funds due to the absence of a certificate(s) approved by the Director of the Budget is not acceptable justification for an exception to the encumbrance policy. Further, an agency’s inability to determine the exact amount of a contract at the time of award is not, in and of itself, sufficient justification for an exception. For such contracts, the agency is required to estimate the amount of liability that will be incurred during the appropriation period, and provide a full encumbrance for that amount.

If an agency submits an encumbrance to OSC in an amount less than required, OSC may return the corresponding contract non-approved, unless the following information and documentation accompanies the contract when it is submitted for approval:

 

 

GRANT PROGRAMS

 

Grant contracts must comply with the requirements described above. In addition, for grant contracts fully or partially funded with federal funds, if the amount encumbered is less than the total liability under the proposed agreement, the agency must provide the following in order to demonstrate how payment obligations to the contractor(s) will be met:

 

 

Agencies should complete the Request for Exception to OSC Encumbrance Policy (AC 3280-S) in order to provide the required information for programs with multiple grant awards. The information should be submitted prior to the submission of the first contract sent to OSC for approval and should then accompany each contract when it is submitted for OSC approval, as long as the information provided remains valid, e.g. the anticipated date for federal funds has not passed.

NOTES

 

These policies and procedures do not apply to the limited number of agencies that submit contracts to OSC for prior approval but whose transactions are not part of the SFS.

State Finance Law Section 40 (Subdivision 2 d) provides that when the grant period of such federal funds extends beyond March 31st of the state fiscal year in which the appropriations are enacted, the appropriation shall be available for liabilities incurred during the grant period after March 31st. While this does not change the minimum amount required to be encumbered, in such circumstances, if the state agency has sufficient funds available to encumber the estimated obligation beyond March 31st, OSC will allow such an encumbrance.

Process and Document Preparation:

TWO – STEP CONTRACT ENCUMBRANCE PROCESS

 

In the SFS, two consecutive steps are required to encumber funds against a contract. First, the agency must create the contract/amendment transaction and submit that transaction for appropriate approvals. The second step - creation of the purchase order (encumbrance) and associating it to the contract/amendment – can only be done after the status of the contract/amendment has been changed to allow it.

 

When a contract transaction requires OSC prior approval, the following steps are taken:

 

 

LAPSING

To facilitate timely processing of contracts, amendments and stand-alone purchase orders that utilize funds with near-term lapse dates within the date ranges identified below, agencies must annotate the AC 340-S or STS or Stand-alone PO with “LAPSING”.

 

Transaction Submittal Date Range Lapse Date
May 15th – June 30th June 30th
August 1st – September 15th September 15th
August 1st – September 30th September 30th

 

 

It is incumbent on the agency to identify lapsing transactions, since OSC will not know the funding source for a contract transaction until the second step of the two-step encumbrance process (i.e. when the agency associates the purchase order to the contract).

In the event that funds encumbered on a contract-related purchase order are unable to be expended prior to the lapse date, the agency is required to manually close the open purchase order(s) prior to the budget close process (see Chapter VI - Budgets of this Guide for more information). Purchase orders with lapsing funds will not be automatically closed by the SFS. If contract-related purchase orders with lapsing(ed) funds are not closed prior to the budget close process, the amount of lapsed funding will continue to be reflected in the encumbered balance of the contract. This funding cannot be liquidated or replaced by other funding. As a result, agencies may not be able to pay obligations and/or encumber additional funds to pay obligations under a contract.

CLOSING CONTRACTS

 

To facilitate closing contracts, agencies should be timely in closing purchase orders associated with contracts by disencumbering excess funds and processing retainage, if applicable (see Chapter XI, Section 12D - Closing Contracts in this Guide for more information regarding closing contracts).


Process and Document Preparation Specific to the SFS:

Phase 1 SFS users create a contract transaction in the SFS using the appropriate Audit Type (see Job Aid JAA-PO 000-008 Audit Type Value Definitions for more information). For transactions subject to OSC approval, users generate a Single Transaction Summary (STS) and submit the STS with the agreement (contract) and required procurement record documents to OSC. Agencies indicate the intended encumbrance amount on the STS. During audit of the contract transaction, OSC will request through the SFS that a purchase order be submitted against the contract, encumbering the appropriate amount of funds. This request by OSC causes the Contract Header Status AND Amendment Header Status to change to “Request PO”. Once the Amendment Header Status changes to “Request PO”, the agency is able to submit a purchase order encumbering funds against the contract transaction. As a note, once OSC requests a purchase order against the initial contract transaction (amendment version 000), the Contract Header Status remains at “Request PO”.

The Contract Header Status should not be used for determining if OSC has requested a purchase order for a subsequent amendment version transaction, i.e. amendment versions 001 and greater. If OSC approves the contract or amendment, the purchase order(s) encumbrance associated with the transaction will reflect a status of “Approved”. If OSC non-approves the contract or amendment, the purchase order(s) status will be “Rejected” in the SFS.

An agency can encumber funds up to the OSC-approved contract amount for the specific amendment version. If a previously OSC-approved contract and any amendments thereto have an unencumbered balance, the agency can encumber additional funds, up to the total contract amount, without OSC approval. An agency shall not reduce a contract encumbrance, except when the estimated liability for the fiscal year is reduced.

Agencies are not required to submit paper copies of contract-related purchase orders to OSC.

Process and Document Preparation Specific to Agency Legacy System Users:

Future Phase SFS users bulkload the contract transaction into the SFS with the appropriate Audit Type (see Job Aid JAA-PO000-008 Audit Type Value Definitions for more information). For transactions subject to OSC approval, users prepare either a STS or Contract Encumbrance Request Form (AC 340-S) and submit it with the agreement (contract) and required procurement record documents to OSC. The agency indicates the intended encumbrance amount on the STS or the AC 340-S. During audit of the contract transaction, OSC will request through the SFS that a purchase order be submitted against the contract, encumbering the appropriate amount of funds. Once the Amendment Header Status has changed to “R” on the Interface Disposition Listing (IDL) or the M061, the agency can submit a purchase order via a T218 transaction encumbering funds against the contract transaction. If OSC approves the contract or amendment, the purchase order(s) encumbrance is also approved, and the status on the IDL or M061 changes to “A”. If OSC non-approves the contract or amendment, the purchase order(s) will be rejected with an “R” status on the IDL or the M061.

Agencies can encumber funds up to the OSC-approved contract amount for the specific amendment version. If a contract and any amendments have an unencumbered balance, agencies can encumber additional funds up to the total approved contract amount without OSC approval. An agency shall not reduce a contract encumbrance, except when the estimated liability for the fiscal year is reduced.

An agency is not required to submit paper copies of contract-related purchase orders to OSC.

 

 

Guide to Financial Operations
REV. 03/19/2012