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XI. Procurement and Contract Management

Guide to Financial Operations

XI.2.C Contract Funds Reservation

XI. Procurement and Contract Management
Guide to Financial Operations

OVERVIEW

To create a funds reservation 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 reserved to ensure their availability for payment of specified expenses. Once funds are reserved they 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 funds reservation on all procurement contracts submitted for the State Comptroller’s approval. Full funds reservation means that the contracting agency must reserve the amount expected to be obligated during the period for which the corresponding appropriation is provided. Purchase Authorization agreements that do not require a guaranteed minimum purchase do not require funds reservations (see Section 5 - Purchase Authorizations of this Chapter for additional information). In addition, centralized and certain multi-agency contracts do not require a funds reservation (see Section 8 - Centralized and Multi-Agency Contracts of this Chapter for additional information).

An agency should not reduce a contract’s funds reservation, except when the estimated liability for the current fiscal year is reduced. It is the responsibility of the agency, throughout the term of the contract, to maintain funds reservation for the amount expected to be obligated during the period for which the corresponding appropriation is provided.

OFFICE OF THE STATE COMPTROLLER FUNDS RESERVATION POLICY

Consistent with the period for which state appropriations are provided, contract fund reservations are 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 appropriations for the operation of the Legislature and the Judiciary.

State Operations Funds Reservation Policy

In all cases where the State Comptroller's approval of a contract is required, the agency must reserve the full amount expected to be obligated during the period for which the corresponding 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 Funds Reservation Policy

Contracts are required for all procurements from Local Assistance appropriations where the award amount is greater than the OSC prior approval thresholds established in State Finance Law §112 (see Section 2.A - Thresholds of this Chapter 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, the agency must reserve the amount expected to be obligated during the period for which the corresponding appropriation is provided.

  • The period for Local Assistance 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 must be reserved 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).

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;
  • Major repair or renovation of a capital asset, or assets, that materially extends its useful life or improves or increases its capacity;
  • 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
  • Reimbursement for legislatively-approved projects undertaken by local governments.

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 Funds Reservation 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 re-appropriation 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 funds reservation for the full amount of all capital project contracts to ensure funds 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 Funds Reservation 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 funds reservation.

Contractual Obligation and Lease-Purchase Payments

Debt service contracts 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 funds reservation for the amount of payments chargeable to the current year appropriation are not required.

EXCEPTIONS

OSC may consider modifications to its funds reservation 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 funds reservation 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 funds reservation are:

  • The federal budget is not passed and the program is receiving federal funding through continuing resolutions, which commit limited funding for short periods of time and allow the program to continue operating pending final approval of a federal budget; or
  • The availability of federal funds does not correspond to the agency’s contract term, such as when the contract term overlaps two federal fiscal years, or if the grant award funds are released to the agency at intervals during the grant period.

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 funds reservation 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 funds reservation for that amount.

If an agency submits a funds reservation 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:

  • The basis for requesting an exception to OSC funds reservation policy, identifying:
    • The full funds reservation (i.e. the estimated obligation expected to be incurred through the end of the appropriation period), and an explanation of how this amount was calculated;
    • Anticipated time frames for when the balance of the full funds reservation amount will become available and reserved.
  • A copy of the Federal Notice of Grant Award (if the exception is being requested because of federal funding delays). The agency must specify the portion of the grant award that is allocated to fund the identified contracts, and must demonstrate the amount allocated ensures the obligations to contractors can be fulfilled.

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 reserved 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:

  • Anticipated timeframes for when the balance of the funds needed for the full contract period will be available; and
  • A comparison of when payments will be due under the terms of the contract(s) to when funds will be available.

Agencies should complete the AC 3280-S Request for Exception to OSC Funds Reservation Policy 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 reserved, in such circumstances, if the State agency has sufficient funds available to reserve the estimated obligation beyond March 31st, OSC will allow such funds to be reserved.

CONTRACT FUNDS RESERVATION PROCESS

Online Agencies

Online agencies must select the Contract Type “Requisition” to initiate the contract creation, submission, and approval processes for all contracts that require funds reservation. The requisition line(s) serve as the funding reservation that systematically pre-encumbers the funds and reduces the State agency’s available budget balance (see Chapter XI-A, Section 2 - Purchase Requisitions of this Guide, for additional information). The system-generated Single Transaction Summary (STS) will display the total funds reserved.

Bulkload Agencies

Bulkload agencies will not use a requisition to create a contract; instead, agencies will bulkload a contract transaction into the SFS. When a contract transaction is bulkloaded with contract line(s) that have been marked “Include for Release”, the SFS will systematically create and/or update a contract requisition. The line(s) created on the contract requisition serve as the funding reservation that systematically pre-encumbers the funds and reduces the agency’s available budget balance (see Chapter XI-A, Section 2 - Purchase Requisitions of this Guide, for additional information). When submitting transactions to OSC, bulkload agencies may indicate on the bottom of the AC 340-S the total funds reserved.

LAPSING

To facilitate timely processing of contract transactions that utilize funds with near-term lapse dates, agencies must prominently write “Lapsing” on the STS or AC 340-S (see Chapter XVII, Section 2.C - Pre-Lapsing Transactions of this Guide, for additional information).

CLOSING CONTRACTS

To facilitate closing contracts, agencies should be timely in reducing unexpended fund reservations (see Section 12.D - Closing Contracts of this Chapter, for additional information). In order to release unneeded fund reservations, any purchase order associated to the fund reservation that has not been fully liquidated must first be reduced to the expended amount against that purchase order. Once the unexpended purchase order amounts have been liquidated, contract lines must be reduced to the expended amount, which will then release the funds reservation. No further action is required by the agency to change the status of the PO as an automatic process will run in the SFS to close purchase orders. Agencies experiencing difficulties with cancelling purchase orders should contact the SFS by submitting a helpdesk ticket at [email protected].

Guide to Financial Operations

REV. 06/26/2015