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What Taxpayers Should Know About City Enterprise Fund Transfers

In Utah, cities are allowed to have what is called an enterprise fund. The Utah League of Cities and Towns describes enterprise funds this way: “Enterprise funds are for services which charge a fee and the fund should be treated like a business organization.”

Examples of enterprise funds include city-owned utilities such as power, water, sewer, or other ventures such as a golf course or an airport.

Fees collected from enterprises should cover the cost of the enterprise. If an enterprise fails to collect enough fees to cover its costs, city taxpayers are then expected to subsidize the cost of the enterprise from the city’s general fund.

If fees greatly exceed the amount that it costs to operate the enterprise, city officials should lower the fees to cover the costs of the enterprise.

Enterprise Fund Transfers to the General Fund

Some Utah cities collect large revenues from their enterprise funds and transfer the gains to the city’s general fund. Some cities label this practice as the city receiving a dividend from its investment in the enterprise. Cities with large amounts of property tax exempt property (for example: government or nonprofit properties) also argues this is one way to collect revenue from exempt properties in lieu of property taxes.

The city of Provo has multiple enterprise funds and regularly transfers revenue from these funds to its general fund. From FY2011 through FY2016 the city transferred $39,736,056 from its Energy Fund (power plant) to the General Fund. The city also transferred revenue from its Sanitation Fund, Water Fund and Waste Water Fund to the General Fund.

 

Once the money has been transferred to the general fund, the money can be used for any service that is funded through the general fund. That means money collected from ratepayers for a utility may also be used to fund city services such as police and fire or fund the city’s summer festival.

From a tax policy perspective this practice of collecting more money from an enterprise fund than is needed to operate the enterprise is government attempting to hide the true cost of services and unfairly placing the burden of the cost of government on the sole users of the enterprise instead of on the general public the government serves.

Anecdotally, stories have been shared where cities have considered raising fees for enterprise funds and then transferring the increased revenue from the fees to the general fund to help city elected officials avoid the need for a property tax increase.

This practice is inappropriate and flies in the face of transparency. If additional revenue is needed to provide essential services, then additional funding should be sought via a property tax increase.

Increasing Transparency in Enterprise Fund Transfers

During the 2017 Legislative session, the Utah Taxpayers Association worked with Rep. Jefferson Moss, R-Saratoga Springs, to pass House Bill 164 1st Substitute. The legislation adds transparency to the transfers from the enterprise funds by requiring the cities to notify fee payers of the enterprise funds about the transfers, similar to notices sent out when a city holds a hearing on a budget.

The public will now receive a notice that informs them 4 about what fund is having a transfer made, the dollar amount of the transfer, the percentage of the transfer from the enterprise funds total budget and which fund the transfer is being made to.

This increased notice will allow taxpayers the opportunity to be fully aware of where the money paid to an entity is truly spent. It will also help taxpayers have a better understanding of the true cost of government.



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