Cities usually operate their utility services in one of two ways. The city may have a separate utility board of commissioners that oversees and funds all utility operations, or the water and sewer utilities may be part of the city budget, and the aldermen serve as the utility board. In either situation, water and sewer utility funds should be set up in a separate fund known as an enterprise fund. Cities may have one enterprise fund for the water operation and another enterprise fund for the sewer operation. However, in most cases it is perfectly permissible to have a combined water and sewer fund. This option has two important advantages for the city:
- Costs can be spread over a larger customer base; and
- Consolidation makes it easier to address administrative, management, and bookkeeping problems.
If the utility elects to operate with a combined fund, bookkeeping should still segregate expenses for water and sewer so that accurate records will be maintained for the cost of operating the water and sewer systems. This is especially important when the utility is seeking grants and loans, as most agencies want to see the costs for water and sewer separately as they compare to revenues.
Enterprise funds differ from the city’s general fund in several ways. Enterprise funds are concerned with income, while the general fund looks at both income and fund balance. Producing an income is important because it is the means of providing funds for capital projects, new equipment, etc. that the utility operation needs. Also, depreciation is used as an expense item in the enterprise fund, while it is not recognized in the general fund.
One other very important aspect of the enterprise fund is the fact that some loan and grant regulations require having a separate fund in order to obtain these monies. This is to assure the lender that there are sufficient revenues being generated by the utility operations to repay the debt.