Accounting for Water Authorities (#380)
/The topic of this episode is the accounting issues pertaining to water authorities. This is not a small area, because there are about 150,000 water authorities of various sizes just within the United States. Even a smaller country may have a few thousand of them.
The Nature of a Water Authority
To begin, what is a water authority? It’s a government entity that’s responsible for managing the supply and distribution of water within a specific area. In some cases, it also includes wastewater management.
Enterprise Fund Accounting
So, let’s get into the accounting. These organizations are accounted for as enterprise funds, which means that they’re accounted for pretty much like private businesses, where they charge fees in order to recover their expenses.
Infrastructure Accounting
They tend to be really heavy on infrastructure investments, like dams, pumps, and pipelines, so a major part of the accounting is capitalizing the cost of these assets correctly and depreciating them over, in some cases, a really long time. To do this properly, you need to maintain detailed accounting records that support how each asset was valued, as well as any additions, retirements, and impairments.
And, as I just noted, all of that infrastructure is subject to impairment. If the service utility of an asset declines, you’re looking at an infrastructure impairment. For example, what if a water authority spends a few million dollars on a pipeline from a reservoir, and then there’s a drought? If the reservoir dries up, then the pipeline is useless, and you could be looking at a massive impairment charge.
Infrastructure Funding Sources
Another accounting issue relates to how that infrastructure is financed. This is usually through revenue bonds, where the authority pays back investors from the revenue it receives from the projects being funded. For example, you might issue $50 million in revenue bonds to finance the construction of a dam, and then pay back the investors from the fees charged to the users of that dam. This means that the accountant has to record the principal and interest portions of each payment made back to the bond holders.
An alternative form of financing for infrastructure could come from a government grant. These grants are classified as non-exchange transactions under government accounting, where the recipient has to recognize both revenue from the grant and the related asset. As the accountant, you have to make sure that the water authority is complying with the terms of the grant. For example, you might only be able to draw down the grant if the water authority incurs specific types of qualifying expenditures.
There’s an additional issue that arises when these grants come from the federal government. If so, and the grant is for at least $750,000 within a fiscal year, then the water authority has to undergo an audit. The intent is to make sure that the funds are used properly, but from the accountant’s perspective, it’s just one more paperwork issue to deal with. These audits can take a lot of time, since they also include an examination of controls.
Revenue Issues
A water authority makes its money primarily from user fees and connection charges. These fees are probably subject to approval by the local government, which could result in losses. This is more of a finance issue than an accounting issue, but if you’re handling the accounting, you’ll likely be spending a good chunk of your time documenting why the authority needs to increase its rates.
Another revenue issue is the manner in which revenue is recognized. This is accrual basis accounting, so you recognize revenue when it’s earned, not when cash is received from customers. The implication here is that you can’t release financial statements unless you’re pretty comfortable with the accuracy of your water usage tracking systems.
Pollution Remediation Obligations
A unique expense that a lot of water authorities have to deal with is pollution remediation obligations. For example, they might have to deal with the cost of replacing lead pipes. If so, the accounting is to recognize the estimated cost of these replacements as soon as they can be reasonably estimated. This can be a massive expense, so as the accountant, you may find that the local government is picking over your estimates to see how accurate they are. And that annoying picking will continue each year, as you update the estimates.
Retirement Plans
Another accounting issue is retirement plans. A water authority might participate in a public retirement plan, which means that someone else is administering the plan. As the accountant, you’ll be generating the related journal entries based on what the plan administrator is reporting to you.
Control Systems
And then we have systems of controls. Water authorities have to set up and monitor some unique controls. For example, you’ll need controls over the misreporting of water usage and the manipulation of meter data. And, from the perspective of the accounting software, you’ll need access controls over who can alter the rates being charged to customers. The purchasing side of the business needs a lot of controls, since water authorities can spend vast amounts on construction. There need to be controls over how supplier contracts are authorized, and whether contractors have actually finished the work for which they’re being paid.
I’ve only touched on the most unique accounting issues that you’ll have to deal with in a water authority. As a general observation, the main annoyance will probably be the degree of public oversight over customer billings and requests for rate increases, since these are issues that impact the voting public. If you’re the type of accountant who likes to work quietly behind the scenes, it could come as quite a shock when outsiders want to inspect your work, and maybe criticize it. Something to think about.