Evaluating Your Allowable Public Expenditures

Local government officials have a fiduciary responsibility to use the funds received by a local government lawfully. When evaluating expenditures, it may also not be clear if the use is acceptable.  An organization may believe that an expense is appropriate because they have had a similar transaction for a few years, but just because you have done it in past does not make it legal.  

The use of government funds, is that purchase allowable? 

The ability of a local government to do anything, including spending funds, comes from the power that is granted by the State Constitution, statutes that have been adopted, and case law.  Generally, a local unit only can spend its resources only for a public purpose. The State Supreme Court has defined this as: 

Generally, a public purpose has for its objective the promotion of the public health, safety, morals, general welfare, security, prosperity, and contentment of all the inhabitants or residents within the municipal corporation, the sovereign powers of which are used to promote such public purpose…The right of the public to receive and enjoy the user’s benefit determines whether the use is public or private. (Hays v City of Kalamazoo, 316 Mich 443, 453-454 (1947)) 

This public benefit test is limited. Even if an expenditure is considered to benefit the public, it still may not be allowed. Under state law, local units are authorized to perform numerous services, such as running elections, providing ambulance service, and maintaining parks and cemeteries. If the local unit is not specifically authorized under state law to provide a specific service, then it has no legal authority to provide that service.  

While it is not always clear if an expenditure is lawful, here are a few examples:

• Donations to a community service organization. Providing funding to the local community service organization is noble and may benefit your citizen. Unfortunately, this type of expenditure is not normally allowed. The payment to another organization should only be for the exchange of providing government services that the local unit is authorized under state law to provide itself.  
• Providing food or coffee. Maintaining a coffee pot for employees or purchasing food for a staff lunch is generally not considered a public purpose. This does not mean that you cannot buy coffee or fund, but if you do it must be for public purposes, like a special meeting that is open to the public. Another exception is for firefighters or employees that are working extended hours.  
• Retirement. It would be nice to provide a gift to the employee who spent 30 years as a devoted public servant, but again there is no statutory authority or public purpose for this use of funds.  
• Flowers. It is only kind to send flowers to the sick or for a funeral, but you cannot do this with governmental funds.  If this is important to your organization’s staff members, you may want to gather donations outside of the governmental function.  

What should a local government do to protect itself?

To ensure that your local government stays within the lines of allowable public expenditure, start by asking questions and educating yourself.  Every expenditure should be evaluated to make sure you have the authority, even if it is something your local unit has spent funds on for years.  While that coffee pot in the break room may have been there for decades, it only costs a few dollars and month, and no one has complained, it does not make it right to continue to purchase the supplies.  

Make sure you have a purchasing policy and that you are following it. A purchasing policy help establish rules around purchases to help make the best expenditure decisions.  This helps the local government reduce potential fraud or conflict of interest and helps ensure that government spends its limited resources efficiently.  Following your purchasing policy will help make sure you have needed checks and balances in place to protect your local government. 

If the local government provides funds to another organization or municipality, document it in a contract or letter of understanding.  This allows you to document that the service that is being provided is authorized by state law, document the public purpose, and set expectations for the service being provided. Without a written agreement, you risk expenditures being considered a donation.  

Some boards or employees raise funds separately to send flowers or provide retiree gifts. This allows the organization to show its support without being in violation. For example, one board collected a few dollars from every meeting from the board members, so they had a small pot of dollars available to spend on items that the government could not legally spend the money on.  If you decided to do this do not comingle the funds with the local government. This must be outside of the government’s operation and not part of the municipality’s financial records.  

Under the Uniform Budgeting and Accounting Act, a local unit must adopt a General Appropriations Act to adopt your budget.  A local unit cannot spend more than the amount authorized in this adopted budget unless the budget is amended first. So even if your expenditures are allowed under state law, make sure your budget allows you to make that expenditure.   

Lastly, take a cautious approach. It is better to assume something is not allowed than to expend public dollars on something that is not allowed. Being critical helps reduce your risk and protect the local government. If you have questions, ask your legal counsel to review them before deciding to spend the funds.  

As you evaluate your budget, policies, and types of expenditures you can make, the team at Maner Costerisan is here to help ensure you are meeting your fiduciary responsibility. Understanding state law or best practices can be overwhelming. If you feel like you need some assistance please contact Rod Taylor, Senior Governmental Consultant, at rtaylor@manercpa.com or maner@manercpa.com.