Disbursing Public Funds

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Kara Millonzi

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G.S. 159-28 is often referred to as the “preaudit statute,” but it actually prescribes two distinct legal processes—the preaudit process and the disbursement process. The statute envisions that most local government expenditures will be subject to both processes. As discussed in previous posts (see here, here, and here), the preaudit process (found in G.S. 159-28(a)) is triggered and performed when a local government or public authority (collectively, local unit) incurs an obligation to pay money, such as when it orders goods, enters into a service contract, hires an employee, or executes a credit card transaction. The disbursement process (found in G.S. 159-28(b) & (d)), on the other hand, must be performed before a local unit actually pays out the funds. Thus, the law requires that a local unit perform the disbursement process when it receives an invoice, bill, or other claim for monetary payment. This blog post describes the disbursement process and other related requirements for expending public funds.

What is the Disbursement Process?
The disbursement process differs for expenditures accounted for in the budget ordinance or a project ordinance than for expenditures accounted for in an intergovernmental service fund, trust fund, or agency fund.

Budget Ordinance and Project Ordinance Process
Read together, G.S. 159-28(b) & (d) require a unit’s finance officer (or a deputy finance officer designated by the governing board for this purpose) to do the following before paying a bill, invoice, or other claim that is accounted for in the unit’s budget ordinance or a project ordinance:

1. Verify that the amount is due and owing. The finance officer or a deputy finance officer must check to see that the goods were delivered or services performed as promised and that the amount claimed matches the unit’s contractual obligation. The officer also must verify that the preaudit process was properly performed when the obligation was incurred. G.S. 159-181 makes it a Class 3 misdemeanor for any officer or employee to approve a claim or bill knowing it to be invalid.

2. Make sure there is (still) an appropriation authorizing the expenditure.

3. Make sure sufficient funds remain in the appropriation to pay the amount due. If there is no longer an appropriation for the expenditure, or if sufficient funds do not remain in the appropriation, the governing board must amend the budget ordinance or project ordinance before monies are dispersed.

4. Include a signed, disbursement certificate on the face of the check or draft. The disbursement certificate should read: “This disbursement has been approved as required by the Local Government Budget and Fiscal Control Act.” It must be printed or stamped on the face of a local unit’s checks. It also must be included on any electronic payment transactions, such as direct deposit payments. Note that it is neither necessary, nor sufficient, to include the disbursement certificate on the invoice, bill, or claim. The statute requires that it be included on the actual payment. A disbursement certificate is not required, however, on payroll checks or drafts on an imprest account if the check or draft depositing the funds in the imprest account includes a signed disbursement certificate.

Intergovernmental Service Fund and Trust and Agency Fund Process
If the bill, invoice, or other claim requires a disbursement from an intergovernmental service fund or a trust or agency fund, the finance officer does not have to perform the full disbursement process. He or she may make payment “if the amount claimed is determined to be payable.” G.S. 159-28(b).

What Happens if a Unit Does Not Comply with G.S. 159-28(b) and (d)?
As with the preaudit, “if an officer or employee . . . pays out or causes to be paid out any funds in violation [of G.S. 159-28], he and the sureties on his official bond are liable for any sums . . . so disbursed.” G.S. 159-28(e). Moreover, if a finance officer or a deputy finance officer gives a false disbursement certificate, he or she also may be held liable for the sums illegally committed or disbursed. It is a Class 3 misdemeanor, and may result in forfeiture of office, if the officer knowingly gives a false certificate. G.S. 159-181.

Governing Board Override
If a finance officer or deputy finance officer disapproves a bill, invoice, or other claim, the governing board may step in to approve payment. G.S. 159-28(c). If the expenditure is accounted for in the budget ordinance or a project ordinance, the board may not approve payment if there is not an appropriation in the budget ordinance or a project ordinance or if sufficient funds do not remain in the appropriation to pay the amount due. The board must adopt a resolution approving the payment, which must be entered in the minutes along with the names of the members voting in the affirmative. The chairman of the board, or designated member, may sign the disbursement certificate.

If the board approves payment and it results in a violation of law, each member of the board voting to allow payment is jointly and severally liable for the full amount of the check or draft.

Other Disbursement Requirements
In addition to the disbursement process, the Local Government Budget and Fiscal Control Act specifies the forms that payment may take and who within the unit may authorize payment.

Forms of Payment
G.S. 159-28(d) directs that all bills, invoices, salaries, or other claims be paid by check or draft on an official depository, bank wire transfer from an official depository, or electronic payment or electronic funds transfer originated by the local government through an official depository. Wire transfers are used, for example, to transmit the money periodically required for debt service on bonds or other debt to a paying agent, who in turn makes the payments to individual bondholders. Automated Clearing House (ACH) transactions are used by local governments to make retirement system contributions to the state, to make payroll payments, and to make certain other payments. The state has extended the use of the ACH system to most transfers of moneys between the state and local governments that are related to grant programs and state-shared revenues.

Significantly, the statute does not authorize cash payments.

Dual Signature Requirement
G.S. 159-25(b) requires each check or draft to “be signed by the finance officer or a properly designated deputy finance officer and countersigned by another official . . . designated for this purpose by the governing board.” Typically the finance officer’s (or deputy finance officer’s) signature attests to completion of review and accompanies the disbursement certificate described above. The second signature may be by the chair of the board of commissioners, the mayor of the city, the manager, or some other employee or official designated by the governing board. (If the governing board does not expressly designate the countersigner, G.S. 159-25(b) directs that for counties it should be the chair or the chief executive officer (i.e., the county manager), and for municipalities it should be the mayor.)

The purpose of requiring two signatures is internal control. The law intends that the finance officer review the documentation of the claim before signing the certificate and check. The second person can independently review the documentation before signing and issuing the check. The fact that two persons must separately be satisfied with the documentation should significantly reduce opportunities for fraud.

In many local units, however, the second signer does not exercise this independent review, perhaps relying on other procedures for the desired internal control. Recognizing this, G.S. 159-25(b) permits the governing board to waive the two-signature requirement (thus requiring only the finance officer’s signature or a properly designated deputy finance officer’s signature on the check) “if the board determines that the internal control procedures of the unit or authority will be satisfactory in the absence of dual signatures.”

Electronic Signatures
As an alternative to manual signatures, G.S. 159-28.1 permits the use of signature machines, signature stamps, or similar devices for signing checks or drafts. In practice, these are widely used in local units all across North Carolina. To do so, a governing board must approve the use of such signature devices through a formal resolution or ordinance, which should designate who is to have custody of the devices. For internal control purposes, it is essential that this equipment be properly secured. The finance officer or another official given custody of the facsimile signature device(s) by the governing board is personally liable under the statute for illegal, improper, or unauthorized use of the device(s).

 

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