Operating Encumbrances

Applicable or Related Code Sections

• ORC 3.12 - Personal liability of officer making contract without authority

• ORC 126.07 - Certification of balance statement in all contracts

• ORC 126.08 - Director of Budget and Management – Powers and Duties

• ORC 126.15 - Adjusting Capital or Operating Budgets

• ORC 131.33 - Unexpended balances

• House Bill 33, Main Operating Budget FY2024-FY2025 - Section 503.50 Reappropriation of Unexpended Encumbered Balances of Operating Appropriations

Purpose

This policy addresses the basis of operating encumbrances, their use and modification, and the length of time encumbrances can legally stay open before they are canceled.

Scope

The terms of this policy apply to all state agencies, boards, and commissions for expenditures made from funds within the state treasury.

Definitions

• “Blanket purchase order”:  A purchase order that encumbers all funds intended for use through a fiscal year. 
• “Dispatching”: The process of sending purchase order information to the vendor by the vendor’s preferred method.

Provisions

An encumbrance reserves appropriation to allow for the future payment of an agency’s legal obligations. An encumbrance is not valid until a requisition undergoes all approvals, passes all budget checks by receiving certification that there is available appropriation, and is dispatched to a purchase order in OAKS. All purchases must serve a “public purpose” and fall within the mission of the agency.
 

1. Basis for the Encumbrance

In most cases, encumbrances should be supported by a contract, agreement, obligation, resolution, or order to be performed in the current fiscal year. An agency may find it advantageous to do a blanket purchase order to set aside appropriation for known reoccurring charges throughout the fiscal year; therefore, these types of encumbrances may lack specific support other than the logic for the amount encumbered. To use a blanket purchase order, secondary purchase orders must be generated that reference the initial blanket encumbrance.

An agency must put procedures in place to document the delegation of authority to personnel authorized to make contracts, agreements, or obligations involving the expenditure of money chargeable to an appropriation. In addition, the agency must document that these delegated personnel are aware of ORC 3.12 and ORC 126.07 regarding personal liability.

2. Encumbrance Use and Modification

A valid encumbrance shall not be used for any purpose other than indicated on the encumbering document. If a circumstance arises that changes the original obligation, the agency should evaluate whether it is appropriate to modify or cancel/close the encumbrance. 

Agencies are unable to modify purchase orders outside of the current fiscal year in which the encumbrance was originally made. Agencies are also unable to modify purchase orders if a payment voucher has been created against it in the current fiscal year. Under certain limited circumstances, such as through legal authority granted in an act of the General Assembly, agencies can cancel and reestablish encumbrances or parts of encumbrances in the appropriate funds and appropriation line items for the same purposes and payees. Agencies can perform these acts through the director of the Office of Budget and Management (OBM). 

3. Prior Year Encumbrances 

Unexpended balances of operating appropriations that an agency lawfully encumbered prior to the close of a fiscal year are available the first day of July of the following fiscal year only for the purposes of expending the encumbrance. Expenditures referencing prior year encumbrances in the subsequent fiscal year must directly relate to activities and/or commitments from that previous fiscal year. When encumbering funds to complete facility or maintenance projects (account category 520), agencies should properly plan and allow sufficient time for project completion. Agencies may not use a previous fiscal year purchase order for activities or obligations that occur in the next fiscal year, except in the case of subsidies. 

4. Expiration of Prior Year Encumbrances and Exceptions

Prior fiscal year operating encumbrances for purchased personal services (account category 510), maintenance (account category 520), equipment (account category 530), or items for resale (account category 560) may stay open for five months from the end of the fiscal year (November 30) for the purposes of paying the liability incurred in the prior fiscal year. OBM is required by law to cancel these prior fiscal year operating encumbrances no later than the weekend following November 30 each year, with the following exceptions:

• Encumbrances for an item of special-order manufacture not available on term contract or in the open market may be extended to June 30 with the approval from the director of OBM. Prior to the end of November each year, a memo will be sent out from the Deputy Director of Financial Support Services to agencies with the deadline for this extension request. Requests for extension must provide justification to include why the item is considered special-order and why it will not be received in the following five months after fiscal year end. Requests will be scrutinized to ensure they meet the criteria of an item of special-order manufacture. OBM’s decision as to whether the encumbrance should remain open will be communicated back to the agency on or before November 30.
• Encumbrances for reclamation of land or oil and gas wells may remain open for a period of no more than two years.
• Encumbrances for any other operating expense outside of purchased personal services, maintenance, equipment, or items for resale may remain open for a period not to exceed two years. The director of OBM by law approves the time these encumbrances remain open.

The Director of OBM reports to the Controlling Board by December 31st of each year the operating appropriations for which unexpended balances remain beyond a five-month period from the end of the fiscal year. The report is updated on a quarterly basis for encumbrances remaining open.