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STATE OF CONNECTICUT

OFFICE OF THE STATE COMPTROLLER

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Encumbrances

1.0 General Information

1.1 Statutory References

CGS Sections 4-69, 4-89, 4-98 & 4-99.

1.2 Definition

Per CGS 4-69 "Encumbrances means the obligations in the form of purchase orders or contracts which are to be met from an appropriation and for which a part of the appropriation is reserved". The terms commitment and cncumbrance have the same meaning in state accounting.

1.3 Encumbrance and Appropriations

Before any obligation is incurred which will require a future expenditure out of an appropriation, a portion of that appropriation must be "reserved" to ensure that funds will be available when payment is due. Purchase orders encumber the funds for future use. The amount reserved is the unliquidated encumbrance balance. When a voucher is processed against the purchase order, the balance in the unliquidated encumbrance is reduced and the cumulative total of expenditures is increased. Exceptions to encumbering funds include payments for payroll debt service, agency, and trust funds.

1.4 Encumbrance and Allotments Calendar

Quarterly allotments are, except for the first quarter, effective on the first day of the quarter, (i.e., October 1, January 1, and April 1). Purchase orders against these allotments should not be processed in Core-CT before the effective date of the allotment.

1.5 Encumbrance and Requisitions

An e-procurement requisition in Core-CT is a pre-encumbrance of funds. After receiving all needed levels of approval, the requisition sources to a purchase order. The approved purchase order encumbers the funds for a particular good or service. A complete listing of contract types, PO types and purchasing authority is found at: http://www.core-ct.state.ct.us/9-training/training/fin/po/cntrct_typ_po_typ_prchsng_athrty.pdf

2.0 Purchase Orders

Purchase orders must be created for all outright purchases of commodities, services and equipment. The Commissioner of the Department of Administrative Services has oversight over all purchasing regulations for the state. See the following to create purchase orders: http://www.core-ct.state.ct.us/9-training/training/fin/po/Create_purchase_orders.pdf

It is important to note, compliance with CGS Sections 4-69, 4-89, 4-98 & 4-99 requires that purchase orders be created, approved and posted prior to accepting any good or service.

2.1 Pre Audits

2.1.1 Purchase of Service Agreements over $1 Million

Agencies must provide electronic documentation for purchase of service (POS) agreements exceeding one million ($1M) for purchases of human services to OSC/APD. Agencies should ensure that electronic version of the contract documents contain the information listed below and are attached in the Core-CT Procurement Contracts module.

Documentation should include:

A. A brief description of the services to be provided.

B. The period of the contract.

C. The total contract amount and a breakdown by fiscal year.

D. Copy of the signature pages.

See OSC Memorandum 2007-22 for details. http://www.osc.ct.gov/2007memos/numbered/200722.htm

See Core-CT Daily Mail dated 10/9/13 for instructions on attaching Electronic Contracts.

 http://www.core-ct.state.ct.us/fin-daily/display.asp?ID=824

2.1.2 Purchase Orders over $1 Million

Purchase order of $1 million or more issued by state agencies must be pre-audited and approved by OSC/APD. Core-CT purchase order workflow will include an OSC approval group where the purchase order has an encumbered amount of $1 million or more. For purchase orders with obligated amount of $1 million or more and encumbered amount less than $1million, agencies must submit a request to osc.apdpa@ct.gov and receive approval prior to making payments.
Proper supporting documentation is required for the pre-audit of purchase orders and change orders. If the purchasing authority is a DAS contract award, no additional documentation is required. If the purchasing authority is an agency contract, the agency should ensure that the contract is scanned and attached to the contract record in Core-CT per Core-CT daily mail dated 10/9/2013 (above), subject: New Procedure for Electronic Contract Documentation.

See OSC Memorandum 2014-11 http://www.osc.ct.gov/2014 memos/numbered/201411.htm

And also See OSC Memorandum 2004-06 http://www.osc.ct.gov/2004 memos/numbered/200406.htm

2.2 P-Card Program

The Office of the State Comptroller's, Administrative Services Division, and the Department of Administrative Services, Procurement Unit co-sponsor commercial card solutions for the State of Connecticut. The P-Card program is designed to help agencies meet their purchasing and travel needs. The P-Card is a MasterCard issued by JP Morgan Chase Bank and each card has custom design features, with built in controls, to meet the specific needs of the cardholder and the agency.

Each cardholder receives one monthly Pathway statement of his/her transactions from their agency coordinator. Each agency verifies and reconciles one monthly total for all agency transactions and processes one monthly payment to JP Morgan Chase. For additional information see: http://www.osc.ct.gov/fpd/pcards/index.html

2.3 Installment Purchase, Lease Purchase and Capital Lease

Purchase orders for the acquisition of equipment from a budgeted appropriation, where the payments extend beyond the end of the fiscal year, require either specific legislative approval (e.g. Special Act) or Finance Advisory Committee (FAC) approval. (Refer to section 5.0 - 5.4) for a detailed discussion of the distinction between operating leases and capital leases/installment purchase/lease purchases).

2.4 CORE-10 and DOIT-10

The CORE-10 has two forms, DAS-Bid or ITD-10, and gives the agency the ability to electronically submit requisitions to the Department of Administrative Services (DAS) for the additional approvals needed for purchases over $10,000 or for electronic data processing (EDP) equipment or services. The approved CORE-10 will be routed back to the originating agency when the DAS approval is received. See the following for a complete guide to the CORE-10: http://www.core-ct.state.ct.us/financials/epro/ppt/intrdcng_core10.pps 

3.0 Encumbrances for Personal Service Agreements/POS Contracts

The purchase order is used to encumber funds for a personal service agreement or a purchase of service contract. On the Core-CT header details hyperlink of the purchase order, the agency must select purchase of service (PSA), competitive, social service agencies (POC); PSA, non-competitive, social service agency (PSC); PSA, competitive, any agency (PSC); or PSA, non-competitive, any agency (PSN) for the contract type. These designations will identify the type of personal service agreement contract or purchase of service contract and will specify if the contract is competitive or non-competitive. Once selected, an Office of Policy and Management (OPM) reporting link will become active for use in entering additional required contract information. OPM reporting requirements include a modification that now requires users to enter all the lines for the services provided for this contract type.

For a full discussion of procurement standards for personal service agreements and purchase of service contracts see: http://www.ct.gov/opm/lib/opm/finance/psa/psa_pos_procurementstandards_021709_update_082709.pdf

3.1 Employee/employer relationships

Before contracting with an individual for personal services, the agency must determine if the characteristics of an employee/employer relationship exits. This is done by applying the Internal Revenue Service common-law rules (following). If an individual does meet the characteristics of an employee, the agency must follow established procedures for placing the individual on the agency payroll.

3.2 Common-law Rules

To determine whether an individual is an employee under the common-law rules, the IRS has identified 20 factors that are used as guidelines to decide whether sufficient control is present to establish an employer-employee relationship.

These factors should be considered guidelines. Not every factor is applicable in every situation, and the degree of importance of each factor varies depending on the type of work and the individual circumstances. However, all relevant factors are considered in making a determination, and no one factor is decisive.

It does not matter that a written agreement may take a position with regard to any factors or state that certain factors do not apply, if the facts indicate otherwise. If an employer treats an employee as an independent contractor and the relief provisions discussed earlier do not apply, the person responsible for the collection and payment of withholding taxes may be held personally liable for an amount equal to the taxes that should have been withheld.

These 20 factors indicating whether an individual is an employee or an independent contractor are:

1) Instructions. An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved.

2) Training. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services.

3) Integration. An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows the employer is interested in the methods as well as the results.

4) Services rendered personally. An employee renders services personally. This shows that the employer is interested in the methods as well as the results.

5) Hiring assistants. An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise, and pay assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result.

6) Continuing relationship. An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals.

7) Set hours of work. An employee usually has set hours of work established by an employer. An independent contractor generally can set his or his own work hours.

8) Full-time required. An employee may be required to work or be available full- time. This indicates control by the employer. An independent contractor can work when and for whom he or she chooses.

9) Work done on premises. An employee usually works on the premises of an employer, or works on a route or at a location designated by an employer.

10) Order or sequence set. An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control.

11) Reports. An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control.

12) Payments. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job or on a straight commission.

13) Expenses. An employee's business and travel expenses are generally paid by an employer. This shows that the employee is subject to regulation and control.

14) Tools and materials. An employee is normally furnished significant tools, materials, and other equipment by an employer.

15) Investment. An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else.

16) Profit or loss. An independent contractor can make a profit or suffer a loss.

17) Works for more than one person or firm. An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time.

18) Offers services to general public. An independent contractor makes his or her services available to the general public.

19) Right to fire. An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract.

20) Right to quit. An employee can quit his or her job at any time without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion, or is legally obligated to make good for failure to complete it.

3.3 Special Instructions for Leases and Contracts Purchase Orders

Contract period - The beginning and ending dates of the contract or agreement. In Core-CT the contract begin date and expire date must be accurate and must reflect the correct period of the contract. The purchase order dates must fall in the contract period. This can be verified by going to the PO obligation hyperlink on the Maintain Purchase Order page.

Incorrect completion adversely affects reporting for the State of Connecticut. It is crucial that these dates are accurate for the generation of reports needed to prepare the Comptroller's Comprehensive Annual Financial Report (CAFR) in conformity with generally accepted accounting principles (GAAP). Proper completion will substantially reduce the information which agencies will have to provide the Comptroller as part of the year-end GAAP closing. Statewide EPM queries were created based on the assumption that proper dates are being entered for these contracts and for the purchase orders against these contracts.

4.0 Change Orders

4.1 Adjustments to Purchase Orders

Adjustments to purchase orders (change orders) must be created for any adjustment to an original purchase order. A change order is used for any change to the existing terms and conditions (including price changes or name changes) of the original. There is an allowance of up to10% for bulk commodities only. Changes to purchase orders for personal property leasing, rental, maintenance or EDP services must have a change order for any price and/or quantity adjustments.

Adjustments to accounting codes and/or commitment amounts should be processed using the same change order. The distinction of this adjustment is that it does not affect the vendor and does not need to be sent to the vendor. The change order must go through the dispatch process for the system to number and track the change orders. The dispatch method for these change orders should be changed to Print so it will not be sent to the vendor.

4.2 Adjustments to State Leased Rental Property

To affect a change in a state property rental lease, a change order must be processed.

5.0 Installment Purchases, Lease Purchase and Capital Leases

5.1 Statutory Reference

CGS Section 4-98 states, in part, "...The amount to be charged against the appropriation for any budgeted agency in any year for a capital expenditure, including an installment purchase, shall be the state's total cost for such capital expenditure unless otherwise authorized by the general assembly or approved by the finance advisory committee...".

5.2 Application to Lease, Lease Purchase, and Installment Purchase

The determination of whether a transaction is a "capital expenditure" is dependant on the substance and not merely the form of the contract or agreement and any agreement which transfers substantially all the benefits and risks inherent in the ownership of the property should be accounted for as a capital expenditure and the acquisition of an asset.

A. The specific criteria to be applied are drawn from Generally Accepted Accounting Principles (GAAP) as promulgated by the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) and any lease agreement which meets any one of the following criteria is a "capital lease" to be accounted for as a "capital expenditure" under the statute:

1. The lease automatically transfers ownership (title) of the property to the lessee either during its term or at the end of the lease term.

2. The lease contains a bargain purchase option.

3. The lease term, including any bargain renewal options, is equal to 75 percent or more of the estimated economic life of the leased property.

4. The present value at the beginning of the lease term of the minimum lease payment is 90 percent or more of the fair value of the leased property.

It is recommended that the above criteria be applied in the order shown.

B. As the criteria require judgment and a knowledge of the specifics of a transaction and the uses of the property, it will be an agency determination whether a lease is a capital lease or not.

5.3 Approvals, Appropriations, and Account Coding

The following is a matrix of required approvals, appropriations to be charged, and account coding to be used. Finance Advisory Committee (FAC) approval applies only to transactions against budgeted appropriations.

-Type of Contract Special Legislative or FAC Approval Appropriation Expense To Be Charged Account Outright Purchase No Equipment (10050) 556XX Capital Leases (Including Installment Purchase) Yes Equipment (10050) 556XX

In addition, all purchasing regulations, as listed by the Commissioner of the Department of Administrative Services, must be followed.

5.4 Definitions and Guidelines for Capital Lease Determinations

A. Lease Term: The non-cancellation period of the lease plus bargain renewal periods.

1. A lease that is cancellable only upon a remote contingency, or with permission of the lessor, or provided the lessee enters a substitute lease with the same lessor, or only on payment of a prohibitive penalty is a non-cancellable lease for this purpose.

2. A lease that provides for cancellation if funds are not appropriated in future periods is to be considered non-cancellable if the possibility of this occurring is remote.

B. Bargain Purchase Option and Bargain Renewal Option: An option price so low that the predictability of exercising the option is almost certain. The definition should be constructed so that it is obvious; i.e. if it isn't obvious, it isn't a bargain.

6.0 State Leased Rental Property

All leases on real property must be approved through the Department of Construction Services and the Department of Administrative Services. CGS 4b-23 states that "The state facility plan shall be used as an advisory document for the leasing of property for use by state agencies and departments and for related capital projects." Agencies must also submit to the Office of Policy and Management a completed State Facility plan by September 1 of each even numbered year. This plan is used to make cost and square footage recommendations in conjunction with the preparation of the State Budget. The Department of Construction Services and the Department of Administrative Services will work with the agency to resolve any leasing issues and problems. http://www.ct.gov/dpw/cwp/view.asp?a=2282&q=296106&dpwNav=|#Facilities Management

7.0 Fiscal Year-End Procedures

In May, the Comptroller publishes a Year-End Procedures memorandum. Please refer to the Comptroller's website for the current year instructions.

7.1 Encumbrance Document Processing

The State's fiscal year for all agencies ends June 30. Fiscal year-end instructions are issued each year which contain cut-off dates earlier than June 30. These cut-off dates are to permit the processing of documents by the statutory limits of June 30 and July 31.

7.2 Lapsing and Continuing Appropriations and Subsequent Expenditures

A. When an appropriation lapses, all unexpended balances lapse.

1. All unliquidated encumbrances as of June 30 are re-established by the system in the new year.

2. Expenditures (payments) will be processed through the normal liquidation procedure.

B. Lapsing Appropriations with A New Year Appropriation

1. No balances are brought forward.

2. Purchase orders with a positive remaining balance, with a status of dispatched and a budget status of valid will be rolled forward to the new fiscal year.

3. Expenditures (payments) will be processed through the normal liquidation procedure.

C. Lapsing Appropriations with No New Year Appropriation

1. The Office of Policy and Management will notify the Comptroller if funds can be carried forward to liquidate encumbrances.

8.0 Assignment and Assumptions of Contracts, Leases and Vendor Payments

8.1 Definitions

Assignments and assumptions are two parts of the same transaction. In general an assignment is a contract in which one party agrees to transfer ("assign") some or all of that party's rights and/or duties/obligations under an existing contract to a third-party who agrees to accept ("assume") the rights and duties/obligations of that existing contract. The party making the transfer is the "assignor" and the party accepting the transfer is the "assignee."

8.2 Types of Assignment

There are two types of assignments: complete and partial, which are explained more fully below:

8.2.1 Complete Assignment and Assumption

A complete assignment and assumption occurs when a party (the "assignor") assigns all of their contractual rights and duties/obligations to a third party (the "assignee") who accepts the assignment. The assignee becomes responsible for complying with all terms and conditions of the original contract between the original parties, i.e. the state and the assignor. An assignment and assumption does not result in any substantive changes to the original contract, the assignee is merely stepping into the shoes of the original party, the assignor. This usually occurs when one business purchases another.

An assignment and assumption can be the result of a larger corporate restructuring such as a merger. Examples of types of mergers are:

1. Vendor "A" merges into vendor "B" in which case vendor "A" ceases to exist and does not conduct regular on-going business;

2. Vendor "B" merges into vendor "A" and vendor "B" ceases to exist ceasing on- going business as in #1;

3. Vendor "A" and vendor "B" merge into each other and both cease to exist for on-going business purposes but a new company vendor "C" is created.

In each instance of 1, 2 and 3 above, the state would have a binding contractual agreement under the original terms with the new business entity provided the new merged entity has complied with the assignment and assumption requirements of the contract with the state. In the case of a merger, if the surviving entity in examples 1 and 2 above is not the original contracting party, the new entity in each instance would need to supply a new taxpayer identification number ("TIN") which is either a social security number or federal employer identification number ("FEIN") to the state. A new TIN would need to be provided by the vendor in example 3 above for the same reason, it is a new entity requiring a new unique identifier.

8.2.2 Partial Assignment

A partial assignment occurs when a party to the contract, the assignor, assigns only a portion of their rights and/or duties under that contract to a third-party, the assignee. The assignor can assign either their right to payment, accounts receivable, or some or all of its performance obligations. If only the performance obligations were assigned, the State would continue to make payments to the original vendor.

NOTE: A change in name only is not an assignment and assumption because the State is still dealing with the same legal entity and the respective rights and duties under the contract remain unchanged.

8.2.3 Completing an Assignment and Assumption

If a vendor wishes to assign all or part of its contractual rights and duties to a third party, then the state must comply with the following procedures:

A. Obtain a letter of understanding from the vendor containing the following:

1. Explanation of type of assignment, i.e. full/partial, accounts receivable or performance; and

2. Acceptance of the assignment and assumption from both parties, assignor and assignee executed by a duly authorized individual (see Authorization below) of each entity.

B. Assignor must submit proof that the assignment and assumption are permitted under its contract with the state. If the contract requires, written confirmation of the agency's consent to the assignment and assumption must be obtained;

C. The documents specified in 1 and 2 of this section must be submitted to the Vendor File section of the Comptroller's Accounts Payable Division (http://www.osc.ct.gov/public/directry/deptdir.htm#ACCOUNTS). The documents must reflect the vendor name, TIN for the original state vendor, assignor, and the new third party vendor, assignee.

D. After Office of the State Comptroller approval of the documents, the state agency must amend documents in Core-CT reflecting:

1. The new vendor name;

2. TINs for the original state vendor/assignor and for the new third party vendor/assignee for personal service agreements (CO-802a) and leases (CO-507) must be delivered to the Accounts Payable Division of the Office of the State Comptroller.

If the assignee is not in the Core-CT Vendor File, a vendor profile (SP-26 or SP-26NB) for the assignee must be submitted to the Office of the State Comptroller Accounts Payable Division for review and entry into Core-CT.

Required Forms.

Amended personal service agreements (CO-802a) and change orders require the assignee's (new third party vendor's) name and TIN. It should indicate it is for accounting purposes only.

Authorization.

Documentation or proof that both parties are authorized to enter into an assignment and assumption contract/agreement must demonstrate three things:

1. Authority of the assignor or assignee to respectively assign or assume all or part of the contract;

2. Authority of a particular individual to enter into the assignment and assumption agreement;

3. Verification that the individual signing the agreement in fact holds a position authorized to execute the agreement.

The following types of documentation are acceptable proof of authority for the type of entity specified:

Corporation

1. Certified corporate or board of directors resolutions (certification is by the secretary of the corporation);

2. Current certified copy of the corporation's by-laws authorizing a specific individual to execute contracts with certification that the specific individual currently holds such office; or

3. In lieu of certified resolutions or by-laws, a certified copy of the minutes of the board of directors of the corporation.

Limited Liability Company ("LLC")

1. Certified copy of all relevant portions of the management agreement or operating agreement providing the authority to enter into contracts and identifying the member(s) or manager(s) authorized to sign contracts on behalf of the LLC; and

2. Certification that the individual(s) specified in the operating agreement is a member(s) or manager(s) or that such member/manager has authority to delegate signature authority to another individual;

Note: If the LLC has a sole individual member or director a notarized or sworn affidavit from that individual will be required.

Partnerships

1. Normally any general partner can bind the partnership;

2. Every effort should be made to obtain a partnership authorization which provides evidence of a partner's authority to bind the partnership. This can be in the form of a certified partnership resolution or a certified copy of the partnership agreement.

Note: A company will not necessarily hold a board meeting to approve every contract it enters into and the general guidance provided in this section should be used to verify the authority to enter into the agreement.

Individuals

1. An individual assigning a contract is required to provide a notarized or sworn affidavit as the assignor.

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