A Report from the City Auditor
Issued September 2024
http://www.sanjoseca.gov/auditor
Presenters: Joe Rois, City Auditor
Alison Pauly, Supervising Auditor
Public Safety, Finance and Strategic Support Committee
Agenda Item (d)1 1
Encumbrances:
Departments Should Regularly
Review All Encumbrances
to Ensure Timely Liquidation
Background
2 • In FY 2024-25, the General Fund had $84.5
million reserved for encumbrances
(5 percent of total General Fund uses).
• The City Policy Manual includes an
Encumbrance Policy.
• Departments are required to liquidate
encumbrances six months after the term of
the agreement ends or when the
encumbrance is no longer needed.
An encumbrance is an amount
of money set aside to pay the
estimated expense for
contracted goods or services.
Timely liquidation ensures that
funds are released promptly to
pay for other City needs.
Finding I: City Staff Should Review Expired and Unused
Encumbrances
3 • More than one third of the
3,500 operating fund
encumbrances should be
reviewed for liquidation or
correction.
• Up to $30 million in
encumbrances may not
still be necessary or are
inaccurately reported.
• Some encumbrances are
fully liquidated and
reported erroneously.
Reason to Review
Should be Reviewed (June 2024)
General Fund Only All Operating Funds
Purchase order ended
6+ months ago.
362 purchase
orders,
$2.8 million
619 purchase
orders,
$7.3 million
No recent recorded
activity for the
encumbrance.
325 contracts,
$8.4 million
525 contracts,
$19.1 million
No spending of the
encumbrance.
76 contracts,
$2.6 million
154 contracts, $3.5
million
T otal 763 encumbrances,
$13.8 million
1,298
encumbrances,
$30.0 million
Finding I: City Staff Should Review Expired and Unused
Encumbrances
4 In a limited sample of older encumbrances
totaling $1.38 million:
• 21 ($950,000) needed to be liquidated.
• 5 ($325,000) had already been
liquidated and were included
erroneously.
• 2 ($109,000) were still valid.
Recommendation: T o address
potentially outdated
encumbrances, the
Administration should:
→Immediately require
departments to review
encumbrances to liquidate or
correct as needed.
5 Recommendations: T o improve
encumbrance monitoring, the
Finance Department should:
→Require regular year-end reviews
of encumbrances that haven’t
been used recently.
→Update training for department
staff about monitoring
encumbrances.
→Update reporting tools to allow
for streamlined monitoring.
• Some department fiscal staff were
unaware of the Encumbrance Policy.
• Further guidance to staff and requiring
regular reviews would improve
encumbrance management.
• The primary reporting tool on
encumbrances from the financial
management system has inaccuracies,
which can make monitoring difficult.
Finding 2: Consistent Monitoring and Accurate Reporting T ools Would Facilitate the Timely Liquidation of
Encumbrances
Conclusion
The report has five recommendations to improve management and liquidation of encumbrances.
We would like to thank the Finance Department, the Information T echnology Department, and the City Manager’s Budget Office for their time and insight during the audit process.
The audit report is available at www.sanjoseca.gov/auditor Audit staff: Alison Pauly
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