January 15, 2003
Bryan Pennington, Water Manager
City of Manchester
200 West Fort Street
Manchester, TN 37355
RE: Use of Utility Revenue
Dear Mr. Pennington,
This morning, you asked a very good question regarding the lawful use of utility revenues. In order
to answer your question concisely, I researched the Tennessee Code Annotated (T.C.A.) for specific
restrictions in this regard.
As a municipality, Manchester is required under T.C.A. 9-2-102 to use a uniform system of
bookkeeping to record all the financial activities of all funds of the city. Through the use of this
system, the financial activity of each individual fund is recorded in a set of self-balancing accounts.
This means that all of the assets, liabilities, retained earnings, revenues and expenses relating to a
particular fund are to be accounted for separately from any other governmental or proprietary fund.
In other words, the financial activity of the Water and Wastewater Fund will be recorded separately
from that of the General Fund. Through the use of this uniform system of bookkeeping, revenues
for the Manchester Water and Wastewater Utility can be easily identified.
Now that we have recorded the utility’s revenue in its own fund, what are the lawful uses for which
it may be spent? T.C.A. 7-34-115 designates the lawful disposition or use of this revenue. Section
(a) states,
“Notwithstanding the provisions of any other law to the contrary, as a matter of public policy,
municipal utility systems shall be operated on sound business principles as self-sufficient entities.
User charges, rates and fees shall reflect the actual cost of providing the services rendered. No
public works shall operate for gain or profit or as a source of revenue to a governmental entity, but
shall operate for the use and benefit of the consumers served by such public works and for the
improvement of the health and safety of the inhabitants of the area served.”
This means that the revenue received from services provided shall be used to operate, maintain, and
expand the utility’s ability to provide service to its customer base, and not to provide money for
other government services. In fact, this section goes on to identify the specific uses of this revenue
by stating,
“Any municipality shall devote all revenues derived from a public works to or for:
(1) The payment of all operating expenses;
(2) Bond interest and retirement and/or sinking fund payments;
Bryan Peninngton, Water Manager
January 15, 2003
Page 2
(3) The acquisition and improvement of public works;
(4) Contingencies;
(5) The payment of other obligations incurred in the operation and maintenance of the public works
and the furnishing of services;
(6) The redemption and purchase of bonds; in which case such bonds shall be cancelled;
(7) The creation and maintenance of a cash working fund;
(8) The payment of an amount to the general fund of a municipality not to exceed a cumulative
return of six percent (6%) per annum of any equity invested from the general fund, if any, of the
municipality . . . so long as these contributions are reflected in the utility’s financial statement.
(9) If the governing body of the municipality by resolution so requests, payments to the municipality
in lieu of ad valorem tax on the property of the public works within the corporate limits of the
municipality not to exceed the amount of taxes payable on privately owned property of similar
nature.”
Penalties listed for the violation of this statute in T.C.A. 73-34-115 (f), include requiring the
municipality to repay the money and calling for the potential ouster of city officials involved.
“If a municipality violates the provisions of this section, it must repay any funds illegally
transferred. If the municipality does not have sufficient funds to repay any funds illegally
transferred, the municipality is required to submit a plan covering a period not to exceed five (5)
years in which to repay the funds. The plan shall be submitted to and approved by the director of
local finance in the office of the comptroller of the treasury. Upon discovery of such violation
through an audit, any city official in violation of this section is subject to ouster under title 8,
chapter 47.”
The State of Tennessee intends for the utility to be operated in the most efficient manner possible
through the use of sound business principles. The financial activity of the utility is to remain
separate from other governmental functions. The revenues generated from charges for service are
to be used to operate the utility for the use and benefit of the consumers served, to promote their
welfare, and to improve their health and safety.
T.C.A. 7-34-103. Declaration of Policy.
(a) It is declared to be the policy of this state that any municipality acquiring, purchasing,
constructing, reconstructing, improving, bettering or extending any public works pursuant to this
chapter shall manage such public works in the most efficient manner consistent with sound
economy and public advantage, to the end that the services of the public works shall be furnished to
consumers at the lowest possible cost.
(b) No municipality shall operate such public works for gain or profit or primarily as a source of
revenue to the municipality, but shall operate such public works for the use and benefit of the
Bryan Peninngton, Water Manager
January 15, 2003
Page 3
consumers served by such public works and for the promotion of the welfare and for the
improvement of the health and safety of the inhabitants of the municipality.”
In summary, the previous references clearly indicate that the State of Tennessee intends for the
municipality to operate public utilities economically through the use sound business practices for
the express benefit, safety, and health of the customers served. The proceeds of the operation are to
be closely held and to be used solely for the operation, maintenance, and improvement of the utility.
Penalties are prescribed for municipalities and city officials who violate the provisions of this law.
I hope the information presented is helpful to you. You will find copies of the T.C.A. sections
referenced in the text attached to this letter. Should you have any questions is in this regard, or if
additional questions arise, please feel free to contact me at (615) 532-6387.
Sincerely,
J. Ralph Cross
Finance and Accounting Consultant
Enclosures
cc: Sharon Rollins, Manager of Technical Consulting, MTAS
Margaret Norris, Management Consultant, MTAS