Encumbrances (commitments for the procurement of goods or services which have not yet been received by the state) are accrued as expenditures by departments at year-end and included in the expenditure totals of individual budget displays. This treatment is in accordance with the budgetary/legal basis of accounting.

Generally Accepted Accounting Principles (GAAP) require that encumbrances be reflected as a reserve against the General Fund balance and not as an expenditure, as in budgetary/legal basis accounting. Government Code Section 13306 and state policy require compliance with GAAP whenever it is in the best interest of the state. This budget reflects a statewide adjustment to reduce expenditures on a budgetary/legal basis by the encumbrance amounts to comply with GAAP. A reserve of fund balance for encumbrances for this same amount is shown in Summary Schedule 1 for the General Fund.

COMPUTATION OF ENCUMBRANCE ADJUSTMENT

The State Controller's Office accumulated a preliminary estimated General Fund encumbrance total of $744,872,000 from 2005-06 year-end financial statements submitted by state departments. For budgeting purposes, encumbrances are estimated to be at the same level for the 2006-07 and 2007-08 fiscal years and are assumed to be liquidated (paid) within the next fiscal year. The Encumbrance Adjustment Table summarizes the methodology and the calculation for the encumbrance adjustment.