Many cities have implemented policies that allow city officials to use procurement cards to make purchases on behalf of the city. While procurement cards offer a more efficient and cost effective way to make purchases, city officials should create policies that protect against potential fraud and abuse.
Procurement or Credit Card Policies
Cities that allow the use of procurement cards need to establish adequate policies to govern the use of the cards. In addition, debit cards should never be used by a city. The function of a debit card is to immediately access the city’s funds. A debit card offers a limited ability to set guidelines for access. No prior approval on types of purchases can be done, and with some banking institutions there may not be much that can be done with fraudulent transactions.
Internal controls over how the card is to be used should be clearly written into the procurement/credit card use policy. Some general guidelines include:
- Be selective on who is authorized to use a procurement/credit card. Having an open line of credit at the local store and issuing a procurement card results in different liability exposure for the city. In addition to identifying the individual cardholder by name, each card should identify that it is a city card. This person, whose name is on the card, is responsible for the safekeeping and use of the procurement card.
- The policy should address when and how the procurement/credit card can be used over the phone, by fax or on the Internet.
- Allow the smallest limit as is practical. For example, many cards can be limited in dollar amount and merchant category code (MCC). The MCC is a four-digit number assigned to a business by the credit card company when the business first starts accepting one of these cards as a form of payment. The MCC is used to classify the business by the type of goods or services it provides. For example, a city credit card should never work in a business with a duty free store code. Before selecting a purchase/credit card vendor for use in the city, check to make sure limits on dollars and MCC codes are available.
- Spending and transaction limits should be imposed upon each cardholder on both a per transaction and a monthly basis. Sometimes card limits are automatically increased by the card company. Procedures should be in place to periodically monitor the card limits to ensure limits are not increased without proper authorization by the city.
- Any requests for new cards or for higher spending limits should be in writing and approved by the appropriate authorizing person, not the person making the request.
- Detailed receipts should be required on all transactions and cities should never pay from statements without proper detailed receipts for each transaction. These receipts should be examined for a purchasing policy and budget compliance by persons that do not have access to the card prior to paying the procurement/credit card bill each month. The procurement/credit card use policy should clearly explain what the consequences are for failure to produce detailed receipts, such as the employee may have to reimburse the city for the item or lose the procurement/credit card privilege.
- Cards should never be shared. For example, the clerk should never allow his or her card to be used by the public works director, even with prior knowledge on an approved item. All purchases made on an individual’s card should be the direct responsibility of the person named on the card.
- Cards should never be used for personal items and policies should prohibit purchases for city items being co-mingled with personal items.
- Policies and guidelines should be in writing and approved by the council. To avoid misuse and limit exposure, cities should require training to ensure purchasing policies and limits are understood. The training should include instructions on employee responsibility, procedures for card issuance, cancellation, lost or stolen cards and consequences for misuse or abuse including employee termination. After the training a written acknowledgement should be signed by the employee.
A request for proposals should be used to select the vendor and negotiate terms for the use of a purchase card/credit card. To prepare a request for proposal, information should be gathered in advance which might include the anticipated number of cards to be issued and the anticipated amount (in dollar volume and frequency of charges). In order for the city to comply with Internal Revenue Service (IRS) reporting requirements make sure the vendor is able to comply with IRS regulations and file IRS form 1099K in a timely manner. Some banking institutions offer automated approval and reconciliation software which is similar to online banking. Some companies may also offer the ability to integrate the purchase/credit card transactions with the city’s accounting software. The agreement with the bank should be in writing and approved by the council. The agreement should clearly explain the fee schedules and processing procedures.
The city’s ability to maintain security and control must be the primary consideration. Internal review and processing procedures should include requiring paper receipts for each purchase. For the vendor this process will be as transparent as making payments with a check. All transactions made with a procurement/credit card are still subject to the publication requirements of claims paid by the city and IRS reporting requirements.
The costs of goods and services will always be a concern for municipalities and it is in their best interest to find the lowest prices for their needs. For government entities, using a group purchasing organization is normally free of charge and can be an excellent way for cities to get the goods and equipment they need to complete their daily tasks while also reducing expenses.
The strength in a group purchasing organization lies in the number of entities that belong to it. The larger the number of participants, the more leverage a group has when negotiating contracts. Vendors and suppliers want to work with groups that will purchase large quantities of their goods and services and therefore are more willing to offer discounts to groups who purchase more than a single entity often will. In addition to the potential cost savings, the strength of a group can lead to better contracts for its members through competitively solicited contracts. As these advantages continue to bear fruit, more and more cities are using group purchasing organizations to lower some of their costs while still getting the supplies they need to operate.