The Napa County (California) grand jury charged the city of St. Helena with overbilling customers for water and sewer services. The city allocated “administrative overhead” to the water and sewer department’s budget. These costs were then added to the “jobs”—that is, to the accounts of the customers of the water and sewer department. The grand jury called the $76,581.20 allocated to the department in the last year “merely a ruse” to generate funds to cover city expenses that were unrelated to water and sewer services, resulting in “bloated water bills” for local customers.

The city finance director explained that the overhead allocation was the way in which the city bills the water and sewer department for time that other departments spend on water and sewer issues. Mayor John Brown concluded that “it was very clear to me that they [the grand jury] didn’t know what they were talking about.”

1. Was the overhead charge to the water and sewer department a legitimate cost to be covered by water and sewer bills? Explain your reasoning to the citizens of St. Helena.

2. Assume that at least part of the overhead charge is a legitimate cost of the water and sewer department. Suggest possible changes in the accounting system that would provide a more accurate measure of the cost of services provided to the water and sewer department by other departments.