When May a Local Government, Public Authority, or Local School Administrative Unit Use P-Cards, Credit Cards, and Fuel Cards?: Legal requirements and internal controls for electronic payments

Procurement cards (p-cards), credit cards, fuel cards, and other electronic payment methods can make local government, public authority, and local school administrative unit (collectively, local unit) purchasing more efficient. They allow employees and officials to purchase through online vendors, obtain fuel while working in the field, respond to emergencies, and handle other transactions for which the traditional purchase-order process may be cumbersome. 

The same features that make these tools useful also create risk. A card purchase can obligate the local unit before the finance office reviews it, while an electronic funds transfer can immediately remove money from the government’s bank account. A well-designed electronic payment program therefore must do more than identify permitted payment methods. It must preserve the preaudit of the obligation, protect the later disbursement of funds, and impose internal controls proportionate to the access being granted.

This post explains when and under what conditions a local unit may use electronic payment methods. It begins with the authority in G.S. 159-28 (for local governments and public authorities) and G.S. 115C-441 (for local school administrative units) and distinguishes between the preaudit process, which applies before the government incurs an obligation, and the disbursement process, which applies before public funds are released. It then reviews the Local Government Commission (LGC) requirements for electronic payments in 20 NCAC 03 .0409 and .0410. Finally, it suggests provisions to include in an electronic transactions policy, with an emphasis on both legal requirements and practical internal controls—such as determining who may receive a card, establishing transaction and spending limits, training cardholders, reconciling transactions, and periodically accounting for all issued cards.

Statutory Authority for P-Cards and Other Electronic Transactions

G.S. 159-28 (local governments and public authorities) and G.S. 115C-441 (local school administrative units) expressly authorize a local unit to pay a bill, invoice, salary, or other claim by electronic payment or electronic funds transfer through an official depository. The statutes define electronic payment as “payment by charge card, credit card, debit card, gas card, procurement card, or electronic funds transfer.” G.S. 159-28(g)(2); 115C-441(g)(2). An electronic funds transfer is “a transfer of funds initiated by using an electronic terminal, a telephone, a computer, or magnetic tape to instruct or authorize a financial institution or its agent to credit or debit an account.” G.S. 159-28(g)(1); G.S. 115C-441(g)(1). It includes ACH transactions, wire transfers, and other electronic disbursement methods. The authority to make an electronic payment is not unconditional, though. A local unit must first follow prescribed fiscal control requirements. 

Fiscal Control Requirements

G.S. 159-28 and G.S. 115C-441 both impose two separate statutory fiscal control requirements: the preaudit process and the disbursement process. The preaudit process ensures budgetary authority before the local unit incurs a legal obligation. The disbursement process separately ensures budgetary authority before money leaves the local unit’s official depository. Completing one process does not complete the other, even when both processes relate to the same purchase. For example, the preaudit process must be performed before a local unit employee or official uses a p-card to make a purchase. Then the disbursement process must be performed before the finance office pays the p-card bill when it comes due.

Preaudit: before the obligation is incurred

Before an employee or official places an order, signs an agreement, uses a p-card, fuel card, or credit card, or otherwise commits the unit to pay money to another party, the finance officer must perform the preaudit process. For local governments and public authorities, a governing board-appointed deputy finance officer also may perform this duty. G.S. 159-28(a). Local school administrative units operate under G.S. 115C-441, which does not authorize deputy finance officers to perform the statutory preaudit function.

For an obligation accounted for in the annual budget ordinance (for local governments and public authorities) or budget resolution (for local school administrative units), the finance officer (or, if applicable, deputy finance officer) must determine: (1) that an appropriation authorizes the obligation; and (2) that a sufficient unencumbered balance remains to pay the sums that will come due in the current fiscal year. G.S. 159-28(a); G.S. 115C-441(a).

Local governments and public authorities may use one or more project ordinances in lieu of the annual budget ordinance for certain purposes. See G.S. 159-13.2. For a capital project, grant project, or settlement project governed by a project ordinance budget, the appropriation and unencumbered balance must be sufficient for the entire amount obligated by the transaction. G.S. 159-28(a). 

If the obligation is reduced to a written contract or agreement or is evidenced by a written purchase order for supplies and materials, the document ordinarily also must carry the statutory preaudit certificate on its face. The finance officer (or, if applicable, a deputy finance officer) must sign the certificate. (And for local school administrative units, it must be dated.) G.S. 159-28(a1); G.S. 115C-441(a1). An obligation that is not reduced to writing still must satisfy the other preaudit requirements, even though there may be no document requiring a certificate.

Timing is critical. The preaudit must be completed before the obligation is incurred; reviewing the transaction after the purchase is not a preaudit. An obligation incurred in violation of these requirements is invalid and may not be enforced. G.S. 159-28(a2); G.S. 115C-441(a2). There also can be serious consequences for any employee or official that incurs an obligation or causes it to be incurred without it being properly preaudited. See G.S. 159-28(e); G.S. 159-181; G.S. 159-182; G.S. 115C-441(e).

Disbursement: before public funds are paid out

The disbursement process occurs later, when a bill, invoice, or other claim is presented for payment, including a p-card, fuel card, or credit card bill. The finance officer must independently review the claim and approve the payment. For local governments and public authorities, a governing board-appointed deputy finance officer also may perform these duties. G.S. 159-28(b). Local school administrative units operate under G.S. 115C-441, which does not authorize deputy finance officers to perform the statutory disbursement function. 

The finance officer (or, if applicable, a deputy finance officer) may approve the payment only after determining that (1) the amount claimed is payable and (2) an appropriation authorizes the expenditure and (3) either an encumbrance was previously created for the transaction, or a sufficient unencumbered balance remains in the appropriation to pay the amount to be disbursed. G.S. 159-28(b); G.S. 115-441(b). If the payment is made by check or draft, it must include a disbursement certificate signed by the finance officer (or, if applicable, a deputy finance officer), unless a statutory exemption applies. G.S. 159-28(d1); G.S. 115C-441(d).

A claim may not be paid until it has received the required approval. If the finance officer disapproves a claim, the governing board may approve it only through the limited formal process in G.S. 159-28(c) or G.S. 115C-441(c). The board may not approve a claim that lacks an appropriation or for which neither an encumbrance nor a sufficient unencumbered balance exists.

The electronic-payment certificate exemptions

The traditional preaudit certificate requirement is difficult, if not impossible, to apply to a card purchase made in the field or through a vendor’s proprietary online system. The law addresses that practical problem by exempting electronic payments and electronic funds transfers that follow specified LGC rules from the certificate requirement. G.S. 159-28(f)(3); G.S. 115C-441(f)(3). The exemption does not eliminate the other steps of the preaudit and disbursement processes. 

The LGC has adopted rules governing electronic payments and electronic funds transfers at 20 NCAC 03 .0409 (related to the preaudit process) and .0410 (related to the disbursement process).

Thus, a local unit may use electronic payments only after its governing board has authorized them and the local unit has implemented the requirements in Rule .0409. The rule substitutes defined procedures and controls for the signed preaudit certificate; it does not permit the unit to buy first and preaudit later. 

If the resulting card statement or another claim will be paid through an electronic funds transfer, the local unit also must complete the separate disbursement process in accordance with Rule .0410 before releasing the funds. Doing so exempts the unit from the disbursement certificate requirement.

The LGC Requirements for Electronic Payments

As stated above, the LGC’s electronic payment preaudit rule appears at 20 NCAC 03 .0409. It requires the following:

1. Governing-board resolution. The governing board must adopt a resolution authorizing the unit to engage in electronic payments. 20 NCAC 03 .0409(a)(1). The board may also adopt the required written policy implementing electronic payments (see below) or authorize the finance officer to adopt it. 

2. Encumbrance system. The unit must have an encumbrance system, which the rule defines as a system of written policies and procedures for tracking obligations. The system itself may be manual, maintained as part of the accounting system, or a combination of the two. A spreadsheet or card-transaction log satisfies the rule only if written procedures govern how obligations are recorded against appropriations and by whom. 20 NCAC 03 .0409(a)(2). G.S. 159-26(d) separately requires municipalities with populations over 10,000 and counties with populations over 50,000 to record encumbrances in their accounting systems. Rule .0409 requires every local unit making electronic payments to have an encumbrance system, even if the unit falls below those population thresholds. For a smaller unit, the system may include a spreadsheet, controlled card-transaction log, or other shared record that reliably tracks obligations against appropriations.

3. Written preaudit policy and procedures. The governing board—or the finance officer, if authorized by the board—must adopt a written policy explaining how obligations incurred through electronic payments will be preaudited. The policy and procedures must provide internal controls that ensure, before each card transaction is completed, that:

• An annual budget ordinance, budget resolution (for local school administrative units) or a project ordinance appropriation authorizes the expenditure, 20 NCAC 03 .0409(a)(3)(A);
• sufficient moneys remain in the appropriation to cover the amount expected to be paid during the current fiscal year for an annual budget-ordinance or budget resolution account, or the entire amount for a project ordinance account, 20 NCAC 03 .0409(a)(3)(B); and
• the amount of the transaction is recorded in the local unit’s encumbrance system, 20 NCAC 03 .0409(a)(3)(C).

The written procedures must identify who performs each step and how the step is documented. It is not enough to require the cardholder to turn in a receipt after the purchase. The appropriation check, sufficient-moneys check, and recording of the transaction must occur before the obligation is incurred. A card transaction completed first and reviewed later does not comply with the preaudit process.

4. Training. The local unit must train all personnel on the written policy and the procedures that must be followed before undertaking an electronic payment. 20 NCAC 03 .0409(a)(4). At a minimum, a cardholder should complete the training before receiving or first using a card. Training should be repeated periodically. The governing board also should communicate its expectation of full compliance.

5. Quarterly budget-to-actual reports. Each quarter, the finance officer must provide the governing board a budget-to-actual statement for all major funds. The statement must include budgeted accounts, actual payments made, amounts encumbered—including electronic obligations—and the amount of the budget that remains unobligated. 20 NCAC 03 .0409(a)(5). Board members need sufficient orientation to interpret these reports and carry out their fiduciary responsibilities.

A local unit that complies with these requirements in Rule .0409 is exempt from the preaudit certificate requirement on electronic payments.

The LGC Requirements for Electronic Disbursements

If a local unit pays a card statement—or any other claim—by electronic funds transfer (EFT), it must satisfy 20 NCAC 03 .0410 before funds leave the unit’s official depository. That rule requires:

1. Governing-board resolution. The governing board must adopt a resolution authorizing the unit to engage in electronic payments. 20 NCAC 03 .0410(a)(1). 

2. Written disbursement policy. The governing board—or the finance officer, if authorized by the board—must adopt written procedures for disbursing public funds electronically. Before each electronic disbursement, the procedures must ensure that:

• the amount claimed is payable, 20 NCAC 03 .0410(a)(2)(A);
• an annual budget ordinance, budget resolution (for local school administrative units), or project ordinance appropriation authorizes the expenditure, 20 NCAC 03 .0410(a)(2)(B);
• there is an encumbrance covering the amount to be paid or sufficient unencumbered funds remain in the appropriation covering the amount to be paid, 20 NCAC 03 .0410(a)(2)(C); G.S. 159-28(b); G.S. 115C-441(b); and
• sufficient cash is available to cover the payment, 20 NCAC 03 .0410(a)(2)(D).

A local unit that complies with Rule .0410(a) does not have to affix the disbursement certificate to the electronic payment. 20 NCAC 03 .0410(b). 

A Certified Automated Preaudit System Does Not Replace These Requirements

Some local governments and public authorities use an automated financial computer system that the finance officer certifies annually to the Secretary of the LGC under G.S. 159-28(a3) and (a4). That certification is not a general exemption from the preaudit process. It allows the automated system to satisfy the preaudit certificate requirement in G.S. 159-28(a1) for a transaction that otherwise requires that certificate. (The certified automated preaudit system option applies only to local governments and public authorities. G.S. 115C-441 does not contain a parallel provision for local school administrative units.) The automated-system provision applies only when no separate statutory exception to the certificate requirement applies.

Electronic payments are already subject to a separate certificate exception. G.S. 159-28(f)(3) provides that the preaudit certificate does not apply to electronic payments made as specified in LGC rules. Thus, certification of the system does not replace compliance with Rules .0409 and .0410. G.S. 159-28(d2) independently requires electronic payments to undergo the preaudit process in accordance with the statute and the LGC rules.

Designing a Lawful and Effective Electronic Payment Policy

G.S. 159-28(d) and G.S. 115C-441(d) authorize local units to pay claims with p-cards, fuel cards, credit cards, and other electronic payment methods, and Rule .0409 conditions the preaudit-certificate exemption for those payments on the unit’s adoption of written policy and procedures governing their use. Developing that policy, however, involves much more than incorporating the legal requirements into a written document. Finance officers must decide when electronic payments are appropriate, how those purchases will satisfy the statutory preaudit requirement, how much purchasing authority should be delegated to employees, and what internal controls are necessary to protect public funds. 

The policy therefore serves two complementary purposes. First, it must ensure compliance with G.S. 159-28 or G.S. 115C-441 and Rule .0409. Those legal requirements establish the minimum framework for using electronic payment methods. Second, it must establish practical internal controls that reduce the risk of fraud, abuse, error, and unauthorized purchases. The strongest policies integrate both. 

The discussion below highlights four decisions every governing board or finance officer should consider when designing an electronic payment policy and procedures. (Note that a separate policy is required for electronic funds transfers made by the finance office, under Rule .0410.)

Decision 1: When Should Electronic Payments Be Used?

The first decision is not how to control electronic payments. It is whether a purchase should be made electronically in the first place. Electronic payments are one procurement tool among many. Just because a purchase may legally be made with a p-card does not necessarily mean that it should be.

The goal should not be to maximize card usage. Instead, finance officers should identify the purchasing method that best balances operational efficiency, oversight, documentation, and financial risk. Sometimes that will be a p-card or other electronic payment method. Other times, a traditional purchase order or centralized purchasing process will provide stronger controls with little additional administrative burden.

Electronic payment methods often make the most sense when employees need flexibility to make purchases away from the office or when traditional purchasing processes are impractical. Examples include emergency repair materials needed by a field crew, conference registrations, online purchases or subscriptions that require card payment, fuel purchases, or small, infrequent operational purchases where preparing a purchase order would provide little additional value.

By contrast, many routine purchases are better suited to traditional procurement methods. Monthly office supply orders from the same vendor, recurring purchases under an existing contract, planned equipment purchases, and repetitive purchases that could be covered by a blanket purchase order often benefit from centralized purchasing. Those processes typically provide greater oversight, better documentation, more consistent pricing, and stronger purchasing leverage while requiring little additional effort.

Accordingly, a written policy should identify not only which electronic payment methods the local unit authorizes, but also the types of purchases for which they should (and should not) be used. Limiting electronic payments to situations where they provide a genuine operational benefit is one of the most effective internal controls a local unit can implement.

Decision 2: How Will Electronic Purchases Be Preaudited and Encumbered?

Once the local unit determines which purchases should be made electronically, it must decide how those purchases will satisfy the preaudit requirements of G.S. 159-28; G.S. 115C-441 and Rule .0409.

Before an employee incurs an obligation through an electronic payment method, the local unit’s procedures must ensure that an appropriation authorizes the expenditure; that sufficient unencumbered funds remain available within that appropriation to cover the amount expected to be paid during the current fiscal year or, for a purchase charged to a capital, grant, or settlement project ordinance, the entire amount of the obligation; and that the anticipated obligation is recorded in the local government’s encumbrance system. 

Encumbrance Frequency

Although those legal requirements are mandatory, the statute and rule leave local units flexibility in how they satisfy them. The principal design decision is determining when encumbrances will be established and how electronic purchases will be tied to those encumbrances and the underlying budget appropriations.

One approach is to preaudit and encumber each purchase individually before the transaction occurs. Under this model, an employee requests approval before making a purchase. The finance officer (or, for local governments and public authorities only, a board appointed deputy finance officer) verifies the appropriate budget appropriation, confirms that sufficient unencumbered funds remain available, records an encumbrance for the anticipated purchase, and authorizes the transaction. This closely resembles the traditional purchase order process and provides strong budgetary control, but it also requires finance office involvement before every electronic purchase. For organizations that make frequent small purchases or whose employees routinely purchase supplies while working in the field, this approach may prove cumbersome.

Many local units instead establish encumbrances for anticipated electronic purchases over a defined period, such as a monthly billing cycle. For example, a parks department that typically makes approximately $5,000 of routine procurement card purchases each month might establish a $5,000 encumbrance at the beginning of the billing cycle after the finance officer or a deputy finance officer verifies the budget appropriation and available funds. Individual purchases are then charged against that encumbrance as they occur. If purchases approach the remaining encumbered amount before the billing cycle ends, the finance officer or deputy finance officer must perform another preaudit and increase the encumbrance before additional purchases are made. This approach reduces administrative burden while preserving the statutory requirement that budget authority and availability be verified before obligations are incurred.

Other methodologies also may be appropriate. A local unit might establish encumbrances by department, by cardholder, or for recurring categories of purchases. Rule .0409 does not prescribe a single methodology because the appropriate approach depends on the size of the organization, purchasing volume, staffing, and operational needs.

Tying Purchases to Budget Appropriations

Regardless of the methodology selected, the written policy should clearly explain how electronic purchases are tied to budget appropriations. This becomes particularly important when one card may be used for purchases from multiple appropriations. For example, a public works supervisor might use the same procurement card to purchase street maintenance materials, park supplies, and building repair items. The policy should explain how the purchaser identifies the correct appropriation before making the purchase, how the finance office associates each purchase with the appropriate encumbrance, and how remaining encumbrance balances are monitored throughout the budget period.

Monitoring Encumbrances

Finally, the policy should establish procedures for reviewing encumbrances periodically. Actual purchasing rarely follows projections exactly. Some encumbrances will need to be increased as purchasing activity exceeds expectations; others should be reduced or released when anticipated purchases never occur. Regular review ensures that the encumbrance system continues to reflect actual commitments of budget authority throughout the fiscal year.

The objective is to design a process that fits the local unit’s operations while ensuring that every electronic obligation is supported by a legally sufficient preaudit before the obligation is incurred.

Decision 3: How Much Purchasing Authority Should Be Delegated (aka who gets a card, what type, and for what purpose(s))?

Issuing a procurement card is, in effect, delegating purchasing authority to an individual employee or official. The broader that authority, the stronger the surrounding internal controls should be.

The first question is who should receive a card. A card should be issued only when there is a documented business need, not simply because an employee or official holds a particular position. Employees or officials who make purchases only occasionally may not need individual cards if those purchases can reasonably be handled through a centralized purchasing process.

The next question is what type of purchasing authority is actually necessary. A general procurement card may be appropriate for some employees or officials, but many operational needs can be met with more restrictive payment tools. A fuel card limited to fuel purchases, a merchant-restricted card, or a virtual card often provides the needed flexibility while substantially reducing risk.

A virtual card is a temporary card number generated electronically rather than a physical card. Depending on the issuer, it may be limited to a single transaction, a specific vendor, a maximum dollar amount, or a defined period of time. Although G.S. 159-28(g)(2) and G.S. 115C-441(g)(2) do not specifically use the term virtual card, a virtual card is simply a credit or procurement card number issued in electronic rather than physical form. As such, payments made with a virtual card fall within the statutes’ definition of an electronic payment. These built-in restrictions make virtual cards particularly well suited for online purchases, conference registrations, subscriptions, and other transactions that do not require an employee or official to carry a physical card. Because a virtual card can be tailored to a specific purchase and then expire automatically, it often provides stronger internal controls than issuing a general procurement card to an employee or official who only occasionally needs to make electronic purchases.

Similarly, transaction limits, monthly spending limits, merchant category restrictions, prohibited vendor lists, and other issuer controls should reflect legitimate business needs. A card with a $10,000 limit that may be used at almost any merchant represents a much greater delegation of purchasing authority than a card limited to fuel purchases or one with a $500 transaction limit. These issuer controls do not replace the statutory preaudit, but they provide an additional layer of protection by preventing inappropriate transactions before they occur.

Debit cards warrant special caution. Although the statutory definition of electronic payment includes debit cards, a debit card collapses the two fiscal control processes into a single moment: the obligation is incurred and the funds leave the official depository simultaneously, at the point of sale. There is no later step at which the finance office reviews a statement before paying it. Both the preaudit determinations and the disbursement determinations under Rule .0410, including the requirement that the unit have sufficient cash to cover the payment, must therefore be completed before the card is used. Because that compressed sequence eliminates the finance office’s most important independent checkpoint, many units prohibit debit cards altogether or restrict them to narrowly defined uses under tightly controlled custody.

Decision 4: How Will Delegated Purchasing Authority Be Overseen?

Every electronic payment program should include strong oversight procedures. The purpose of these controls is not simply to detect fraud. More commonly, they identify routine mistakes before public funds are disbursed.

Cardholders must receive training, ideally before being issued a card, and should understand both the legal requirements governing electronic purchases and the local unit’s own purchasing procedures. Approving officials likewise should understand their responsibilities for reviewing transactions and supporting documentation.

Monthly reconciliation should verify that purchases complied with the local unit’s policy, were charged to the proper appropriation, were supported by the appropriate encumbrance, and included adequate documentation. Reconciliation also provides an opportunity to identify incorrect coding, duplicate charges, missing receipts, disputed transactions, or purchases that exceeded authorized limits before the monthly card statement is paid. It is important to remember that reconciliation is not the statutory preaudit; rather, it is an independent control that helps verify the preaudit process operated as intended.

Effective oversight also depends on segregation of duties. To the extent staffing permits, making a purchase, approving it, reconciling the statement, and reviewing the reconciliation should be assigned to different individuals; the finance officer’s or deputy finance officer’s disbursement review before the statement is paid then provides a final, independent check. A small unit that cannot fully separate these functions should document a compensating control, such as a detailed transaction review by the department head, the manager, or another employee independent of the cardholder, so that no single person controls a purchase from initiation through payment.

The policy also should require regular review of the electronic payment program itself. Finance officers should periodically inventory outstanding cards, review inactive accounts, confirm that cardholders still require purchasing authority, and evaluate whether spending limits and merchant restrictions remain appropriate. Controls that are effective when a card is issued may become less effective as employees change positions or operational needs evolve.

Finally, the policy should clearly establish consequences for policy violations. Employees should understand that purchasing authority is a privilege, not an entitlement. Depending on the circumstances, violations may warrant retraining, suspension or revocation of card privileges, reimbursement of unauthorized expenditures, disciplinary action, or referral for criminal investigation. Consistent enforcement reinforces the importance of following the established purchasing procedures. Refer to the statutory penalties, including those in G.S. 159-28(e); G.S. 159-181; G.S. 159-182; and G.S. 115C-441(e).