In 1987, the state legislature passed the Wastewater Facilities Act. T.C.A. § 68-221-1001 to 1015. This provides a method for the state to intervene in the financial affairs of any financially distressed, publicly owned wastewater facility. In 1997 the Wastewater Facilities Act was amended to also include authority over financially distressed water systems that do not already have a combined fund with the sewer system. In 2023 the state legislature consolidated the two boards responsible for this section of law into one board. The new board is called the Tennessee Board of Utility Regulation.

Cities are required to have an annual independent audit of their financial records. Each of these audits is submitted by the auditor to the Tennessee Comptroller of the Treasury. Audits that show a net loss or negative net position are forwarded to the staff of the Wastewater Financing Board for further review and possible action if the system falls into one or more of the following situations:

• Two consecutive years of negative change in net position;
• Being in default on any long-term debt; or
• Deficit in net position in any one year.

City management will be asked to appear before the board and submit a plan, for board approval, that will eliminate the deficits and operate the enterprise fund in a positive manner. The board has established certain guidelines for the city to accomplish this:

• Deficit in net position — the board may allow the city a period of time of up to 10 years to eliminate the deficit; or
• Two years consecutive negative changes in net position — the board may allow the city a period of time of up to three years to begin operating with a positive change in net position.

In Tennessee, the state comptroller prescribes accounting standards and procedures. Some of the alternatives discussed in this manual exceed “recommended practices and procedures.” The comptroller has the final say over what’s acceptable in municipal accounting practices.