Funds, Funds, Funds!

December 2007

One of the unique features of governmental financial statements is that governments use pools or funds to track and report on their resources. When you look at a proprietary conglomerate, like IBM, you will see all the financial resources consolidated into one huge category. As far as the readers of the financial statements can tell, all the money is flowing in and out of one big purse.

Governments, on the other hand, keep track of their money in distinct pockets in the one big purse. (Think back to those huge, multi-pocket granny purses they used to sell on late-night TV in the 70s.) Cities keep their funds separate so they can track the revenues and expenditures for different programs and functions.

Governments hate to commingle the resources of one fund with another fund. Commingling means that money out of one fund is being used to pay for another fund’s program or project. For example, commingling occurs when you use money set aside to pay for a fire truck to pay for a copier for the police department. The federal government especially forbids commingling their funds with other funds because they want federal grants to be used only for the purposes intended by Congress.

For example, let’s say that the new First Lady of the United States has a pet project. She wants to build one new library per 200,000 children across the country. These funds will be funneled down to the local level through the cities. So, you received funding for one new library in your city from the feds.

The feds want to be sure that you don’t use their money for any other purpose except to build libraries. If you do—if you use the library funds to fix a sewer line for example—they will pull the plug on the program and take their money back plus a penalty.

So you create a separate fund to track this library grant in until the libraries are finished. You do not commingle the fed’s money with any other money. Each year that it takes you to build the library, you are able to report to the feds how much of their money was spent and on what items.

Types of Funds

So now that we understand the purpose of the government having funds, let’s talk about the different types of funds. There are three super-categories of funds:

• Fiduciary funds
• Proprietary funds
• General funds

Each of these general categories has several fund types and each fund type can have several different fund titles. For example, the governmental fund super-category contains several fund types—one being special revenue funds. A government may have as many special revenue funds as it likes lumped under special revenue fund type.

• General Funds—super-category
  • Special Revenue Fund—fund type
    • Federal Highway Construction Grant—fund title

Fiduciary Fund Super Category

You have heard a bank referred to as a “fiduciary institution”, right? This means the bank is entrusted with protecting your money. When you decide you want your money back, they have to give it to you.

This super-fund category accounts for monies that the government is holding in trust on behalf of others. These monies are not to be spent by the government—ever.

Agency Funds

When you are an “agent” for someone else,  you are acting on their behalf. A real estate agent acts on the seller’s behalf. A sports agent acts on a baseball player’s behalf.

Agency funds are simply monies held on someone else’s behalf. The account will eventually be emptied out and distributed to the true owners.

For instance, when a county collects property taxes, not all of the taxes belong to the county. Some of the taxes are collected on behalf of the school district. When the county collects these funds on behalf of the school district, they deposit them in an agency fund and eventually give the entire amount in the agency fund to the school district.

Pension Trust Fund

Pension trust funds are monies that employees set aside for their retirement. The monies are not to be spent by the government on roads, buildings, salaries or anything else.

In Texas, we have two major retirement systems that are affiliated with the state—The Employees Retirement System and the Teachers Retirement System. Each has over $20 billion dollars in investments ready to fund their members’ retirement. Every time we get a new legislative group in office the question inevitably comes up as to whether state leaders can borrow from these pension trust funds just to get them through the latest budget crisis. See any danger here?

Some poor accountant from the Comptrollers’ Office has to go to the capital every few years and meet with the new legislators and explain that the money is being held in a fiduciary capacity and cannot be spent.

Investment Trust Fund

Investment trust funds are created when one government makes investments on behalf of another government. Oftentimes governments will have excess cash for a few months of the year. As you can imagine, a county will be cash rich right after property taxes are assessed each year, but may be running low on cash several months later. Instead of letting that extra cash sit in the local bank making a puny return, the government may invest it in more high-yield investments.

But wise investing is a skill that not all government managers have. So what governments do is pool their investments together and hand them over to one more financially savvy government to choose the investments. This way they are getting a higher yield, but don’t have to worry about what to invest in.

The entity that is taking care of the pool cannot spend the pool. It is in the physical possession of the investing entity, but when the contributing government wants their money back, the investing entity must produce it quickly.

Private Purpose Trust funds

Private Purpose Trust Funds are funds that are set aside for specific uses for the benefit of specified individuals and organizations. For instance, let’s say a rich widow dies and leaves her downtown Victorian mansion to the city. In her will she stipulates that the house must be used as a home for unwed mothers. Her house cannot be used for any other purpose but to house unwed mothers. The city cannot sell it and use the proceeds to renovate city hall or use it as offices for city employees.

Proprietary Funds

The proprietary fund super-category accounts for activities that the government is involved in that mimic the commercial world. The term proprietary means owned. When you are the proprietor of an establishment, you are the owner of the establishment.

Enterprise Funds

Enterprise Funds account for activities that operate like a business enterprise. These government-run businesses charge a fee for a service or product and can generate a profit. If they do generate a profit, their profits are often siphoned off to support other government activities.

Examples of enterprise funds include public utilities and airports.

Be careful, however, not to assume that all enterprise funds generate a profit. Some show a loss every year and must be supported by appropriations from other governmental funds. An example of an enterprise fund that often doesn’t make money is a bus system. Very few bus systems in the United States actually turn a profit by charging rider fees (Las Vegas is one of them). Tax revenues, federal grants, or private donations must supplement their operations.

Internal Service Funds

Internal Service Funds are businesses within the government and they do not transact with entities outside the government; instead, they support government operations. For example, the State of Texas has an agency whose function is to assist other state agencies in making purchases. It is called the Buildings and Procurement Commission. Instead of each state agency hiring staff to handle purchasing, they can go to the Commission, pay them a little fee, and have the it all taken care of. Other examples include print shops or motor pools.

Governmental Funds Super Category

The governmental fund super-category is the catchall category for any fund that isn’t fiduciary or proprietary. This super-category accounts for a wide variety of governmental operations.

General Fund

The general fund accounts for all resources not accounted for in another fund. Governments have only one of these and they usually account for a majority of the government’s transactions. For most governments this is the largest and most active fund.

Special Revenue Fund

Special Revenue Funds account for resources restricted for specific purposes. This restriction may be legal or administrative. For instance, a “sin” tax may be levied on cigarettes and the proceeds are to be used to pay for ads to discourage teens from smoking. (Yes, that really is a true use of some of the cigarette tax in Texas.)

Or federal government grants might funds to a state to be used for a special purpose, such as road construction. Many cities collect hotel and motel taxes and use the proceeds for economic development.

Capital Projects Fund

Capital Projects Funds account for resources being used to construct capital projects. For instance, the funds a town sets aside to build a town hall or a library would be accounted for in this fund. This way, the funds don’t get lost or commingled in the general fund and possibly spent.

Debt Service Funds

Debt Service Funds are like a savings account set aside to pay off bond debt. Instead of hoping that the general fund will have enough resources to cover the next bond payment, the government sets aside the money in a debt service fund.

Think of the potential problems here if this money is not separate from the other funds. It may be time to make the bond payment but the city is out of money because they just spent it paying payroll and utilities. Many times, bondholders require the government to create a debt service fund just to make sure the bondholders will get paid back!

Permanent Fund

Here I think of the University of Texas, where I got my degree. A long, long time ago the founder of the University left a bunch of oil wells to the University with the stipulation that the principle (the land/wells) would stay in tact always—hence the term “‘permanent.”

The earnings are used to support the operations of the school.

Funds make the financial statements of government very complicated

Government financial statements and budgets are compiled and disclosed using fund types. Be careful to read the header of the financial statement or the budget to be sure what type of fund you are looking at because there are so many!