Does Your City have Too Many Funds?
Not too long ago, I read a short tidbit in one of the local newspapers about the adoption of a nearby city’s budget. I was struck by the fact that the city had 28 different funds in its budget. With so many funds to account for, it got me thinking about the criteria for establishing funds and when a city might have too many funds.
The City of Waitsburg is unique in its governmental operating structure (it's the only unclassified city in the state) and relatively small in population (1,230). When I started in 2004, we had 20 funds that had a combined budget of approximately two million dollars. Out of all those funds, more than half were dedicated to water and sewer capital or debt service needs along with a few other restricted funds for projects and specific activities; each requiring a separate monthly interfund transfer to meet budgeted expenditures. With the retirement of debt service and the completion of the various projects, the city council as part of the 2016 budget approved a fund consolidation plan which would allow the city to reduce the total number of funds by half.
The fund consolidation plan provided an opportunity to evaluate all of the funds within our budget. The analysis revealed that the city had several sub-funds which had a requirement to be rolled into their respective parent fund during the preparation of the annual financial report and submission to the state. Did it make sense to have all of these sub-funds? Every city is different and my guess is size will dictate the number of funds a city uses. Aside from specific accounting requirements prescribed in BARS for proprietary activities (utilities), and certain special purpose activities or projects with restricted revenue sources, the BARS code system can easily allow users to track revenues or expenditures by its code, making the need to establish a separate fund, in my opinion, basically unnecessary. The consolidation plan not only reduced the number of funds, it also allowed the city to account for all of its activities without the extra interfund transactions that were previously required.
Granted, there are exceptions to this minimal fund concept. Classic examples are restricted resources such as REET dollars, or GASB 54 requirements for special revenue funds (fund must generate a minimum of 20% restricted or committed funds ) or debt servicing requirements. However, there are times when it is just as easy to transfer money between funds as it is to post it directly to the parent fund or the intended project fund. An example of this is the use of REET dollars for park M & O expenses where the REET dollars are held in a 100 series fund and parks are most likely a department within the entity’s general fund. At the end of the month, quarter or year, a transfer is made out of the 100 series fund into the general fund via interfund transfer by BARS codes 597/397. Through the use of BARS, this utilization of REET funds is easily tracked, and an allowed use of funds as long as the expense meets the REET statutory requirements.
But what about reserve funds and how they factor into the overall fund structure and keeping money for “rainy day” needs? For my city, we essentially hold back a certain amount of fund balance in a contingency reserve line item, rather than have a separate dedicated fund for the same purpose. While this idea has some drawbacks, in theory it serves two purposes. One, it provides a cushion in the budget to account for cost overruns or other issues unknown at budget time. Second, it’s more efficient and cost-effective to utilize funds from within a fund level budget appropriation than it is to use money out of a dedicated reserve fund that may require a budget amendment. This method will not work for everyone as there is a real potential to overspend, exhaust the resources dedicated to the contingency reserve line, and subsequently lead to budget concerns.
If a city implements a practice of monitoring in conjunction with adopting a fiscal policy for control that provides management a level of authority for efficiency and flexibility these practices can be an effective budgetary tool to keep funds to a minimum and minimize redundancies associated with having multiple sub-funds in the overall fund structure of the city.
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