Couch Cushions or Redirecting Investment Interest? Finding New Ways to Bolster Your General Fund

Following each of MRSC's finance bootcamps, we generally get a few inquiries regarding sweeping interest, which is discussed during the investments segment of the training.

For those unfamiliar with the practice of sweeping interest, this blog will provide the authority and what steps an entity must take to enable it.

What Is Sweeping Interest?

Sweeping interest is the act of allocating investment interest not to the funds that have earned the interest but instead to the general fund.

While there are a few instances where interest earnings must be receipted to the fund it was earned from, there is also an opportunity to 'sweep' interest earnings that may have been earned from the surplus cash of a specific fund into a general one (for example, from the water fund into the general fund).

How It Applies to Counties

Pursuant to RCW 36.29.020, counties are allowed to sweep interest from most funds to the general fund following the adoption of an authorizing resolution.

There are, however, three funds whose statutory language requires any investment earnings stay with that fund. These are

• The veterans’ assistance fund (RCW 73.08.080),
• The high occupancy vehicle system fund (RCW 81.100.080), and
• The firefighters’ pension fund (RCW 41.16.050).

The Washington State Attorney General’s opinion AGO 2010 No. 10 discusses these funds and their related statutes in greater detail, while I will provide an overview below.

Veterans’ assistance fund

RCW 73.08.080 states: “Expenditures from the veterans' assistance fund, and interest earned on balances from the fund, may be used only for…” (Emphasis added by author)

High occupancy vehicle system fund

RCW 81.100.080(1) states:

Funds collected under RCW 81.100.030 or 81.100.060 and any investment earnings accruing thereon shall be used by the county or the regional transportation investment district in a manner consistent with the regional transportation plan…” (Emphasis added by author)

Firefighters’ pension fund

RCW 41.16.050 states:

There is hereby created and established in the treasury of each municipality a fund which shall be known and designated as the firefighters' pension fund, which shall consist of: (1) All bequests, fees, gifts, emoluments, or donations given or paid thereto; (2) twenty-five percent of all moneys received by the state from taxes on fire insurance premiums; (3) taxes paid pursuant to the provisions of RCW 41.16.060; (4) interest on the investments of the fund...” (Emphasis added by author)

While the three funds/statutes are specifically called out in AGO 2010 No. 10, which addresses county investments, they are not intended to provide a comprehensive list of all revenues where the allocation of interest is restricted.

Each local government should review statutory language governing a particular revenue source to determine whether there are restrictions to interest and other investment income.

How It Applies to Cities and Towns

For cities and towns, there are two statutes governing sweeping interest, depending on the type of entity.

Non-code cities should refer to RCW 35.39.034, which reads, in part:

Moneys thus determined available for this purpose may be invested on an individual fund basis or may, unless otherwise restricted by law be commingled within one common investment portfolio for investment. All income derived from such investment shall be apportioned and used for the benefit of the various participating funds or for the benefit of the general or current expense fund as the governing body of the city of [or] town shall determine by ordinance or resolution: PROVIDED, That funds derived from the sale of general obligation bonds or revenue bonds or similar instruments of indebtedness shall be invested, or used in such manner as the initiating ordinances, resolutions, or bond covenants may lawfully prescribe. (Emphasis added by author)

The statute for code cities is RCW 35A.40.050 and reads as follows:

Excess and inactive funds on hand in the treasury of any code city may be invested in the same manner and subject to the same limitations as provided for city and town funds in all applicable statutes, including, but not limited to the following: RCW 35.39.030, 35.58.510, 35.81.070, 35.82.070, 36.29.020, 39.58.020, 39.58.080, 39.58.130, 39.60.010, 39.60.020, 41.16.040, 68.52.060, and 68.52.065.

The responsibility for determining the amount of money available in each fund for investment purposes shall be placed upon the department, division, or board responsible for the administration of such fund

Moneys thus determined available for this purpose may be invested on an individual fund basis or may, unless otherwise restricted by law be commingled within one common investment portfolio for the mutual benefit of all participating funds: PROVIDED, that if such moneys are commingled in a common investment portfolio, all income derived therefrom shall be apportioned among the various participating funds or the general or current expense fund as the governing body of the code city determines by ordinance or resolution.

Any excess or inactive funds on hand in the city treasury not otherwise invested for the specific benefit of any particular fund, may be invested by the city treasurer in United States government bonds, notes, bills or certificates of indebtedness for the benefit of the general or current expense fund. (Emphasis added by author)

Considerations

Just because a local government can sweep interest, leaders should discuss whether or not it should, and if so, to what degree it will take action (because, as with most things, there could be unintended consequences).

At a minimum, that discussion should include the departments that have been receiving this revenue and may be adversely affected by the loss of these funds.

As an example, a water capital fund could have built up revenues over several years and is now receiving a considerable amount of interest income, with the intent those monies will help fund several capital projects in the near future. If that revenue stream dries up, will projects need to be delayed or will utility charges have to increase to make up for the loss?

Another example is a street fund which generates a small amount of investment interest that is used for operations. It is also subsidized by the general fund. Should the interest be swept and, if so, does the general fund then increase its subsidy by a like amount?

A thorough analysis and discussion of each fund being considered for diversion of interest should be completed prior to a decision being made on the sweeping of interest. Once completed, a recommendation and proposed resolution/ordinance should be presented to the governing board for approval.

Conclusion

If a city, town, or county is thinking of sweeping interest earned from a specific fund into the general fund, first check to see that there are not any statutory restrictions against doing so and then make sure to run a careful and thorough analysis to determine whether this is the best course of action for the agency.