A Primer on Local Government Funds

Let’s talk about funds — not as in the context of “I’m a little short on funds,” but in the context of governmental accounts that accept revenues and, ultimately, expend them.

What Are Funds?

The state auditor’s office defines a fund this way:

A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related expenditures and residual balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.

I like to explain funds this way: Much like a personal budget, most governmental entities also have budgets, many of which are required by law. There are three main differences, though, between a personal budget and that of a government. First, while both budgets may have categories for expenditures, personal budgets include things like groceries, entertainment, rent, and clothing, while governmental budget categories include things like streets, water, sewer, sanitation, capital improvements, and the catch-all — general or current expense. These governmental categories are referred to as “funds.”

Second, while you may place restrictions on your own personal money, it is still yours to do with as you please. Governmental entities, on the other hand, may have many revenue streams that are restricted in their use, either by state statute or some other means, such as lodging tax, real estate excise taxes (REET), certain sales taxes, and charges for services such as water, sewer, sanitation. These restrictions often come with the requirement that the money generated be in a separate “fund” and spent only for the purpose of that fund.

Finally, unless you are ranked among the 1%, governments generally have a lot more money to manage than you do, requiring a more complex accounting of that money — hence, all of these funds.

Who Sets the Guidelines?

The Office of the Washington State Auditor (SAO) has the responsibility for establishing the uniform system of accounting for Washington’s governmental entities, and for updating this system as needed. Because of their work, governmental entities in Washington State report their revenues and expenditures in a uniform manner, meaning that it doesn’t matter if you are reporting for Wilbur, Spokane, or Moses Lake, if you have lodging tax (tourism) dollars, they should be reported in a special revenue fund.

Types of Funds

Understanding why separate funds are needed, we can now look at the types. These are are broken into several categories delineated by a three-digit code. Some common categories include:

• Code 000 - General (Current Expense) fund
• Code 100 - Special Revenue funds
• Code 200 - Debt Service funds (excluding Enterprise)
• Code 300 - Capital Projects funds (excluding Enterprise)
• Code 700 - Permanent funds

Proprietary funds include:

• Code 400 - Enterprise funds (water, sewer, sanitation, electricity, and more)
• Code 500 - Internal Service funds

Fiduciary Funds encompass the 600 codes and include:

• Code 600-609 - Investment Trust funds
• Code 610-619 - Pension (and Other Employee Benefit) Trust fund
• Code 620-629 - Private-Purpose Trust funds
• Code 630-698 - Custodial funds
• Code 699 - External Investment Pool fund

How Many Funds Do You Need?

Not all of the fund types listed above are used by all entities. In fact, many entities, such as special purpose districts, may only use one or two funds.

On the other hand, cities and towns that provide utility services may have — at a minimum — a General fund (likely 001); a Street fund (probably a 100 series); a Lodging Tax fund (also referred to as Hotel/Motel, 100 series); a REET fund (codes 300 and perhaps 100); and funds for water, sewer, sanitation, and other utilities (all 400s).

In addition, if the local entity has general debt, it may have a Debt Service fund (200). If it has utility debt and/or utility capital reserve funds, those could either be in the primary utility fund or the entity can have additional 400 series funds for the debt and capital of each utility. And, of course, if the entity has approved any additional revenue streams that are restricted (for example, affordable housing) they will have more funds.

The question then is: how many more funds does an entity need? In the 2016 blog, Does Your City Have Too Many Funds?, the author stated that when he was hired by his city, he was faced with a budget containing 20 funds. Over the next several years, he was able to reduce those funds by half. In another example, I recently reviewed a budget that had in excess of 30 funds.

So, back to the question: how many funds does an entity need? There is no definitive answer to this question. Every entity is different and must determine what structure works best for them. That said, there should be considerable thought in determining when and whether new funds are necessary. Again, here’s what SAO says on this topic:

Governments should establish and maintain those funds required by law and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established. Using numerous funds results in inflexibility, undue complexity, and inefficient financial administration.

As well as this advice, specific to elected officials:

Elected officials should be educated to the fact that accountability may be achieved effectively and efficiently by judicious use of department, program and other available account coding or cautious use of managerial (internal) funds.

Next time you are considering a new fund, you may want to ask yourself this:

• Is the new fund required per statute or other means, (and if not)
• Can we accomplish what we are aiming for by using spreadsheets and/or project codes within our software?

SAO also addresses the importance of fund review:

Local governments should periodically undertake a comprehensive evaluation of their fund structure to ensure that individual funds that became superfluous are eliminated from accounting and reporting.

Fund Closure

Prior to elimination of an existing fund, a review of the enabling ordinance or resolution that originally established the fund should occur. Questions to ask include:

• Has the fund served its purpose (maybe it was for one specific capital project), or
• Is there a reason within the ordinance/resolution that requires the fund to continue to exist?

If there is no longer a need for a fund, it should be closed by the entity’s governing body (e.g., council, commission, board) in the same manner in which it was established.

Additional Resources

For a more comprehensive discussion regarding funds, visit SAOs website and review Fund Accounting and Fund Types from the BARS manual.