Fund accounting: governmental, proprietary and fiduciary funds

A fund is a fiscal and accounting entity with a self-balancing set of accounts, recording resources and the related liabilities and residual balances that are segregated for specific activities or objectives. Fund accounting is the oldest feature of governmental reporting and remains central to it: every government uses a general fund, and many use dozens of others. GASB recognizes three categories and eleven fund types. This lesson explains each, the GASB Statement No. 54 classifications of fund balance, interfund activity, and the reconciliation that links the governmental funds to governmental activities in the government-wide statements.

Governmental funds

Governmental funds account for activities financed mainly by taxes and intergovernmental revenue. The general fund accounts for all financial resources not required to be reported in another fund. Special revenue funds account for proceeds of specific revenue sources restricted or committed to purposes other than debt service or capital projects, such as a library tax or state street aid. Capital projects funds account for resources restricted, committed or assigned to capital outlays. Debt service funds account for resources for principal and interest on long-term debt. Permanent funds account for resources legally restricted so that only earnings may be used for the government's programs, such as a cemetery perpetual care fund.

Each governmental fund reports a balance sheet and a statement of revenues, expenditures and changes in fund balance on the modified accrual basis. Fund balance is classified under GASB 54 by the extent to which the government is bound to honor constraints: nonspendable (not in spendable form, such as inventories and prepaids, or legally required to be kept intact); restricted (constrained by external parties, constitutional provisions or enabling legislation); committed (constrained by the government's highest decision-making authority through formal action, such as an ordinance); assigned (intended for a specific purpose by the governing body or an official it delegates); and unassigned (the residual of the general fund, or deficits in other funds).

# Governmental funds and the reconciliation to governmental activities for the
# invented City of Aspen Ridge, Nebraska, at 30 September 2027 (thousands).
fund_balance = {   # fund: {GASB 54 classification: amount}
    "General":          {"nonspendable": 300, "committed": 1_200, "assigned": 420, "unassigned": 12_880},
    "Capital projects": {"restricted": 8_900},
    "Debt service":     {"restricted": 1_240},
    "Nonmajor":         {"restricted": 1_100, "committed": 500},
}
total = 0
for f, parts in fund_balance.items():
    s = sum(parts.values()); total += s
    print(f"{f:18}{s:>8,}  " + ", ".join(f"{k} {v:,}" for k, v in parts.items()))
print(f"{'Total fund balances':18}{total:>8,}")
recon = [("Capital assets, net (not financial resources)", 121_000),
         ("Unavailable revenue is revenue in full accrual", 450),
         ("Deferred outflows related to pensions", 2_600),
         ("Deferred inflows related to pensions", -4_100),
         ("Bonds payable", -21_800),
         ("Compensated absences", -1_600),
         ("Net pension liability", -5_300),
         ("Accrued interest payable", -90)]
print()
net = total
for k, v in recon:
    net += v
    print(f"{k:48}{v:>9,}")
print(f"{'Net position of governmental activities':48}{net:>9,}")

General             14,800  nonspendable 300, committed 1,200, assigned 420, unassigned 12,880
Capital projects     8,900  restricted 8,900
Debt service         1,240  restricted 1,240
Nonmajor             1,600  restricted 1,100, committed 500
Total fund balances  26,540

Capital assets, net (not financial resources)     121,000
Unavailable revenue is revenue in full accrual        450
Deferred outflows related to pensions               2,600
Deferred inflows related to pensions               -4,100
Bonds payable                                     -21,800
Compensated absences                               -1,600
Net pension liability                              -5,300
Accrued interest payable                              -90
Net position of governmental activities           117,700

The program lists Aspen Ridge's governmental fund balances and reconciles them to the net position of governmental activities. The general fund's $14.8 million includes $300,000 nonspendable for inventories and prepaids, $1.2 million committed by ordinance to a budget stabilization account, $420,000 assigned for encumbrances and $12.88 million unassigned. The capital projects fund holds $8.9 million of unspent bond proceeds, restricted by the bond covenants, and the debt service fund $1.24 million restricted for debt service. Total fund balances of $26.54 million become net position of $117.7 million after adding capital assets and unavailable revenue and subtracting long-term liabilities and pension deferrals.

Proprietary and fiduciary funds

Proprietary funds use the economic resources focus and accrual basis. Enterprise funds account for activities for which fees are charged to external users, and must be used when the activity is financed by debt secured solely by fees, when laws require costs to be recovered by fees, or when pricing policies set fees to recover costs including capital costs; Aspen Ridge's water and sewer utility is an enterprise fund. Internal service funds account for goods and services provided to other departments on a cost-reimbursement basis, such as fleet maintenance or self-insurance. Fiduciary funds hold resources for others and cannot be used for the government's programs: pension and other employee benefit trust funds, investment trust funds, private-purpose trust funds and custodial funds, as defined by GASB Statement No. 84.

Interfund activity is reported in two ways. Reciprocal interfund activity, the internal counterpart of exchange transactions, includes interfund loans (receivables and payables) and interfund services provided and used, such as the general fund paying the utility for water, which are revenues and expenditures. Nonreciprocal activity includes interfund transfers, reported as other financing sources and uses in governmental funds and as transfers in proprietary funds, and interfund reimbursements, which are repayments of costs initially paid by another fund and are not reported as revenues. In the government-wide statements, activity within governmental activities is eliminated, but transfers between governmental and business-type activities, such as the utility's $500,000 payment in lieu of taxes, are shown.

The reconciliation

Because governmental funds and governmental activities use different focuses, GASB requires a reconciliation of total governmental fund balances to the net position of governmental activities, and of the net change in fund balances to the change in net position. The usual reconciling items are: capital assets, which are not financial resources; long-term liabilities, such as bonds, leases, compensated absences and net pension liabilities, which are not due currently; deferred outflows and inflows related to pensions and OPEB; revenues that are unavailable in the funds but earned government-wide; accrued interest; and the assets and liabilities of internal service funds included in governmental activities. The reconciliation is presented on the face of the fund statements or in an accompanying schedule.

The governmental reporting entity is defined by GASB Statements No. 14, 39, 61 and 80. A primary government includes component units for which it is financially accountable, normally because it appoints a voting majority of the governing body and can impose its will or receives a financial benefit or burden, and organizations whose exclusion would be misleading. Component units are blended (reported as if part of the primary government) when, for example, the governing bodies are substantively the same or the unit serves the primary government exclusively; otherwise they are discretely presented in a separate column. GASB 103 adds that major component units that cannot be shown in separate columns are presented in combining statements in the basic statements.

Fund balance policies

Governments adopt fund balance policies that set targets for unassigned general fund balance and rules for using it. The GFOA recommends that general-purpose governments maintain unrestricted budgetary fund balance in the general fund of no less than two months of regular operating revenues or expenditures, adjusted for the government's circumstances. Aspen Ridge's policy targets unassigned general fund balance of 25 percent of general fund expenditures, about $7.1 million; its $12.88 million balance exceeds the target, so the council has committed $1.2 million to a budget stabilization account and is considering using some of the excess for capital projects. Governments must also disclose their policy on the order in which restricted, committed, assigned and unassigned amounts are used when more than one is available.

Fund balance raises a governance question: should a government accumulate resources for future needs or keep taxes as low as possible today? Interperiod equity supports saving for known future costs, while residents may prefer lower taxes now. The fund statements cannot answer the question, but by classifying fund balance by constraint, they make the trade-off visible. Users should be careful not to confuse fund balance with cash: the general fund's balance may include receivables, and a large capital projects fund balance usually reflects unspent bond proceeds that will be spent on a specific project.

Combining and individual fund statements

Governments that publish an ACFR include combining statements for nonmajor funds and individual fund statements and schedules in the supplementary information. A combining statement shows each nonmajor governmental fund, such as Aspen Ridge's library special revenue fund and its cemetery permanent fund, in its own column, with totals that agree with the nonmajor funds column of the basic statements. Budgetary comparisons for nonmajor funds with legally adopted budgets also appear there. These schedules are supplementary information, covered by the auditor's opinion only in relation to the basic statements as a whole.

Fund information also supports intergovernmental agreements. Aspen Ridge provides fire protection to a neighboring rural fire district under an interlocal agreement priced at the full cost of the service; its cost allocation plan and the public safety function's expenses support the price. Similar agreements under Nebraska's Interlocal Cooperation Act cover regional water supply, landfills and emergency dispatch.

Changes to the reporting entity also deserve attention. When a city creates a new organization, such as a housing authority, a development corporation or a joint public safety agency, it must assess whether it is financially accountable and whether the organization is a blended or discretely presented component unit, or a joint venture accounted for by the equity method. The notes describe the entities included and any changes, so readers understand why the statements' scope may differ from year to year.

Fund information also shows how the city pays for growth. Special assessments on benefiting properties, impact fees where state law allows them, and developer contributions of infrastructure fund new streets and utilities, while the capital projects fund tracks bond-financed projects. Reading these together shows whether growth is paying for itself or adding to future costs.

A last observation: the United States kept fund statements while Canada moved to consolidated summary statements, reflecting different views of accountability. GASB concluded that users need to see compliance with legal fund restrictions as well as a whole-of-government picture; Canadian standard setters concluded that a single consolidated picture serves users best, with segment and reserve disclosures in the notes. Students who work in both countries need to read both kinds of statements comfortably.