GOVERNMENTAL-TYPE FUNDS

Five types of governmental funds are used to account for the day-to-day operating services pro- vided by state and local governments: the General Fund, Special Revenue Funds, Debt Service Funds, Capital Projects Funds, and Permanent Funds. All governments have one General Fund; most governments use one or more Special Revenue Funds, Capital Projects Funds, and Debt Service Funds; and some have Permanent Funds. Table 2-4 summarizes the purposes of each fund type and gives examples of their use.

Governmental Accounting in Practice

Current Financial Resources versus Economic Resources

As already discussed, the GASB requires preparation of two sets of financial statements: a fund set and a government-wide set. The required reconciliation of the net change in fund balances for governmental- type funds (fund set) with the change in net assets for governmental activities (government-wide set) explains the effect on the operating statements of using different measurement focuses and bases of accounting in each set. To illustrate, as a result of its fiscal year 2010 operations, fund balances of New York City’s governmental-type funds declined by $1,582 million. But net assets of the governmental activities reported in the government-wide set declined by $11,702 million. So the bottom line reported in the fund set was better than that reported in the government-wide set. Here are some of the reconcil- ing items from the fund operating statement to the government-wide operating statement. (Numbers are in millions of dollars.)

Capital outlays are reported as expenditures in governmental-type funds. However, in the gov- ernment-wide operating statement, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. Because capital outlays exceeded depreciation expense in the current period, the bottom line of the fund statements is worse than that of the government-wide statements by

Purchases of capital assets $5,783 Depreciation expense (2,139) $3,644

Issuing long-term debt provides current financial resources to governmental-type funds, while repaying long-term debt consumes those resources. Neither transaction has any effect on the operat- ing results reported in the government-wide statements. But because bond proceeds exceeded princi- pal repayments, the bottom line of the fund statements is better than that of the government-wide statements by

Proceeds from sales of bonds $(10,818) Repayment of bond principal 5,886 Other (78) (5,010)

The City does not finance retiree health care benefits as earned by employees. Instead, benefits are paid on behalf of employees after they retire. The resulting accrual, made for purposes of prepar- ing the government-wide statements, does not require expenditure of current financial resources. Therefore, the bottom line of the fund statements is better than that of the government-wide state-

ments by (9,440)

Source: Based on the Comprehensive Annual Financial Report, City of New York, NY, for the fiscal year ended June 30, 2010.

The financial statements of Mt. Lebanon, Pennsylvania, for the year ended December 31, 2009, illustrate the types of revenues, expenditures, assets, liabilities, and other accounting ele- ments encountered within governmental-type funds. The statements also help introduce the reporting implications of the measurement focus and basis of accounting used in those funds. Mt. Lebanon, a suburb of Pittsburgh, has a population of about 33,000. It has received the Cer- tificate for Excellence in Financial Reporting, awarded by the Government Finance Officers Association, for 33 consecutive years. Table 2-5 presents the statements of revenues, expendi- tures, and changes in fund balances (operating statements) for four of Mt. Lebanon’s governmental- type funds, and Table 2-6 presents the balance sheets. We will return to these statements in later chapters.

Following is a skeletal outline of the governmental-type fund operating statements. Notice in particular the caption “Other financing sources and uses, including transfers” and the items listed under that caption in Table 2-5 . This caption is needed to accommodate the financial resources measurement focus used in the governmental-type funds; it is also used to report the relatively large number of interfund resource transfers caused by the use of fund accounting. Also, notice the types of revenues, expenditures, and other financing sources for each of the fund types in Table 2-5 .

Revenues (detailed) 2 Expenditures (detailed)

5 Excess (deficiency) of revenues over expenditures

6 Other financing sources and uses, including transfers (detailed) 6 Special and extraordinary items (detailed)

5 Net change in fund balances 1 Fund balances—beginning of period 5 Fund balances—end of period 2

Next, notice the general format of the governmental fund balance sheets in Table 2-6 : assets = liabilities + deferred inflows of resources + fund balances. Mt. Lebanon, like most govern- ments, reports deferred inflows of resources as a result of applying the measurable and available

2 _{GASB Cod. Sec. 2200.159. For accounting in governmental-type funds, the GASB defines revenues essentially as}

increases in fund financial resources other than from interfund transfers and debt issue proceeds, and expenditures as decreases in fund financial resources other than through interfund transfers (GASB COD Sec 1800.114). The GASB pro- vides no specific definition of other financing sources or uses . Although inconsistencies in standards regarding fund accounting make it difficult to develop precise definitions, we suggest the following for working purposes: (a) Revenues are inflows of fund financial resources related to the current reporting period, resulting from transactions (such as taxes and intergovernmental grants) that generally produce increases in the net assets of the entity as a whole. (b) Other financ- ing sources are increases in the assets of a fund that generally do not increase net assets of the entity as a whole. They include debt issue proceeds and interfund transfers (which do not increase net assets of the entity as a whole) and the sale of capital assets (which may increase them). (c) Expenditures are outflows of financial resources related to the current reporting period, for current operations, capital outlay, and payment of debt service on long-term debt, subject to the measurement issues discussed in Chapter 5 .

TABLE 2-4 Purposes of Governmental-Type Funds Fund Type To Account For

General All financial resources not accounted for in some other fund; includes most day-to-day activities of government

Examples: Operations of police, fire, and sanitation departments

Special Revenue Specific revenue items restricted or otherwise limited to spending for specific purposes other than debt service or capital projects

Examples: Dedicated tax on motor fuel for highway paving and care or on hotel occupancy for business district maintenance

Capital Projects Financial resources restricted or otherwise limited to spending for capital outlays, including facilities and other capital assets

Examples: Construction of firehouse, office buildings, roads

Debt Service Financial resources restricted or otherwise limited to spending for principal and interest on general long-term debt

Examples: Property taxes and transfers of financial resources from other funds to pay debt service on long-term debt sold to acquire capital assets Permanent Resources restricted to the extent that only earnings (not principal) may be

used to support the government’s programs

Examples: Public cemetery perpetual-care fund; endowment fund for acquiring library books

criteria for recognizing revenues in governmental-type funds. Governmental-type funds might also have deferred outflows of resources.

The General Fund

All general-purpose governments and certain special-purpose governments, such as school dis- tricts, use a General Fund. By definition, the General Fund is a residual fund; that is, it is used to account for and report all financial resources not accounted for and reported in some other fund. In reality, however, the General Fund is the single most important fund because it encompasses government’s basic day-to-day operations. It is the fund that politicians and citizens alike focus on during the budget adoption period.

General Funds obtain most of their resources from taxes on real property, general sales or specific types of sales, and personal and corporate incomes. They may also obtain intergovern- mental grants for specific programs such as education and public assistance. Licenses, fees, and fines also are generally recorded in the General Fund. These resources are expended for basic operating programs, such as police and fire suppression services, trash removal, parks and cul- tural activities, traffic control, road maintenance, and the general administrative functions of government. The General Fund may also be used to acquire nonmajor items of equipment, including police sedans. In addition, financial resources may be transferred from the General Fund to other funds to fully or partially finance the activities of those funds.

Assets found in the General Fund are primarily current financial resources and usually include cash, investments, receivables (such as unpaid property taxes), and receivables from other funds. In governmental accounting terminology, short-term receivables from other funds are

TABLE 2-5 Governmental-Type Funds—Statements of Revenues, Expenditures, and Changes in Fund Balances

Mt. Lebanon, Pennsylvania Selected Governmental-Type Funds

Statements of Revenues, Expenditures, and Changes in Fund Balances For the Year Ended December 31, 2009

(in thousands of dollars)

General Fund Special Revenue Fund Capital Projects Fund Debt Service Fund Revenues Taxes $22,761

Licenses, permits, fees 832 $ 7,043

Intergovernmental grants 1,241 Other 4,413 41 $ 6 $ Total revenues 29,247 7,084 6 0 Expenditures Current: General government 4,216 71 Public works 6,216 3,734 Culture, recreation 2,594 Public safety 9,846 Other current 1,681 Debt service: Principal 1,640 Interest 870 Capital outlay 280 4,425 Total expenditures 24,833 3,734 4,496 2,510

Excess of revenues over expenditures 4,414 3,350 (4,490) (2,510) Other Financing Sources (Uses)

Transfers in 369 2,555 2,510

Transfers out (3,364) (2,992)

Proceeds—bond issuance 2,115

Bond issuance premium 3

Total other financing sources

(uses) (2,995) (2,992) 4,673 2,510

Net change in fund balance 1,419 358 183 0

Fund balance, beginning of year 6,348 1,894 80 0

Fund balance, end of year $ 7,767 $ 2,252 $ 263 $ 0

TABLE 2-6 Governmental-Type Funds—Balance Sheets Mt. Lebanon, Pennsylvania Selected Governmental-Type Funds

Balance Sheets December 31, 2009 (in thousands of dollars)

General Fund Special Revenue Fund Capital Projects Fund Debt Service Fund Assets

Cash and cash equivalents $ 5,641 $ 3,698 $ 447 $ Receivables:

Taxes 3,751

Assessments 16 672

Accounts 565 17

Due from other funds 630 520

Due from other governments 472

Advance to other funds 760

Other 468

Total assets $12,303 $ 4,370 $ 984 $ 0

Liabilities

Accounts payable $ 595 $ 941 $ 590 $

Advance deposits 480

Due to other funds 875 114

Accrued payroll 848

Total liabilities 1,923 1,816 704 0

Deferred Inflows of Resources

Deferred revenue 2,613 302 17

Fund Balances

Nonspendable 760

Restricted 2,252 263

Assigned for subsequent year’s budget 1,896

Assigned for other purposes 1,426

Unassigned 3,685

Total fund balances 7,767 2,252 263 0

Total liabilities, deferred inflows of resources, and

fund balances $12,303 $ 4,370 $ 984 $ 0

Source: Adapted from the Comprehensive Annual Financial Report, Mt. Lebanon, Pennsylvania, December 31, 2009. (We made some format changes to enable this illustration to show the effect of changes in accounting standards after this statement was prepared.)

referred to as due from other funds; if they result from loans not currently due, they are referred to as loans receivable or advances to other funds. Liabilities found in the General Fund are also primarily currently due to be paid. They typically include salaries and accounts payable and payables to other funds. The latter items are referred to as due to other funds; as in the case of receivables, if these liabilities are not currently due, they are referred to as loans payable or advances from other funds. (Inclusion of long-term loans between funds is an exception to the general rule regarding current financial resources. The special treatment required in this case is discussed in Chapter 5 .) As noted earlier, the General Fund is also likely to have deferred inflows of resources, pri- marily because application of the measurable and available criteria for recognizing property taxes results in recording property taxes receivable for revenues that will not be recognized until a future accounting period. Accounting for property taxes is discussed in detail in Chapter 5 . 3

The excess of assets over liabilities and deferred inflows of resources in the General Fund is called fund balance. Fund balance results from the cumulative excess of revenue and other sources of financing over expenditures and other uses of fund resources. The fund balance is of major concern both in the budget process and in analyzing financial condition because it shows— subject to various constraints—the net assets available for future spending. Fund balance is expressed in up to five classifications, based on the extent to which the government is required to honor those constraints. The classifications—nonspendable, restricted, committed, assigned, and unassigned—are discussed in Chapter 5 .

Scan the format and the captions shown for the numbers in the General Fund column of Mt. Lebanon’s financial statements. In the operating statement ( Table 2-5 ) notice that expendi- tures are reported by major function. Each function may cover salaries, supplies, and other expenditures incurred by several departments. Notice also the section “Other Financing Sources (Uses).” These increases and decreases in General Fund financial resources (which include trans- fers in and out of funds) are neither revenues nor expenditures, but they nevertheless affect the net change in fund balance. In the balance sheet ( Table 2-6 ) notice the current nature of the assets and liabilities, as well as the various components of fund balance. Also notice that, because the $760 (thousand) loan receivable is not currently available for spending, an equivalent amount is classified as nonspendable fund balance.

COMPARISON WITH BUSINESS ENTERPRISE REPORTING—OPERATING STATEMENT Before discussing the purposes of the other four governmental-fund types, it is useful to better under- stand the financial reporting implications of the accounting measurements in governmental-type funds. We can accomplish this to some extent by exploring the major differences between finan- cial statements prepared for governmental-type funds and the statements prepared for business enterprises. We will refer again to Tables 2-5 and 2-6 , looking at the data in all four fund types.

As previously stated, governmental fund operating statements focus not on measurement of net profit, but rather on increases and decreases of current financial resources, leading to bal- ance sheets that measure the amount of financial resources available for spending . Thus, when a governmental-type fund spends current financial resources to acquire capital assets, the result— in terms of the effect on current financial resources—is to reduce the amount of financial resources available for spending. The fact that it acquired capital assets is relevant to the entity’s

3 _{Until recently, deferred inflows of resources were reported as liabilities. GASB Statement No. 63, “Financial Reporting of}

Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position” (June 2011) and related standards reclassified the reporting effects of certain specific transactions from assets and liabilities to deferred outflows and deferred inflows of resources, respectively.

ability to perform its mission, but not to the measurement focus of the fund financial statements. Similarly, long-term borrowing results in an inflow of financial resources available for current spending. Increasing its long-term debt is relevant to the entity’s long-term financial position, but not to the measurement focus of the governmental fund financial statements.

This difference in measurement focus causes governmental fund operating statements to use a format different from that used by business enterprises. To accommodate the current finan- cial resources measurement focus, the governmental-type fund operating statement takes on aspects of a cash flows statement. (Conceiving of these statements as modified cash flows state- ments helps you understand both the elements reported and the measurements made in them.) Notice, for example, that Mt. Lebanon’s operating statement ( Table 2-5 ) shows capital outlays and repayment of long-term debt principal as expenditures in several of the funds; it also shows pro- ceeds from the sale of long-term debt as inflows of financial resources in the Capital Projects Fund. Business enterprises would report these items in the statement of cash flows and the effect of the transactions in their balance sheets.

Another significant difference between governmental fund and business enterprise operat- ing statements lies in the appearance of transfers among funds in the governmental statements. Table 2-5 shows transfers among all four governmental-type funds. Transfers cause increases or decreases in the financial resources of the affected funds and therefore need to be reported in the individual fund financial statements. Although transfers among related companies occur in busi- ness enterprises, they are eliminated when financial statements are prepared because they do not affect the enterprise as a whole. (When governmental entities prepare government-wide financial statements, interfund transfers offset each other and are eliminated, as discussed in Chapter 10 .) The other important difference between governmental fund and business enterprise oper- ating statements is not apparent from Table 2-5 . This difference results from the accounting mea- surements made in the governmental-type funds, which use the modified accrual basis of accounting. (Recall the discussion earlier in the chapter regarding pension and retiree health care benefits.) We will discuss this difference in detail in later chapters.

COMPARISON WITH BUSINESS ENTERPRISE REPORTING—BALANCE SHEET Significant dif- ferences between balance sheets prepared for governmental-type funds and business enterprises also result from the current financial resources measurement focus used by governmental-type funds. Notice that the balance sheets ( Table 2-6 ) prepared for Mt. Lebanon’s governmental-type funds consist almost entirely of currently spendable financial resources. The governmental-type funds do not report any capital assets, such as buildings and equipment, even though it is clear from the fund operating statements that Mt. Lebanon acquired capital assets during the current year and it is reasonable to assume it still has capital assets acquired in previous years. Similarly, notice that the liabilities sections of Mt. Lebanon’s governmental fund balance sheets report only short-term liabilities, even though it is clear from the operating statements that Mt. Lebanon had proceeds from the sale of bonds during the year. Business corporations that have capital assets and long-term bonds payable report them on their balance sheets.

Another significant difference between the balance sheets prepared for governmental-type funds and for business enterprises concerns the difference between assets and liabilities. This net difference is called owners’ equity for business enterprises and fund balance for government. In business corporations, owners’ equity consists of contributed capital and retained earnings. No attempt is made to show how much of the equity is available for spending. Both internal and exter- nal users of governmental-type fund statements, however, are very concerned with the fund bal- ances—the amounts available for spending either for general purposes or for specific purposes.

Therefore, the fund balances on governmental fund balance sheets are expressed in up to five clas- sifications, depending on the level of constraint regarding the use of the net financial resources. Four of those levels are shown in Table 2-6 . The five levels are discussed in detail in Chapter 5 .

After considering the types of assets, liabilities, and equity reported in Mt. Lebanon’s finan- cial statements, it is apparent that the accounting equation for governmental-type funds differs from the traditional business-type accounting equation. Governmental funds report only a por- tion of the assets and liabilities reported by business enterprises. The governmental fund account- ing equation covers only financial assets and certain matured liabilities that it expects to pay shortly after the end of the reporting period . From a practical standpoint, the governmental fund account- ing equation may be expressed as follows:

financial assets 5 matured short-term liabilities 1 deferred resource inflows 1 fund balance In that equation “financial assets” include primarily cash, investments, and receivables;