Don’t Forget About Internal Service Funds

INSIGHTS

If your state or local government has centralized management of services such as fleet, facilities, information technology, or fringe benefits, you may have an “internal services fund” (ISF). ISFs operate like a business because they provide services and charge customers. ISFs may be more efficient and economical because they avoid duplication of effort. They allow customers to focus on core responsibilities.

Proprietary funds account for government operations financed and operated in a manner similar to a private business enterprise. Examples often include Water, Sewer, Electric, Stormwater, Solid Waste Disposal, and some recreational activities (e.g., golf). Governments frequently review the rates they charge for these services to meet bond covenants, regulatory rules, or help ensure that customers who do not live or work in the community are paying appropriate rates.

It is also important that governments review the rates they charge for Internal Service Funds (ISFs). ISFs finance and account for activities and services provided to other governmental agencies. These customers are usually internal customers, but they are often agencies of other governments. For example, a Fleet ISF may service vehicles for a nearby school or park district while a 911 Center may support communications for a number of other emergency service departments in the area.

Governments that operate ISFs need to review the rates they charge to avoid subsidizing other agencies. Unintended subsidies may result in the General Fund picking up the deficit. Rates also need to factor in the cost of equipment through replacement reserves or depreciation. Also, while some governments allocate ISF expenses through a Cost Allocation Plan, recouping expenses through the CAP may result in delays in cost recovery. Keeping rates updated and recovering through chargebacks should help expedite cash flows for a government.

Publish Date

Posted on February 3, 2021

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