CHAPTER 8

FIDUCIARY FUNDS

Introduction

Agency Funds

Pass-Through Grants

Special Assessments

Pension (and Other Employee Benefit) Trust Funds

Deferred Compensation Plans

Investment Trust Funds

Private-Purpose Trust Funds

Summary

INTRODUCTION

Governments are often required to hold or manage assets on behalf of others. NCGAS 1 recognized the need for fiduciary funds (known as trust and agency funds prior to GASBS 34), “to account for assets held by a governmental unit in a trustee capacity or as an agent for individuals, private organizations, other governmental units, and/or other funds.”

GASBS 34 updated the types of fiduciary funds to include the following:

The funds are reported under GASBS 34 only in fiduciary fund financial statements. They are not reported as part of the government-wide financial statements.

Each of these fund types is described below. In addition, Chapter 22 describes the accounting and financial reporting principles used by pension trust funds.

AGENCY FUNDS

Agency funds are used to account for assets held solely in a custodial capacity. As a result, assets in agency funds are always matched by liabilities to the owners of the assets

The accounting and financial reporting for agency funds are unique and do not really follow those of governmental funds or proprietary funds. Agency funds use the modified accrual basis of accounting for purposes of recognizing assets and liabilities, such as receivables and payables. However, agency funds do not have or report operations, and accordingly are said to not have a measurement focus.

In determining whether an agency fund or a trust fund is used to account for various types of transactions, there are no clear-cut distinctions for selecting the proper fund to account for a particular transaction. The degree of the government’s management involvement and discretion over assets is generally much greater over trust fund assets than over agency fund assets. Private-purpose trust funds, for example, may require that a government’s management identify eligible recipients, invest funds long- or short-term, or monitor compliance with regulations. Agency funds, on the other hand, typically involve only the receipt, temporary investment, and remittance of assets to their respective owners.

Agency funds are often used by school districts to account for student activity funds that are held by the school district but whose assets legally belong to the students. Another common use of agency funds is to account for taxes collected by one government on behalf of other governments. The collecting government has virtually no discretion on how the funds in the agency fund are to be spent. They are simply collected and then remitted to the government on whose behalf they were collected. In addition to this example, there are three instances where the use of an agency fund is mandated. These mandated uses are described in the following paragraphs.

Pass-Through Grants

GASB Statement 24 (GASBS 24), Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, states that as a general rule, cash pass-through grants should be recognized as revenue and expenditures or expenses in a governmental, proprietary, or trust fund. GASBS 24 provides, however, that in those infrequent cases where a recipient government only serves as a cash conduit, the grant should be reported in an agency fund. The GAAFR, using the guidance of GASBS 24, states that an agency fund only be used to account for grants if the government has no administrative involvement with the program and has no direct financial involvement with the program. Examples provided are as follows:

Administrative requirements

• The government functions solely as an agent for some other government in collecting and forwarding funds
• The government undertakes no responsibility for subrecipient monitoring for specific requirements
• The government is not responsible for determining the eligibility of recipients

Direct financial involvement

• The government has no matching requirements, and
• The government is not liable for grant repayments.

If a grant does not meet these criteria, it is required that the revenues and expenditures or expenses of the grant be accounted for and reported in one of the other fund types.

Special Assessments

The accounting and financial reporting for special assessments is described in Chapters 4 and 14. The use of an agency fund for special assessments is required when a government is not obligated in any manner for capital improvements financed by special assessment debt. GASBS 6 requires that “The debt service transactions of a special assessment issue for which the government is not obligated in any manner should be reported in an agency fund rather than a debt service fund, to reflect the fact that the government’s duties are limited to acting as an agent for the assessed property owners and the bondholders.”

When an agency fund is used for this purpose, any cash on hand from the special assessment would be shown on the agency fund’s balance sheet. In addition, receivables would be reported for delinquent assessments. Only delinquent receivables would be reported as receivables on the agency fund’s balance sheet, however. If the total receivables relating to the special assessment were shown, they would be offset by a liability that would essentially represent the special assessment debt. This would violate the requirement that special assessment debt for which the government is not obligated in any manner should not be displayed in the government’s financial statements.

PENSION (AND OTHER EMPLOYEE BENEFIT) TRUST FUNDS

Governments almost always offer pension benefits to their employees. The pension plans related to these benefits are reported as pension trust funds in the government’s financial statements if either of the following criteria is met:

• The pension plan qualifies as a component unit of the government.
• The pension plan does not qualify as a component unit of the government, but the plan’s assets are administered by the government.

Pension (and other employee benefit) Trust Funds,” are used to account for other employee benefit funds held in trust by a government, such as an Internal Revenue Code Section 457 Deferred Compensation Plan discussed below. This type of fund would also be used for trust funds established to fund postemployment benefits other than pensions (OPEBs).

Pension (and other employee benefit) trust funds use the flow of economic resources measurement focus and the full accrual basis of accounting, similar to nonexpendable trust funds and proprietary funds. A separate pension (and other employee benefit) trust fund should be used for each separate plan. Separate pension (and other employee benefit) trust funds are also sometimes established to account for supplemental pension benefits.

Governmental pension plans are usually administered by public employee retirement systems (PERS). The GASB has specific pronouncements governing the accounting and financial reporting for both governmental employers that offer pension plans and the accounting and financial reporting of the plans themselves. Chapter 18 addresses the governmental employer accounting questions, and Chapter 24 addresses the accounting for the plans themselves.

Deferred Compensation Plans

Many governments establish and offer participation to their employees in deferred compensation plans established under Section 457 of the Internal Revenue Code. These plans are often referred to as Section 457 plans. The laws governing these plans were changed so that as of August 20, 1996, new deferred compensation plans would not be considered eligible under Internal Revenue Code Section 457 unless all assets and income of the plan are held in trust for the exclusive benefit of the plan participants and their beneficiaries. For existing plans to remain eligible under Internal Revenue Code Section 457, this requirement was required to be met by January 1, 1999. Thus, the entire nature of the access to the assets of deferred compensation plans changed under the new requirements. The assets (and their related earnings) are no longer be accessible to the governmental entity and its creditors. They are held in trust for the exclusive benefit of the plan participants and their beneficiaries. Governments also sometimes offer employees similar deferred compensation plans established under Section 401(k) of the Internal Revenue Code. The accounting guidance discussed in this section would apply to the Section 401(k) plans as well.

In applying the requirements of GASBS 32, the first step for governments is to determine whether the Internal Revenue Code Section 457 plan should be included as a fiduciary fund of the reporting government. If the plan meets the criteria of NCGAS 1 for inclusion as a fiduciary fund, the plan would be reported under GASBS 32 as part of pension (and other employee benefit) trust funds. If the criteria of NCGAS 1 are not met, then the plan would not be included as a fiduciary fund of the reporting government.

NCGAS 1 defines fiduciary funds as “Trust and Agency funds to account for assets held by a governmental unit in a trustee capacity or as an agent for individuals, private organizations, other governmental units, and/or other funds.” No additional guidance on when to report Internal Revenue Code Section 457 plans is provided by GASBS 32. The basis for conclusions of GASBS 32 indicates that the GASB’s research indicated at the time of the statement issuance that most governments had little administrative involvement with their plans and did not perform the investing function for those plans. This is consistent with the practice that has emerged upon adoption of GASBS 32 of many governments not reporting their plans as fiduciary funds.

However, whether the plan is reported is a matter of professional judgment, and the extent of the governments activities relating to the plan, particularly in selecting investment alternatives and holding the assets in a trustee capacity needs to be evaluated.

Governments that report Internal Revenue Code Section 457 deferred compensation plans should apply the valuation provisions of GASB Statement 31 (GASBS 31), Accounting and Financial Reporting for Certain Investments and for External Investment Pools. In addition, all other plan investments should be reported at fair value. Thus, all of the investments of the plan will be reported at fair value.

GASBS 32 further provides that if it is impractical to obtain investment information from the plan administrator as of the reporting government’s balance sheet date, the most recent report of the administrator should be used—for example, reports ending within the reporting government’s fiscal year or shortly thereafter, adjusted for interim contributions and withdrawals.

INVESTMENT TRUST FUNDS

A special type of trust fund, the investment trust fund, is used by governments that sponsor external investment pools and that provide individual investment accounts to other legally separate entities that are not part of the same financial reporting entity. The investment trust fund is required to be used in these circumstances by GASB Statement 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (GASBS 31). The accounting for these funds is unchanged by GASBS 34.

Investment trust funds report transaction balances using the flow of economic resources measurement focus and the accrual basis of accounting. Accordingly, the accounting and financial reporting for investment trust funds is similar to that used by nonexpendable trust funds (and proprietary funds).

The two instances where GASBS 31 specifies that investment trust funds be used are as follows:

PRIVATE-PURPOSE TRUST FUNDS

Private-purpose trust funds are a type of fiduciary fund introduced by GASBS 34. They are used to report all trust arrangements (other than pension and other employee benefit, and investment trust funds), under which principal and income benefit individuals, private organizations, or other governments. Similar to other fiduciary funds, private-purpose trust funds cannot be used to support a government’s own programs. It is important therefore, to make sure that an activity is absent any public purpose of the government before it is accounted for as a private-purpose trust fund, even if individuals, private organizations, or other governments receive direct or indirect benefits from the activity. The distinction that a private-purpose trust fund should not be used to account for a grant program that supports a government’s own programs is an important one. If a donor provides a government with a grant for the government to use to support its own programs, that grant should be recorded in the government’s general fund as grant revenue. The expenditures for this example program then become subject to the budgetary appropriations of the government’s general fund. However, if the grant does not directly benefit the government or go to support its own programs, then the grant is properly accounted for as a private-purpose trust fund. Generally because of their nature, there are no legal budgetary appropriations for these types of fiduciary funds and the program is administered essentially only in accordance with the grant agreement.

SUMMARY

Governments frequently hold assets in a fiduciary capacity and should use the appropriate fiduciary fund to account for the assets and liabilities relating to these fiduciary responsibilities. The use of fiduciary funds provides the capability to improve accountability and control over these assets.