Introduction to Internal Service Funds

1. Introduction to Internal Service Funds

2. Internal Service Funds (ISFs) • Instructions for this power point presentation. • This button appears throughout the presentation. Click to obtain additional data. • Clicking on underlined text will provide links to additional information.

3. ISFs . . . continued • Established to avoid duplication of effort. • Bill clients for service. • Are self supporting. • Provide services more conveniently or at a lower cost.

4. ISFs . . . continued • Reflect major capital items as assets. • Record depreciation to determine all costs of operating the activity. • Measure the full cost of the goods or services. • Operate as a business.

5. Journal Entries • Various journal entries record the establishment and operational activities of an Internal Service Fund. • See slides 6 through 9 for these journal entries.

6. Journal Entries . . . continued • Establish an equity transfer: • Debit: Cash • Credit: Contributed capital from General Fund

7. Journal Entries . . . continued • Acquisition of IT equipment • Debit: IT equipment • Credit: Cash • Supplies for the operation • Debit: Computer supplies expense • Credit: Cash

8. Journal Entries . . . continued • Billings for services rendered • Debit: Due from State department • Credit: Revenues • Payment of billings • Debit: Cash • Credit: Due from State department

9. Journal Entries . . . continued • Depreciation • Debit: Depreciation expense • Credit: Accumulated depreciation

10. End of the Year • Internal Service Funds prepare various financial statements: • Trial Balance • Closing Entries • Balance Sheet • Revenue and Expense Statement • Cash Flow Statement

11. Internal Service Funds (ISFs) • From here on, this presentation is on the State of California’s Internal Service Funds. • How does California establish an Internal Service Fund?

12. Establishing ISFs • First, an Internal Service Fund is: • Created • Classified

13. ISFs Created Legislation Administratively (Government Code Section 13306) Electorate Initiative

14. ISFs Classified • Funding source/appropriation to finance program activities must: • Identify the resources. • Specify the legal authority to expend.

15. ISFs Classified . . . continued • Fund Codes • Alphabetical • Numerical • Fund structure • Generally Accepted Accounting Principles (GAAP) • Legal basis

16. Uniform Codes Manual (UCM) • Provides the source for coding the ISF. • Provides a uniform coding system. • Provides a chart of accounts for budgetary, accounting, and reporting purposes.

17. UCM. . . continued Comprehensive listing of • Accounts • Funds • Objects of expenditures • Receipts

18. In California, Internal Service Funds are used to:

19. Internal Service Funds (ISFs) • Account for State of California activities, which provide: • Goods and services to other State departments. • Reimbursement of costs.

20. ISFs . . . continued • California has established over 20 ISFs. • Not all of these ISFs are active. • See slides 21 through 27 for some examples of California’s ISFs.

21. Examples of Internal Service Funds (ISFs) . . . continued • Water Resources Revolving Fund • Accounts for charges for administrative services related to water delivery provided by the Department of Water Resources to federal, State, and local entities.

22. Examples of ISFs . . . continued • Equipment Service Fund • Accounts for the purchase, maintenance, and administrative costs of equipment used by the Department of Transportation.

23. Examples of ISFs . . . continued • Service Revolving Fund • Accounts for printing and procurement charges for services rendered by the Department of General Services for State departments and other public entities.

24. Examples of ISFs . . . continued • Stephen P. Teale Data Center Revolving Fund (TDC) • Accounts for charges of IT services performed for various State departments by the TDC.

25. Examples of ISFs . . . continued • Prison Industries Revolving Fund • Accounts for charges for goods produced by inmates in State prisons that are sold to State departments and other entities.

26. Examples of ISFs . . . continued • Health and Human Services Agency Data Center Revolving Fund (HHSDC) • Accounts for charges of IT services performed for various State departments by the HHSDC.

27. Examples of ISFs . . . continued • Other Internal Service Funds • Account for all other goods or services provided to other agencys, departments, or governments on a cost reimbursement basis.

28. Examples of ISFs . . . continued • Let’s look more closely at the Health and Human Services Agency Data Center (HHSADC), an Internal Service Fund.

29. Health and Human Services Agency Data Center (HHSADC) • Created in 1972. • Provides centralized IT services for State departments. • Centralizes IT at reduced costs. • Eliminates of duplication of work. • Ensures optimum capacity.

30. HHSADC . . . continued • Self supporting. • No General Fund appropriation. • Costs recovered through user charges. • User charges set at the beginning of each fiscal year. • Goal is to break even. • Uneven demand for services makes it difficult to predict billing rates. Shortages or surpluses often occur.

31. HHSADC . . . continued • Uses a standard costing system. • Costs are categorized under separate group or cost pools related to an activity. • Cost centers represent a billable service. • Expenses are assigned a cost center. • Expenses are totaled at the end of year to determine the cost for each service.

32. HHSADC . . . continued Example of some cost centers at HHSADC :

33. HHSADC. . . continued Each cost center has a billing rate: Projected Annual Cost Billing Rate = ----------------------- Projected Annual Usage

34. HHSADC . . . continued • Utility system records the usage for each client. Calculates a bill based on actual usage of each services. • Monthly an invoice is sent to the client listing service usage multiplied by the billing rate. • Client pays invoice.

35. HHSADC . . . continued • Analysis of Costs • Quarterly review of rates. • Annual adjustments. • Invoice adjustment for refunds. • Financing impacts rates charged to clients. • Click on button to see types of financing.

36. HHSADC . . . continued • Clients receiving federal funds bill the federal government for these charges. • Over/under collections result in over/under billings to the federal government.

37. HHSADC . . . continued • Why should anyone care if the federal government is over or under charged? • Or any other fund, State department, entity? • Let’s look at some items for background to this issue.

38. Cost Plans • Statewide Cost Allocation Plan (SWCAP) recovers central service costs from federal funds. • SWCAP plan has two sections.

39. Cost Plans . . . continued • Both Section I and Section II of the SWCAP follow the regulations and guidelines of . . . • Office of Management and Budget, Federal Circular A-87 “Cost Principles for State and Local Governments”. • Department of Health and Human Services guideline ASMB C-10.

40. Cost Plans . . . continued • SWCAP Section I is the allocated central service costs distributed to State departments. • State departments transfer SWCAP recoveries to the General Fund from reimbursements received from the federal government.

41. Cost Plans . . . continued • SWCAP Section II includes data for each ISF with an operating budget over $5 million, including: • Rates • Billings • Policies • Refunds

42. Cost Plans . . . continued • SWCAP Section II • Costs for operating the ISF are included in billings by the State department (indirect cost rate proposals, cost allocation plans) to the federal government. • Yearly, the federal government reviews these ISFs.

43. Cost Plans . . . continued • For each ISF, SWCAP Section II includes: • Description of Service • Balance Sheet • Revenue and Expense Statement • Cost recovery and billing methodology • Cost center billing rates • Other information

44. State Requirements • State’s requirements are: • Full Cost Recovery • Government Code 11010 • Government Code specific to an ISF • HHSDC Fund Balance billing rate Government Code 11755 • State Administrative Manual • Rates reviewed by audit groups

45. Federal Requirements • Federal requirements are: • Rates reviewed annually. • Allowable A-87 retained earnings. • Include only reasonable costs as defined in A-87 and ASMB C-10.

46. Federal Requirements . . . continued • After issuance of the Comprehensive Annual Financial Report (CAFR) each ISF in the SWCAP prepares a Reconciliation of Retained Earnings Balance to Federal Guidelines . • SCO website for CAFR: California Comprehensive Annual Financial Report

47. Federal Requirements . . . continued • Retained earning reconciliation determines the excess retained earnings. A portion is owed to the federal government, based upon the federal financial participation of the clients.

48. StateandFederalDifferences • State and federal government differ on the calculation of working capital. • Differences are shown on the next slides.

49. 2001-02 State of California Federal government Current Assets 60 days worth of cash expenses, minus Current a portion of retained earnings Definition Liabilities that functions as a reserve Authority FASB and AICPA OMB Circular A-87 Complies with GAAP Yes No Excess RE balance $0 $0 StateandFederalDifferences. . . continued Working Capital

50. Other Differences • Different statements • Governmental funds • Only current assets and current liabilities are accounted and reported. • ISF funds • All assets and liabilities are accounted and reported.