15.2 Capital Projects Funds (CPF)

3. Capital Projects Funds (CPF)

Capital Projects Funds account for financial resources to be used for the acquisition, construction, or major renovation of major capital facilities or infrastructure networks (such as municipal administrative centers, bridges, police headquarters, parks, or arterial roadways).

• Exceptions: CPFs are not used to account for capital assets financed directly by Proprietary Funds (e.g., a new water treatment plant built by an Enterprise Fund) or Trust Funds, which account for their own capital outlays directly on their accrual ledgers.
• Financing Sources: CPFs typically receive funding through the issuance of general obligation bonds, capital grants from federal or state agencies, special assessments levied on benefiting property owners, and interfund transfers from the General Fund.

4. Debt Service Funds (DSF)

Debt Service Funds account for the accumulation of financial resources for, and the payment of, general long-term debt principal and interest.

• Mandatory Creation Criteria: A government is not required to establish a separate Debt Service Fund unless:
  1. Legally mandated by state statute, local charter, or bond covenants; or
  2. Financial resources are being actively accumulated in advance to pay principal and interest maturing in future fiscal years.
• If a government pays annual debt service directly from current-year General Fund revenues on the date debt service falls due without prior resource accumulation, it may account for the expenditure directly within the General Fund, unless bond indentures mandate a separate escrow or sinking fund.

5. Permanent Funds

Permanent Funds account for financial resources that are legally restricted to the extent that only earnings, and not principal (corpus), may be used for purposes that support the reporting government’s own civic programs—that is, for the benefit of the government or its general citizenry.

• Endowment Structure: The original gift or bequest principal must remain permanently intact in perpetuity. Only investment yields, dividends, and interest generated by the endowment may be expended.
• Examples: A perpetual trust established by a civic benefactor where the principal is preserved intact and annual earnings must be used to purchase new books for the municipal public library; or an endowment whose earnings finance the perpetual care and maintenance of a municipal public cemetery.

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The Two Proprietary Funds

Proprietary funds account for a government's ongoing, business-type activities where operations are financed and operated in a manner similar to private business enterprises, recovering costs through voluntary user charges. Proprietary funds utilize the economic resources measurement focus and the full accrual basis of accounting.

Measurement Focus and Accounting Basis

• Economic Resources Measurement Focus: Measures all economic assets, inflows, outflows, and liabilities associated with the activity. Fixed capital assets (land, buildings, equipment, utility pipelines) are capitalized on the balance sheet and depreciated over their estimated useful lives. Long-term debt (revenue bonds, equipment leases) is reported directly on the fund's Statement of Net Position.
• Full Accrual Basis of Accounting: Inflows are recognized as operating or nonoperating revenues when earned, and outflows are recognized as operating or nonoperating expenses when the economic resources are consumed or liabilities are incurred, regardless of the timing of cash receipts or payments.

1. Enterprise Funds

Enterprise Funds account for operations that provide goods or services to the general public on a user-charge basis.

Under GASB Statement No. 34 (Paragraph 67), an activity must be accounted for in an Enterprise Fund if any one of the following three statutory criteria is met:

1. Debt Backed Solely by Net Revenues: The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity.
2. Legal Requirement for Cost Recovery: Laws or regulations require that the activity's costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues.
3. Pricing Policy Designed for Cost Recovery: The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service).

If none of these criteria are met, a government may still elect to use an Enterprise Fund if it desires to track full operational revenues and expenses for public accountability, but it is not mandatory.

• Common Examples: Municipal water and wastewater utilities, electric and gas utilities, public transit authorities, regional commercial airports, municipal toll bridges, public parking structures, and municipal golf courses.

2. Internal Service Funds (ISF)

Internal Service Funds account for the financing of goods or services provided by one department, agency, or organizational unit to other departments or agencies of the same governmental unit, or to other governments, on a cost-reimbursement basis.

• Internal Customer Focus: The distinguishing characteristic of an ISF is that its customer base is predominantly internal (other government agencies), rather than the general public. If external citizens are the primary customer, an Enterprise Fund must be used.
• Cost Recovery Mandate: Pricing structures in an ISF should be designed to recover the full operational cost of providing services, including normal operating overhead and depreciation of capital assets, without generating excessive sustained operational profits.
• Common Examples: Centralized motor vehicle fleet management and maintenance pools, central information technology (IT) data centers, centralized printing and duplicating operations, risk management and self-insurance reserves, and central purchasing and warehouse stores.
• Government-Wide Consolidation Rule: Because the primary customer of an ISF is the general government, the assets, liabilities, and operating results of Internal Service Funds are typically eliminated and consolidated into the Governmental Activities column in the government-wide Statement of Net Position and Statement of Activities, rather than reported alongside Enterprise Funds under Business-Type Activities.

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The Four Fiduciary Funds

Fiduciary funds account for assets held by the government in a trustee or custodial capacity for the benefit of parties outside the reporting government (such as retirees, external investment pool participants, private individuals, or other sovereign governments). Like proprietary funds, fiduciary funds use the economic resources measurement focus and the full accrual basis of accounting.

The Critical Reporting Exclusion Rule

Authoritative GASB Mandate: Fiduciary funds are strictly excluded from the government-wide financial statements (Statement of Net Position and Statement of Activities).

Because fiduciary assets are legally pledged to external beneficiaries, they cannot be mobilized, diverted, or expended to support the government's own public civic programs, finance general operating deficits, or satisfy general sovereign debts. Consequently, reporting fiduciary resources on the government-wide balance sheet would give a misleading and inflated impression of the government's available financial capacity. Fiduciary activities appear solely within specialized Fiduciary Fund Financial Statements (Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position).

1. Pension (and Other Employee Benefit) Trust Funds

Pension Trust Funds account for financial resources that are required to be held in trust for the members and beneficiaries of defined benefit and defined contribution pension plans, other post-employment benefit (OPEB) plans (e.g., retiree healthcare), or other employee benefit arrangements.

• Governed by GASB Statements No. 67, 68, 74, and 75.
• Financial additions include employer contributions, employee payroll deductions, and net investment earnings. Deductions include retiree benefit disbursements, disability payments, refunds of employee contributions upon termination, and administrative overhead expenses.

2. Investment Trust Funds

Investment Trust Funds account for the external portion of investment pools and individual investment accounts reported by the sponsoring government.

• Many state and county governments operate commingled investment pools (Local Government Investment Pools - LGIPs) where cities, school districts, and special taxing authorities place surplus cash to achieve higher yields and lower transaction costs.
• Internal vs. External Rule: The resources belonging to the sponsoring government's own funds (the internal portion) are accounted for directly within those respective governmental and proprietary funds. Only the resources belonging to independent external governments participating in the pool are reported in the Investment Trust Fund.

3. Private-Purpose Trust Funds

Private-Purpose Trust Funds account for all other trust arrangements under which principal and/or income benefit specific individuals, private organizations, or other governments—and where the resources do not support the programs of the reporting government.

• Key Distinction: The beneficiary of a Private-Purpose Trust Fund is always private or external, never the general citizenry or public programs of the reporting government.
• Common Examples: Escheat property (unclaimed bank accounts, abandoned deposits) held by a state government until rightful private owners or heirs are identified; a memorial scholarship trust where income is awarded to designated private high school graduates attending college; or a trust fund established to provide financial assistance to surviving families of individual first responders injured in the line of duty.