Fiduciary funds

LINK_POOL:

• trustee
• custodial accounts
• Governmental Accounting Standards Board (GASB)
• accrual basis of accounting
• modified accrual basis of accounting
• financial statements
• pension funds
• estate planning
• asset management
• internal controls
• unclaimed property
• defined contribution plan
• general fund
• revenue bonds
• public finance

What Is Fiduciary Funds?

Fiduciary funds represent resources held by a government or organization in a trustee or agency capacity for individuals, private organizations, or other governmental units. These funds are not available to support the government's or organization's own programs or operations. In essence, they operate as a custodian, managing assets on behalf of others, and are a key component of governmental accounting and financial reporting, falling under the broader category of public finance.

The distinguishing characteristic of fiduciary funds is the inherent fiduciary responsibility: the entity holding the funds must manage them solely for the benefit of the designated beneficiaries, not for its own purposes. This principle is fundamental in ensuring accountability and transparency in the management of public or third-party assets. Financial reporting standards, such as those established by the Governmental Accounting Standards Board (GASB), dictate how these funds are presented in a government's financial statements to clearly separate them from the government's own programmatic resources⁴⁸, ⁴⁹.

History and Origin

The concept of fiduciary responsibility has deep roots in legal and ethical principles, extending back to ancient trust laws. In the context of government finance, the formalization of fiduciary funds and their distinct accounting treatment gained significant prominence with the evolution of governmental accounting standards. A pivotal development in the United States was the issuance of GASB Statement No. 34, "Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments," in June 1999.

P⁴⁷rior to GASB 34, governmental financial reporting often aggregated various fund types, potentially obscuring the true nature of assets held in a fiduciary capacity. GASB 34 fundamentally changed this by requiring governments to exclude fiduciary activities from their government-wide financial statements, emphasizing that these resources are not available to finance the government's programs. Th⁴⁴, ⁴⁵, ⁴⁶is marked a significant shift toward greater transparency and accountability, ensuring that users of financial statements could clearly distinguish between a government's own resources and those held in trust for others. Th⁴², ⁴³is evolution reflects a growing emphasis on sound financial practices and the understanding that public officials have a unique fiduciary duty to protect and manage resources entrusted to them for specific purposes.

#⁴⁰, ⁴¹# Key Takeaways

• Fiduciary funds represent assets held by an entity in a trustee or agency capacity for external parties.
• These funds are not available for the government's or organization's own programs.
• A core principle is the fiduciary responsibility to manage funds solely for the beneficiaries.
• GASB Statement 34 significantly enhanced the distinct reporting of fiduciary funds in governmental financial statements.
• Common examples include pension funds and private-purpose trusts.

Interpreting Fiduciary Funds

Interpreting fiduciary funds involves understanding that the reported balances do not represent resources available for a government's discretionary spending. Instead, these balances signify assets that are legally or contractually dedicated to specific beneficiaries. For example, a government's financial statements might show a substantial balance in pension funds under fiduciary activities. This indicates the amount of assets held by the government on behalf of its employees for future retirement benefits, not money the government can use for general operations like road repairs or public safety.

The primary interpretation is one of stewardship and accountability. Users of financial statements, such as citizens, bondholders, and oversight bodies, should assess how effectively the government is managing these entrusted assets to meet its obligations to the beneficiaries. Significant changes in fiduciary fund balances might indicate changes in contributions, investment performance, or benefit payments. This interpretation also extends to other types of fiduciary funds, such as private-purpose trust funds, which hold resources for individuals, organizations, or other governments, or agency funds, which hold assets in a purely custodial capacity.

#³⁹# Hypothetical Example
Imagine the City of Evergreen manages a municipal employee retirement plan. This retirement plan operates as a fiduciary fund. Let's say, at the beginning of the fiscal year, the plan holds \$500 million in assets. Throughout the year, employees contribute \$20 million, and the city, as employer, contributes another \$30 million. The investments within the fund generate \$25 million in earnings. During the same period, \$40 million is paid out in retirement benefits to former employees.

The changes in the fiduciary fund would be calculated as follows:

At the end of the year, the fiduciary fund would report an ending balance of \$535 million. This example highlights that while the city manages these funds, they are strictly for the benefit of the employees and cannot be used to, for instance, finance a new public park, which would typically be funded through the city's general fund. The accounting for these funds would typically follow the accrual basis of accounting to capture all economic events related to the trust.

#³⁸# Practical Applications
Fiduciary funds are crucial in several areas of finance and governance:

• Public Sector Accounting: State and local governments extensively use fiduciary funds to report assets held in a trust or agency capacity. This includes public pension funds, which hold retirement savings for public employees, and other trust accounts for specific purposes, such as scholarships or perpetual care of cemeteries. Th³⁶, ³⁷ese distinct reporting requirements ensure transparency and accountability in governmental asset management.
• Unclaimed Property: State treasuries across the United States hold billions of dollars in unclaimed property, which are essentially fiduciary funds. These funds represent dormant bank accounts, uncashed checks, forgotten safe deposit box contents, and other assets that businesses or organizations are required by law to turn over to the state after a specified dormancy period. The New York State Comptroller's office, for example, actively manages and facilitates the claiming of such funds by their rightful owners. Th³², ³³, ³⁴, ³⁵e National Association of State Treasurers (NAST) plays a role in fostering cooperation and best practices among states regarding the administration of unclaimed property laws.
• ²⁷, ²⁸, ²⁹, ³⁰, ³¹ Employee Benefit Plans: Private sector entities also utilize fiduciary funds, particularly for qualified retirement plans like 401(k)s and pension plans. The assets within these plans are held in trust for the employees and are subject to strict regulations, such as the Employee Retirement Income Security Act (ERISA) in the U.S., which mandates fiduciary duties for those managing these plans.
• ²³, ²⁴, ²⁵, ²⁶ Estate Planning and Trusts: Individual trusts established for personal wealth management or estate distribution also operate on fiduciary principles, where a trustee holds and manages assets for beneficiaries according to the trust agreement.

Limitations and Criticisms

While designed to ensure accountability, fiduciary funds and their reporting can have limitations and face criticisms.

One challenge is the complexity of governmental accounting, particularly for those unfamiliar with the distinctions between government-wide statements and fund financial statements. While GASB Statement 34 aimed to improve clarity, the separation of fiduciary funds can sometimes lead to a fragmented view of a government's overall financial health if not properly understood. Fo²⁰, ²¹, ²²r instance, large balances in pension funds are a liability to the government's taxpayers in the long run, but they are not reported as such on the government-wide statements, which focus on the governmental entity itself rather than its role as a fiduciary for external parties.

Another area of criticism can arise from the management of these funds. While public officials are bound by fiduciary duty to act in the best interest of beneficiaries, the investment performance of large public pension funds, for example, can be a subject of public scrutiny, especially during economic downturns. Concerns about potential misuse or mismanagement, although rare, highlight the importance of robust internal controls and oversight. The U.S. Government Accountability Office (GAO) frequently reports on the sustainability and integrity of federal trust funds, highlighting challenges such as improper payments and fraud risks, which underscore the ongoing need for vigilance in fiduciary oversight.

T¹⁵, ¹⁶, ¹⁷, ¹⁸, ¹⁹he "escheatment" process, where unclaimed property is transferred to state custody, also has its complexities. While states act as custodians, ensuring proper due diligence in attempting to locate owners and managing the volume of unclaimed assets can be a significant undertaking. State laws vary regarding dormancy periods and reporting requirements, which can create compliance challenges for businesses holding such property.

#¹⁰, ¹¹, ¹², ¹³, ¹⁴# Fiduciary Funds vs. Proprietary Funds
Fiduciary funds and proprietary funds are two distinct categories of funds used in governmental accounting, differentiated by the nature of the activities they report and how their resources are utilized. Understanding this distinction is fundamental to grasping governmental financial reporting.

Fiduciary Funds are used to account for assets held by the government in a trustee or agency capacity for individuals, private organizations, or other governmental units. The key characteristic is that these resources are not available to support the government's own programs. Examples include pension funds, private-purpose trust funds, and agency funds that handle items like taxes collected on behalf of other governments. They are generally reported using the accrual basis of accounting and are excluded from government-wide financial statements.

⁷, ⁸, ⁹Proprietary Funds, conversely, are used to account for a government's business-type activities. These funds operate much like commercial enterprises, charging fees for services provided to the public. The revenues generated by proprietary funds are intended to cover the costs of providing those services. Examples include municipal utilities (water, sewer, electric), public transportation systems, and airports. Proprietary funds use the full accrual basis of accounting and report both operating and non-operating revenues and expenses. Th⁵, ⁶e intent is that these activities are self-sustaining, and their resources are available to support the specific programs they represent.

The primary confusion arises because both involve "funds." However, the critical difference lies in ownership and accessibility: fiduciary funds are held for others and are not the government's own, whereas proprietary funds represent the government's business operations and their resources are for those operations.

FAQs

What is the main purpose of fiduciary funds?

The main purpose of fiduciary funds is to report assets held by a government or organization in a custodial or trustee capacity for external parties. These funds are managed for the benefit of those parties and cannot be used to finance the government's own programs or operations.

Are fiduciary funds included in a government's general fund?

No, fiduciary funds are distinctly separate from a government's general fund and other governmental or proprietary funds. The Governmental Accounting Standards Board (GASB) requires that fiduciary activities be excluded from government-wide financial statements to clearly differentiate them from the government's own resources.

##², ³, ⁴# What types of assets are typically held in fiduciary funds?
Fiduciary funds typically hold assets such as investments for pension funds, cash and securities for private-purpose trusts, and assets related to unclaimed property programs. The specific assets depend on the purpose of the fiduciary relationship.

Can a government use fiduciary funds to balance its budget?

No, a government cannot use fiduciary funds to balance its general budget or finance its own operations. These funds are held in trust for specific beneficiaries, and using them for general government purposes would violate the fiduciary duty and legal restrictions governing these funds.

What is the difference between an agency fund and a trust fund?

Both agency funds and trust funds are types of fiduciary funds. An agency fund typically holds resources in a purely custodial capacity, meaning the government acts as a collection and disbursement agent, and assets generally equal liabilities. A trust fund, however, involves a more complex relationship where the government or entity acts as a trustee, managing assets over a longer period, often involving investment activities, for specific beneficiaries or purposes.¹