Special Revenue Funds
A special revenue fund is a type of governmental fund used by state and local government entities to account for and report the proceeds of specific revenue sources that are legally restricted or committed for expenditure for specific purposes, other than for debt service or capital projects. These funds are a crucial component of public finance and governmental accounting, providing transparency and accountability in how dedicated resources are managed and spent49, 50.
Unlike the general fund, which handles a broad range of governmental activities, special revenue funds are established for narrowly defined objectives, ensuring that specific revenue streams are used exclusively for their intended purposes47, 48. The use of special revenue funds highlights the principle of fiscal accountability, where governments demonstrate responsible stewardship over public resources by segregating and tracking funds with specific mandates45, 46.
History and Origin
The evolution of governmental fund accounting in the United States has a long history, formally beginning with the establishment of the National Committee on Municipal Accounting (NCMA) in 1934, later succeeded by the National Council on Governmental Accounting (NCGA)44. These bodies worked to establish accounting standards for government entities. The current authoritative body for these standards is the Governmental Accounting Standards Board (GASB), which was established in June 198442, 43.
The GASB plays a pivotal role in shaping financial reporting for state and local governments. A significant development in the definition and use of special revenue funds occurred with the issuance of GASB Statement No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions," in 200940, 41. This statement clarified the criteria for establishing and reporting special revenue funds, specifically stating that they are for proceeds of specific revenue sources that are restricted or committed to expenditure, thereby reducing ambiguity that existed previously38, 39. This emphasis ensures that the creation of special revenue funds is driven by the nature of the revenue source itself rather than merely by the intent to spend.
Key Takeaways
- Special revenue funds are governmental funds used to track money from specific sources that is legally restricted or committed for particular purposes.
- They enhance transparency and accountability by ensuring dedicated revenues are used only for their intended programs or activities.
- These funds cannot be used for debt service or major capital projects, as those have their own distinct fund types.
- Examples include taxes for specific services, intergovernmental grants, and fees earmarked for particular programs.
- The Governmental Accounting Standards Board (GASB) provides the authoritative guidance for their establishment and reporting.
Interpreting Special Revenue Funds
Special revenue funds are critical for understanding how governments manage specific, earmarked financial resources. When reviewing a government's financial reporting, the presence of multiple special revenue funds indicates a commitment to dedicated programs or services funded by specific sources. For instance, a city might have a special revenue fund for public safety initiatives funded by a dedicated sales tax or a fund for park maintenance supported by user fees36, 37.
Interpretation involves examining the source of the revenue and the specific nature of the expenditures. These funds provide an assurance to taxpayers and other stakeholders that monies collected for a specific purpose, such as a gasoline tax for road maintenance, are indeed spent only on that purpose34, 35. This distinct segregation aids in demonstrating compliance with legal mandates and public expectations regarding the use of taxpayer dollars32, 33.
Hypothetical Example
Imagine the city of "Veridian Valley" decides to establish a dedicated fund for its local stormwater management program. This program involves maintaining drains, street sweeping, and public education campaigns to reduce water pollution. To finance this, the city implements a specific stormwater utility fee on residents' water bills.
Instead of putting this fee revenue into its general fund, Veridian Valley establishes a "Stormwater Management Special Revenue Fund." Each fiscal year, the revenue collected from the stormwater utility fees is deposited directly into this special revenue fund. All expenses related to stormwater management—such as salaries for maintenance crews, equipment purchases, and educational materials—are paid out of this specific fund.
This setup ensures that the utility fees are exclusively used for stormwater-related activities. The city's financial statements will clearly show the inflows and outflows of this particular fund, demonstrating to citizens exactly how their stormwater fees are being utilized, thus providing an extra layer of accountability.
Practical Applications
Special revenue funds are widely applied across various levels of government to manage financially restricted or committed activities. Common practical applications include:
- Road and Highway Maintenance: Revenues from gasoline taxes or vehicle registration fees are often placed into special revenue funds dedicated solely to infrastructure repair and construction.
- 30, 31 Public Safety Programs: Funds received from specific fines, grants for law enforcement training, or dedicated levies for detention facilities may be accounted for in special revenue funds.
- 28, 29 Education Funding: State and federal grant accounting for specific educational initiatives, such as programs for special education or technology in schools, often flow into special revenue funds.
- 27 Parks and Recreation: Dedicated property taxes, user fees, or private donations for maintaining parks, community centers, or specific recreational facilities are typically managed through special revenue funds.
- 26 Environmental Protection: Funds from environmental fees, dedicated bond proceeds, or grants for conservation efforts may be tracked in special revenue funds designed for maintaining natural resources or improving environmental quality.
T25hese funds facilitate clear budgeting and spending for programs that have specific funding mandates, allowing governments to demonstrate compliance with legal requirements and donor restrictions. Fo23, 24r instance, a state might collect a cigarette and tobacco tax that is specifically earmarked for various public health programs, which would be managed through a special revenue fund. Th22e Michigan Department of Technology, Management & Budget, for example, lists various types of special revenue funds used by the state, including those for transportation, health and human services, and environmental quality, reflecting the diverse range of dedicated activities these funds support.
##21 Limitations and Criticisms
While special revenue funds enhance accountability, they also present certain limitations and can be subject to criticism. One significant drawback is the potential for inflexibility in financial management. Once revenues are legally restricted to a specific purpose, redirecting them to address emerging or more critical needs can be challenging, even if the original purpose becomes less urgent or is fully funded. Th20is can lead to situations where one fund has a surplus while another vital program faces a deficit, yet funds cannot be easily reallocated.
Another point of contention can arise from the interpretation of what constitutes a "specific revenue source" that is "restricted or committed." Ambiguity, prior to clearer guidance like GASB Statement No. 54, sometimes led to discretionary use of these funds or their creation for purposes that might otherwise be handled by the general fund. The Governmental Finance Officers Association (GFOA) notes a challenge where special revenue funds are sometimes used for internal budgeting purposes but may not always meet the rigorous GAAP standards for external financial reporting as a standalone fund type. Th19is can lead to discrepancies between internal financial planning and external audited statements.
Furthermore, if the substantial portion of inflows no longer derives from a restricted or committed source, governments are required to discontinue reporting that special revenue fund and integrate its remaining resources into the general fund. Th17, 18is highlights that their existence is tied directly to ongoing, dedicated revenue streams rather than merely a desired expenditure purpose.
Special Revenue Funds vs. Enterprise Funds
Special revenue funds are often confused with enterprise funds due to both being used for specific purposes, but their fundamental nature and measurement focus differ significantly.
Special Revenue Funds:
- Purpose: Account for proceeds of specific revenue sources that are restricted or committed to governmental activities that are not self-supporting.
- Activities: Typically involve activities that serve the public at large, such as street maintenance, specific public health programs, or library services funded by dedicated taxes or grants.
- Measurement Focus: Primarily use the modified accrual basis of accounting, focusing on current financial resources.
- Funding Source: Fund governmental functions, where services are often provided to the public without a direct user fee covering the full cost. Examples include gasoline taxes for roads or property taxes for libraries.
Enterprise Funds:
- Purpose: Account for operations that are financed and operated in a manner similar to private business enterprises, where the intent is to recover costs (including depreciation) primarily through user charges.
- Activities: Deliver goods or services to the public, such as water utilities, public transportation systems, or municipal airports, where users pay a fee for the service received.
- Measurement Focus: Use the full accrual basis of accounting, focusing on economic resources. This means they account for long-term assets and liabilities.
- Funding Source: Services are predominantly funded by fees charged to external users for services rendered.
The key distinction lies in the nature of the activities and their funding model: special revenue funds support general government services with dedicated but non-exchange revenues, while enterprise funds operate like businesses, aiming to cover their costs through charges for specific services provided directly to users.
#16# FAQs
What types of revenues typically go into special revenue funds?
Revenues for special revenue funds typically come from sources that are legally restricted or committed to specific purposes. Common examples include gasoline taxes earmarked for road maintenance, sales taxes for specific public safety programs, certain intergovernmental grants, parking meter receipts dedicated to parking facilities, and specific licensing or inspection fees.
#13, 14, 15## How do special revenue funds ensure accountability?
Special revenue funds ensure accountability by physically segregating monies that have specific legal or contractual mandates. This dedicated approach means that financial resources collected for a particular purpose can only be spent on that purpose. This clear separation allows for easier tracking and auditing of how funds are used, demonstrating to taxpayers and other stakeholders that resources are being managed as intended.
#11, 12## Can a special revenue fund be abolished or discontinued?
Yes, a special revenue fund can be discontinued. According to GASB standards, a government should stop reporting a special revenue fund if it no longer expects a substantial portion of the fund's inflows to come from restricted or committed revenue sources. In9, 10 such cases, the remaining resources of that fund would typically be transferred to the general fund or another appropriate fund.
Are special revenue funds considered major funds in financial statements?
In governmental financial statements, some special revenue funds may be reported as "major funds" if they meet certain criteria for size and significance, as outlined by GASB Statement No. 34. Ho7, 8wever, not all special revenue funds will qualify as major funds; smaller ones are typically grouped together and reported as "nonmajor funds". Th6e purpose of each major special revenue fund must be disclosed in the notes to the financial statements.
#5## What is the role of the GASB in defining special revenue funds?
The Governmental Accounting Standards Board (GASB) is the independent organization that sets accounting standards for state and local governments in the United States. GA3, 4SB Statement No. 54 provided crucial definitions and criteria for special revenue funds, clarifying their purpose and how they should be reported. This guidance helps ensure consistency and comparability in governmental financial reporting across different entities.1, 2