Reserve Funds, Special Revenue Funds or Revolving Funds: Choosing the Right Tool for the Right Job
Capital reserve funds, expendable trust funds and special revenue funds are useful budgeting tools that allow municipalities to set money apart from the general fund for specific purposes. With the passage of Chapter 79, Laws of 2005 authorizing the use of revolving funds for recycling, ambulance and public safety services outside of ordinary details, towns now have a new vehicle for setting money aside. Understanding the differences between these funds, in terms of how money is placed into each fund and expended from each fund, is necessary to insure that the right tool is chosen for the right job.
Capital Reserve and Expendable Trust Funds
Towns, school districts and village districts under the provisions of RSA 35, and cities under RSA 34, may establish capital reserve funds. Expendable trust funds are established under RSA 31:19-a for towns and RSA 198:20-c for school districts. After many years of confusion over the similarities, differences and terminology used in these particular statutes, in 1995 the legislature enacted an amendment to clarify that the same provisions apply to both capital reserve funds and expendable trust funds regardless of what the fund is called or the statutory authority under which it was established. Hence, the term “reserve fund" now commonly refers to both capital reserve funds and expendable trust funds.
Reserve funds may be established to finance capital projects, capital acquisitions, revaluations, extraordinary legal fees, and to fund maintenance or operational costs. Placing money into a reserve fund requires an appropriation voted by the legislative body, which is the town, school or village district meeting, city or town council. Withdrawing money from a reserve fund also requires a vote of the legislative body at either an annual or special meeting, unless the legislative body has named agents to expend from the reserve fund. If so named, agents may authorize expenditures from the reserve fund at any time without further appropriation by the legislative body, but only for the purpose for which the fund was established. The legislative body may name agents at the time the reserve fund is established, or at a later date. Regardless of whether or not agents have been named to authorize expenditures, all reserve funds are held in the custody of the Trustees of Trust Funds.
Special Revenue Funds
Special revenue funds are established by towns under the provision of RSA 31:95-c and allow the legislative body to vote to restrict all or a portion of future revenues from a specific source to expenditures for a specific purpose. An example would be to establish a special revenue fund from tipping fees for the purpose of funding operating costs at the transfer station. The law requires that the use of special revenue funds be limited to those activities funded primarily through user fees. Although placing money into a special revenue fund only requires an initial vote by the legislative body to identify the revenue source, expenditures from a special revenue fund require an annual appropriation. The law is very specific that special revenue funds “shall be expended only after a vote by the legislative body to appropriate a specific amount from said fund for a specific purpose related to the purpose of the fund or source of the revenue." There is no provision under the special revenue fund law for agents to be named to authorize expenditures from the fund, as there is under the reserve fund provisions described above. Also, in contrast to the reserve funds statutes, special revenue funds are not held by the Trustees of Trust Funds, but rather are held by the town or district treasurer.
Since 1996, schools have had authority under RSA 194:3-c to establish revolving funds for self-supporting programs. Towns, cities and village districts have had authority under RSA 35-B to establish a revolving fund limited to recreation and parkland purposes. During this past legislative session, a new provision of law was added under RSA 31:95-h which now authorizes towns to establish revolving funds for the following additional purposes: facilitating or encouraging recycling; providing ambulance service; or providing public safety services outside the ordinary detail of municipal employees or volunteers, including public safety services in connection with special events, highway construction and other construction projects. After voting to establish the revolving fund, the legislative body may vote to deposit into the fund: “all or any part of the revenue from fees, charges, or other income derived from the activities or services supported by the fund, and any other revenues approved by the legislative body."
Expenditures from a revolving fund are made upon orders of the governing body, or other board or body designated by the legislative body at the time the fund was created. Unlike a special revenue fund, no further appropriation approval is required by the legislative body in order to expend revolving funds. However, the legislative body may, at any time, vote to place limitations on expenditures from the fund, including restrictions on the types of items or services that may be purchased, limitations on the amount of any single expenditure, or limitations on the total amount of expenditures to be made in a year. Similar to the “no-means-no" provision of RSA 32:10, no amount may be expended from a revolving fund for any item or service for which an appropriation has been specifically rejected by the legislative body during the same year. Finally, revolving funds are held in the custody of the town treasurer.
Which Tool for Which Job?
Capital reserve funds are best used in a way similar to a college savings account, in terms of setting money aside to help offset a significant future expense. Expendable trust funds are most often used as maintenance reserve funds, to insure that money is available in the event of situations such as equipment or building failure. Unlike capital reserve funds, which are usually established to fund a particular project several years down the road, expendable trust funds are usually established to address immediate needs that may arise during the year, such as repairs to an ambulance or roof. If immediate access to maintenance reserve funds is needed, then it is advisable to name agents to those reserve funds in order to insure that expenditures from those funds can be authorized without waiting until the next annual meeting of the legislative body.
Special revenue funds are an excellent means of segregating specific revenues from the general fund for a specific purpose. Although a special revenue fund restricts the use of the identified revenue, it still allows the legislative body to retain control over the level of expenditure, via an appropriation. Revolving funds segregate a specific revenue source similar to a special revenue fund; but a revolving fund also provides immediate access for expenditure from those funds, much like naming agents to an expendable trust fund. Private police detail is an excellent example of an activity that is well suited to a revolving fund. Finally, it should be noted that expenditures from all of these funds are limited to the specific purpose for which the fund was established.
Converting From One Type of Fund to Another
The statutes for each of the funds previously discussed outline the procedure necessary to abolish or rescind the fund. Upon voting to abolish or rescind a capital reserve fund, expendable trust fund, special revenue fund or revolving fund, any balance in the fund lapses to the general fund and becomes part of the general fund unreserved fund balance, which is then available for appropriation. For example, a municipality could dissolve the special revenue fund that was established for private police detail, allowing the balance of that fund to lapse to the general fund, and then establish a revolving fund for private police detail, with an initial appropriation funded from fund balance. This could be accomplished in one warrant article, or via two separate warrant articles that are contingent upon passage of each other.
When preparing the upcoming budget, municipal, school and village district officials should be aware of the statutory provisions governing these various funds, and should recommend establishing the appropriate fund to accomplish the particular objective. The following chart should help determine which fund is the best budgeting tool for a particular purpose.
Barbara Reid is a Government Finance Advisor for the Local Government Center.