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Fiduciary Funds
and
Permanent Funds
Chapter 10
Chapter 10
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David Walker, former
Comptroller General of the United States
and President & CEO of the
Peterson G. Foundation
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“The trust funds that the federal government has
aren't the same as those you find in the private
sector. You can't trust the federal government's
and they aren't funded!”
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Thought to Ponder: Chapter 10
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Endowment
Permanent and Fiduciary Funds
Expendable and Nonexpendable Trust Funds
Accounting for these Funds
Accounting for Investment Gains and Losses
Pensions and the distinction between Defined
Contribution and Defined Benefit Pension Plans
Accounting for Pensions under current standards
New Pension Standards, GASB Stds No 67 and 68
Accounting for postemployment health care benefits
Agency Funds
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Learning Objectives
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1) Accounts for nonexpendable resources
2) Resources benefit government
3) Measurement focus: Current Financial Resources
4) Basis of Accounting: Modified Accrual
5) Not all governmental entities have Permanent Funds
and these funds may be major or non-major funds.
6) Funds included in government-wide statements
Example: City of Boston, has three non-major
permanent funds.
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Permanent Funds (a governmental fund)
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1) Account for both nonexpendable and expendable
resources
2) Resources benefit outside parties (i.e. government is
acting as a trustee for a beneficiary)
Beneficiary examples: employees and their survivors,
individual citizens, other governments etc.
3) Measurement focus: Economic Resources
4) Basis of Accounting: Full Accrual
5) Funds excluded from government-wide
statements.
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Fiduciary Funds
(NOT governmental funds)
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• 4 major types:
I) Private-Purpose Trust Funds
II) Investment Trust Funds
III) Pension Trust Funds
IV) Agency Funds
• Required Financial Statements
o Statement of Fiduciary Net Assets
o Statement of Changes in Fiduciary Net Assets
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Fiduciary Funds
Additional Information
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Endowment Fund
• Definition: a contribution for which the donor requires
o Universities
o Private foundations (Ford, Carnegie, Gates)
o Churches and synagogues
o Municipalities
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• Endowments accounted for in nonexpendable fiduciary
(or trust).
• Endowment may also be accounted for in a permanent
fund.
• Examples of who maintains endowments:
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that only the income from the investment may be expended,
while the principal is preserved in perpetuity (i.e. remains intact.)
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Investment Income &
Investment Gains/Losses
• Issue: should income be reported as
A) revenue strictly in the receiving fund OR
B) a nonreciprocal transfer-out from the
permanent (nonexpendable) fund and a
nonreciprocal transfer-in to the recipient
(expendable) fund.
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• Income from permanent (nonexpendable trust)
funds is intended to benefit other funds.
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Investment Income
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WITH Donor Stipulations:
• ACTION:
o Donors may stipulate whatever they want.
o Usual stipulations are that gains be reinvested and not
expended.
• ISSUE: None.
• REPORTING: Whatever is consistent with donor
stipulations.
o I.E. if donor stipulation or law mandates gains
permanently restricted, then reported as additions to
permanently restricted net assets.
o If donor stipulation or law mandates gains temporarily
restricted, then reported as additions to temporarily
restricted net assets.
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Investment Gains/Losses
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Investment Gains/Losses (Cont’d)
WITHOUT (absence) donor or legal stipulations:
• ACTION:
o Recipient institution can appropriate gains for current use.
• ISSUE:
B) Nonexpendable principal
• REPORTING: (in the absence of donor or legal restrictions)
o GASB:
 Gains: should be reported as unrestricted assets and hence expendable
 Losses: Unaddressed by GASB
--Government may allocate losses between expendable & nonexpendable
resources
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A) Expendable income OR
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o In the absence of donor restrictions, should investment gains/losses be
recognized as:
o FASB: (Conflicting Standards)
 Gains/Losses: report as increases or decreases in unrestricted net assets
 Losses: (2 steps)
1) Charge temporarily restricted net assets until it is depleted.
2) Charge any remainder losses to unrestricted net assets.
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Non-profit:
• Interest income and investment gains—reported
in statement of activities as increases in
temporarily restricted resources.
• Interest income and investment gains are
expendable.
• Investment income is aggregated and reported
on a single line.
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Non-profits Vs. Government
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Definition: To account for assets the government holds as an agent or
trustee for individuals, organization, or other governmental units (a
beneficiary).
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Basis of accounting either
A) Full Accrual OR
B) Whatever basis is prescribed by state law or donor.
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Investments:
o GAAP requires that most be “marked to market” (i.e. reported at fair
value)
o
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GASB Statement No. 31
Nonexpendable trust fund income:
o Most states have adopted a version of either the Uniform
Management of Institutional Funds Act or the Uniform Prudent
Investors Act.
o
Permits a “prudent” portion of unrealized gains/losses to be used as
distributable income.
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Chapter 10
Trust Funds - Overview
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Definition: Created by a donor for the benefit of an individual,
organization, or other government (as opposed to one that
benefits the government’s own program(s) or its citizenry).
May be either expendable or nonexpendable trust fund
Established for: Scholarships, Escheat property funds,
Endowments for needy employees, NFP Historical societies,
museums
Examples: The District of Columbia has a private purpose trust
fund through which it “offers a tax-advantaged 529 College
Savings Investment Plan (named after Section 529 of the
Internal Revenue code). The plan is designed to help families
save for the higher education expenses of designated
beneficiaries and is available to DC residents as well as nonresidents nationwide,” (CAFR, 2007). The city of Boston has
several private purpose trust funds, one of which is used for
scholarship awards, the purchase of educational equipment
and the aid of needy students.
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I) Private-Purpose Trust Funds
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• NOT a Fiduciary Fund
• If the government or its citizenry (i.e. Public) is the
primary beneficiary, then account for the gift in either
a “Public-purpose”:
A) Permanent Fund
o if the gift is nonexpendable
B) Special Revenue Fund
o if the gift is expendable
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Public (i.e. Governmental) Purpose
Permanent Fund
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II) Investment Trust Funds
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Example: The City of San Francisco’s Investment Trust Fund
accounts for the external portion of the Treasurer’s office
investment pool, the funds of the San Francisco
Community College District, San Francisco
Unified School District, and the Trial courts.
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Used to account for “investment pools.”
Used to account for the balance sheet and operating
statement transactions affecting the external
participants of a centrally managed investment pool.
• A fund type created by GASB Statement No. 31 in
1997, Accounting and Financial Reporting for Certain
Investments and for External Investment Pools.
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III) Pension Trust Funds
Pension trust funds are a(n):
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Independent Entity
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Legal Entity
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Financial Entity
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Accounting entity
Responsibility of the EMPLOYER
The current* authoritative guidance for pension accounting and
reporting is provided by GASB Statements:
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Accounting for Pensions by State and Local governmental Employers (GASB
Statement No. 27)
Financial Reporting for Defined Benefit Pension Plans and Note Disclosures
for Defined Contribution Plans (GASB Statement No. 25)
Financial Reporting for Postemployment Healthcare Plans Administered by
Defined Benefit Pension Plans (GASB Statement No. 26)
Pension Disclosures—an amendment of GASB Statements No. 25 and No.
27 (GASB Statement No. 50)
*GASB Statements No. 67, Financial Reporting for Pension Plans— an amendment of GASB
Statement No. 25, which pertains to pension plan is effective for financial statements for fiscal years
beginning after June 15, 2013.
GASB Statement No. 68, Accounting and Financial Reporting for Pensions—an amendment of
GASB Statement No. 27 , which pertains to employers is effective for years beginning after June 15,
2014.
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Chapter 10
Liabilities of Pension Trust Fund:
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Statement of Fiduciary Net Assets* (Table 10-5)
Statement of Changes in Fiduciary Net Assets*
Schedule of Funding Progress (Table 10-6)
Schedule of Employer Contributions (Table 10-6)
*Table 10-5 presents a Statement of Net Assets
rather than a Statement of Net Position because
the City of Charlotte has not yet adopted
GASB Statement No. 63 for FY 2011.
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Chapter 10
Financial Reporting
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Financial Reporting(cont’d)
Note Disclosures
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1) A detailed pension plan description and
types of benefits provided.
2) employer’s funding policy (including
employer and employee contribution rates
for the current and past two years.
3) Key components of pension cost and the
changes in Net Pension Obligation(NPO).
4) Key assumptions used in determining the
pension cost.
5) Actuarial value of plan assets and liabilities
for the current year and past two years.
6) Significant ratios.
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GASB standards require note disclosures
relating to:
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• Employer makes series of pension contributions.
• Employer defines inputs and contributions normally expressed as a
percentage of each employee’s salary.
• Employer reports annual expense for the amount that it is obligated
to contribute to pension fund.
• Employer has no pension related liab on its B/S
• Employer has a lower risk
• Defined Contribution plans are more
portable.
• Employee bears all the investment risks
• Pension fund, very often is managed by
a third party that is totally independent of
the employer.
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Defined Contribution Plan
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Defined Benefit Pension Plan
• Employer specifies the benefits – the actual payments that
the employee will receive.
• Amount to be contributed to meet future pension
obligations are calculated by actuaries.
--Actuarial cost method: allocation of total cost of expected benefits
over the total years of employee service.
• Liabilities of the Defined Benefit Pension plan are in
substance those of the employer.
• Both funding and accounting decisions relating to defined
benefit pension plans are complex because of
--the uncertainties as to the amts to be paid to the retirees and
--the amt earned on fund investments
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• Interperiod equity: Pension costs must be allocated to the
periods in which the employees perform their services and
earn their pension benefits.
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• Employer guarantees ONLY the outputs and not the inputs.
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Defined Benefit Pension Plans (cont’d)
• GASB standards provide guidance for defined
benefit plans that are either:
(1) included as part of an employer's financial report OR
(2) included in stand-alone reports
• GASB Standards distinguish between two categories
of pension information:
(1) current financial information about plan assets, and
activities and
(2) actuarially determined information about the funded status
of the plan and progress in accumulating assets
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objective in pension plan accounting and reporting is to provide
useful information for assessing the stewardship of plan
resources and the ongoing ability of the plan to pay benefits.
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Financial Reporting: According to GASB, the main
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Annual Pension Cost is the government’s annual required
contribution subject to certain technical adjustments that take
into account interest on, and amortization of, any net pension
obligation.
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Annual Required Contributions (ARC) Employer’s annual
required contribution to a defined benefit pension plan,
calculated in accordance with specified GASB parameters.
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Actuarial deficiencies (excesses) Difference between the
annual required contributions and the actual contributions.
• NOTE: Per GASB Stmt. No 27, a government’s annual pension
cost of maintaining or participating in a defined benefit pension
plan should be based mainly on its annual required
contributions.
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Key Terms
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Transition liability/asset is based on funding relative to prior
actuarial requirements--retroactive application of the new
requirements is not necessary
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Net Pension Obligation (NPO) Cumulative difference measured
from the effective date of the new statement between
• the annual pension cost and
• the employer's contributions plus (minus)
• any transition pension liability (asset) and excluding
(a) short-term differences and
(b) unpaid contributions that have been converted to pensionrelated debt.
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Key Terms (cont’d)
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Accounting – Overview
government-owned or affiliated healthcare entities,
colleges and universities,
public benefit corporations and authorities,
utilities, and
pension plans themselves if they are also employers.
GASB standards provide guidance for:
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Pension expenditures/expenses
Pension liabilities and assets
Required supplementary information
Note disclosures
GASB requires that the pension plans include:
• Plan assets, liabilities, and net assets available for benefits
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Changes in Net assets
Contribution requirements of employers and employees
Funded status of plan
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GASB pension accounting standards apply not only to general
purpose government employers but also to:
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Accounting-Annual Required Contribution
4) Actuarial value of pension plan assets must be market related.
5) Assumptions as to investment earnings rates and future inflation
should be based on long-term projections, rather than on those for
a single year
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1) Contribution must consist of the employer’s normal cost which is
the portion of the present value of pension plan benefits that is
allocated to a particular year by an actuarial cost method (based
on one of six specified actuarial cost methods).
2) a provision for amortizing the plan’s unfunded actuarial accrued
liability.
3) Actuarial assumptions, including those pertaining to mortality,
changes in compensation rates, and investment earnings.
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Minimum current criteria that an employer’s Annual Required
Contribution (ARC) must satisfy include:
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If more than one fund contributes to a plan, the
government must apportion the ARC-related
contributions to each fund.
--NPO (a reduction/addition to ARC), must be
allocated between business-like and governmental
activities based on proportionate share of beginning
balance of NPO
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Accounting
Annual Required Contribution (cont’d)
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NPO allocated to proprietary funds
• If NPO is positive:
--Then it should be reported as an asset
• If NPO is negative:
--Then it should be reported as a liability
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NPO allocated to governmental funds:
• If NPO is positive:
--Then it should be reported as a liability in the
government-wide statement of net position
• If NPO is negative:
--Then it should first be used to reduce any previous
liability to the same plan, and second, any excess
should then be reported as an asset in government-wide
statement of net position.
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Accounting (cont’d) –
Net Pension Obligation (NPO)
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Accounting (cont’d) – NPO
 If NPO is negative (a funding excess), the adjustment is an
addition to ARC
 Regardless of whether NPO is positive or negative, it is
referred to as an “Unfunded Actuarial Liability.”
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 If NPO is positive (a funding deficiency), the adjustment is a
deduction from ARC
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 This is an adjustment to ARC calculated by using the same
amortization method, actuarial assumptions, and amortization
period used in determining the ARC for that year.
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Pension expenditure and pension expense are accounting
constructs and are determined in accord with the rules
established by the Board.
• In governmental funds, pension expenditure is the cost
that will be liquidated with current financial resources.
• In proprietary and government-wide statements,
pension expense is the cost subject to various GASB
required adjustments.
• Employer’s pension expenditures/expense may include
one or both of the following:
1) ARC Contributions AND/OR
2) Payments of pension-related debt (not included in ARC
or NPO).
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Accounting (cont’d) –
Pension Expense/Expenditure
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• Require an employer to report on its government-wide and proprietary
statements of net position its net unfunded pension obligation—the
difference between the total actuarial liability and the fair value of the
assets held in the pension plan.
• Limit the flexibility that governments have in determining their pension
cost (which will be the amount reported as an expense in their
government-wide and proprietary fund financial statements).
• Require the plan assets would be valued at fair value, not as currently
permitted, a “market-related” value.
• Increase comparability among employers by requiring all governments to
use the same actuarial cost method—the entry-age method.
• Further improve reporting by requiring assumptions that are deemed
more realistic.
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GASB Statement No. 67, Financial Reporting for Pension Plans—
an amendment of GASB Statement No. 25, pertains to pension plan
and is effective for financial statements for fiscal years beginning
after June 15, 2013.
GASB Statement No. 68, Accounting and Financial Reporting for
Pensions—an amendment of GASB Statement No. 27 , pertains to
employers and is effective for fiscal years beginning after June 15,
2014.
Key features: The new standards
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New GASB Statements No. 67 & No. 68
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• Benefits, such as health care for retirees, may
represent a material liability.
• GASB: The disclosure requirements in notes and
supplementary schedules are similar to those for
pensions.
• 2 basic statements are required:
--Statement of plan net position
--Statement of changes in plan net position
• If the OPEB is administered by a defined benefit
pension plan, it follows the standards set forth in
GASB Statement No. 26 (and GASB Codification
Sec. P. 50)
• Financial reporting is similar to those for a defined
benefit pension plan.
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Other Postemployment Benefits (OPEB)
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Assets = liabilities
• Since it is held on behalf of another party, all the assets it has,
are someone else’s.
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Purpose:
• To account for assets held by a governmental unit acting as
an agent for one or more other governmental units,
individuals, or private organizations (i.e. custodial in nature)
• Use an agency fund if:
o Dollar amount of transactions dictate use of agency fund
for accountability reasons
o Its use will improve financial management or accounting
o Mandated by law, regulation, or GASB standards
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IV) Agency Funds
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Agency Funds – Examples
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The City and County of San Francisco has seven
different Agency funds (Assistance Program Fund,
Deposits Fund, Payroll Deduction Fund, State
Revenue Collection Fund, Tax Collection Fund,
Transit Fund, and Other Agency Funds).
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The City of Houston Agency funds include: Payroll
Revolving, City Deposits, and Tax Clearing Funds.
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Note: Agency fund is generally not needed for routine
agency relationships such as payroll withholding
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• Special assessment accounting when the government
is not obligated in any manner for special assessment
debt
• Tax Agency Funds
--Very common usage
• Pass-through agency funds
--(but not as common since GASB Statement 24 on
grant accounting was issued).
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Agency Funds – Typical Uses
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The levy for the year for the General Fund of
each governmental unit was $500,000, which was
$250,000 for Delta City (50%), $150,000 for the
school district (30%), and $100,000 for the Library
(20%).
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The Clinton County tax collector acts as property tax
collection agent for Delta City, the Delta R-5
Consolidated School District, and the County Library.
Delta City and the school district are charged a 1%
collection fee which is passed to the county's general
fund as revenue.
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Tax Agency Funds -Example 1
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Example 1 (cont’d)
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County Tax Agency Fund:
Dr.
Cr.
Taxes Receivable for Other
Funds and Units
$500,000
Due to Other Funds and Units
500,000
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At the time of tax levy:
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Example 1 (cont’d)
Dr.
Cr.
$250,000
10,000
240,000
Delta R-5 CSD General Fund:
Taxes Receivable-Current
$ 150,000
Estimated Uncollectible Current Taxes
6,000
Revenues
144,000
County Library General Fund:
Taxes Receivable-Current
Estimated Uncollectible Current Taxes
Revenues
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Delta City General Fund:
Taxes Receivable-Current
Estimated Uncollectible Current Taxes
Revenues
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Assuming each governmental unit estimates that 4% of taxes
levied will be uncollectible:
$100,000
4,000
96,000
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Example 1 (cont’d)
*Amount
due is $400,000 X Percentage of Levy
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Fund/Unit
Levy Amt % of levy Amt Due* Fees
Net Due
Delta City
$250,000
50%
$200,000 $(2,000) $ 198,000
R-5 C.S.D.
150,000
30%
$120,000
(1,200)
118,800
Library
100,000
20%
80,000
80,000
County GRF
3,200
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During the first six month of the year, $400,000 was collected from
current taxes. Calculate the amount to be distributed to each
governmental unit.
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Example 1 (cont’d)
Dr.
$400,000
Cr.
400,000
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Clinton County Tax Agency Fund:
Cash
Taxes Receivable for
Other Funds and Units
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The following entries are required in the County Tax
Agency Fund to record the collection and allocation.
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Example 1 (cont’d)
Dr.
$400,000
Cr.
198,000
118,800
80,000
3,200
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Clinton County Tax Agency Fund:
Due to Other Funds and Units
Due to Delta City
Due to R-5 CSD
Due to County Library
Due to County GRF
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Following entry in the agency fund shows the allocation
of collected amounts to each participating fund and unit.
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Example 1 (cont’d)
Dr.
$198,000
118,800
80,000
3,200
Cr.
400,000
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Clinton County Tax Agency Fund:
Due to Delta City
Due to R-5 CSD
Due to County Library
Due to County GRF
Cash
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When the County Tax Agency Fund disburses the
amounts due to each governmental unit, it would make
the following entry:
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Example 1 (cont’d)
Upon receipt of the amounts due each government
Delta City General Fund:
Dr.
200,000
Delta -5 CSD General Fund:
Cash
Expenditures
Taxes Receivable-Current
$118,800
1,200
120,000
County Library General Fund:
Cash
Taxes Receivable-Current
$ 80,000
80,000
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$198,000
2,000
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Cash
Expenditures
Taxes Receivable-Current
Cr.
County GRF
Cash
Revenues
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$ 3,200
3,200
•
•
Used only if the intermediate (“pass through”) government
has NO administrative involvement or direct financial
involvement in the grant.
The pass-through government must simply be acting as a
conduit before an agency fund is used.
GASB NO. 24:
o A government accounts for proceeds of passthrough grants in an agency fund ONLY if it merely
transmits funds without any administrative
involvement.
o If government has administrative involvement, it
accounts as revenues and expenditures/expenses.
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Chapter 10
Pass-Through Agency Funds
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Summary
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There are three types of trust funds
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All trust funds essentially follow full accrual basis.
Accounting and financial reporting requirements for
defined benefit pension plans and the related
employer requirements are complex, relying on
actuarial estimates for much of the information
reported.
Agency Funds are used only for significant agency
relationships in which a governmental units acts as
an agent for another party.
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Chapter 10
I) Private-Purpose Trust Funds
II) Investment Trust Funds
III) Pension Trust Funds
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