1. Introduction to Internal Service Funds
July 2002

2. Internal Service Funds (ISFs)
Instructions for this power point presentation.
This button appears throughout the presentation. Click to obtain additional data.
Clicking on underlined text will provide links to additional information.
July 2002

3. ISFs . . . continued Established to avoid duplication of effort.
Bill clients for service.
Are self supporting.
Provide services more conveniently or at a lower cost.
July 2002

4. ISFs . . . continued Reflect major capital items as assets.
Record depreciation to determine all costs of operating the activity.
Measure the full cost of the goods or services.
Operate as a business.
July 2002

5. Journal Entries
Various journal entries record the establishment and operational activities of an Internal Service Fund.
See slides 6 through 9 for these journal entries.
July 2002

6. Journal Entries . . . continued
Establish an equity transfer:
Debit: Cash
Credit: Contributed capital from General Fund
July 2002

7. Journal Entries . . . continued
Acquisition of IT equipment
Debit: IT equipment
Credit: Cash
Supplies for the operation
Debit: Computer supplies expense
July 2002

8. Journal Entries . . . continued
Billings for services rendered
Debit: Due from State department
Credit: Revenues
Payment of billings
Debit: Cash
Credit: Due from State department
July 2002

9. Journal Entries . . . continued
Depreciation
Debit: Depreciation expense
Credit: Accumulated depreciation
July 2002

10. End of the Year
Internal Service Funds prepare various financial statements:
Trial Balance
Closing Entries
Balance Sheet
Revenue and Expense Statement
Cash Flow Statement
July 2002

11. Internal Service Funds (ISFs)
From here on, this presentation is on the State of California’s Internal Service Funds.
How does California establish an Internal Service Fund?
July 2002

12. Establishing ISFs First, an Internal Service Fund is: Created
Classified
July 2002

13. ISFs Created Legislation
Administratively (Government Code Section 13306)
Electorate Initiative
July 2002

14. ISFs Classified
Funding source/appropriation to finance program activities must:
Identify the resources.
Specify the legal authority to expend.
July 2002

15. ISFs Classified . . . continued
Fund Codes
Alphabetical
Numerical
Fund structure
Generally Accepted Accounting Principles (GAAP)
Legal basis
July 2002

16. Uniform Codes Manual (UCM)
Provides the source for coding the ISF.
Provides a uniform coding system.
Provides a chart of accounts for budgetary, accounting, and reporting purposes.
July 2002

17. UCM . . . continued Comprehensive listing of Accounts Funds
Objects of expenditures
Receipts
July 2002

18. Internal Service Funds
In California,
Internal Service Funds
are used to:
July 2002

19. Internal Service Funds (ISFs)
Account for State of California activities, which provide:
Goods and services to other State departments.
Reimbursement of costs.
July 2002

20. ISFs . . . continued California has established over 20 ISFs.
Not all of these ISFs are active.
See slides 21 through 27 for some examples of California’s ISFs.
July 2002

21. Examples of Internal Service Funds (ISFs) . . . continued
Water Resources Revolving Fund
Accounts for charges for administrative services related to water delivery provided by the Department of Water Resources to federal, State, and local entities.
July 2002

22. Examples of ISFs . . . continued
Equipment Service Fund
Accounts for the purchase, maintenance, and administrative costs of equipment used by the Department of Transportation.
July 2002

23. Examples of ISFs . . . continued
Service Revolving Fund
Accounts for printing and procurement charges for services rendered by the Department of General Services for State departments and other public entities.
July 2002

24. Examples of ISFs . . . continued
Stephen P. Teale Data Center Revolving Fund (TDC)
Accounts for charges of IT services performed for various State departments by the TDC.
July 2002

25. Examples of ISFs . . . continued
Prison Industries Revolving Fund
Accounts for charges for goods produced by inmates in State prisons that are sold to State departments and other entities.
July 2002

26. Examples of ISFs . . . continued
Health and Human Services Agency Data Center Revolving Fund (HHSDC)
Accounts for charges of IT services performed for various State departments by the HHSDC.
July 2002

27. Examples of ISFs . . . continued
Other Internal Service Funds
Account for all other goods or services provided to other agencys, departments, or governments on a cost reimbursement basis.
July 2002

28. Examples of ISFs . . . continued
Let’s look more closely at the Health and Human Services Agency Data Center (HHSADC), an Internal Service Fund.
July 2002

29. Health and Human Services Agency Data Center (HHSADC)
Created in 1972.
Provides centralized IT services for State departments.
Centralizes IT at reduced costs.
Eliminates of duplication of work.
Ensures optimum capacity.
July 2002

30. HHSADC . . . continued Self supporting. No General Fund appropriation.
Costs recovered through user charges.
User charges set at the beginning of each fiscal year.
Goal is to break even.
Uneven demand for services makes it difficult to predict billing rates. Shortages or surpluses often occur.
July 2002

31. HHSADC . . . continued Uses a standard costing system.
Costs are categorized under separate group or cost pools related to an activity.
Cost centers represent a billable service.
Expenses are assigned a cost center.
Expenses are totaled at the end of year to determine the cost for each service.
July 2002

32. HHSADC . . . continued Example of some cost centers at HHSADC :
Cost center number
Description
Costs captured
Measurement unit to allocate costs to clients
001
Mainframe
All CPU costs
Per CPU hour
038
Printing Services
All print support costs
Per line printed
060
Internet Service
Internet provider cost
Per Internet user
300
Disk Storage
Disk storage costs
Per track stored
July 2002

33. HHSADC. . . continued Each cost center has a billing rate:
Projected Annual Cost
Billing Rate =
Projected Annual Usage
July 2002

34. HHSADC continued
Utility system records the usage for each client. Calculates a bill based on actual usage of each services.
Monthly an invoice is sent to the client listing service usage multiplied by the billing rate.
Client pays invoice.
July 2002

35. HHSADC . . . continued Analysis of Costs Quarterly review of rates.
Annual adjustments.
Invoice adjustment for refunds.
Financing impacts rates charged to clients.
Click on button to see types of financing.
July 2002

36. HHSADC continued
Clients receiving federal funds bill the federal government for these charges.
Over/under collections result in over/under billings to the federal government.
July 2002

37. HHSADC continued
Why should anyone care if the federal government is over or under charged?
Or any other fund, State department, entity?
Let’s look at some items for background to this issue.
July 2002

38. Cost Plans
Statewide Cost Allocation Plan (SWCAP) recovers central service costs from federal funds.
SWCAP plan has two sections.
July 2002

39. Cost Plans continued
Both Section I and Section II of the SWCAP follow the regulations and guidelines of . . .
Office of Management and Budget, Federal Circular A-87 “Cost Principles for State and Local Governments”.
Department of Health and Human Services guideline ASMB C-10.
July 2002

40. Cost Plans continued
SWCAP Section I is the allocated central service costs distributed to State departments.
State departments transfer SWCAP recoveries to the General Fund from reimbursements received from the federal government.
July 2002

41. Cost Plans continued
SWCAP Section II includes data for each ISF with an operating budget over $5 million, including:
Rates
Billings
Policies
Refunds
July 2002

42. Cost Plans . . . continued SWCAP Section II
Costs for operating the ISF are included in billings by the State department (indirect cost rate proposals, cost allocation plans) to the federal government.
Yearly, the federal government reviews these ISFs.
July 2002

43. Cost Plans . . . continued For each ISF, SWCAP Section II includes:
Description of Service
Balance Sheet
Revenue and Expense Statement
Cost recovery and billing methodology
Cost center billing rates
Other information
July 2002

44. State Requirements State’s requirements are: Full Cost Recovery
Government Code 11010
Government Code specific to an ISF
HHSDC Fund Balance billing rate Government Code 11755
State Administrative Manual
Rates reviewed by audit groups
July 2002

45. Federal Requirements Federal requirements are:
Rates reviewed annually.
Allowable A-87 retained earnings.
Include only reasonable costs as defined in A-87 and ASMB C-10.
July 2002

46. Federal Requirements . . . continued
After issuance of the Comprehensive Annual Financial Report (CAFR) each ISF in the SWCAP prepares a Reconciliation of Retained Earnings Balance to Federal Guidelines .
SCO website for CAFR:
California Comprehensive Annual Financial Report
July 2002

47. Federal Requirements . . . continued
Retained earning reconciliation determines the excess retained earnings. A portion is owed to the federal government, based upon the federal financial participation of the clients.
July 2002

48. State and Federal Differences
State and federal government differ on the calculation of working capital.
Differences are shown on the next slides.
July 2002

49. State and Federal Differences. . . continued
Working Capital
State of California
Federal government
Definition
Current Assets
minus Current
Liabilities
60 days worth of cash expenses,
a portion of retained earnings
that functions as a reserve
Authority
FASB and AICPA
OMB Circular A-87
Complies with GAAP
Yes No
Excess RE balance $0
July 2002

50. Other Differences Different statements Governmental funds
Only current assets and current liabilities are accounted and reported.
ISF funds
All assets and liabilities are accounted and reported.
July 2002

51. Other Differences . . . continued
Governmental funds
Modified accrual basis
Expenditures
No gain or loss
Spending
ISFs funds
Full accrual
Expenses
Gain or loss recognized
Income determination
July 2002

52. State’s Working Capital
Defined in Accounting Research Bulletin No. 43 issued by the AICPA.
July 2002

53. Federal Working Capital Calculation
Total Expenses per audited financial statements.
Less Non-cash expenses such as depreciation.
Equals total cash expenses for year.
Calculation continued on next slide.
July 2002

54. Federal Working Capital Calculation . . . continued
Divide by 360 days equals total average cash expenses per day.
Multiply by 60 equals 60 days worth of cash expenses.
Deduct from retained earnings to arrive at the excess level of retained earnings.
July 2002

55. Working Capital Impact Comparison
State and federal working capital comparison is shown in the following spreadsheet.
Re.xls
July 2002

56. State Controller’s Office Reports
SCO presents financial data on activities similar to the private sector.
Per GASB (Governmental Accounting Standards Board) statement number 20, the State applies all applicable GASB and FASB (Financial Accounting Standards Board) pronouncements issued on or before November 30, 1989, with one exception.
July 2002

57. Exception
Prison Industry Authority, an ISF, follows FASB pronouncements issued after November 30, 1989, unless they conflict with or contradict GASB pronouncements.
July 2002

58. Auditors review of ISFs
Some points auditors look at when reviewing ISFs:
Users billed at the same rate for the same service.
Identification of outside users, such as other governmental entities (local governments).
Treatment of past profit/loss.
July 2002

59. Auditor’s review of ISFs. . . continued
Some points auditors look at when reviewing ISFs: continued
Procedures followed for billings that exceed original amounts.
Review of rate base to determine equal distribution of costs for services.
In the future, selectively reviewed.
July 2002

60. Reconciling Budgetary Basis with Generally Accepted Accounting Principles (GAAP)
Perspective difference
Fund classification
July 2002

61. Reconciling Budgetary Basis with GAAP . . . continued
Perspective difference - continued
State basis
Governmental
General Fund and other governmental cost fund.
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62. Reconciling Budgetary Basis with GAAP . . . continued
Perspective difference continued
State basis
Non-governmental
Not subject to annual appropriation
Monies other than General Fund and special taxes, fees, etc.
July 2002

63. Reconciling Budgetary Basis with GAAP . . . continued
Perspective difference continued
GAAP
Classified as governmental, proprietary, or fiduciary funds.
July 2002

64. Reconciling Budgetary Basis with GAAP . . . continued
Basis difference
Advances and Loans
Budgetary basis -- recorded as expenditures
GAAP -- recorded as assets
July 2002

65. Reconciling Budgetary Basis with GAAP . . . continued
Basis difference continued
Encumbrances
Budgetary basis -- not recorded
GAAP -- recorded
July 2002

66. Reconciling Budgetary Basis with GAAP . . . continued
Basis difference continued
Contributed capital
Budgetary basis -- not recorded
GAAP -- recorded
July 2002

67. Additional Information
Provides information or links to a variety of items:
UCM
CALSTARS
Budgets
Pro Rata and SWCAP
State Administrative Manual
Federal websites
July 2002

68. That's It
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73. Establish Funds Administratively
Necessary to . . .
Properly manage the State’s assets
Account for the financial activities
Deposit resources of the State
July 2002

74. Establish Funds Administratively . . . continued
Comply with legal requirements
“Generally Accepted Accounting Principles”
Effective financial administration
July 2002

75. Financing ISF must find ways to buy new equipment or other assets.
How?
General Fund appropriations
Capital contributions
Debt financing
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