What are Fiduciary Funds? Understanding Stewardship in Government Accounting

Fiduciary funds are government-held resources held in a trustee capacity for the benefit of parties outside the government. These funds are not the government’s own money, but rather assets held and managed by the government on behalf of individuals, private organizations, or other governmental entities. The government acts as a fiduciary, responsible for managing these resources with utmost care and loyalty, adhering to strict standards of conduct. Think of it as a solemn promise: the government is essentially saying, “We’ll hold this money, and we’ll manage it wisely for you.”

The Heart of Fiduciary Duty

The term “fiduciary duty” is key here. It’s a legal obligation requiring the fiduciary (in this case, the government) to act solely in the best interest of the beneficiary. This duty encompasses several responsibilities:

• Prudence: Managing the funds with the same care and skill a prudent person would use in similar circumstances.
• Loyalty: Acting exclusively in the beneficiary’s interest, avoiding conflicts of interest.
• Impartiality: Treating all beneficiaries fairly if there are multiple stakeholders.
• Disclosure: Providing complete and accurate information about the fund’s activities.
• Compliance: Adhering to all applicable laws and regulations.

These obligations form the bedrock of fiduciary funds, ensuring that these resources are managed responsibly and ethically.

Types of Fiduciary Funds

The Governmental Accounting Standards Board (GASB) defines four main types of fiduciary funds, each with its own specific purpose:

Pension (and Other Employee Benefit) Trust Funds

These funds are established to hold assets for pension plans, other post-employment benefits (OPEB), such as healthcare benefits, or other employee benefit programs. Contributions are made by both the employer (the government) and, in many cases, the employees. The fund’s assets are then invested to generate income and ensure sufficient resources are available to pay benefits to eligible employees upon retirement or separation. Examples include state retirement systems and local government pension plans.

Investment Trust Funds

These funds account for the external portion of investment pools when the reporting government is the sponsor. Basically, if the government acts as a sort of communal investment manager, this is where the investments belonging to entities outside the government reside. This could include investments from other governments, non-profit organizations, or even private individuals who participate in the pool. The goal is to leverage economies of scale and potentially achieve higher returns.

Private-Purpose Trust Funds

These funds account for all other trust arrangements under which principal and income are for the benefit of individuals, private organizations, or other governments. Unlike pension trust funds, these are not specifically for employee benefits. They can include things like escheat property (unclaimed property held by the government), endowments for specific purposes, or other trusts created for various beneficiaries. The key is that the government is acting as a trustee, managing assets for someone else’s benefit.

Custodial Funds

These funds are used to report resources held by the reporting government in a custodial capacity (i.e. acting as a holding agent) for individuals, private organizations, other governments, and/or other funds. Custodial funds typically involve the government collecting resources, holding them temporarily, and then remitting them to the appropriate recipient. A common example is taxes collected by a government on behalf of another government or entity. Importantly, in a custodial fund, the government typically doesn’t have significant administrative involvement with the assets.

Fiduciary Funds vs. Governmental Funds

It’s crucial to understand the difference between fiduciary funds and governmental funds. Governmental funds are used to account for the government’s own resources that are used to provide services to the public. Fiduciary funds, on the other hand, are for resources held in trust for others.

Think of it this way: governmental funds are “our money,” while fiduciary funds are “their money we’re holding.” This distinction is fundamental in government accounting, as it reflects the government’s role as both a provider of services and a steward of resources belonging to others. Governmental funds are subject to budgetary control and often have different accounting rules. Fiduciary funds are generally accounted for using the economic resources measurement focus and the accrual basis of accounting.

Reporting Fiduciary Funds

Fiduciary funds are reported in the fiduciary fund financial statements, which are a separate section of the government’s Comprehensive Annual Financial Report (CAFR). The fiduciary fund financial statements typically include a statement of fiduciary net position and a statement of changes in fiduciary net position. These statements provide information about the assets, liabilities, and net position of the fiduciary funds, as well as the changes in net position during the reporting period. This transparency ensures that stakeholders can see how the government is managing these important resources.

FAQs: Delving Deeper into Fiduciary Funds

Q1: What is the difference between a defined benefit pension plan and a defined contribution pension plan, and how do they relate to fiduciary funds?

Answer: A defined benefit plan promises a specific retirement benefit based on factors like salary and years of service. A defined contribution plan, like a 401(k), defines only the contributions made, with the ultimate benefit depending on investment performance. Both can be managed within pension trust funds; however, defined benefit plans require more complex actuarial valuations to ensure adequate funding.

Q2: How is GASB involved in regulating fiduciary funds?

Answer: GASB (Governmental Accounting Standards Board) sets the accounting and financial reporting standards for state and local governments in the United States. This includes providing guidance on how to account for and report fiduciary funds to ensure transparency and consistency in financial reporting. Their pronouncements provide the rules of the road for governmental accountants.

Q3: What are some examples of activities typically accounted for in a custodial fund?

Answer: Activities accounted for in custodial funds often include tax collections for other governments (e.g., school districts), child support payments collected and disbursed by the state, or pass-through grants where the government is simply a conduit for funds. The key characteristic is that the government has little to no administrative involvement with the assets.

Q4: What are escheat properties, and how are they accounted for in fiduciary funds?

Answer: Escheat properties are unclaimed assets (like bank accounts, uncashed checks, or stocks) that revert to the state when the owner cannot be located. These are typically held in a private-purpose trust fund. States hold these assets in perpetuity, attempting to locate the rightful owner. If the owner is never found, the state may eventually use the income from these assets for public purposes.

Q5: How are investment trust funds different from external investment pools that a government might invest in?

Answer: An investment trust fund is used when the government sponsors an external investment pool (i.e. they manage the pool). If the government invests in an investment pool managed by someone else, this investment is typically reported in a governmental fund, depending on the nature of the investment.

Q6: What does the term “economic resources measurement focus” mean in the context of fiduciary funds?

Answer: The “economic resources measurement focus” means that fiduciary funds measure all economic resources – both current and long-term assets and liabilities. This is different from the modified accrual basis used for governmental funds, which focuses on current financial resources. This comprehensive approach provides a more complete picture of the fund’s financial position.

Q7: What kind of auditing is involved in overseeing fiduciary funds?

Answer: Fiduciary funds are typically subject to both internal and external audits. Internal audits are conducted by the government’s internal audit department to ensure compliance with policies and procedures. External audits are conducted by independent auditors to provide an opinion on the fairness of the financial statements. Pension trust funds may also be subject to actuarial audits.

Q8: What are the potential risks associated with managing fiduciary funds?

Answer: Risks associated with managing fiduciary funds include investment risk (market fluctuations), compliance risk (failure to follow laws and regulations), operational risk (errors in processing transactions), and fiduciary risk (breach of fiduciary duty). Effective risk management is crucial to protecting the interests of beneficiaries.

Q9: How do fiduciary funds address the issue of intergenerational equity, especially in pension plans?

Answer: Intergenerational equity in pension plans refers to the fair distribution of costs and benefits between current and future generations of employees. Actuarial valuations and funding policies are designed to ensure that sufficient assets are available to pay benefits to all eligible employees, preventing the burden from falling disproportionately on future generations. This is a complex balancing act requiring careful planning.

Q10: What is a “pass-through grant,” and how does it relate to custodial funds?

Answer: A “pass-through grant” is a grant received by a government that is then passed on to another entity (e.g., another government, a non-profit organization). If the government acts merely as a conduit, with no significant administrative involvement, the grant is typically accounted for in a custodial fund. The government is simply holding the funds temporarily.

Q11: What are the key differences in the financial reporting requirements for fiduciary funds compared to governmental funds?

Answer: The most significant differences are: 1) Fiduciary funds use the economic resources measurement focus and the accrual basis of accounting, while governmental funds use the current financial resources measurement focus and the modified accrual basis of accounting. 2) Fiduciary funds are reported in a separate section of the CAFR (Comprehensive Annual Financial Report), while governmental funds are the primary focus of the government-wide financial statements. 3) Governmental funds have budgetary compliance reporting, fiduciary funds do not.

Q12: Where can I find more information and resources about fiduciary funds and government accounting standards?

Answer: Key resources include the Governmental Accounting Standards Board (GASB) website, which provides access to pronouncements and implementation guidance. Professional organizations like the Government Finance Officers Association (GFOA) also offer valuable resources and training. State auditor offices also offer training and guidance. Additionally, textbooks and academic articles on government accounting provide in-depth analysis of fiduciary fund accounting.