The structure of the state's accounting system for revenues and expenditures--the labyrinth of hundreds of funds, earmarked revenues and dedicated funding mechanisms--has been the subject of numerous studies and legislative proposals. After studying the pros and cons of the various issues involved, the recommendations in all of these studies have been unanimous: consolidate the state's funds. Minimizing the number of state funds would simplify the financing of state government and generate a significant one-time revenue boost.
Recent Studies and Proposals
* The Senate Committee on Agency Funds Management in 1984 determined that "the need for significant fund consolidation is of major import to the overall fund management of the state."
* Senate Bill 1322, passed by the 69th Legislature and signed into law in 1985, began with this finding: "...to ensure the efficient operation of state agencies and to provide for the necessary costs of state government operation, it is in the public interest to provide a means for periodic legislative review and control of unobligated cash balances and income held by state agencies in funds other than the general revenue fund."
* Representative Richard Williamson introduced House Bill 1786 in 1987 to completely eliminate all existing funds by combining their accounts into six "super funds." The measure was based on the finding "...that in order to improve the efficiency of fund accounting and reporting procedures, it is in the public interest to consolidate funds in the State Treasury."
* In 1989, the Select Committee on Tax Equity presented to the 71st Legislature a comprehensive report on state finances. The report included this finding: "Adding to the complexity and lack of flexibility in the tax system is the complex network of state funds and revenue earmarking policies that mark the state tax system...". This system of segregation and revenue earmarking makes the overall state fiscal system more inflexible than is desirable. [emphasis in the original]
The desirability of funds consolidation is not limited to Texas. National sources have also called for state and local governments to move in this direction. As long ago as 1979, the Governmental Accounting Standards Board called for funds consolidation. In 1990, for example, the Board published the Codification of Governmental Accounting and Financial Reporting Standards "intended to provide authoritative accounting and financial reporting guidance for state and local governmental entities." It is an integration of all current standards and is used as a source for generally accepted accounting principles (GAAP). One of the specific accounting principles suggested in the report concerns the number of funds:
Governmental units should establish and maintain those funds required by law and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established, however, because unnecessary funds result in inflexibility, undue complexity and inefficient financial administration.
Survey of Practices in Other States. Over the past five years, a number of states have moved to implement funds consolidation, some with mixed results. A recent survey of financial administrators from selected states showed that, without exception, they see benefits in funds consolidation. The state's fiscal operations become clearer and more accessible, making it easier to identify revenue sources and their potential uses.
Yet, in at least three states, funds consolidation has been followed by an increase in dedicated funds. Survey respondents observed that in the absence of self-imposed curbs for creating dedicated revenue sources, a legislature remains vulnerable to intense pressures from special interest groups, giving rise to an increasing number of funds.
Some states have raised impediments to the creation of special funds by extending to the chief financial officer either (1) concurrence authority to be exercised prior to the creation of a fund or (2) the authority to determine independently when a separate fund is required. In states where this type of authority is exercised, the number of funds has remained relatively low and stable. Michigan and Pennsylvania have approximately 100 funds and Washington has only 48.
Some of the highlights of the Performance Review survey of fiscal practices in other states are shown in Table 1.
1991 Survey of Selected States' Fund Structures
Latest Number of Treasury Funds Authority to
State Restructuring 1986 1991 Create Funds
California None 400 500 Legislature
Florida 1984 800 1,600 Legislature
Illinois None 350 450 Legislature
Louisiana 1988 218 55 Legislature
Michigan 1979 101 101 Legislature/
Director of Management
New York 1982 95 140 Legislature
Pennsylvania None 95 106 Legislature/
Office of Budget
Washington 1985 40 48 Legislature/
Office of Financial
Texas None 434 537 Legislature/
Current State Government Funds. Of the 537 state funds, 366 (excluding petty cash accounts) had a cash balance in the State Treasury at the end of the state's 1990 fiscal year (August 31, 1990). The funds are commonly separated into eight groups, or types. The number of funds in each group, as well as the total cash balance at the end of the fiscal year for that group, is given in Table 2.
Fiscal 1990 Ending Cash Balances by Fund Group
Cash Balance on
Number August 31, 1990
Fund Group of Funds (in millions)
General State Operating and Disbursing Funds
(excludes the General Revenue Fund, $767 million) 208 $ 675.8
Constitutional Funds Expendable for Specific Purposes 59 806.8
Federal Funds 21 99.7
Pledged Funds 8 569.9
Constitutional Nonexpendable Funds 6 205.1
Tax Clearance Funds 2 90.8
Trust Funds 55 1,967.7
Suspense Funds 6 274.8
Total 365 $4,690.6
General state operating funds cover the day-to-day operations of state agencies and boards and institutions of higher education, with balances ranging from $167 million in the Welfare Administration Fund to such small accounts as the License Plates Depicting Capitol Fund ($450.03), the Sesquicentennial Fund ($1,744.42) and the Radiation and Perpetual Care Fund ($1,245.75).
Constitutional funds expendable for specific purposes, the second group, include the Available School Fund ($48 million), the Available University Fund ($54 million), the Highway Fund ($223 million) and numerous bond funds for such things as construction of prisons and land loans to veterans.
Federal funds are tied to specific programs, such as school lunches ($1 million), law enforcement ($3 million), public welfare administration ($19 million) and land and water conservation ($11 million). Pledged funds hold revenues dedicated for bond issues and short-term cash management notes. Nonexpendable constitutional funds include the investment transactions for public schools (the Permanent School Fund, $173 million) and universities (the Permanent University Fund, $31 million).
Tax clearance funds hold revenue that will be returned to local governments as their share of mixed beverage and bank franchise taxes. Trust funds are required when the state acts as the trustee of money for someone else: retired teachers and state employees, tax payments to the federal government, federal unemployment payments and local sales taxes. Finally, tax payments made in protest, as well as payments awaiting clearance to other funds, are deposited into suspense funds.
All of these funds receive revenues tied to specific programs and agencies, either by constitutional or statutory allocation or transfer from the General Revenue Fund. Dollars that come to the state, whether from taxes, fees, investment earnings or the federal government, may go through a series of funds and accounts before finally being paid out to school districts, benefit recipients and state workers.
A study for the Select Committee on Tax Equity showed that over 48 percent of state revenues were allocated to these specialized funds. The General Revenue Fund itself, which is used to support most discretionary spending, has about a quarter of its revenues allocated to other funds: a portion of cigarette taxes for parks and education, a quarter of motor vehicle sales taxes for public education, unclaimed motor boat fuel refunds are transferred to support fish, game and water safety as well as public education and some of the hotel/motel tax is set aside for the Department of Commerce to foster tourism.
Dedicated revenue sources do permit a degree of security which allows long range continuity and planning. In fact, proliferation in the number of funds may actually be stimulated by understandable agency needs for medium and long range planning. Nonetheless, the overall effect is an increasingly complex and restrictive funds structure.
The complicated flow of state revenues and expenditures may be well understood by only a few budgetary insiders, when it should be accessible to legislators charged with responsibility for the whole system, as well as to a public panoply affected by appropriations decisions. Ultimately, the most serious consequence of the abundance of funds and fund types, interwoven restrictions and the intricate accounting methods to manage them may be that certain policy choices available in a less restrictive environment are precluded; state government policy may be led in certain directions rather than in others for nearly imperceptible reasons. In this respect, the reservoir of new policy ideas may be limited by a well established, perhaps entrenched, system of fiscal decisions. Legislators and their staff must spend time unnecessarily tackling the intricacies of arcane accounting methods, time that could be better spent focusing on policy goals and setting the parameters of program administration.
There are specific actions that can be taken to eliminate or reduce these inefficiencies and to promote consideration of new policy ideas, while streamlining the machinery of state government financing.
Consolidate Funds. As part of the conversion to the Uniform Statewide Accounting System in 1992-93, legislation should be enacted which would collapse the 301 non-constitutional funds into five "super funds," basically paralleling the fund groupings given above. Following objective accounting and fiscal principles, the actual number and types of new funds would be established after a careful review of existing funds. The 65 constitutional funds would remain as they are, thus avoiding the need for a constitutional amendment election. To the extent possible, the Comptroller shall transfer operating and other funds into a general operating fund and create other funds as necessary. A possible new fund configuration is given in Table 3.
Possible New Fund Configuration
Current Funds Proposed Funds
209 Operating Funds
2 Tax Clearance Funds fi General Operating Fund
21 Federal Funds fi Federal Fund
8 Pledged Funds fi Pledged Fund
55 Trust Funds fi Trust Fund
6 Suspense Funds fi Suspense Fund
301 Non-Constitutional Funds fi 5 Non-Constitutional Funds
Source: Texas Performance Review.
The actual process of funds consolidation would require the careful scrutiny of each and every existing fund. Such a process would involve review of the fund's original purpose as well as its current uses and classification, with a specific plan to merge its existing accounts into a larger, more comprehensive system that is more in accordance with GAAP.
Subject New Funds to Review and Ongoing Evaluation. New funds should only be created in order to conform to clear accounting requirements or when required by federal law or bond indenture. The Comptroller, as the state's Chief Financial Officer, should have the authority to determine the most appropriate accounting mechanism and reporting method for implementing legislative actions affecting revenues and expenditures. There should also be a formalized method to regularly monitor the state's accounting structure and make recommendations for its improvement. States that have successfully consolidated their funds use some sort of formal procedure to contain growth in the overall structure of funds and to optimize on a continuing basis legislative decision flexibility.
Besides these specific recommendations, there should be a long-term assessment of "local funds," the accounts in local banks maintained by state universities and health-related institutions. Additional research is needed to assess the desirability of moving some or all of these local funds into the State Treasury.
Consolidation of the state's funds would have clear and immediate benefits.
1. State finances would be simplified, thus becoming more manageable by the Legislature. A simplified fund structure would also enable more accurate reporting to the financial community, ensuring the highest possible ratings for Texas debt.
2. There would be a one-time revenue gain as the cash balances tied up in special funds are made available for budget certification.
There are few identifiable disadvantages to funds consolidation. Taxpayers may find it more palatable to accept certain taxes and fees if they know that the revenue is being set aside into separate funds for clearly defined, popular state programs and services. Revenue dedications will still be available, however, through the use of special accounts inside the new General Operating Fund. Some may believe that the one-time revenue gain from funds consolidation represents an accounting "trick." The truth of the matter is that under the state's constitutionally mandated cash-basis budgeting system, there is no trickery involved. Bond rating agencies, for example, see funds consolidation as a component of prudent fiscal management; the one-time revenue gain from such consolidation is a valid and immediate benefit of improving the structure of fiscal management.
Adoption of the recommendations would not result in any new dollars coming to the State Treasury. Combining all of the state's operating funds, however, would provide a significant one-time certification gain to the state as the cash balances are combined into one General Operating Fund. There would be a cash, but not a certification, loss of approximately $300 million to the new General Operating Fund as federally earmarked oil overcharge receipts are removed to one of the remaining special funds.
Total Gain/(Loss) to the General
Fiscal Year to State Operating Fund
1992 0 $ 0
1993 0 540,000,000
1994 0 0
1995 0 0
1996 0 0
The estimate of the fiscal impact assumes that consolidation will take place in fiscal year 1993 as part of the overall conversion to the Uniform Statewide Accounting System.