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4 Benefits of Implementing Internal Service Funds

by Victoria Holthaus, CPA

Is your city struggling to come up with money to replace critical assets? Having a hard time managing building or vehicle maintenance work orders? Needing a more efficient budgeting process, or to be more strategic in procurement decisions? 

An internal service fund could help. 

Internal service funds are used to account for activities and services provided by and for an organization unit or agency within the city. Common types of internal service funds include Central Garage Funds, Employee Leave Funds, Insurance Reserve Funds, Information Technology Funds, and Building Funds; each operates as a separate business, even though all internal service funds are included on a city’s books. 

Typically, an internal service fund will establish charge-out rates each year for the activities and services it provides within the city. Not only do its rates, which are charged directly to the “customer” (i.e., the internal department or agency’s operating budget), cover the cost of the activity or service but they also serve to centralize costs.

Here are a few benefits of leveraging internal service funds within your city.

A more consistent budget. 

When implemented appropriately, internal service funds provide a way for city departments to systematically budget for expenses. For example, a Central Garage Fund serves to centralize a city’s fleet management while providing an economy of scale. The city sets both maintenance and replacement charge-out rates, the latter of which provide a way the department to save for replacement vehicles without creating fluctuations within its operating budget.  

Reduced risk. 

This is a benefit of Employee Leave and Insurance Reserve Funds, which charge employee leave time and insurance costs out to departments based on a rate each year. The money is then set aside into a pool. When employees take leave or require a severance package, the funds are there to pay for it.

 Increased buying power and transparency.

Consolidating budget items from multiple departments into one fund can help to increase a city’s buying power. In the case of a Central Garage Fund or Building Fund, it can also provide transparency around the true cost of maintaining an asset.

Improved accountability. 

Centralizing activities and services can help a city be more efficient with its human resources, too. Instead of each department using its own process, an internal service fund allows for a citywide work order system. 

Ready to take the first step? 

Implementing internal service funds within your city can have far-reaching benefits that go beyond your budget. If you have questions about how implementing these funds could benefit your city, we’re here to help. Our team can guide you through the entire process, from establishing funds to determining which budget items should be under centralized management. Contact us today to get started.