FIACCT 12-03_00 Internal Service Funds – ISF – Fixed Asset Funding and Deficit Working Capital

Effective: July 1, 1994
Revised: December 30, 2015

Purpose

A. This policy defines the state policy for funding Internal Service Funds (ISFs) fixed asset purchases.

B. This policy also outlines the procedures for requesting and accounting for interfund loans from the General Fund for working capital to fund fixed assets purchases by ISFs.

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Policy

A. Legislative approval in an Appropriations Act is required for the total amount of ISF fixed asset purchases. See the Internal Service Funds – Fixed Asset Acquisition policy for more information.

B. An ISF agency may not acquire fixed assets unless the agency has adequate working capital. Working capital shall be provided first from operating revenues to the extent allowed by state statute and federal regulations, second from interfund loans, and third from an appropriation. See the Internal Service Funds – Federal Retained Earnings Requirements policy for more information on federal regulation requirements.

C. An ISF may receive interfund loans from the General Fund to use for working capital to acquire fixed assets. These interfund loans will be made through cash deficits in the ISFs during the year. These ISF cash deficits will then be reclassified as liabilities at fiscal year end.

D. ISFs may set rates sufficient to cover fixed asset replacement costs in order to reduce their amount of interfund loans. However, this is not a federally allowable cost and may result in a refund to the Federal government.

E. Interfund loans should not be used for long-term ISF general operating working capital, but for fixed asset purchases only. ISF operating losses should be recovered as soon as possible through ISF rate adjustments. See the Internal Service Funds – Rate Setting policy for more information.

F. ISFs shall repay all interfund loans from the General Fund. This should be done as depreciation is taken over the useful life of the assets purchased with the interfund loans according to the asset’s depreciation schedule.

G. Interfund loans through ISF cash deficits may be made until the ISF deficit working capital position reaches 90 percent of the net book value of the ISF agency’s fixed assets as of the end of a fiscal year.

H. If an ISF agency wishes to purchase or lease authorized fixed assets that would increase its working capital deficit beyond 90 percent of the net book value of the agency’s fixed assets, the agency may purchase or lease those assets only if monies are appropriated from another fund.

I. The Division of Finance will monitor yearend working capital and interfund loan balances for each ISF and will notify the ISFs of any corrective action required.

J. Each ISF shall include a plan for the financing of fixed asset purchases with all budget requests. See the Internal Service Funds – Budget Requests and Compliance policy for more information.

K. If an ISF has used or plans to use interfund loans to finance fixed asset purchases or leases, a cash flow statement projecting the interfund loan or cash balances for at least the next three fiscal years will be required by the Division of Finance and the Governor’s Office of Management and Budget. This cash flow statement must be included with the ISF’s budget request. The cash flow statement should include the following information:
1. Cash balance at the beginning of the year
2. Projected revenues/cash receipts from sales for the year
3. Projected fixed asset depreciation (interfund loan repayment amount) for the year
4. Estimated proceeds from disposal of fixed assets for the year
5. Projected operating expenses/cash payments for the year
6. Estimated fixed asset purchases or leases for the year
7. Projected amount of cash balance at the end of the year

L. The Division of Finance and the Governor’s Office of Management and Budget will review each ISF’s fixed assets financing plan, cash flow statement, and deficit working capital limit statement forms for compliance, accuracy, and reasonableness. See the Internal Service Funds – Budget Requests and Compliance policy for more information.

M. The Legislature must approve funding sources outside the ISF for fixed asset purchases. These funding sources may include direct funding by non-general fund agencies or by private institutions such as leasing companies, banks, or vendors.

N. Non-state entities may donate to ISFs either fixed assets or money to purchase fixed assets

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Background

ISFs were authorized in the past to receive advances for the acquisition of fixed assets, inventory, and general working capital. However, Senate Bill 117 passed by the 1993 Legislature requires that deficit working capital be limited and advances be used only to acquire capital assets. See Utah Code, Section 63J-1-410 (8).

ISFs also have acquired assets through leases and through direct funding from vendors or financial institutions. The Governor’s Office of Management and Budget and the Legislature must authorize this type of financing. This type of funding, however, is discouraged because of the high interest costs.

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Procedures

OTHER FUNDING REQUESTS
These may include capital and operating leases or direct financing.