FIACCT 12-05_00 Internal Service Funds – Rate Setting

Effective: July 1, 1988
Revised: June 12, 2017
Reviewed: June 12, 2017

Purpose

This defines policies and procedures related to rate setting for Internal Service Funds (ISFs) and establishes guidelines for the determination of rates used by ISFs.

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Background

A. ISFs are established and maintained within state government to account for the operation of state agencies which provide goods or services to other governmental agencies on a cost-reimbursement basis. For the most part, ISFs do not receive direct appropriation of funds but operate solely on revenues collected from customers.

B. Rates are determined from a mixture of fixed, variable, direct, indirect, and unexpired costs of the
ISF.

1. Fixed expenses are defined as costs which remain unchanged in total for a given time period within a given range of activity but become progressively smaller per unit as volume increases. Fixed expenses may include personnel service expenses if they do not change based on volume, maintenance expenses not dependent on use, and capital expenses, such as depreciation on buildings and equipment that do not vary with volume.

2. Variable expenses are defined as costs which are uniform per unit, but which fluctuate in total in direct proportion to changes in related activity or volume. For example, the purchase price of goods or services sold, the materials, supplies, or utilities used in the actual production of goods or services, and the maintenance costs that vary with activity are variable expenses.

3. Direct costs are those costs that can be directly traced to the production of a specific good or service. Direct costs may include both fixed and variable expenses.

4. Indirect costs are those costs that cannot be directly associated with a specific unit of service or product. Indirect costs may include both fixed and variable expenses. Overhead is usually synonymous with indirect costs.

5. Unexpired costs are costs that may be carried forward to future periods as an asset and are associated with the revenue of future periods. These costs would include inventories, prepaid maintenance agreements expenses, and other prepaid expenses, such as prepaid rent.

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Policy

A. Rates should be established for each unit of service provided by the ISF.
A unit of service is defined as any distinct activity with measurable costs, which are required to be
recovered by the servicing agency from the requesting agency. The unit of service should reflect types of service rather than organization structure. A unit of service, however, may represent a single rate for an entire organization.

B. Rates should be developed using past, current, and anticipated future cost information. Prior year surpluses or deficits for each service should be considered in each service’s rate determinations.

C. Rates should be developed for each service based on a break-even analysis for that service where revenues equal expenditures with adjustments for prior years retained earnings or loss balances for the service. The rate for one service should not be set higher in order to subsidize other services within an ISF.

D. ISF rates should be set to recover the full cost of capital asset acquisitions through depreciation expense. ISF rates may also include amounts for capital asset replacement in addition to operating costs. However, this is not a federally allowable cost, and it may result in a refund to the federal government. If ISF rates that include capital asset replacement costs generate federal excess retained earnings, the federal portion should be refunded to the federal government and the state portion should be kept in the fund until the fund’s average cash balance reaches zero. See the FIACCT 12-06.00 Internal Service Funds – Federal Retained Earnings Requirements policy for more information on federal requirements.

E. An ISF’s rates should generate enough cash through operations to maintain cash balances approximately equal to the working capital cash needs of the fund. ISFs with large negative cash balances should work to bring their average cash balances to zero.

F. All costs of operating the ISF must be allocated to the goods or services sold and must be reflected in current and future rates. Costs should include allocations for department and state indirect costs, overhead allocation adjustments as determined by the DAS Division of Finance, and direct costs, such as cost of goods sold, direct labor, materials, supplies, etc. This will ensure that all federal, state, and other programs are properly charged.

G. Rates must be equitable and based on a justifiable distribution basis. ISFs may not discriminate between users and sources of funding. Any appropriated subsidies to the ISFs should not reduce standard rates charged to users. Subsidies generally will be used to replace lost revenue from un-billed or under-billed services.

H. Rates will remain constant throughout the fiscal year unless approved by the Legislature. Adjustments can be made only when new services are begun, when new products are introduced during the year, when extraordinary situations arise, or when a decrease in rates is appropriate.

I. All ISF rates must be approved by the Legislature, per Utah Code section 63J-1-410 (3) (a) (ii). Rate
changes must be submitted to the Governor’s Office of Management and Budget (GOMB) with the
ISF’s budget request during the annual budgetary process and must then be approved by the Legislature prior to the beginning of the fiscal year for which the rates are to be effective.

See the FIACCT 12-02.00 Internal Service Funds – Budget Requests and Compliance policy for more
information.

J. ISFs rates must be preapproved by their appropriate ISF Rate Committee before they are submitted to the GOMB and Legislature for approval. These include all ISFs in the Department of Administrative Services (DAS), Department of Human Resources Management (DHRM), and Department of Technology Services (DTS). These ISFs must also present all proposals for rate decreases, rebates, and rates for new products or services during the fiscal year to their ISF Rate Committees for review and approval.

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Procedures