You may recall last August when we discussed Internal Service Funds (ISFs) as they relate to the Attorney General’s Office. Today, we take a step back and review how Internal Service Funds play a role in the state’s budget.
Function and Purpose of ISFs
The purpose of an ISF is for an agency to provide specialized goods or services to other state agencies. The desired result is a cost-effective delivery of goods or services, as agencies don’t have to invest in training or staff for a necessary function. Client agencies are billed by the Internal Service Funds for the services they receive. Examples in Utah include human resources, purchasing vehicles, technology services, risk management, and procurement. The most recently authorized ISF was in 2018 for legal services provided by the Attorney General’s Office. Outside of the Attorney General, the Department of Government Operations manages 20 different ISFs housed under seven divisions.
Though part of state government, Internal Service Funds differ from typical agencies and line items. While a part of the budgeting process, appropriations to ISFs are non-binding; they are allowed to spend up to the amount they collect. ISFs are also unique in that UCA 63J-1-410 allows carrying negative working capital and taking on long-term debt—up to 90% of a capital assets’ value—with repayment made over an asset’s useful life.
Unlike traditional state agencies, statute does not require expenses to match revenues for ISFs, they are also permitted to retain earnings and carry them between fiscal years without specific intent language. Federal rules cap retained earnings for internal service funds at 30 to 60 days of operational costs depending on the ISF. Amounts in excess of these caps may be subject to federal reimbursement, as agencies paying into an ISF are supported by Federal Funds. The Legislature periodically redirects excess earnings to the General Fund or lowers rates to limit earnings.
Within the Department of Government Operations, a rate committee approves pricing for the various services available to agencies through ISF. Rates are designed to cover the actual costs of the service without running a profit. After committee approval, rates are approved by the Governor’s Office of Planning and Budget, the relevant Legislative Appropriations Subcommittee, and finally by the entire Legislature in the annual “ISF rate authorization” bill (H.B. 8 in the 2024 General Session). This legislation limits the number of permanent full time staff, fees and rates, and capital asset acquisitions.
Unlike the ISFs in the Department of Government Operations, the Attorney General Internal Service Fund is not included in the annual rate authorization bill. The ISF budget is included with the rest of their Agency budget in the Executive Offices and Criminal Justice Subcommittee (H.B. 6 in the 2024 General Session).
Reviewing ISFs in the Accountable Budget Process
During the 2024 Interim, the Infrastructure and General Government Appropriations Subcommittee reviewed the Department of Government Operations ISFs as part of the Accountable Budget Process (ABP). The Legislative Fiscal Analyst also surveyed customer agencies to evaluate their experience with the services provided, the results of that survey are available here: Internal Service Fund Customer Satisfaction Survey.
Recommendations from the subcommittee include:
- addressing surplus earnings in the 2025 General Session,
- allowing customer agencies to review bills before they are paid,
- updating statutory requirements to allow ISFs to receive compensation adjustments at the same time as other state agencies,
- giving ISFs flexibility to charge lower rates,
- adding appropriation units for transparency,
- replacing General Fund appropriations with Dedicated Credits, and
- reviewing staff reporting requirements.
The Executive Offices and Criminal Justice Appropriations Subcommittee evaluated the Attorney General ISF as part of their ABP for the 2024 interim. The committee approved the recommendation for the Attorney General to coordinate and report on a reconciliation between appropriations for the ISF and the amount budgeted to each client agency, including adjustments made during the 2025 General Session. This recommendation would position the Attorney General ISF to follow suit with the other statewide Internal Service Funds in being included in the annual ISF rate authorization bill.
Both of these appropriations subcommittees are slated to change in the 2025 General Session, but the internal service funds will remain in their rebranded committees.