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Revolving Funds as Budgeting Tools: An Examination of Oklahoma State AgenciesAuthor(s): Aimee L. Franklin and James W. DouglasSource: State & Local Government Review, Vol. 35, No. 2 (Spring, 2003), pp. 90-101Published by: Sage Publications, Inc.Stable URL: http://www.jstor.org/stable/4355338 .Accessed: 06/11/2014 05:25
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State and Local Government ReviewVol. 35, No. 2 (Spring 2003): 90-101
RevolvingFunds as
BudgetingTools:
An Examination of Oklahoma State Agencies
Aimee L. Franklin and James W. Douglas
Are
all dollars created equal when
budgeting for the operations of a
state government? Is there a differ?
ence in the way in which revenues from a va?
riety of sources are scrutinized and allocated
by the legislature? Theorists and practitionersalike agree that the legislature exercises con?
trol over agency actions through the budget?
ing process. Appropriations bills can restrict
funding by object code, by program or activ?
ity, or by fund. In addition, agency actions canbe limited in statutory language or by person?nel caps. Although there is wide variation,each state has at least one appropriation from
a general revenue fund. Other funds that maybe appropriated include capital, rainy day,special cash, federal, revolving, and enterpriseor proprietary funds.
Oklahoma is a state that has relied exten?
sively on revolving funds throughout its his?
tory (Weaver 1940). The first revolving fund
was introduced in Oklahoma in 1910 (three
years after statehood). From 1934 to 1944, an
average of only 34.1 percent of state revenueswent to the
generalrevenue fund
(Lee 1945).In
FY 1999, revolving fund revenues amounted to
approximately $640 million (about 26 percentof own-source revenues) for 54 state agencies.
Normally, revolving funds operate as con?
tinuing appropriations. These funds have no
lapse date; the cash balances remain available
to agencies indefinitely. Agency discretion in
how revolving funds are spent is enhanced be?
cause object code or program activity limits
are not established, and the money is available
for expenditure as soon as it is received. Thisarrangement reduces the expectation that the
legislature will micromanage how revolvingfund money is spent.
Most revolving funds in Oklahoma agen?cies are different from internal service fundsand enterprise funds. Generally, they do not
represent cost centers or reimbursements
for administrative service activities within an
agency or between state agencies, nor are they
designed to be mechanisms by which to com?
pare revenues and expenditures to determineif programs and activities are self-supporting.For most state agencies, revolving funds sup?
plement general revenue funds that are insuf?
ficient for operations and capital requirements.
Revolving funds may affect agency spend?ing differently than other types of funds, butthere is a lack of research regarding the treat?ment of
revolvingfunds.
Moreover,most re?
volving funds in Oklahoma are quite differentfrom the funds discussed in the literature. We
therefore examine the use of revolving fundsin the state, particularly the different aspectsof control over public funds. From an exter-
90 State and Local Government Review
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Revolving Funds as Budgeting Tools
nal perspective, there is a need to ensure ac?
countability; internally, however, managersneed flexibility to achieve the desired results.This
studyassesses the
abilityof
revolvingfunds to improve efficiency and managerial
flexibility. We also investigate whether end-
of-year spending is reduced when an agencyhas access to nonlapsing revolving funds. Fi?
nally, we consider the degree to which revolv?
ing funds affect public accountability for gov?ernment spending.
Description of Revolving Funds
Each of the 54 agencies included in this studyreceived funding from 1 to 21 revolving fundsin addition to general revenue, other appro?
priated revenue, and/or federal funds receipt.The oldest funds started in 1955; 14 were es?
tablished after 1990. (See Table 1 for a de?
scription of the revolving funds for the agen?cies included in this study.)
Typically, revolving funds are created when
there is a new revenue source or a legislativeprogram initiative. Instead of proposing a new
revolving fund, agencies are more likely to
propose changes to an existing fee or fine struc?ture currently authorized in statute. Agencies
may also initiate the elimination of outdatedor inactive funds or the consolidation of ex?
isting funds. Revolving fund revenues are pri?
marily derived from fees and sales of items or
services. Other sources include (in decreasingorder of importance) licenses and exams, fines
and forfeitures, general revenue appropria?tions, dedicated taxes,
occupational licensing,federal funds,1 permitting activity revenues,bond revenues, client or other governmenttrust accounts, and transfers from other re?
volving funds.2 Agencies are responsible for
providing basic information on the current
fee structure and for preparing a revenue fore?
cast for each revolving fund and must include
these forecasts with their annual budget re?
quest. This information helps legislators de?
termine agency capacity and needs for generalfund revenues.
Statutory language concerning expendituresfrom revolving funds ranges from fairly vagueand nonrestrictive to explicit and restrictive.The language may identify revenue sources
and limit allowable programmatic uses. Typi?
cally, revolving fund monies are used in the
following ways: to purchase large ticket items
such as fleet replacement, as a match for fed?
eral funds, for operations expenses such as elec?trical repairs, to stabilize cash flow, to make
up general revenue underfunding, to fund cap?ital projects such as ADA compliance, as a
hedge against unexpected expenses, to meet
special unfunded needs, as a savings account,to provide flexibility, to restrict activities af?
ter a scandal, as a disbursing fund, for inter-
agency or interprogram transfers, in end-of-
Table 1. Descriptive Statistics for the Revolving Funds for the 54 Participating Agencies
Total number of revolving funds 197
Range of number of revolving funds by agency 1 21
Total revolving funds expended in FY 1999 $639,349,657
Revolving funds as a percentage of state funds expended in FYI999 26.2%
Median percentage of state fund expenditures derived from revolving funds 22%
Range of percentage of state fund expenditures derived from revolving funds 0.6%-l 00%
Minimum expenditures from a single revolving fund $20,730?
Maximum expenditures from a single revolving fund $209,890,069a Some funds had no expenditures n FY1999. Thisamount eflects he smallest xpenditure roman agency revolving und
in the year studied.
Spring 2003 91
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year spending (throughout the year), to payfor special program activities, for regulatoryor oversight activities, as reimbursement for
interagency services, for payroll, and for some
enterprise activities. As these uses suggest, re?
volving fund expenditures can cover a wider
range of categories than can expenditures from
the general revenue fund.
Revolving funds are often used in conjunc?tion with other funds, especially general rev?
enue funds. Some agencies operate as if there
is no difference between the two types of funds:
both are regarded as appropriated funds. How?
ever, specific limits such as line-item restric?tions, one-twelfth allotments, and lapse datesthat apply to general revenue funds do not
apply to revolving funds. Typical limits on re?
volving funds include federal laws, fee struc?
tures specified in law, legislative bills settingoverall agency spending limits, and statutes
directing the automatic reversion of excess re?
volving fund balances to the general revenue
fund. Revolving fund revenues that are ear?
marked are not included in the funds availablefor appropriation certified by the State Board
of Equalization. However, there has to be acash balance available in the revolving fundbefore encumbrances can be made. For a few
revolving funds, the transfer may be madefrom the general revenue fund, federal funds,or other revolving funds. Through transfers,
agencies can gather together enough moneyto fund an activity or purchase or to advance
expenditures planned for the fourth quarter.
Literature Review
There is little research examining the effectsof revolving funds on agency budgeting. Muchof what is known about revolving funds is an?ecdotal and merely suggests likely outcomesfor government agencies that use revolvingfunds.
Accordingto Osborne and Gaebler
(1992), revolving funds have the potential to
help agencies avoid perverse incentives asso?ciated with traditional budgeting practices.The authors argue that traditional budgetingpractices in many jurisdictions force agencies
to spend all of their appropriations or risk
losing funding in future fiscal years. Elected
officials often assume that an end-of-year bal?ance in an agency's account signifies a lack of
need on the part of the agency. Therefore, the
agency can be twice penalized. First the leg?islature takes the year-one balance away, then
it reduces the agency's budget in year two byan amount equal to the balance at the end of
year one. Such budget practices often cause
agencies to rush to spend any balances theyhave prior to the end of the fiscal year (Wild-
avsky 1992). This practice results in wasteful
spending, which does little to maximize re?sources to best achieve agency missions (Os?borne and Gaebler 1992).
Osborne and Gaebler (1992) contend that
revolving funds can also help eliminate per?verse incentives for public managers. Money in
revolving funds does not lapse, so managersdo not need to rush to spend balances at the
end of the fiscal year. Therefore, managershave an incentive to find ways to save so that
additional money can be directed to high pri?orities. Because revolving funds are not ap?
propriated by line item, public managers areable to allocate resources where they are mostneeded without having to seek authorizationfor transfers.
Barzelay (1992) also supports the use of re?
volving funds, claiming that they improve man?
agerial discretion and increase incentives for
agency personnel to use resources more effi?
ciently. He found that revolving funds are mosteffective when they introduce market forcesinto agency operations, as when governmentunits are able to provide centralized servicesto other agencies and charge those agenciesa competitive price for the services provided.These conditions best enable agencies to use
revolving funds to optimize resources and re?
spond to changing needs.Rubin
(2000)found that earmarked funds
(which are often sources of revolving fund rev?enues in Oklahoma state government) allow
groups to lock in particular revenue sourcesfor specific purposes. A group could provideor expand a service by identifying a new rev-
92 State and Local Government Review
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Revolving Fund Interview Questions
1. Explain your revolving funds. Are theysingle or multipurpose?
2. Are there any limitations placed uponrevolving funds?
3. Do revolving funds improve manage?rial flexibility? How so? Due toabsence of line-item restrictions? Dueto the nonlapsing attribute?
4. Do revolving funds create any prob?lems? (open ended)
5. Do revolving funds reduce wasteful
end-of-year spending?6. Does the nonlapsing attribute create
an incentive to save?
7. Does the legislature take balances?
8. Does the legislature reduce generalappropriations if revolving fundbalances are large?
9. Does the agency spend balances down
prior to the end of the year (end of
legislative session) so that the moneywon't be lost? If not, why not?
10. Are any balances politically untouch?able?
11. How do revolving funds reduce publicaccountability?
12. How do revolving funds increase
public accountability?
Rossman 1999). Tb answer the research ques?tions, the native views of state governmentfinance officers were investigated to uncovercommonalties and differences. Transcripts were
prepared from notes taken during the inter?
views, and patterns were identified and themeswere developed based on the transcripts.
Because this research is based heavily on
qualitative analysis,there are threats to the
validity of the findings. First is the concern ofresearcher bias in interpreting the responses.To minimize this threat, the data were ana?
lyzed using a protocol described by Loflandand Lofland (1984) and Strauss and Corbin
(1990). An additional validity concern is the
truthfulness of interviewees' responses. Tb re?
duce the likelihood of receiving socially desir?able
responses,the
participantswere assured
confidentiality. Finally, the generalizability of
findings based on interviews of agency offi?cials in a single state is limited. However, theuse of elite interviews has proven to be an ef?fective technique for studying the budgetaryprocess (for example, see Gosling 1985; Lauth
1978; and Thurmaier and Willoughby 2001),and we believe the value of our findings out?
weighs concerns for reliability, validity, and
replication.
Findings
The literature suggests three propositions con?
cerning revolving funds that were deductivelytested in this study:
Research Proposition #1: Revolving funds in?
crease managerial flexibility. Improved flex?
ibilityresults
primarilyfrom the absence of
line-item restrictions. It is expected that re?
volving funds will aid managers in focusingresources on priorities and increasing agencyefficiency.
Research Proposition #2: Revolving funds re?duce wasteful end-of-year spending. The non-
lapsing characteristic of revolving funds makesit unnecessary for agencies to rush to spend allof their resources by the end of the year. Stat?
utes creating revolving funds enable the fundsto retain end-of-year balances. It is expectedthat agency managers will focus their fundingefforts on priorities rather than on spendingdeadlines.
Research Proposition #3: Revolving funds re?duce public accountability for spending. Trans?fers from revolving funds to the general rev?enue fund can be used to help subsidize general
expenditureswithout
raisingtaxes. It is ex?
pected that such actions divert earmarked rev?enues from their intended purposes and makeit more difficult for citizens and elected offi?cials to determine how earmarked revenuesare being spent.
94 State and Local Government Review
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Revolving Funds as Budgeting Tools
Increasing Managerial Flexibility
The interviewees indicated that the revolvingfunds for their agencies did improve manage?
rial flexibility in several ways. Revolving fundsimprove efficiency and offer flexibility in Ok?lahoma agencies by covering cash flow prob?lems associated with shortfalls in the one-twelfth allotments and delays in federal funds.
Eighteen agency officials (34.6 percent) men?tioned the importance of revolving funds in
dealing with cash flow problems. This flex?
ibility is particularly useful when large ticketitems need to be purchased by agencies, as
one interviewee described:
Car contracts are released in October orNovember. They are technically for a year,but in reality there is a shorter time frame.
Generally, we can only get purchases onthat contract through June, because thenthe new models are being introduced.When they are delivered, we usually have10 days to pay. The car manufacturers
only produce a limited number of the cars
we need. If we wait too long, they will besold out. Revolving fund money can reallyhelp here. Without them [revolving funds],we would have to wait until we built upenough reserve from our one-twelfth al?lotments. By that time, the cars we needcould be sold out.
Revolving funds improve managerial flex?
ibility in other ways. Fourteen agency officials
(26.9 percent) cited revolving fund balances as
being invaluable for the funding of unexpectedexpenditures and shortfalls in general reve?nues. They stated that revolving fund balancesenable them to deal with such occurrencesbecause they do not have to wait for specialauthorization or for additional appropriationsas long as they maintain sufficient balances intheir funds. For example, one agency officialremarked that the management and planningfor
resolving computer problemsis facilitated
by revolving funds because repairs can be madewithout having to wait for more money or au?thorization.
Moreover, 23 officials (44.2 percent) assertedthat the nonlapsing nature of revolving funds
helps increase flexibility, thereby allowing agen?cies to save balances for high priorities and
encumbrances that do not come due until af?ter the fiscal year is over. One official from a
large agency noted that the agency had a fundwith a balance of approximately $4 million for
which $4.6 million was obligated but unrec?
ognized. When the obligation became due,the agency found that its budget was under?
funded, and it had to seek additional funds.
Agency officials gave additional reasons
why revolving funds improve flexibility. Agen?cies try to preserve these funds by spending
from all other sources first. Interviewees sug?gested an implicit pecking order for how theyexpend money from different sources (in de?
creasing order of importance): carry-overgeneral revenue appropriations, special cashfund appropriations, general revenue, federal
funds, and revolving funds.
Eighteen officials (34.6 percent) stated that
revolving funds make it easy to move moneyto areas of need. The lack of line-item restric?
tions allows agencies to spend revolving fundmoney on the most pressing issues facing themat any particular time. Having revolving funds
prevents agencies from needing to obtain ap?proval to shift money between appropriatedaccounts. Despite this advantage, most officials
argued that the bulk of their revolving fund
money constitutes an important part of their
recurring budgets, thereby limiting their flexi?
bility to shift significant amounts of moneywithin their budgets at any particular time.
Five agency officials (9.6 percent) statedthat their agencies' revolving funds help to
protect their revenues from the legislature.They feared that if they relied entirely on
general revenue appropriations for their bud?
gets, the legislature would gradually reducetheir funding. Revenues that were earmarkedfor revolving funds helped to protect their
budgetsfrom cuts. Three
agencyofficials
(5.8percent) claimed that revolving funds can pre?vent legislative micromanagement of agencyactivities by providing managers with a gooddeal of discretion over how revolving fund
money is spent.
Spring 2003 95
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Agency officials also indicated that revolv?
ing funds often limit their flexibility in impor?tant ways, although only five agency officials
(9.6percent)
claimed thatrevolving
funds did
not yield any flexibility improvements for
their agencies. Perhaps the most importantcharacteristic of revolving funds in terms of
managers' flexibility is the type of fund. Re?
volving funds that can be used for any purposetend to give managers more flexibility than do
revolving funds dedicated to a single purpose.It is extremely difficult to shift the balances in
single-purpose funds to other agency needs be?
cause the revenues are ordinarily earmarked bystatute, and legislative action is needed to shift
revolving fund balances to other agency ac?
counts. This inability to shift single-purposefunds prevents the moving of revolving fund
balances to high-priority agency needs.
Seventeen agency officials (32.7 percent)cited cash flow issues as being problematic.Fund balances may be artificially inflated be?
cause a particular revenue stream in the fund
may be uneven during the fiscal year. Cur-rendy, most occupational licenses operate un?der a batch renewal system, so revenues are
realized at only one time per year. Many fundshave licenses, fees, permits, and renewals astheir primary revenue source. Similarly, sea?sonal services (e.g., camping, hunting, etc.)that are provided by various state agencies are
cyclical, and the revolving fund balances mayshow significant peaks and valleys over thecourse of a year. Another situation that causescash flow concerns is when an agency experi?ences delays in federal funds receipts becauseof a difference in the federal fiscal year and de?
lays in passing the federal budget. Addition?
ally, agency officials indicated that it is diffi?cult to predict how much money earmarkedrevenue sources for revolving funds will gen?erate each year. Unstable revenue sourcesmake
planningdifficult in these
agencies.Twelve agency officials (23.1 percent)?es?pecially those in agencies with large numbersof revolving funds?complained that main?
taining revolving funds created a consider?able amount of work. Agency officials pointed
out that keeping track of earmarked revenue
sources, monitoring fund balances, forecast?
ing revolving fund revenues, and meeting re?
porting requirementsincreases work loads
and makes budgeting more time consuming.One agency official claimed that forecasting
revolving fund revenue collections caused such
big cash flow problems in his agency that he
preferred that the agency receive only generalrevenue appropriations: that way, we would
know exactly when and how much money we
are getting.Moreover, some revolving funds are so small
that they are not useful. Five officials (9.6 per?cent) revealed that they maintained revolvingfunds that had very small revenue sources that
occasionally were the result of the legislature
overestimating how much money a new fee
would raise. The earmarking of funds for nar?row purposes forces agencies to maintain ac?
counts for which it may take several years toaccumulate enough money to spend on any?thing useful. In other cases, revenue sources
have dried up for particular revolving funds.The balances remaining in the funds are in?
sufficient to spend. Because legislative actionis needed to shift the money to another ac?
count, small balances may sit untouched for
years.Two additional problems were identified
by agency officials. First, four budget officers
(7.7 percent) in agencies that receive a largepercentage of their budgets from revolvingfunds charged that the legislature often over?looks them when increasing the general rev?enue fund of other agencies. The legislatureapparently assumes that these agencies get
plenty of money from their revolving funds.This assumption can sometimes force agen?cies to ask for increases in fees and charges inorder to meet increasing demands on their
budgets. Second, three agency officials (5.8
percent)stated that
revolving funds only im?prove flexibility if they bring in more moneythan was anticipated. Otherwise, tight rev?enues and strict demands prevent them from
shifting resources to other priorities or pro?viding new services.
96 State and Local Government Review
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Revolving Funds as Budgeting Tools
Overall, the findings lend support to the
research proposition that revolving funds in?
crease managerial flexibility (research propo-stion #1).
Agencyofficials
reportedthat re?
volving funds helped them avoid cash flow
problems, deal with unexpected events, focus
on priorities, handle encumbrance issues, pro?tect revenue sources, and lessen legislative
micromanagement. The findings do not fullyconfirm the research proposition, however.
Several agency officials noted that gains to
managerial flexibility can be offset by revolv?
ing funds that are dedicated to narrow pur?
poses, are dependent upon uneven or unpre?dictable revenue streams, lead to increased
workloads and paperwork, and receive negli?
gible revenues.
Reducing Wasteful
End-of-Year Expenditures
As stated earlier, the nonlapsing nature of re?
volving funds may reduce the incentive to
spend down balances at the end of the year.
Because they are nonlapsing, revolving fundsshould therefore encourage agencies to be?
come more efficient and save more so that
they can focus on priorities.We found that, to a limited extent, revolv?
ing funds encourage agencies to find ways to
maintain balances so that they can deal with
unexpected events and focus on priorities. The
incentive to save is severely limited, however,
by the fear that the legislature will transfer
large balances in revolving funds to the gen?eral revenue fund. Agency officials are cogni?zant that central budget offices and legislatorsand their staffs closely scrutinize the balancesto find extra money to be divvied up in sub?committee budget hearings. Each year, sub?committees look at the general revenue cer?tified funds and revolving fund balances assources available for the next year's budget.
Revolvingfund balances are
especially tempt?ing targets during times of fiscal stress. Eigh?teen officials (34.6 percent) indicated that their
agency had already experienced transfers ofthis kind. Two agencies have a revolving fundthat has statutory caps on the balance. Any
money exceeding the cap in one of these
funds at the end of the year is automaticallytransferred to the general fund. Although
many interviewees indicated that they were
willing to work with the legislature, theywere generally despairing of legislative inter?
vention.
Losing part of their revolving fund bal?
ances is not the only financial risk agenciesrun when maintaining large balances. Several
agency officials reported that the legislature
may reduce the general revenue appropria?tion if it is evident that there are large bal?
ances in revolving fund accounts. Alternatively,the legislature may provide a smaller appro?
priation increase relative to that received byother agencies because large revolving fund
balances are regarded as a sign that the agencydoes not really need all of the money it is re?
ceiving. Similarly, agency officials claim that
the legislature might force an agency to use its
revolving fund balance to fund a new initia?
tive, assuming that the revolving fund is suf?
ficient to cover the cost of the initiative.Most agency officials acknowledged that
maintaining large balances in revolving funds
can be a gamble because doing so risks a po?
tentially negative reaction from the legisla?ture. Typical comments in regard to this threatinclude the following:
During the session, the legislature is so
tight on money that in the last several years
[it had] been telling agencies that [it had]to take our balances. We had this happento us on the next to the last day of the ses?sion a couple of years ago. The legislaturetakes large balances, especially when moneyis tight. Offices without good plans abouthow to spend their balances will have theirbalances taken away.
The legislature threatens every year to de?crease the general revenue appropriationbecause of large [revolving] fund balances.
Agency officials appear to be more worried
about losing revolving fund balances than about
legislative actions to reduce their general rev?enue appropriations. Tb protect their budgets
Spring 2003 97
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from these potential threats, agencies follow
a number of strategies. By far, the most popu?lar strategy mentioned during the interviewswas
spendingdown balances. Seventeen
agencyofficials (32.7 percent) admitted to keepingbalances low in order to avoid losing them.
Several officials said that they keep their bal?
ances below a specific dollar amount, believ?
ing that the legislature ignores balances smallerthan that amount. One official claimed that
the agency would maintain even lower bal?ances if the legislature ever took some of the
money. Another agency official commented
that, You want revolving fund balances to besmall during appropriations time, so that the
legislature will not take any of the balances
away. Yet another interviewee stated that cash
balances have been worked down. [The leg?islature is] trying to take some of the cash now.
This is bad because we need to keep [a certainamount of money] in float to cover shortfallsfrom the one-twelfth allotment schedule. De?
spite comments such as these, most inter?
viewees indicated that their agency did not tryto spend down the balances of most revolvingfunds either because the balances were toosmall to attract notice from the legislature orthe legislature recognized that the revolvingfund balances were obligated.
Other strategies for protecting revolvingfund balances include overbudgeting moneyin order to make balances seem obligated and
maintaining a good plan for using the balanceso that a case can be made to the legislatureshould it try to take some of the money. Of?ficials who indicated that they have had bal?ances taken away from their agency admittedthat such events do not generally occur often,and the amount of money lost tends to besmall. This situation could be a function of
strategies to avoid losing money, especiallymaintaining low balances.
Somerevolving
funds are not at risk of los?
ing balances because of political considerations.These funds are almost exclusively earmarkedfor single purposes. Several interviewees statedthat they knew the legislature would not take
any of the balances out of certain revolving
funds, no matter how large the balances. Re?
volving funds that are thought to be politi?cally safe include those that finance pet proj?ects of
important legislators,those that are
popular with citizens (for example, children's
programs and programs for the elderly), and
those that are protected by a politically active
constituency. Thirteen officials (25 percent)indicated that at least one of their agencies'revolving funds is politically untouchable.
One additional issue concerning revolvingfund balances is worth mentioning. All agencieshave legal limits on the total amount of money
that may be spent from all of their accountsduring the fiscal year. As a result, the flexibilitygained from being permitted to save money inthe form of a revolving fund balance or as an
end-of-year carryover is somewhat diminished.The findings yield mixed results concern?
ing the research proposition that revolvingfunds reduce wasteful end-of-year spending(research proposition #2). Most agencies main?tain balances in their revolving funds at the
end of the fiscal year. However, these balancesare sometimes smaller than agencies would
prefer to sustain in their revolving funds. Thefear of losing portions of their funding to leg?islative action causes many agencies to spenddown their balances prior to the end of thefiscal year. This action forces agencies to spendmoney from their balances rather than keepthem for potentially more pressing needs inthe future. The nonlapsing nature of revolv?
ing funds allows agencies to save at least some
money for high priorities. However, the fearthat large balances will result in lost fundingprovides agencies with an incentive to engagein the same type of end-of-year spending thatthe nonlapsing aspect of revolving funds was
designed to prevent. It is possible, however,that legislative practices that make revolvingfund monies more fungible may help dimin?ish the
trade-off problem mentioned by Ru?bin (2000).
Accountability
Only 3 of the 52 interviewees raised concernsabout revolving funds making budgetary ac-
98 State and Local Government Review
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Revolving Funds as Budgeting Tools
countability more difficult for elected officials
or citizens. In sharp contrast, 29 agency offi?
cials (55.8 percent) asserted that revolvingfunds
actually improve accountability.The
remaining interviewees claimed that revolv?
ing funds had no impact on accountability.As stated earlier, the main concern regard?
ing accountability is that transfers from re?
volving funds to the general revenue fund di?
vert earmarked revenues from their intended
purposes and make it more difficult to deter?
mine how those revenues are being spent.
Only one agency official cited this concern as
being a problem, however. Such transfers donot appear to be common for most revolvingfunds; no agency claimed that one of their re?
volving funds was continually being raided to
supplement the general revenue fund. Addi?
tionally, when money is transferred out of a
fund, keeping track of the amounts is rela?
tively easy because most transfers have to be
done by legislative action. This arrangementallows interested parties to identify exactly how
much money was transferred out of a fund butnot necessarily how the money is being spentonce it has been transferred into the generalfund.
Seventeen agency officials (32.7 percent)stated that revolving funds (largely single-pur?pose revolving funds) improve accountabilityby making it easy to identify whether ear?
marked revenues are being spent as intended.
The legislature likes to use such funds to en?
sure that an identified revenue source goesto a specific purpose and to keep track of the
funding for specific programs. As one agencyofficial said, There is a transparency in spend?
ing. Things are more visible. Now you haveone line entry that shows what is going in,what is being spent, and the balance that is ac?
cumulating. For legislators searching for a
way to deal with specific problems, this trans?
parencyis attractive.
Revolvingfunds can
helplegislators monitor, or even micromanage, petprojects. Revolving funds with multiple rev?
enue sources are less useful. Two interviewees
explained that keeping track of earmarked rev?enue is more difficult when it is lumped with
revenues from other sources. Thus, commin?
gling of funds reduces accountability.Another way in which revolving funds in?
creaseaccountability
isby encouraging agen?cies to be more aggressive in collecting fees
and issuing fines. Twelve agency officials (23.1
percent) stated that they are more active in is?
suing fines and collecting fines and fees when
the money goes into the revolving fund. Agen?cies can increase the amount of money com?
ing into their revolving funds and therebyincrease accountability by providing an incen?
tive for the agency to carry out the legisla?
ture's will and actively enforce the law. How?ever, several officials said that revolving funds
did not make their agencies more determined
to collect fees or fines.
The findings disconfirm the research prop?osition that revolving funds reduce public ac?
countability for spending. Most interviewees
stated that, if anything, revolving funds in?
crease accountability (research proposition #3).The evidence merely suggests that account?
ability can become more difficult when re?
volving funds have multiple revenue sources,some of which may be earmarked for specific
purposes. Furthermore, in terms of transpar?ency, the true cost of a program can be hid?den when funds and revenue sources cannot
be discerned.
Conclusion
The findings show some support for the re?search propositions drawn from the litera?
ture. However, conflicting evidence exists for
each of the propositions. Our analysis reveals
the following:
1. Revolving funds often lead to increased
managerial flexibility and serve as an im?
portant financial management tool. How?
ever, certain aspects of revolving funds,such as earmarked revenue sources, can
limit the flexibility gains enjoyed by agen?
cy officials.
2. Accessibility to nonlapsing revolvingfunds has the effect of reducing wasteful
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Franklin and Douglas
end-of-year spending from general rev?
enue appropriations because agencieshave more time to carefully consider and
prioritize their needs. However, there is
also a need to keep balances low or risk
having the money taken away by the leg?islature.
3. The effect of revolving funds on account?
ability is not what was expected. Single-
purpose revolving funds tend to increase
accountability because of their ability tofocus attention on and, to a certain extent,
protect specific spending activities. How?
ever, accountability can be more difficultwhen revenues from multiple sources are
commingled. When commingling occurs,
expenditure accountability and legisla?tive control are weakened.
With a better understanding of the proce?dural mechanisms associated with revolvingfunds, program performance can be enhancedand fund management control systems can bemore carefully designed, thereby mitigatingpotential threats to the fund. As a result, agen?cies will be more flexible and political officialswill be more accountable.
There are several possibilities for furtherresearch based on these findings. Descriptiveand explanatory research would be enhanced
by a more representative sample drawn fromthe 50 states. A theoretical model should be
developed to examine effects by type of fundand
statutoryrestrictions across various lev?
els of government or under various scenarios.
Moreover, the relationship between generalrevenue and revolving fund allocation and theeffect of political interaction should be fur?ther explored.
Aimee L. Franklin is assistant professor of publicadministration at the
University ofOklahoma.
Government reform, public budgeting and finance,public management, and organization culture andethics are among her teaching and research interests.Her work has been published in the International
Journal of Public Administration, Public Bud-
geting and Finance, and Public Productivityand Management Review, among other journals.
James W. Douglas is assistant professor of public
administration at the University of South Carolina.His teaching and research interests focus on issues
of state budgeting. His work has been published in
several journals, including the American Review
of Public Administration, Public Administra?
tion Review, and Public Budgeting, Account?
ing, and Financial Management.
Notes1. Some federal funds can be transferred into revolving
funds. Other types of federal funds are restricted andmust be segregated.
2. The Oklahoma budget document only records self-generated revenues for revolving funds. Monies trans?ferred from general revenues, federal funds, or otherrevolving funds are not generally recorded in thebudget document as revenues for a particular revolv?ing fund. Such transfers are recorded internally byagencies. As a result, revenues for several revolvingfunds in the budget document appear to be smaller
than they actually are.
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