Making Sense of Fiduciary Funds: Chapter 8

Types of Fiduciary Funds and Their Purposes

David Miller: Alright, welcome back to Government & Non-Profit Accounting, everyone! Today, we’re diving straight into fiduciary funds—those mysterious, often misunderstood pots of money that governments hold on behalf of, well, other people. Maya, you ready to get into the thick of it?

Maya Collins: I am so ready! Fiduciary funds always sound intimidating, but they’re really just about governments acting kinda like... a really responsible babysitter for someone else’s resources. Right?

David Miller: Yeah, exactly. So, there are four main types we have to remember: agency funds, investment trust funds, private-purpose trust funds, and pension or other employee benefit trust funds. Each serves a different role, and, honestly, the differences can get a little... blurry the first time through.

Maya Collins: Let’s start with agency funds. I always think of the local county tax collector for this—a classic example. Like, you’ve got this county official collecting property taxes, but those taxes aren’t for the county itself. They get passed through to the school district, the city, the fire department, whatever. The county’s just the middleman—the agent.

David Miller: Right, exactly. And with agency funds, what’s key is that whatever comes in for these other parties goes right back out. So, assets and liabilities—they always balance. There’s no net position in an agency fund because the money never truly “belongs” to the government. It’s just being held there for someone else. That’s a really important point. And, you don’t recognize any revenue or expenses either—just additions and deductions.

Maya Collins: And another thing that used to trip me up is when people talk about public-purpose trusts. You’d think, “Oh, it’s in trust, so it must go in a fiduciary fund,” but that’s not always true, is it?

David Miller: Nope. If the resources in trust are for that government’s own programs or citizens, like for community parks or street maintenance funded through a trust, then that’s a governmental fund situation. Only if it’s specifically for private individuals, other governments, or organizations does it go into a fiduciary fund.

Maya Collins: That one took me a while, too. So if a city sets up a scholarship trust for local residents, even though it says “trust,” you’d still usually use a governmental fund unless the trust’s beneficiaries are only private individuals or outside organizations. The accounting differences really matter because fiduciary funds aren’t even rolled up into the government-wide statements, right?

David Miller: Exactly—agency funds, in particular, don’t show up in the government-wide statements at all. That’s a detail you don’t wanna miss if you’re prepping for an exam or, I guess, auditing someone’s books. Okay, so quick recap: you’ve got these four fund types, but the “who” you’re holding the money for—private parties versus public purposes—really determines where it gets recorded.

Pass-Through Funds and Investment Pools

Maya Collins: Alright, so speaking of acting as a middleman, let’s slide into pass-through agency funds. Now, these come up a ton with grants that get sent to a state government and then passed down to, I dunno, smaller cities or school districts. The trick with pass-through funds—according to GASB, anyway—is understanding when the government is just a pass-through or when it has actual “administrative involvement."

David Miller: Yeah—if you’re just handing off the cash with no strings attached, that’s basically an agency fund. But if you, as the primary government, have to monitor, approve, or determine how the money’s spent, then it's not agency anymore. That’s where you have to recognize actual revenue and expenditures on your books. I’ve seen mistakes here when folks don’t realize the distinction—makes a mess of the reports.

Maya Collins: And the fun doesn’t stop there! Investment pools—this is one that tripped me up at first. So, lots of governments combine extra idle cash into a big investment pool. But whether it goes in an agency fund or an investment trust fund... that depends on who else is in the pool. If it’s only your own departments joining in, you’re fine keeping it in an agency fund.

David Miller: But if you open the doors to outside governments—like, say, the state runs a pool and local school districts and maybe a few tiny towns all throw their money in, looking for higher yields—now you need an investment trust fund. I actually caught a reporting issue in a compliance review once. An external investment pool where a couple local agencies parked their money, but it was all stuck under a generic agency fund. That wasn’t right, and it actually affected their financial disclosures since investment trust funds require showing the pool’s assets, liabilities, net position, and all that jazz.

Maya Collins: Ouch, compliance reviews are brutal for catching those mix-ups. And—just to clarify—if that state, in your example, also puts its own money in the pool, its share just stays with its regular funds and doesn’t show up in the trust fund financials. So, quick practical: if your school district just joins a state’s external pool? Their piece is tracked in the investment trust fund, not mixed in with regular agency funds.

David Miller: Exactly—it’s one of those boundaries people overlook in practice, but it’s crucial for transparency. And if you’re prepping for an accounting test, trust me, this is where professors love their tricky multiple-choice scenarios... “Is this an internal or external investment pool?!”

Pension Trust Funds and Required Reporting

David Miller: Alright, let’s shift to the big show—pension trust funds. I swear, if you ever listen to the national news about underfunded pensions, you know why these get so much attention. The top 100 government pension plans in the US? As of a few years ago, they were holding $3.7 trillion. That’s trillion, with a "T." But there’s a reason they make headlines—if these get underfunded, it’s not just a reporting issue, it’s a real-world crisis for retirees and budgets alike.

Maya Collins: Totally, and it’s wild how detailed the reporting is for these. I took a deep dive into the Johnson County Employee Retirement System’s actual statements, just to see how this all flows together. So, at year-end they were reporting assets like cash, investments—both bonds and stocks—plus interest receivable. Then, on the liability side, mainly payables and accrued expenses. The difference? That’s the net position restricted for pensions. In this case, about $146 million.

David Miller: And for pension trust funds, GASB says you need two statements: one for the fiduciary net position—like you just described—and another for changes in fiduciary net position over the year. Do you remember what’s in that second statement, Maya?

Maya Collins: Yeah, absolutely. Additions first—broken out by employer and employee contributions, plus investment income. And you want to watch those numbers, ‘cause a big swing in market values hits the investment line hard. In Johnson County, they actually had a net decrease in investment value, but the interest and dividends offset that, so total investment income was still over $12 million. And then for deductions: annuity benefits, disability, refunds to employees who left, plus administrative costs. Subtract all of that, and in their case, net position still went up by over $28 million that year. Not bad!

David Miller: But that’s only one year. If the trend goes the other way—a few years of losses or underfunding—watch out. Now, do you wanna talk about the difference in the two main types of pension plans? That can trip up even seasoned accountants.

Maya Collins: Sure! Okay, so defined contribution plans, like your classic 401(k), just record contributions as they come in, and the individual bears the risk—how much they retire with depends on investment performance. But defined benefit plans are trickier from an accounting perspective, because the government’s promising a certain payout regardless. So pension trust funds have to track way more—future obligations, assumptions, all that. If there's a funding shortfall, that risk sits squarely with the government, and you really need careful monitoring and transparency here.

David Miller: Yup, exactly. Monitoring is huge—it’s all about making sure those contributions and investments cover long-term promises to employees. If not, that’s when you see big deficits in the news. And with that, I think we’ve, uh, covered just about all the fiduciary fund drama for today.

Maya Collins: No kidding. This is a topic that keeps evolving, so we’ll definitely circle back down the line. Meanwhile, thanks for listening and sticking with us as we untangle all these fiduciary details!

David Miller: Appreciate you joining us, Maya, as always. And thanks everyone for tuning in—catch us next time as we keep breaking down the world of government and nonprofit accounting. Take care, Maya!

Maya Collins: Thanks, David. Bye, everyone!