Revolving Fund as Budgeting Tools_aimee&Douglas

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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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Franklin and Douglas

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-





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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.





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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.





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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-





11/13


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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12/13


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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