State and local governments organize their money into 11 types of government funds, sorted into three categories: five governmental funds, two proprietary funds, and four fiduciary funds. Each fund type isolates a specific slice of public money so that dollars raised or received for one purpose cannot quietly be spent on another. This structure exists because a government cannot legally treat all its resources as one pot. Tax revenue dedicated to roads, grant money for housing, and retirement contributions belonging to employees each have to stay walled off from general spending, and fund accounting is how that separation is proven on the books.1HUD Exchange. Multifamily Housing Program Financial Management Toolkit
The purpose is accountability rather than profit. A private company measures success by earnings; a government measures success by showing that restricted dollars stayed restricted and that spending did not exceed what legislators approved. Grant agreements and legal mandates require this segregation, and noncompliance can mean losing future funding.1HUD Exchange. Multifamily Housing Program Financial Management Toolkit
The Five Governmental Fund Types
Governmental funds cover the core tax-funded activities most people picture when they think of local government. They all use the modified accrual basis of accounting, which tracks current financial resources — what is available to spend soon — rather than long-term profitability.2Governmental Accounting Standards Board. Summary – Statement No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments Revenue counts only when it is measurable and expected to be collected soon enough to pay current bills.
General Fund
The General Fund is the main operating account. If a revenue source or expenditure does not legally belong in another fund, it lands here. Property taxes, sales taxes, and other broad-based revenues flow into the General Fund to pay for police, fire protection, administration, and the day-to-day services people associate with local government. Because it holds the bulk of flexible spending, this fund receives the heaviest scrutiny during budgeting and audit season, and overruns beyond appropriated amounts can trigger legal consequences.
Special Revenue Funds
Special Revenue Funds isolate money that comes from specific sources and must, by law or agreement, be spent on specific purposes. A dedicated gasoline tax restricted to road maintenance is a textbook example; the revenue cannot be redirected to hire office staff. GASB Statement No. 54 tightened how governments classify the balances sitting in these funds, sorting them into nonspendable, restricted, committed, assigned, and unassigned categories based on how strong the legal or policy constraints are.3Governmental Accounting Standards Board. Summary – Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions
Debt Service Funds
Debt Service Funds accumulate the money needed to make principal and interest payments on long-term bonds. When a government borrows to build a school or upgrade a sewer system, it typically pledges specific revenue to repay those bonds, and that revenue collects here until payment is due. Keeping debt payments in a separate fund reassures bondholders and rating agencies that dedicated cash flow is set aside, and it lets taxpayers see whether the government is keeping up with its obligations. A poorly managed Debt Service Fund can trigger a credit downgrade that raises borrowing costs for years.
Capital Projects Funds
Capital Projects Funds track spending on major construction and infrastructure: new buildings, bridge replacements, water treatment plants, and similar large-scale work. Financing typically comes from bond proceeds, federal or state grants, or transfers from other funds. Separating these costs matters because a single project can run into tens of millions of dollars. If those expenditures ran through the General Fund, routine operations would appear wildly over budget one year and artificially lean the next. Once a project wraps up, any remaining balance usually moves to the Debt Service Fund or back to the General Fund.
Permanent Funds
Permanent Funds hold resources where the principal is legally untouchable but the investment earnings can support government programs.4National Center for Education Statistics. Chapter 4 – Governmental Accounting, Fund Structure A donor might leave money to maintain a public cemetery or a library; the government invests the principal and spends only what the investments generate. The restriction is permanent — no future council or legislature can vote to spend the principal on something else. Because the principal cannot be liquidated, it falls into the nonspendable category under GASB 54’s classifications.3Governmental Accounting Standards Board. Summary – Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions
The Two Proprietary Fund Types
Proprietary funds operate on a business model. They use the full accrual basis of accounting, the same approach private companies use, recording revenue when earned and expenses when incurred regardless of when cash moves.2Governmental Accounting Standards Board. Summary – Statement No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments That means they also track long-term assets and liabilities like equipment depreciation and outstanding debt.
Enterprise Funds
Enterprise Funds serve the public and are designed to be self-sustaining through user fees. Water utilities, sewer systems, electric services, airports, and public transit systems are the most common examples. The people who use the service pay for it, rather than funding it through general tax revenue. User fees should cover not only daily operations but also long-term capital needs such as replacing aging pipes or upgrading treatment plants. When a government issues revenue bonds backed by an enterprise fund, the covenants typically require the fund to generate enough net revenue to cover debt payments by a specified margin.
Internal Service Funds
Internal Service Funds handle operations that serve other government departments rather than the public. A centralized fleet maintenance shop, a government printing office, or a shared IT department might each operate through an Internal Service Fund, billing other departments on a cost-reimbursement basis. Instead of every department buying and maintaining its own vehicles, one department manages the entire fleet and charges each agency for what it uses. The accounting challenge is setting accurate billing rates: charge too much and one department quietly subsidizes another, charge too little and the fund runs a deficit. In the government-wide financial statements, most internal service fund activity gets folded into the governmental activities column to avoid double-counting.
The Four Fiduciary Fund Types
Fiduciary funds hold money the government manages on behalf of someone else: retirees, other governments, private individuals, or organizations. The government cannot spend this money on its own programs. Because these resources are not available for the government’s use, GASB Statement No. 34 requires them to be excluded from the government-wide financial statements entirely; lumping fiduciary assets into the government’s own totals would grossly inflate its reported net position.2Governmental Accounting Standards Board. Summary – Statement No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments
Pension and Other Employee Benefit Trust Funds
These are typically the largest fiduciary funds and manage retirement savings and other post-employment benefits for public employees. The money belongs to current and future retirees. Plan assets must be dedicated exclusively to paying benefits and legally shielded from the creditors of both the employer and the plan administrator. GASB Statement No. 68 requires employers participating in defined benefit pension plans to report their share of the net pension liability directly on their financial statements. That number represents the gap between what the plan owes retirees and what it has invested to cover those promises, and a large unfunded liability signals that future budgets will need to devote more money to pension contributions.5Governmental Accounting Standards Board. Summary – Statement No. 68, Accounting and Financial Reporting for Pensions
Investment Trust Funds
Investment Trust Funds report the external portion of investment pools managed by a sponsoring government.6Governmental Accounting Standards Board. Summary – Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools A state treasurer might operate a pooled investment program where counties, cities, and school districts combine idle cash to earn better returns than any of them could get individually. The state reports its own share in its governmental or proprietary funds, but the portion belonging to outside participants goes into an Investment Trust Fund. Pooling gives smaller governments access to more diversified investment options and lower management costs, while the trust structure keeps their assets identifiable and separate.
Private-Purpose Trust Funds
Private-Purpose Trust Funds hold assets where both the principal and income benefit specific individuals or private organizations rather than the government or the general public. A scholarship fund for local students or a trust supporting a private foundation are common examples. The government managing these assets acts as a steward, following the terms of the trust agreement and making distributions accordingly. Mismanaging the assets can expose responsible officials to personal liability.
Custodial Funds
Custodial Funds account for resources a government holds temporarily for outside parties. A county collecting property taxes on behalf of a school district is the classic scenario: the county gathers the payments, holds them briefly, and passes them along. GASB Statement No. 84 established the modern reporting framework for these funds, replacing what used to be called agency funds with clearer standards for identifying and reporting fiduciary activities.7Governmental Accounting Standards Board. Summary – Statement No. 84, Fiduciary Activities Because the government does not own these assets, custodial fund balances stay out of the government-wide statements.
Fund Balance Classifications Within Governmental Funds
The money sitting in a governmental fund is not all equally available to spend. GASB Statement No. 54 sorts fund balances into five categories based on how tightly the money is constrained:
- Nonspendable: resources that cannot be spent at all, either because of their form (like inventories or prepaid items) or because of legal restrictions (like the principal of a permanent fund).
- Restricted: money that can only be spent for purposes set by the constitution, an outside grantor, or enabling legislation. The government cannot redirect these dollars without changing the law or the grant agreement.
- Committed: funds set aside for specific purposes by a formal action of the government’s highest decision-making authority, such as a city council resolution. Changing the commitment requires another formal action at the same level.
- Assigned: money intended for a particular purpose but without the formal constraints of the committed category. In funds other than the General Fund, assigned balance is whatever is left after restricted and committed amounts.
- Unassigned: the residual balance in the General Fund, everything not captured by the categories above. Only the General Fund should carry a positive unassigned balance; other funds report unassigned balances only when they have deficits.
These classifications matter because they tell anyone reading the financial statements how much spending flexibility the government actually has.3Governmental Accounting Standards Board. Summary – Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions A government might report a healthy-looking total fund balance, but if most of it is restricted or committed, the actual cushion for unexpected costs can be thin. That gap between total balance and truly flexible balance is where fiscal stress hides.
How the Funds Appear in Financial Reports
All 11 fund types come together in a government’s financial statements, but they do not all follow the same accounting rules. Governmental funds report using the modified accrual basis. Proprietary and fiduciary funds use the full accrual basis, tracking all economic resources including long-term assets and liabilities.2Governmental Accounting Standards Board. Summary – Statement No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments
GASB Statement No. 34 also requires a set of government-wide financial statements prepared on the full accrual basis, giving readers a consolidated view of overall financial position. Those government-wide statements include governmental and business-type activities but exclude fiduciary funds, since those assets are not the government’s to spend.2Governmental Accounting Standards Board. Summary – Statement No. 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments Many governments package this material into an Annual Comprehensive Financial Report, or ACFR. Producing the full ACFR is voluntary, though the basic financial statements it contains — management’s discussion and analysis, the fund-level statements, and accompanying notes — are required under generally accepted accounting principles.8Governmental Accounting Standards Board. GASB Changes Name of Report to Annual Comprehensive Financial Report The ACFR is the single most useful document for anyone trying to understand a government’s financial health.