Common examples of internal service funds include centralized motor pools, information technology operations, self-insurance and risk management pools, print shops, and central supply warehouses. Governments also use them for facilities maintenance, mail services, telecommunications, and employee benefits administration. In each case, one department operates the service and bills every other department that uses it, so the cost shows up where it is actually consumed.
What Makes a Fund an Internal Service Fund
An internal service fund (ISF) is a proprietary fund established under standards issued by the Governmental Accounting Standards Board. Its job is to finance goods or services that one department provides to other departments on a cost-reimbursement basis, with the goal of breaking even rather than making a profit. Revenue comes entirely from internal billings, not from taxes or fees paid by the public.
That internal focus is the line between an ISF and an enterprise fund. Enterprise funds cover services sold to outside customers, like a municipal water utility or a public transit system. An ISF exists to serve other parts of the same government. GASB guidance says a government should use an ISF only when the government itself is the predominant user of the service; if outside customers account for most of the activity, the fund belongs in an enterprise fund instead.
Pushing a shared service into an ISF forces each department to see what it actually costs. When the police department gets a bill for fleet maintenance or the parks department pays for IT support, that cost shows up in the department’s own budget rather than being buried in a general fund appropriation.
Central Motor Pool and Fleet Maintenance
A motor pool ISF is one of the oldest and most widespread examples. The fund buys, maintains, fuels, and eventually replaces every vehicle in the government’s fleet. Departments that use those vehicles pay the motor pool based on mileage, hours of use, or a flat monthly rate, and those charges are the fund’s revenue.
Billing rates for a motor pool usually have three pieces: the day-to-day cost of fuel, parts, and mechanic labor; a charge for depreciation on the current vehicle; and a surcharge that builds a reserve for future vehicle replacement. The replacement surcharge matters because depreciation alone rarely keeps up with rising vehicle prices. Separating the pieces in the rate lets administrators see how much is going to operations and how much is going toward replacing aging equipment.
In practice, the public works department might be billed for every mile its dump trucks travel, while the building inspections division pays a monthly lease rate for its sedans. Both charges flow into the motor pool ISF, which uses the revenue to run the garage, pay mechanics, buy fuel in bulk at negotiated prices, and set money aside for the next round of vehicle purchases.
Information Technology Services
Governments that centralize IT into an ISF typically pull data centers, network infrastructure, cybersecurity, software licensing, and help desk support into a single fund. The fund then bills every department for what it uses.
Allocation methods vary. Some governments charge a flat rate per employee, treating headcount as a reasonable proxy for IT consumption. Others bill based on more specific measures like the number of devices supported, help desk tickets submitted, or server capacity used. Larger governments sometimes use a hybrid: a per-employee charge for baseline services like email and network access, plus variable charges for specialized resources like database hosting or application development hours.
The IT ISF model fits expensive, shared infrastructure. A single department could never justify the cost of an enterprise firewall or a redundant data center on its own. Spreading that cost across every department through an ISF makes the investment manageable and keeps each department’s budget honest about the technology it relies on.
Self-Insurance and Risk Management
Many governments self-insure rather than buy commercial policies for employee health benefits, workers’ compensation, or general liability claims. A self-insurance ISF collects premium-like charges from every department, pools the money, and pays claims as they come in.
The premiums charged to each department are based on actuarial estimates of its risk profile. A department with a large workforce doing physically demanding jobs will pay more per employee into the workers’ compensation ISF than a department of desk workers. When claims are filed, the ISF pays the medical provider or the injured employee directly from the pool.
GASB Statement No. 10 addresses risk financing specifically and provides that when a government uses a single fund for its risk financing activities, that fund should be either the general fund or an internal service fund. Self-insurance ISFs often carry significant liabilities for incurred-but-not-yet-reported claims, which is why their actuarial assumptions and reserve levels tend to get close attention from external auditors.
Central Printing and Duplicating
A printing ISF houses industrial-grade copiers, large-format printers, binding equipment, and the staff to operate them. Departments submit work orders and get billed per impression, with rates varying by color, paper stock, and finishing. The alternative is every department leasing its own expensive equipment that sits idle most of the day.
High-volume users like the elections office or the clerk’s office drive most of the revenue. The fund uses it to cover paper inventory, toner, equipment depreciation, and staff salaries. As governments shift more communication online, some printing ISFs have expanded into digital design and mail processing to stay viable.
Central Stores and Supply Warehousing
A central stores ISF keeps a warehouse of commonly used items like office supplies, cleaning products, and standardized maintenance parts. Departments draw from the warehouse as needed instead of placing their own small purchase orders with outside vendors.
The fund charges a markup over acquisition cost to cover warehousing, handling, and inventory management. Bulk purchasing power is the main point: the government negotiates volume discounts that no single department could get alone. The parks department requisitioning cleaning supplies and the courthouse ordering printer paper both pay the central stores ISF, and those charges keep the warehouse running.
Other Common Internal Service Funds
The five examples above come up most often, but governments create ISFs for any centralized service where cost tracking matters. Other common ones include:
- Facilities maintenance and building management, where a single fund covers custodial services, HVAC repair, and building upkeep across all government-owned properties, billing departments based on square footage occupied.
- Mail and courier services, with centralized mail processing and interdepartmental delivery billed by piece or by weight.
- Telecommunications, meaning phone systems, mobile devices, and internet connectivity managed as a shared service, typically billed per line or per device.
- Employee benefits administration, which is separate from self-insurance and covers the overhead of administering benefit programs, processing enrollments, and managing vendor relationships.
The common thread is that the service benefits multiple departments, standardizes well, and produces measurable units of consumption that can drive a fair billing rate.
How the Billing Rates Behind These Examples Work
Rate-setting is the operational heart of every one of these funds. The fund’s administrators estimate total costs for the coming year, including operating expenses, depreciation on capital assets, and any needed adjustment to working capital, then divide that total by the expected volume of service to arrive at a per-unit rate.
Getting rates right matters more than it looks. Rates set too high cause the ISF to pile up a surplus, which means user departments were overcharged. Rates set too low create a deficit that eventually requires a bailout from the general fund or a sudden rate spike. Either outcome distorts departmental budgets and undermines the transparency that justified creating the ISF in the first place. Standard practice is to review and adjust rates annually based on actual costs and usage from the prior year.
When an ISF does accumulate excess revenue, that money should be credited back to the departments that were overcharged, not quietly transferred to the general fund. The whole point of the cost-reimbursement model is that departments pay for what they use and nothing more.
When a Similar Fund Is Not an ISF
Not every government service that bills for its work belongs in an internal service fund. A water utility, a public transit system, or any other operation whose customers are mostly outside the government goes into an enterprise fund instead. The predominant-user test is the dividing line: if the government itself is the main customer, the activity fits an ISF; if the public is, it does not.