Revolving Funds as Budgeting Tools: An Examination of Oklahoma State Agencies

Author(s): Aimee L. Franklin and James W. Douglas

Source: State & Local Government Review, Vol. 35, No. 2 (Spring, 2003), pp. 90-101
Published by: Sage Publications, Inc.
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State and Local Government Review

Vol. 35, No. 2 (Spring 2003): 90-101

An

as

Funds

Revolving

of

Examination

L. Franklin

Aimee

all

and James

dollars

Agencies

W. Douglas

equal when
of a
for the operations
Is there a differ?

ence in the way in which revenues from a va?

and allocated
riety of sources are scrutinized
and practitioners
by the legislature? Theorists
alike agree that the legislature
exercises con?
trol over agency actions through the budget?
bills can restrict
Appropriations
funding by object code, by program or activ?
ity, or by fund. In addition, agency actions can
be limited in statutory language or by person?
ing process.

nel caps. Although

there is wide variation,
each state has at least one appropriation
from
a general revenue fund. Other funds that may
be appropriated
include
capital, rainy day,
special cash, federal, revolving, and enterprise
or proprietary
funds.
Oklahoma

State

Oklahoma

created

budgeting
state government?

Are

Tools:

Budgeting

is a state that has relied

exten?

its his?
funds throughout
sively on revolving
tory (Weaver 1940). The first revolving fund
in Oklahoma
was introduced
in 1910 (three
From
after
to 1944, an
1934
statehood).
years

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. This
reduces the expectation
that the
arrangement
will micromanage
how revolving
legislature
fund money is spent.
Most revolving
funds in Oklahoma
agen?
cies are different

from internal

service

funds

and enterprise
funds. Generally,
they do not
cost centers
or reimbursements
represent
for administrative
agency

service

activities

within

an

or between

state agencies, nor are they

to be mechanisms
by which to com?

designed
pare revenues

and expenditures
to determine
if 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.
funds may affect agency spend?
Revolving
than other types of funds, but
ing differently

average of only 34.1 percent of state revenues

went to the general revenue fund (Lee 1945). In
FY 1999, revolving fund revenues amounted to
$640 million (about 26 percent
approximately

regarding the treat?

ment of revolving funds. Moreover,
most re?
volving funds in Oklahoma are quite different

of own-source

therefore

Normally,
tinuing
90

revenues)
revolving

appropriations."

for 54 state agencies.

funds operate as "con?
These

funds have no

there is a lack of research

from the funds discussed

in the literature.

We

examine

the use of revolving funds

in the state, particularly
the different aspects
of control over public funds. From an exterState and Local Government Review

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Revolving Funds as Budgeting Tools

however,
managers
countability;
internally,
need flexibility to achieve the desired results.
This study assesses the ability of revolving

Other sources include (in decreasing

order of importance)
licenses and exams, fines
and forfeitures,
general revenue appropria?
dedicated
tions,
taxes, occupational
licensing,

funds

federal

nal perspective,

there is a need

to ensure

ac?

to improve efficiency
and managerial
whether endWe
also
flexibility.
investigate

is reduced when an agency

of-year spending
has access to nonlapsing
revolving funds. Fi?
consider
we
the
nally,
degree to which revolv?
ing funds affect public accountability
ernment spending.

of Revolving

Description

for gov?

Funds

Each of the 54 agencies included in this study

received funding from 1 to 21 revolving funds
in addition

to general revenue, other appro?

priated revenue, and/or federal funds receipt.
The oldest funds started in 1955; 14 were es?
after 1990. (See Table 1 for a de?
of
the revolving funds for the agen?
scription
cies included in this study.)
tablished

services.

bond

funds,1
revenues,

activity revenues,
permitting
client or other government
and transfers from other re?

trust accounts,
for
funds.2 Agencies
are responsible
basic
information
on
the
current
providing

volving

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
termine agency capacity
fund revenues.

de?
helps legislators
and needs for general

Statutory language concerning expenditures

from revolving funds ranges from fairly vague
to explicit and restrictive.
and nonrestrictive
The

may identify revenue sources

language
and limit allowable programmatic
uses. Typi?
in the
fund
monies
are
used
cally, revolving

or a legislative
of proposing a new

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

are more likely to

agencies
to an existing fee or fine struc?

to fund cap?
up general revenue underfunding,
ital projects such as ADA compliance,
as a

funds are created when

Typically, revolving
there is a new revenue
program

initiative.

revolving

fund,

source

Instead

propose changes
ture currently authorized

in statute. Agencies
of outdated
also
initiate
the
elimination
may
or inactive funds or the consolidation
of ex?

hedge

isting funds. Revolving fund revenues are pri?

marily derived from fees and sales of items or

ter a scandal, as a disbursing

fund, for intertransfers, in end-ofagency or interprogram

Table 1. Descriptive

Statistics for the Revolving

to meet
against unexpected
expenses,
unfunded
as
a
needs,
special
savings account,
to provide flexibility, to restrict activities af?

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

Median percentage of state fund expenditures derived from revolving funds
Range of percentage of state fund expenditures derived from revolving funds
Minimumexpenditures from a single revolving fund

26.2%
22%
0.6%-l 00%
$20,730?

Maximum expenditures from a single revolving fund

$209,890,069
a Somefundshad no
expendituresin FY1999. Thisamountreflectsthe smallestexpenditurefroman agency revolvingfund
in the year studied.
Spring 2003

91

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Franklin and Douglas

the year), to pay

year spending
(throughout
for special program activities, for regulatory
for
or oversight
activities, as reimbursement
services, for payroll, and for some
activities. As these uses suggest, re?

interagency
enterprise

can cover a wider

volving fund expenditures
of
can
expenditures from
range
categories than
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
between the two types of funds:
both are regarded as appropriated funds. How?
restric?
ever, specific limits such as line-item

is no difference

and lapse dates

tions, one-twelfth
allotments,
that apply to general revenue funds do not
apply to revolving funds. Typical limits on re?
laws, fee struc?
in law, legislative
bills setting
limits, and statutes
spending

funds include

volving
tures specified
overall
directing

federal

agency
the automatic

reversion

of excess re?

volving fund balances to the general revenue

fund. Revolving
fund revenues that are ear?
marked

are not included

for appropriation
of Equalization.

in the funds available

certified

by the State Board

there has to be a

However,
available in the revolving
fund
encumbrances
can be made. For a few

cash balance
before

funds,

the transfer

may be made
fund, federal funds,

revolving
from the general revenue
or other revolving funds. Through
transfers,
agencies can gather together enough money
to fund an activity
expenditures

or purchase or to advance
for the fourth quarter.

planned

Literature

Review

There

is little research examining

the effects
of revolving funds on agency budgeting. Much
of what is known about revolving funds is an?
ecdotal and merely suggests likely outcomes
for government
that use revolving
agencies
funds. According
to Osborne
and Gaebler

funds have the potential to

revolving
avoid
asso?
help agencies
perverse incentives
ciated with traditional
budgeting
practices.
(1992),

The authors
practices
92

argue that traditional budgeting

in many jurisdictions
force agencies

to spend

all of their

appropriations
in future fiscal years.

or risk

Elected
losing funding
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
can
twice
First
be
the
penalized.
agency
leg?
islature takes the year-one balance away, then
it reduces
an amount

the agency's budget in year two by

equal to the balance at the end of

year one.

Such budget practices often cause

to
rush to spend any balances they
agencies
have prior to the end of the fiscal year (Wildavsky 1992). This practice results in wasteful
re?
which does little to maximize
spending,
to best achieve

sources
borne

agency missions
1992).
and Gaebler (1992) contend

(Os?

and Gaebler

Osborne

funds

revolving
verse incentives

that

can also help eliminate

per?
for public managers. Money in

funds does not lapse, so managers

revolving
do not need to rush to spend balances at the
end of the fiscal year. Therefore,
managers
have an incentive to find ways to save so that
additional

money can be directed to high pri?

Because revolving
funds are not ap?
propriated
by line item, public managers are
able to allocate resources where they are most
orities.

needed

without

having

to seek authorization

for transfers.
Barzelay (1992) also supports the use of re?
volving funds, claiming that they improve man?
and increase incentives
for
agerial discretion
to use resources more effi?
personnel
ciently. He found that revolving funds are most
effective when they introduce
market forces
agency

into agency operations,

as when government
units are able to provide centralized
services
to other agencies and charge those agencies
a 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 sources
for specific purposes. A group could provide
or expand a service by identifying
a new revState and Local Government Review

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Revolving Funds as Budgeting Tools

enue source

and dedicating

pose, thereby preventing

new revenue source within

it for such a pur?

other claims to the

ilar to many entitlement

1998), revenues earmarked

the budget. Sim?

(White
programs
for revolving funds

bud?
agencies with some permanent
get authority, which can enhance managerial
flexibility. However, Fisher (1975; 1979) found
that earmarks can have the same limiting ef?
line
as restrictive
fect on agency discretion

provide

items, especially if the agency was likely to re?

ceive the same amount of money anyway. In
such cases, the earmarks simply tell the agency
how the money is to be spent.
The potential
benefits of revolving
do not come without

costs. According

funds
to Ru?

bin (1988, 542), municipal enterprise funds (a

form of revolving
fund) "increase the com?
plexity of the budget
to act as an instrument

and reduce

its capacity
of accountability."
Pub?

lic accountability
is especially
difficult when
transfers are made from enterprise
funds to
other funds (Tyer 1989).
it difficult to determine

Such practices make

the extent to which

other

public services are being subsidized

by
fund
revenues.
As
these
enterprise
suggested by
public funds need to be treated in a
that ensures comprehensive
report?
to those
ing in a format that is transparent
concerned.
studies,
manner

Research

in other

ing has found

cific purposes

areas of public budget?

dedicated to spe?
are often more fungible than

that revenues

legal requirements
suggest. For example, Mil?
ler and Pierce (1997) found that public lottery
revenues that are legally committed
to educa?
tional

programs often fail to increase educa?

tion spending
because they are offset by re?
ductions
in general fund appropriations
to
education
These

(see also Mikesell

and Zorn

1986).
are a concern

Rubin (2000) highlights an additional prob?

lem, noting that locking revenues into enter?
prise funds makes trade-offs between programs
more

difficult.

Services funded by enterprise

are at least partially protected
by the
fact that revenues are legally dedicated to them.

funds

Other services, no matter how important they

have become, often cannot gain access to these
revenues easily.

Research
This

study

Design

and

deductively

Data

tested

Analysis
assumptions

spending,
concerning
flexibility, end-of-year
based on the prescriptions
and accountability
found in existing literature. The research data
were gathered during the spring of 2001 from
52 face-to-face
and telephone
interviews with
the chief finance officers from 54 state govern?
ment agencies in Oklahoma
(2 agencies re?
fused to participate). Included in this total are
the director of the executive budget office (the
Office of State Finance)
and the chief fiscal
for
The agencies were
the
state
senate.
analyst
selected
from 60 state agencies
purposively
that had a total funding in excess of $1 million
and at least one revolving fund.
For the elite interviews,
a structured inter?
with
was
protocol
follow-up
prompts

view

used (see the instrument

on page 94). Partici?
answered
pants
questions that (1) investigated
the sources and uses of revenues for each ap?
fund and inquired about the bal?
propriated
ances in each of the accounts,
(2) described
the relationship
of revolving
funds to other
funds the agency had access to, (3) explained
interaction
legislative
during the appropria?
tions process, and (4) invited perceptions
re?
garding the impact of the availability of these
funds

on managerial
and innova?
efficiency
authors conducted
all of the inter?

tion. The

problems
accountability
given that special funds such as revolving funds
are generally viewed as enhancing
accounta?
revenues
for
bility by segregating
particular

views.

purposes, thus making the use of these funds

easier to identify and track (Razek and Hosch
1995).

the content

The

notes

from the interviews

and finan?

cial information
Office

published
by the Oklahoma
of State Finance formed the basis for

analysis of the transcripts.

Using
this study attempted
to de?
data,
descriptive
validate
the
literature
(Marshall and
ductively

Spring 2003

93

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Franklin and Douglas

Fund

Revolving

Interview

Questions

1. Explain your revolving funds. Are they

single or multipurpose?
2. Are there any limitations placed upon
revolving funds?
3. Do revolving funds improve manage?
rial flexibility? How so? Due to
absence of line-item restrictions? Due
to 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
an incentive to save?

9. Does the agency spend balances down

prior to the end of the year (end of
legislative session) so that the money
won't be lost? If not, why not?
politically

11. How do revolving

accountability?
12. How do revolving

untouch?

able responses,
confidentiality.
findings based

of receiving socially desir?

the participants
were assured
the
of
Finally,
generalizability

on interviews

of agency offi?
cials in a single state is limited. However,
the
use of elite interviews
has proven to be an ef?
fective

for studying the budgetary

technique
process (for example, see Gosling 1985; Lauth
and Willoughby
1978; and Thurmaier
2001),
and we believe the value of our findings out?
weighs

concerns

for reliability,

validity,

and

Findings
The literature

con?
suggests three propositions
funds
that were deductively
cerning revolving
tested in this study:
Research Proposition #1: Revolving

funds in?

crease

flex?
managerial
flexibility. Improved
ibility results primarily from the absence of
line-item
restrictions.
It is expected that re?
in focusing
volving funds will aid managers
resources on priorities and increasing agency

funds reduce public

efficiency.

funds increase

Research Proposition #2: Revolving funds re?

duce wasteful end-of-year
spending. The nonlapsing characteristic of revolving funds makes

public accountability?

it unnecessary
for agencies to rush to spend all
of their resources by the end of the year. Stat?
utes creating revolving funds enable the funds

Rossman
tions,
finance

duce the likelihood

create

are large?

10. Are any balances

able?

is the
Tb re?

replication.

7. Does the legislature take balances?

8. Does the legislature reduce general
if revolving fund
appropriations
balances

(1990). An additional validity concern

of interviewees'
truthfulness
responses.

1999). Tb answer the research ques?

the "native views" of state government
officers

were investigated
to uncover
and differences. Transcripts were
from notes taken during the inter?

to retain

balances. It is expected
end-of-year
that agency managers will focus their funding
efforts on priorities rather than on spending

commonalties

deadlines.

prepared
views, and patterns were identified and themes
were developed
based on the transcripts.

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

Because

this research
there

is based

heavily on
are threats to the

qualitative
analysis,
validity of the findings. First is the concern of
researcher bias in interpreting
the responses.
To minimize
this threat, the data were ana?
described
lyzed using a protocol
and Lofland (1984) and Strauss
94

by Lofland
and Corbin

without
expenditures
raising taxes. It is ex?
that
such
actions
divert earmarked rev?
pected
enues from their intended
it more

difficult

cials to determine
are being

for citizens

purposes and make

and elected offi?

how earmarked

revenues

spent.
State and Local Government Review

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Revolving Funds as Budgeting Tools

Increasing

Managerial

Flexibility

The interviewees

indicated that the revolving

funds for their agencies did improve manage?
rial flexibility in several ways. Revolving funds
improve efficiency and offer flexibility in Ok?
lahoma
lems

agencies
associated

by covering cash flow prob?

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
with
cash
flow
flex?
This
dealing
problems.
useful when large ticket
ibility is particularly
items need to be purchased
as
by agencies,
one interviewee
described:
Car contracts are released in October or
November. They are technically for a year,
but in reality there is a shorter time frame.
Generally, we can only get purchases on
that contract through June, because then
the new models are being introduced.
When they are delivered, we usually have
10 days to pay. The car manufacturers
only produce a limited number of the cars
we need. If we wait too long, they will be
sold out. Revolving fund money can really
help here. Without them [revolving funds],
we would have to wait until we built up
al?
enough reserve from our one-twelfth
lotments. By that time, the cars we need
could be sold out.
funds improve managerial
flex?
Revolving
in
other
Fourteen
officials
ibility
ways.
agency
(26.9 percent) cited revolving fund balances as
being invaluable for the funding of unexpected

helps increase flexibility, thereby allowing agen?

cies to save balances for high priorities
and
that do not come due until af?
encumbrances
ter the fiscal year is over. One official from a
large agency noted that the agency had a fund
with a balance

of approximately
$4 million for
which $4.6 million was obligated
but unrec?
When the obligation
became due,
ognized.
the agency found that its budget was under?
funded, and it had to seek additional funds.
officials

reasons
gave additional
funds
why revolving
improve flexibility. Agen?
cies try to preserve these funds by spending
Agency

from all other sources

first. Interviewees
sug?
an
for
order
how
implicit
gested
pecking
they
expend money from different sources (in de?
order of importance):
creasing
carry-over
general revenue appropriations,
special cash
fund appropriations,
general revenue, federal
funds, and revolving funds.
officials (34.6 percent) stated that
funds
make it easy to move money
revolving
to areas of need. The lack of line-item restric?
Eighteen

tions allows agencies to spend revolving fund

money on the most pressing issues facing them
at any particular
prevents

time. Having revolving funds

agencies from needing to obtain ap?
to shift money between appropriated

proval
accounts.
argued
money

Despite this advantage, most officials

that the bulk of their revolving
fund
constitutes
an important part of their

recurring budgets, thereby limiting

amounts
bility to shift significant

their flexi?

and shortfalls
in general reve?
expenditures
nues. They stated that revolving fund balances
enable them to deal with such occurrences

of money
their budgets at any particular time.
Five agency officials (9.6 percent)
stated
that their agencies'
funds
revolving
help to
their
revenues
from
the
protect
legislature.

because

They

they do not have to wait for special

authorization
or for additional appropriations
as long as they maintain sufficient balances in
their funds. For example, one agency official
remarked

that the management

and planning
for resolving computer problems is facilitated
by revolving funds because repairs can be made
without having to wait for more money or au?
thorization.
Moreover, 23 officials (44.2 percent) asserted
that the nonlapsing
nature of revolving funds

within

feared that if they relied entirely

on
for their bud?
general revenue appropriations
would gradually reduce
gets, the legislature

their funding.
for revolving

Revenues

that were earmarked

funds

helped to protect their

from
cuts.
Three
budgets
agency officials (5.8
claimed
that
percent)
revolving funds can pre?
vent legislative
of agency
micromanagement
activities

by providing managers with a good

deal of discretion
over how revolving
fund
is
money
spent.

Spring 2003

95

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Franklin and Douglas

Agency officials also indicated that revolv?

ing funds often limit their flexibility in impor?
tant ways, although only five agency officials

out that keeping track of earmarked revenue

fund balances, forecast?
sources, monitoring
and meeting re?
fund
revenues,
ing revolving

(9.6 percent) claimed that revolving funds did

not yield any flexibility
for
improvements
their agencies.
Perhaps the most important

requirements
porting
and makes budgeting

of revolving
funds in terms of
the
is
managers'
flexibility
type of fund. Re?
that
can
used
for any purpose
funds
be
volving
characteristic

increases

work

loads

more time consuming.

claimed that forecasting

One agency official

revolving fund revenue collections caused such
big cash flow problems in his agency that he
preferred that the agency receive only general

tend to give managers more flexibility than do

revolving funds dedicated to a single purpose.
It is extremely difficult to shift the balances in

revenue

"that way, we would

appropriations:
know exactly when and how much money we
are getting."

funds to other agency needs be?

single-purpose
cause the revenues are ordinarily earmarked by
statute, and legislative action is needed to shift

Moreover, some revolving funds are so small

that they are not useful. Five officials (9.6 per?
cent) revealed that they maintained
revolving

fund balances to other agency ac?

revolving
counts. This inability to shift single-purpose
funds prevents the moving of revolving fund

funds that had very small revenue sources that

were the result of the legislature
occasionally

balances

how much money a new fee

overestimating
would raise. The earmarking of funds for nar?
row purposes forces agencies to maintain ac?

cited

counts

to high-priority
agency needs.
Seventeen
officials
(32.7 percent)
agency
cash flow issues

as being problematic.
be
may
artificially inflated be?
cause a particular revenue stream in the fund

Fund balances

may be uneven during

rendy, most occupational
der a batch

the fiscal year. Curlicenses operate un?

system, so revenues are

realized at only one time per year. Many funds
have licenses,
fees, permits, and renewals as
their primary revenue source. Similarly, sea?
sonal

renewal

services

etc.)
camping,
hunting,
that are provided by various state agencies are
cyclical, and the revolving fund balances may
show significant
peaks and valleys over the
(e.g.,

for which

it may take several years to

enough money to spend on any?
useful.
In other cases, revenue sources
thing
have dried up for particular revolving funds.
accumulate

The

balances

sufficient
is needed

in the funds are in?

remaining
to spend. Because legislative action
to shift the money to another ac?

small balances

count,

may sit untouched

for

years.
Two additional

were identified
problems
by agency officials. First, four budget officers
(7.7 percent) in agencies that receive a large
of their budgets from revolving
percentage

course

of a year. Another situation that causes

cash flow concerns is when an agency experi?
ences delays in federal funds receipts because

funds charged that the legislature often over?

looks them when increasing
the general rev?
enue fund of other agencies. The legislature

of a difference

in the federal fiscal year and de?

lays in passing the federal budget. Addition?
ally, agency officials indicated that it is diffi?

assumes that these agencies

apparently
get
of
from
their
funds.
plenty
money
revolving
This assumption
can sometimes
force agen?

cult to predict how much money earmarked

sources for revolving funds will gen?
erate each year. Unstable
revenue
sources

cies to ask for increases

revenue

make planning difficult in these agencies.

Twelve agency officials (23.1 percent)?es?
pecially those in agencies with large numbers
of revolving

that main?

funds?complained
funds created a consider?
taining revolving
able amount of work. Agency officials pointed
96

order

to meet

in fees and charges in

demands
on their
increasing

Second, three agency officials (5.8

percent) stated that revolving funds only im?
prove flexibility if they bring in more money
budgets.

than was anticipated.

Otherwise,
enues and strict demands prevent
shifting
viding

resources

to other

tight rev?
them from

priorities

or pro?

new services.
State and Local Government Review

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Revolving Funds as Budgeting Tools

Overall, the findings lend support to the

that revolving funds in?
research proposition
crease managerial flexibility (research propostion #1). Agency officials reported that re?
volving funds helped them avoid cash flow
deal with unexpected
events, focus
problems,
on priorities, handle encumbrance
issues, pro?
and lessen legislative
tect revenue
sources,
do not fully
micromanagement.
however.
confirm the research proposition,
Several agency officials noted that gains to
The findings

flexibility can be offset by revolv?

managerial
to narrow pur?
ing funds that are dedicated
upon uneven or unpre?
poses, are dependent
dictable revenue streams, lead to increased
workloads

and paperwork,

and receive

negli?

the cap in one of these

money
exceeding
funds at the end of the year is automatically
fund. Although
to the general
transferred
that they were
indicated
interviewees
many
to work with the legislature,
willing
were generally despairing of legislative
vention.

they
inter?

fund bal?
Losing part of their revolving
ances is not the only financial risk agencies
run 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?
increase
relative to that received by
priation
fund
other agencies because large revolving
balances are regarded as a sign that the agency
does not really need all of the money it is re?
ceiving. Similarly, agency officials claim that

gible revenues.
Wasteful
Reducing
End-of-Year
Expenditures
As stated earlier, the nonlapsing
nature of re?
reduce
the
incentive
to
funds
volving
may

the legislature might force an agency to use its

fund balance to fund a new initia?
revolving

spend down balances at the end of the year.

Because they are nonlapsing,
revolving funds
to be?
should therefore
encourage
agencies
come more efficient
and save more so that

tive, assuming that the revolving fund is suf?

ficient to cover the cost of the initiative.

they can focus on priorities.

We found that, to a limited

extent, revolv?
funds
to
find ways to
ing
encourage
agencies
maintain balances so that they can deal with
unexpected events and focus on priorities. The
incentive to save is severely limited, however,
will transfer
by the fear that the legislature
funds to the gen?
large balances in revolving
eral revenue fund. Agency officials are cogni?
zant that central budget offices and legislators
and their staffs closely scrutinize the balances
to find extra money to be divvied up in sub?
committee
budget hearings. Each year, sub?
committees
look at the general revenue cer?
tified
sources

Most agency officials acknowledged

that
large balances in revolving funds
maintaining
can be a gamble because doing so risks a po?
reaction from the legisla?
tentially negative
ture. Typical comments
include the following:

in regard to this threat

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 happen
to us on the next to the last day of the ses?
sion a couple of years ago. The legislature
takes large balances, especially when money
is tight. Offices without good plans about
how to spend their balances will have their
balances taken away.

funds

and revolving
fund balances
as
for the next year's budget.
fund balances are especially tempt?

available

Revolving
ing targets during times of fiscal stress. Eigh?
teen officials (34.6 percent) indicated that their
transfers of
agency had already experienced
this kind. Two agencies have a revolving
that has statutory
caps on the balance.

The legislature threatens every year to de?

crease the general revenue appropriation
because of large [revolving] fund balances.

fund

Agency officials appear to be more worried

about losing revolving fund balances than about
legislative actions to reduce their general rev?

Any

enue appropriations.

Tb protect

Spring 2003

their budgets
97

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Franklin and Douglas

from these

potential threats, agencies follow

of strategies. By far, the most popu?
lar strategy mentioned
during the interviews
was spending down balances. Seventeen agency
a number

officials
balances
Several

admitted
to keeping
(32.7 percent)
low in order to avoid losing them.
officials said that they keep their bal?

ances below

a specific dollar amount, believ?

that
the
ing
legislature ignores balances smaller
than 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 be
small during appropriations
time, so that the
will
take
not
legislature
any of the balances

funds, no matter how large the balances. Re?

to be politi?
volving funds that are thought
safe
include
those
that
finance
cally
pet proj?
ects of important
those that are
legislators,
popular with citizens (for example, children's
programs and programs for the elderly), and
those that are protected by a politically active
Thirteen
officials (25 percent)
constituency.
indicated

that at least one of their

agencies'
untouchable.
revolving funds is politically
One additional issue concerning
revolving
fund balances is worth mentioning. All agencies

have legal limits on the total amount of money

that may be spent from all of their accounts
during the fiscal year. As a result, the flexibility
gained from being permitted to save money in

away." Yet another interviewee stated that "cash

balances have been worked down. [The leg?
islature is] trying to take some of the cash now.

the form of a revolving

This is bad because

that revolving
ing the research proposition
funds reduce wasteful end-of-year
spending
(research proposition #2). Most agencies main?
tain balances in their revolving
funds at the

we need to keep [a certain

of money] in float to cover shortfalls
from the one-twelfth
allotment schedule." De?
amount

spite comments
viewees indicated

such

as these, most inter?

that their agency did not try
to spend down the balances of most revolving
funds either because the balances were too
small to attract notice

from the legislature

or
that
the
recognized
revolving

the legislature
fund balances
Other

were obligated.
for protecting
strategies

fund balances

revolving

include

overbudgeting
money
in order to make balances seem obligated and
a good plan for using the balance
maintaining
so that a case can be made to the legislature
should it try to take some of the money. Of?

fund balance

or as an

end-of-year carryover is somewhat diminished.

The findings yield mixed results concern?

end of the fiscal year. However, these balances

are sometimes
smaller than agencies would
to
sustain
in their revolving funds. The
prefer
fear of losing portions of their funding to leg?
action causes many agencies to spend
down their balances prior to the end of the

islative

fiscal year. This action forces

money from their balances
them for potentially
more
the future. The nonlapsing

agencies to spend
rather than keep
pressing needs in
nature

of revolv?

ficials who indicated

ing funds allows agencies to save at least some

the fear
money for high priorities. However,
that large balances will result in lost funding

and the amount

provides agencies with an incentive to engage

in the same type of end-of-year
spending that
the nonlapsing
of
aspect
revolving funds was

that they have had bal?

ances taken away from their agency admitted
that such events do not generally occur often,
small.

This

of money "lost" tends to be

could be a function
of

situation
to avoid

strategies
losing money, especially
low balances.
maintaining
Some revolving funds are not at risk of los?
ing balances because of political considerations.
These

bin (2000).

funds are almost

exclusively earmarked
Several interviewees
stated

for single purposes.

that they knew the legislature would not take
any of the balances out of certain revolving
98

to prevent. It is possible, however,

designed
that legislative
practices that make revolving
fund monies more fungible may help dimin?
ish the trade-off problem mentioned
by Ru?

Accountability
raised concerns
Only 3 of the 52 interviewees
about revolving
funds making budgetary
acState and Local Government Review

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Revolving Funds as Budgeting Tools

countability
or citizens.
cials

(55.8

more difficult

for elected

In sharp contrast,
asserted
percent)

funds

actually improve
interviewees
remaining

officials

29 agency offi?
that revolving

The
accountability.
that
revolv?
claimed

ing funds had no impact on accountability.

As stated earlier, the main concern regard?
is that transfers from re?
ing accountability
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 do
not appear to be common for most revolving
funds; no agency claimed that one of their re?
volving funds was continually
being raided to
the general revenue fund. Addi?
supplement
out of a
tionally, when money is transferred
fund,

track of the amounts

is rela?
keeping
most
transfers
have
to be
because
easy

tively
done by legislative
action. This arrangement
allows interested parties to identify exactly how
much money was transferred out of a fund but
not necessarily
how the money is being spent
once it has been transferred
into the general
fund.
Seventeen

officials

(32.7 percent)
agency
stated that revolving funds (largely single-pur?
pose revolving funds) improve accountability
whether
ear?
by making it easy to identify
marked

revenues

The

revenues

from other sources.

accountability.
funds in?
way in which revolving
is by encouraging
crease accountability
agen?

gling
Another

in collecting
fees
aggressive
and issuing fines. Twelve agency officials (23.1
percent) stated that they are more active in is?
cies to be more

suing fines and collecting fines and fees when

the money goes into the revolving fund. Agen?
cies can increase the amount of money com?
funds and thereby
ing into their revolving
accountability
by providing an incen?
tive for the agency to carry out the legisla?
ture's will and actively enforce the law. How?

increase

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?
for spending. Most interviewees
countability
funds in?
that, if anything,
revolving
crease accountability
(research proposition #3).
The evidence merely suggests that account?
stated

more difficult when re?

ability can become
volving funds have multiple revenue sources,
some of which may be earmarked for specific
in terms of transpar?
purposes. Furthermore,
true
of
a
the
cost
ency,
program can be hid?
den when funds and revenue sources cannot
be discerned.

are being spent as intended.

likes to use such funds to en?

legislature
sure that an identified

Conclusion

revenue
source goes
to a specific purpose and to keep track of the
funding for specific programs. As one agency
official said, "There is a transparency in spend?

The

ing. Things are more visible. Now you have

one line entry that shows what is going in,
what is being spent, and the balance that is ac?

the following:

For legislators
for a
cumulating."
searching
to
deal
with
this
trans?
way
specific problems,
parency is attractive. Revolving funds can help
monitor, or even micromanage,
pet
funds with multiple rev?
projects. Revolving
enue sources are less useful. Two interviewees
legislators

explained that keeping track of earmarked rev?

enue is more difficult when it is lumped with

commin?

Thus,

of funds reduces

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

1. Revolving

funds often

lead to increased
and serve as an im?

managerial flexibility
portant financial management

tool. How?

ever, certain aspects of revolving funds,

such as earmarked revenue sources, can
limit the flexibility
cy officials.

gains enjoyed

by agen?

2. Accessibility
to nonlapsing
revolving
funds has the effect of reducing wasteful

Spring 2003

99

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Franklin and Douglas

from general rev?

because
agencies

end-of-year
spending
enue appropriations

have more time to carefully consider and

there is
prioritize their needs. However,
also a need to keep balances low or risk
having the money
islature.

taken away by the leg?

3. The effect of revolving funds on account?

Singleability is not what was expected.
purpose revolving funds tend to increase
of their ability to
on and, to a certain extent,
protect specific spending activities. How?
can be more difficult
ever, accountability
because

accountability
focus attention

when revenues
commingled.
expenditure
tive control

from multiple sources are

When commingling
occurs,

accountability
are weakened.

and legisla?

a better understanding
of the proce?
associated
with revolving
can be enhanced
funds, program performance
and fund management
control systems can be
With

dural mechanisms

more

carefully designed,
thereby mitigating
potential threats to the fund. As a result, agen?
cies will be more flexible and political officials
will be more
There
research

accountable.

are several

possibilities
based on these findings.

and explanatory
research
a
more
representative
by
the 50 states.

A theoretical

would

for further
Descriptive
be enhanced

sample drawn from

model should be

to examine effects by type of fund

developed
and statutory restrictions
across various lev?
els of government
or under various scenarios.
the relationship
between
Moreover,
general
revenue and revolving fund allocation and the
effect of political interaction
should be fur?
ther explored.

Aimee

L. Franklin

administration
Government

is assistant professor of public

at the University of Oklahoma.
reform, public budgeting and finance,

public management, and organization culture and

ethics are among her teaching and research interests.
Her work has been published in the International
Public BudJournal of Public Administration,
100

geting and Finance, and Public Productivity

and Management
Review, among other journals.
is assistant professor of public
James W. Douglas
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,
tion Review, and Public
ing, and Financial

Public Administra?
Budgeting,

Account?

Management.

Notes
1. Some federal funds can be transferred into revolving
funds. Other types of federal funds are restricted and
must be segregated.
2. The Oklahoma budget document only records selfgenerated revenues for revolving funds. Monies trans?
ferred from general revenues, federal funds, or other
revolving funds are not generally recorded in the
budget document as revenues for a particular revolv?
ing fund. Such transfers are recorded internally by
agencies. As a result, revenues for several revolving
funds in the budget document appear to be smaller
than they actually are.
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