SPECIAL FUND PROS AND CONS

Special revenue funds are a well-established way for governments to earmark money for specific uses so that promised cash isn’t sometimes diverted due to temporary political preferences. As Investopedia explains, “special revenue funds are created by governments for specific projects to ensure financial accountability and transparency to taxpayers. These funds are distinct from general, capital, and rainy-day funds in government budgets.”

Although special funds have many laudable uses, they can also be confusing, labor-intensive and overused.

The cash that goes into special funds is used for a variety of needs and can come from multiple sources. The list begins with hotel and motel occupancy taxes which are supposed to be devoted to tourism promotion; 911 emergency surcharges, which are designed to be used exclusively for that service; voter-approved property tax levies or portions of the sales tax, which are maintained to help defray the costs of parks, libraries or emergency medical services. There are also instances in which individuals or organizations make a contribution specifying that it must be used for an initiative they want to nurture, like youth programs.

For example, explains Investopedia, “A city might establish a special revenue fund to pay expenses associated with stormwater management. The money in this fund could only be used for stormwater management costs, such as street sweeping, drain and ditch cleaning, system maintenance, and a public awareness campaign. The city would be required to publicly report on where it collected the special revenue fund money from and how it spent the special revenue fund's budget.”

There are hundreds of thousands of these funds in active use. Sometimes they are simply created by elected officials to demonstrate that they are prioritizing a particular service and want to guarantee to voters that they are committed to this funding regardless of prevailing economic conditions or other needs.

Financial accounting and reporting standards established by the Governmental Accounting Standards Board (GASB) provide caution about a proliferation of the number of funds that state and local governments introduce. “Only the minimum number of funds consistent with legal and operating requirements. should be established,” according to the June 2026 version of the summary statement of principles from the Governmental Accounting Research System (GARS). That’s because “unnecessary funds result in inflexibility, undue complexity, and inefficient financial administration."

Over the course of years, we’ve sometimes been befuddled by the distinct differences between the numbers for all funds in an annual report and the accounting just for the general fund. One issue is that special funds that are loaded with cash can easily mislead people to think that an entity is in healthy economic shape, when in fact, the special revenue funds obscure shortages in the general fund.

For example, a city might have $10 million dollars in these restricted funds, aimed at tree-planting or public awareness campaigns, when in fact the general fund, which is used to provide more essential services like road repair or emergency medical services, might be facing a shortfall.

One issue, particularly in time of budget stress, is that money sitting in special funds can sometimes be transferred to core services. This happens with a certain amount of frequency, but the practice has been described as a “budget maneuver,” to be avoided according to the Volcker Alliance. 

Additionally, even though most cities and counties have financial staff that are overloaded with work maintaining and accounting for the entity’s major expenditures, every single additional restricted fund requires its own accounting and legal oversight.

Though we don’t have a concrete example, we also fear that when there’s no powerful need for all the cash that comes into special revenue funds, there may be a tendency to retain large balances or absorb excess revenue on unnecessary equipment or contractors at the same time as basic municipal tasks are shortchanged.

We’d like to suggest one way to help ensure that special revenue funds are used sensibly and skillfully. It makes sense to have a policy that mandates that these funds are reviewed on a regular basis to make certain that they are being used as designed, to uncover inactive accounts and to consider sunsetting them, if necessary. As things stand, it can easily be the case that special revenue funds can continue in the same way as they were created without the same kind of budgetary analysis that occurs with the general fund.

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