Is Your Agency Sitting on Any “Lost Funds”?

By Mark Moses, RGS Director of Finance Services

Every year or two, an agency discovers funds for which it had lost track. In July 2012, after nearly $54 million of mostly previously undisclosed funds was discovered in California state parks funds, a newspaper article reported: “Hidden California state parks funds spark outrage.” In May 2013, another headline read: “Los Angeles Discovers $42.6 million Lost Through Accounting Error.” These types of events are embarrassing to those agencies involved, and have forced resignations by those responsible for the administration of the funds.

Were these funds truly hidden, a result of accounting errors, or were other factors involved? In my experience, assessing the existence or likelihood of “hidden” or “lost” funds is typically a straightforward task and, more importantly, there are management techniques that minimize future incidents of such disruptive finds.

Assessing hidden or lost funds
Such funds are only hidden or lost in the sense that they are not transparent in the budgeting or resource allocation process. For example, a fund balance in a risk management internal service fund that exceeds the balance requirement implied by the most recent actuarial report can be easily overlooked in the budgeting process. Further, any fund for which there is no policy governing the target level of fund balance or the intended use of fund balance raises questions regarding the sufficiency or excessiveness of those balances. My approach in conducting this assessment is to work through each fund with the following filters: (1) If there is a policy governing the accumulation of funds, how does the current balance compare to the policy requirements – i.e., deficit or excess; (2) If there is no policy governing the accumulation of funds, what are the potential financial and/or operational consequences. For example, the lack of clear policy guidance on vehicle replacements puts at risk the ability to maintain the organization’s fleet at an acceptable level.

Model for ongoing fund accountability
In order to ensure that there are policies in place that govern all accumulated fund balances, and that there is adequate ongoing management of all funds, it is best to delegate responsibilities for the policy, operational and accounting management of all funds. The following matrix presents the areas for which there are critical responsibilities, and some examples of how they might be assigned.

Very few agencies have clear accountability in these areas that survive retirements and other attrition in management, operations and accounting. If any of these three key assignments is not clear for any one of the agency’s funds, the organization is vulnerable to incidents or accusations of hidden or lost funds. Vigilance in these areas also helps prevent unsettling discoveries of hidden liabilities and obligated funds.