Proprietary funds occupy a unique niche within government fund accounting, specifically designed to account for entities that operate with a business-like model. Understanding the distinctive characteristics of these funds can provide deeper insights into their function and significance in public financial management. Here’s a closer look at what makes each type of proprietary fund notable.
Self-Supporting Operations
Proprietary funds are primarily used to manage financial resources of self-sustaining operations, which generate revenue mainly through user fees rather than traditional government funding sources like taxes. This revenue model reflects a business-oriented approach, where the financial sustainability of the fund depends on the income generated from the sale of goods or services.
Consider a municipal water utility, such as East Bay Municipal Utility District in the San Francisco Bay Area. The revenue generated from water bills paid by residents directly supports the operations and maintenance of the district water system, rather than relying on taxpayer dollars.
Business-Like Operations
The operations accounted for by proprietary funds are akin to those of a private sector business. This means that the management practices and financial strategies adopted are geared towards efficiency and cost recovery. Proprietary funds are expected to operate with a focus on profitability and effective resource management, reflecting their commercial-like nature.
A city’s parking garage might operate as a proprietary fund, with revenue from parking fees covering all associated costs and investments, mirroring the financial management practices of a commercial parking facility.
Accrual Basis of Accounting
Proprietary funds employ the accrual basis of accounting, a method that recognizes revenues when earned and expenses when incurred, regardless of when cash transactions occur. This approach contrasts with the modified accrual basis used by other government funds, which records revenues and expenses based on cash flow. The accrual basis provides a more accurate picture of financial performance and obligations.
For example, the Metropolitan Atlanta Rapid Transit Authority in Georgia, better known as MARTA, may record revenues from ticket sales when the service is provided and expenses related to the transit operation when incurred, even if payments are made or received at different times.
Comprehensive Financial Statements
Proprietary funds are required to produce financial statements similar to those of private sector businesses. These statements include:
- Balance Sheet: Shows the financial position at a specific point in time, detailing assets, liabilities, and net position.
- Statement of Revenues and Expenses: Provides an overview of income and expenditures over a period, highlighting financial performance.
- Statement of Cash Flows: Illustrates the cash inflows and outflows from operating, investing, and financing activities.
An airport authority, operating as a proprietary fund, would prepare detailed financial statements reflecting its revenues from airline fees and services, operational costs, and capital investments, akin to the financial reports of a private airport operator.
Proprietary funds stand out for their focus on self-sustaining, business-like operations, adherence to the accrual basis of accounting, and the production of comprehensive financial statements. By understanding these distinctive features, one can better appreciate how these funds contribute to transparent and effective financial management in the public sector.
