Fund Transfers

To move cash from one fund to another, a council must be prepared to take formal action during the budget or budget amendment process and/or through a resolution. Below is a listing of allowed transfers.

Interfund Transfers

These transfers account for cash transfers out of one budgeted fund to another budgeted fund:

• Required by bond covenant into a sinking fund. Many revenue bonds require some type of assurance that the amount due, which includes principal and interest amounts, be transferred from the revenue fund, where all funds are receipted into a “sinking fund”. This typically may be one-twelfth of the annual requirement, be sure to check the bond documents for the amount stipulated for each bond, as it may be different. This monthly transfer is set up by resolution as part of the proceedings when bonds are sold. As such, the monthly transfer can be done without additional action of the council.
• Required by bond or grant agreement to establish an improvement fund. Many times a grant agreement or bond will require that the city establish an improvement fund, in essence to force the city to plan for future repairs or improvements on a cash basis. This agreement is adopted by resolution so no additional action of the council is required.
• If a general obligation bond is sold with the intent of payments coming from the utility fees, the city should include the transfer in the budget adoption process. If it is included in the budget, separate council approval is not required.
• When the council decides (through the budgeting process) a certain amount be transferred to fund for a future purchase, such as a reserve for a fire truck, when that transfer is actually done, it is advised a transfer resolution be approved by the council.
• When a city collects special revenue funds, such as property taxes for the Federal Insurance Contributions Act (FICA), but reflects the expenditure in the area where the employee works, such as the General or Road Use Tax Fund, then the transfer should be reflected in the budget preparation and no further council approval is required.
• A transfer may be needed if special assessment projects are completed and all assessments are collected yet deficit balances and inactive funds remain, reflecting liabilities for the city share of the project.
• Review capital projects accounts for inactive accounts and schedule transfers to close these accounts. These transfers need to be approved by resolution of the Council.

Internal Service and Other Non-Budgeted Funds

Under Iowa municipal accounting, moving money from a budgeted fund to a non-budgeted fund must be handled carefully because the transfer does not remove the expenditure from budget law or change the legal purpose of the money. Generally, if a transfer is made from a budgeted fund, it should be recorded as a transfer out/other financing use in the budgeted fund and a transfer in/other financing source in the receiving fund, but only if the receiving fund is legally permitted to receive those dollars and use them for that purpose. For example, transfers from a budgeted operating fund to a Debt Service Fund may be appropriate to pay debt, and transfers to a TIF Debt Service sub-fund may be appropriate when repaying an internal loan or applying TIF revenues to eligible debt. However, a city should not move money to a non-budgeted fund simply to avoid budget limitations or to shift the spending outside of the budget process. If the dollars will ultimately be used for a capital project, debt payment, or other expenditure, the city should ensure the activity is recorded in the proper fund and that the expenditure is authorized and budgeted where required. In short, under Iowa practice, the transfer itself must reflect the legal purpose of the funds, proper fund classification, and compliance with budget law, debt restrictions, and TIF restrictions—not simply where the city wants the cash to sit.

Special Handling of Tax Increment Financing for Transfers

Transfers involving Tax Increment Financing funds must be handled carefully to ensure compliance with Iowa law.  Because TIF revenues may only be used to pay eligible TIF-related debt or obligations, transfer out of the TIF Fund are generally limited to repaying an internal loan that financed a qualifying TIF project or transferring funds to the Debt Service Fund to offset general obligation debt issued for TIF-eligible purposes.  TIF revenues should not be transferred to Capital Projects Funds, as those transfers do not reflect payment of incurred TIF debt.  Likewise, debt proceeds related to TIF projects should be recorded directly in the appropriate fund based on the source of financing rather than transferred from a TIF sub-fund after the fact.

Other Transfers: Guidelines from the Administrative Code

Administrative Code 545—2.4(1)(384,388) Cash fund transfers – general provision: Transfers between funds in one fund type are types of transfers that do not require budgeting, but must comply with the state laws regarding the funds and the following sub-rules:

• 545—2.4(2)(384,388) Debt Service fund. In most cases, cash can be transferred from any city fund to the Debt Service fund to pay for principal and interest payments. Such transfers must be authorized by the budget or an amendment.
• 545-2.4(3)  Moneys may be transferred from any city fund to the capital improvements reserve fund for purposes specified in Iowa Code section 384.7.  These transfers must be authorized by the original or amended budget which has been adopted per Iowa Code Section 384.16 and are subject to protest as provided in Iowa Code section 384.19
• 545-2.4(4) Utility and enterprise funds which have a surplus  in their funds may transfer such surpluses to any other city fund by resolution of the appropriate governing body.
  • A utility or enterprise fund only has a true surplus after the city has first made all required transfers to restricted accounts, such as debt reserve or bond payment accounts, as required by any revenue bond or loan agreement
  • A surplus shall be defined as the cash balance in the operating account or the unrestricted retained earnings calculated in accordance with GAAP in excess of:
    • The cost of operating and maintaining the utility for the past three months, and
    • Any required transfers to restricted accounts for the next three months
    • Anything above those amounts is a surplus

These rules are intended to implement state code Chapters 384 and 388.